5 New Things to Know About Living Too Long
April 11, 2017 by Allison Bell
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Living longer than expected can throw off your clients’ financial projections.
Unexpected increases in annuity holder longevity can also throw off the annuity issuers’ own financial projections.
The Life Risk-Based Capital Working Group, part of the National Association of Insurance Commissioners, is thinking about ways to include longevity risk in annuity issuers’ risk-based capital ratios.
An RBC ratio is a number that’s supposed to show how much financial power an insurer might have to meet its obligations during a period of extreme stress. In the past, regulators have tended to focus on trying to predict how the insurer assets parked in various types of investments might perform in a financial crisis. Regulators have dinged insurers for putting too much of the portfolio in shares of common stock, or too much in bonds issued by companies with low credit ratings.
These days, regulators are trying to analyze the effects of other types of risk, such as the impact of severe epidemics on life insurers, or the effects of successful life-extension pills on annuity issuers.
The Life RBC Working Group heard a presentation on annuity holder longevity risk Saturday, in Denver, at the spring meeting of the NAIC.
Tricia Matson, the chairperson of the Longevity Risk Task Force at the American Academy of Actuaries, and Heather Jerbi, assistant director of public policy at the academy, gave the presentation.
Actuaries are people who have passed tests showing that they understand the math used to create and analyze insurance programs, pension programs and other programs that involve statistical analysis of risk.
For an insurance agent or financial advisor, the presentation shows how thinking about longevity risk may shape the financial machinery inside annuities and other longevity-based insurance products in the future.
Here are five highlights from the presentation, drawn from a copy of the presentation posted on the working group’s section of the NAIC website.
1. Annuity issuers should have enough reserves to handle ordinary lifespan increases.
The actuaries who gave the presentation said regulators try to set reserve requirements high enough to make up for longevity-related risk at least 85% of the time.
The RBC ratio is meant to help insurers, regulators and others understand the adequacy of an insurer’s reserves, not to make up for shortfalls in reserves, the actuaries said.
2. Regulators want to know how well the issuers’ capital would hold up if typical lifespans permanently shot up.
The actuaries said RBC factors typically cover “95th percentile events,” or severe events that might occur every 20 years.
“Short-term volatility risk will have a small financial impact on longevity products,” the actuaries said.
3. One problem actuaries have is a limited supply of modern lifespan increase data.
To create the tables used in the presentation for the NAIC working group, the actuaries used population data for the period from 1900 through 1913 for the Social Security population.
The Social Security population consists of all U.S. workers, and that population might be different from the kinds of higher-income, well-organized, conscientious people who make the effort to buy annuities or other insurance products.
Another challenge is that the Social Security data set includes information for only a limited number of separate 20-year periods, and that hurts efforts to show what a “once in 20 years” event might look like, the actuaries said.
4. The lifespan picture for typical people is different from the picture for people who are tough as nails.
For typical Americans, the actuaries found, lifespan increased 0.91% over a 20-year period, during the period studied.
For the very durable people at the 95th percentile in terms of lifespan, lifespan increased 1.41% over that same period.
For ordinary people, the lifespan increase was much smaller for older people than for younger people. The median increase was 1.28% for ordinary people ages 35 to 64, for example, and just 0.46% for ordinary people ages 85 and older.
For very durable people, the lifespan increase was somewhat smaller for older people, but only somewhat smaller. The lifespan increase for people at the 95th percentile was 1.83% for the 35-64 age group. The increase was 1.23% for people in the 95th percentile at ages 85 and older.
In other words: For very durable people ages 85 and older, the average lifespan increase was about three times higher than it was for ordinary people ages 85 and older.
5. Actuaries worry about extreme longevity events.
The actuaries said one Longevity Risk Task Force concern is medical breakthroughs.
The task force is thinking about starting by excluding the possible effects of medical breakthroughs in RBC calculations.
There are differing ideas about how medical breakthroughs will affect mortality, the actuaries said.
“Further discussion is needed to determine if potential effects should be included in RBC,” the actuaries said.