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Longevity risk

Longevity Risk Management and the Development of a Life Annuity Market in Australia John Evans and Michael Sherris Australian School of Business University of New South Wales Sydney, NSW, Australia, 2052. Introduction. Products and Markets: Annuities, Deferred Annuities, Variable Annuities.

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Longevity risk

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  1. Longevity Risk Management and the Development of a Life Annuity Market in AustraliaJohn Evans and Michael SherrisAustralian School of BusinessUniversity of New South WalesSydney, NSW, Australia, 2052

  2. Introduction • Products and Markets: Annuities, Deferred Annuities, Variable Annuities • Longevity risk

  3. Risk Management for Longevity Risk Products • Investment • Mortality • Expenses • Long term interest rate, inflation, credit risk • Heterogeneity, systematic risk, reinsurance, hedging • Inflation and productivity

  4. Interest rate risk • Lack of longer term government bonds • Limited inflation linked securities (infrastructure) • Equity and asset swaps or options (downside protection) • Lack of liquidity

  5. Longevity Risk and Pooling • Heterogeneity • Adverse selection • Pooling and systematic risk • “Unknown/unknown” - wars, pandemics and disease • Solvency and credit risk

  6. Longevity Risk and Pooling Dependence significantly reduces risk pooling efficiency Independence – risk pooling efficient • Correlation • No of lives • Indexed annuity value • 95% confidence age • Caution: Normal distribution of lifetime assumed

  7. Inflation risk • Volatility and hedging • Product design – CPI, full, fixed indexation, minimum, capped • Demand and pricing

  8. Role of Private Markets • Product innovation • Lack of hedging instruments (longevity, inflation, long term interest rate) • Capital and regulatory requirements (Solvency II, risk based) • Expense and efficiency • Mutual (Industry funds, Government) • Shareholder (Retail funds, Insurers)

  9. The Role of Government • Private Market Support • Longevity/survivor bonds • Inflation linked bonds • Longevity Indices • JP Morgan Lifemetrics • Deutsche Bourse Xpect indices • Australian Government Actuary (population); APRA, ASX (annuitants)

  10. The Role of Government • Public provision • Immediate annuities or Deferred annuities • Compulsory or optional • Full, partial, minimum level • Risk rating or community rating • Expense efficiencies • Costs of capital and credit risks

  11. Policy Options • Private Sector: develops an annuity market with government support to provide or organise hedging products for the major risks otherwise private sector can’t supply efficiently priced lifetime annuities attractive to retirees. • Public Sector: annuitisation compulsory for compulsory accumulation SGL retirement benefits, purchase price reflect differing longevity risks. • Private/Public Sector partnership: a private/public combination with the private sector providing annuities for fixed terms, such as until age 85 or earlier death and the public sector providing a (compulsory) deferred annuity from age 85 until death.

  12. Acknowledgements: Evans and Sherris. Longevity Management Issues for Australia's Future Tax System, Commissioned Paper Australia’s Future Tax System. Working Paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1585563 Questions and Discussion

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