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1. abcd Panning for SilverThe Implications of an Ageing PopulationJoanne WellsYounger Member Convention 2002

2. TODAY'S PRESENTATION • Population trends • Opportunities for insurers • Longevity and medical advances • Developments in the pricing and underwriting of risk

3. THE CHANGING DEMOGRAPHICS Age profile of the UK is rising • Ageing of the ‘baby boomers’ • Declining fertility • Improving mortality • Some consequences: • The number of people aged over 50 is forecast to grow by 6m over the next 25 years • Total number of older people is higher and these people are also living longer • A different target market for the financial services industry

4. DEMOGRAPHICS Fertility Rate Source: Government Actuaries Department

5. DEMOGRAPHICS Improving Mortality Life expectancy at different ages Source: Government Actuary’s Department

6. DEMOGRAPHICS Projected Age Distribution United Kingdom 1971 2070 Source: Government Actuaries Department

7. WEALTH Income in Retirement Source: Department of Social Security (2001) Pensioners’ Income Series, 1999-2000

8. WEALTH Home Ownership Source: NOP, Financial Research Survey, 2000

9. LONGEVITY HAS ITS BENEFITS .......and its problems • All financial services brochures for the silver market show happy attractive old people - we all want to live longer • ‘Silver market’ is expanding……….. • Insurers run significant extra risks on their new and existing business • Reinsurers are keen to selectively expand into this large market by assisting their clients

10. WHICH RISKS ARE PROVIDERS FACING? • We are living longer - but not necessarily in a healthy state • We will work, and need income protection, for longer • People will need life assurance at older ages • Annuitants are already living longer and will continue to do so • Impaired annuity market will grow • The need for long term care will be greater

11. PROVIDERS FACE EXTENDED RISKS FOR: • Income protection • Life assurance • Critical Illness • Annuities • Impaired annuities • Long term care

12. NEW RISKS FOR INSURERS Life Assurance • Improving longevity is good news for existing block! • More demand from older lives • People have children older • Inheritance tax, demand up to age 90 or longer • Retirement age to increase? • Demand for higher ages at entry • Little data available • Reinsurers have mortality studies from around the world and have written such business in specialist areas

13. NEW RISKS FOR INSURERS Life Assurance • Mortality continuing to improve…… • ……….…..but already priced in? • Rates close to bottom?

14. IMPROVED LONGEVITY HAS ITS RISKS The Annuity Market • Existing blocks - improvements greater then expected • New business - how much further will mortality improve? • How much have rates changed - due to improved longevity? • Male 65, £100,000 purchase price in 1991: £9,455pa • Male 65, £100,000 purchase price today : £8,511pa • Reduction in annuity: 10% • Can reinsurance help?

15. REASSURANCE AND ANNUITIES Will reinsurers help? • Reinsurers know about mortality, but most of us are reluctant to take longevity risk from existing blocks • Why? • Life insurer has margins in investment and expenses • Everyone worried about the scale of future improvements - including the reinsurers • A large possible downside for little upside! • So where can we help in this market?

16. IMPAIRED ANNUITIES A growing market • We are keen to provide support to clients for impaired annuities, why? • The market is relatively new and growing • Opportunities for innovative product development • Underwriting and mortality pricing are our key strengths • Risk can be high, so insurers keen to pass risk on • Potential upside is higher - in relation to downside

17. IMPAIRED ANNUITIES Key questions for reinsurers and providers • Which market segment? • Serious impairments • Lifestyle impairments • Occupation / location • What is risk profile for each impairment? • How will medical advancement affect experience? • New drugs for Alzheimer's for example

18. LONG TERM CARE Markets • Two separate markets • Pre-funded • Immediate needs • Insurers and reinsurers and tried to develop a pre-funded market in the early 90s, without success • Immediate needs market is now growing

19. LONG TERM CARE Immediate Needs • Impaired annuity, with different characteristics • Older age at entry, typically aged 80 and higher • Lower expected life expectancy • No compulsion to effect annuity

20. REINSURANCE FOR IMMEDIATE NEEDS LTC • Underwriting at advanced ages is a difficult art • Pricing information is scarce • Potential error could be high • Living one more year causes larger proportionate loss • For shorter term annuities investment yield less significant • Reinsurance product a great benefit for providers

21. EQUITY RELEASE Role of Reinsurance • Great product for the ‘silver market’ • Product structure is complex ‘behind the scenes’ • Product design depends on ‘expected’ longevity • Lenders require repayment based on ‘expected’ deaths • Reinsurance product can swap ‘expected’ for ‘actual’

22. THE SILVER MARKET Reinsurance Services Required • Research • Pricing • Underwriting • Product design • Ongoing advice • Fits very well with our skills and services brought to a long term client partnership

23. Developments in the Pricing and Underwriting of Risk

24. SOCIAL POLICY • To underwrite and price for the elderly we must consider a wider social view • Government and social policy will be a major influence • Current elderly population are not high priority for government • What will happen as elderly population becomes more affluent?

25. GOVERNMENT INITIATIVES Our Healthier Nation • Priority areas are: • Heart disease and stroke • Accidents • Cancer • Mental health • Aim to reduce death rates • Targetted at working population - up to 65

26. IMPLICATIONS OF GOVERNMENT POLICY • As initiatives work, there will be knock on effect to older ages • Improving mortality will continue into old age • We will view people with minor impairments as ‘standard’ • Those disease free will be ‘super preferred’ • Major implications for annuity market, especially with growth of impaired products

27. AVAILABILITY OF TREATMENT • Availability of diagnosis and treatment for older lives will be key • As our generation ages, we will demand the best care - and many of us will be able to pay for it • We won’t accept priority given to younger lives • More treatment will be given to elderly lives • Underwriting will become even more specialised

28. MEDICAL ADVANCEMENT • Life expectancy for men was 45 in 1901 and is projected to be 84 in 2011 (GAD 1998 population projections) • Medical science has advanced substantially in the 20th century • Still developing very fast • Of specific interest to the life assurance and health industry: • New diagnostic techniques • New screening programmes • May improve mortality - but what about morbidity?

29. SPECIFIC DEVELOPMENTS • Improvements in treatment of hypertension have already benefited incidence of heart attack and strokes • Screening initiatives • Cervical screening • Prostate cancer

30. EXAMPLE New Screening Programs

31. EXAMPLE New screening programmes • Prostate Cancer • Screening programme now proposed • 2 year trial launched April 2001 • 230,000 men between 50-69 invited to attend for check • Sweden has had a full screening programme for some time • They have one of the highest incidence rates of prostate cancer in the world

32. PROSTATE CANCER Possible effects of successful screening • Many more cases of prostate cancer detected • Average age of detection will reduce • Diagnosis before disease is life threatening • Cases which would have gone undetected will be found • Mortality rates will improve, morbidity rates will worsen

33. CRITICAL ILLNESS Prostate cancer

34. POSSIBLE FUTURE DEVELOPMENTS • Early detection system for lung cancer • Early use of MRI scans for Multiple Sclerosis • Memory assessment testing for Dementia • MRI screening to detect silent stroke • Full body scanning • Genetic screening by GPs in general practice

35. PRICING Life and Health • Developments point to improving mortality • Are these improvements already priced in? • If so term rates could be close to bottom • Critical Illness rates set to increase at older ages • Especially if definitions not updated • Guarantees to become more expensive, if available • Other health products to become more expensive at older ages

36. PRICING Annuities • More players will enter the impaired annuity market • ‘Own mortality table’ pricing by reinsurers • Segmentation of annuity market resulting in lower standard rates • More criticism of annuities? • Further product development

37. UNDERWRITING THE SILVER MARKET • No ‘clean’ proposals at older ages • How do diseases interact? • Underwriting decision for a disease may vary by product • For example, diabetes: • In middle age insurable for life assurance (with rating) • May not be insurable for health assurance • In old age the survivors may be ordinary rates

38. SUMMARY Some speculation • Medical science will continue its relentless advancement • As a result mortality will continue to improve at the middle and advanced ages • Demand for health insurance will grow in these age groups • Product designs in both the health and annuity areas will change • Interaction between product development actuaries and underwriters will become ever more important • Risks run by life insurers and reinsurers will need careful and close monitoring

39. THE SILVER MARKET Summary • Large potential for growth in risk products • Pricing and underwriting are major challenges • Reinsurers will continue to research this growing market and provide their clients with competitive advantage

40. abcd Panning for SilverThe Implications of an Ageing PopulationJoanne WellsYounger Member Convention 2002