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Society of Actuaries20 January 2011Understanding and managinglongevity riskCopyright 2011 Hewitt Associates Limited. All rights reserved.Hewitt Associates Limited, 6 More London Place London SE1 2DA Registered in England No. 4396810
IntroductionsMartin BirdManaging Principal, Head of Risk Settlement, GlobalRisk Services, Aon Hewitt 44 (0) 7949 169 449Matt WilmingtonPrincipal, Global Risk Services, Aon Hewitt UK 44 (0) 7852 897 6032
Agenda Longevity modelling Measuring longevity risk Longevity risk transfer solutions Practicalities of a longevity hedge Market outlook3
Evolution of mortality modelling4
Longevity risk vs economic riskEconomic risk over time2010Year202020252030Cumulative returnMortality and most other economic risksare fundamentally different:2015Longevity risk over timeCumulative return201052015Year202020252030
The components of longevity riskTrend RiskBasis RiskIdiosyncratic RiskChanges in a generallongevity for a bigpopulation (e.g. Englandand Wales, insuredlives, or SAPS)How your schemediffers from the bigpopulation, and thedifficulty of measuringthis and its implicationsEven if you knew the“correct” mortality rate,experience will differ,particularly in smallschemes “First person to live to 1,000might be 60 already”6
A look to the past - UK7
UK Projection8
Irish experience9
Typical Irish projections10
Outlook for Irish mortality11
Possible shape of things to comeShort term trend riskLong term trend risk12
Decision to retain longevity risk Attitude towards longevity risk between pension funds is divided:“Whilst I am actively taking investmentrisk, I can’t see the point spendingmoney removing longevity risk whichis acting as a diversifier for me”Growing number offunds are thinkingthis wayLongevity riskappetite“I am trying to run my scheme like aninsurer might with minimal risk.What are my options?”“I am actively seeking rewardedinvestment risk as part of myfinancing strategy .but I keepgetting derailed by ever-increasinglongevity which I don’t like orunderstand.How do I get rid of it?”Investment risk appetite13
Managing pension liability risks – the broad optionsLongevity riskhedged14
Longevity swapsMonthly payment toscheme untilpensioner diesPENSIONPENSIONERFloating LegPROVIDERFUNDMonthly paymentuntil pensionerdiesFixed legMonthly pensionpayment to providerfor fixed term15
Providers16
The longevity risk transfer chainDistribution of riskLongevity swapPension FundReinsuranceMarket“Intermediary”(bank or primaryinsurer)Redistribution ofriskRetro-cessionariesCapital Markets Reinsurance markets:– Are “long” on mortality risk– Can use longevity risk to diversify– Freeing up capital to write new business– Capacity limited to 30bn p.a Capital markets:– Have no existing life exposure– Seeking return earning, diversified portfolios17
Anatomy of a longevity hedge18
The castCollateral managerInvestment AdviserLead brokerScheme ActuaryCompany ActuaryTrusteesCompanyScheme lawyerCompany LawyerAdministratorProject ManagerScheme AuditorPR/Communications19Company auditor
Irish appetite20
To protect the confidential and proprietary information included in this material, it may not be disclosed orprovided to any third parties without the prior written consent of Hewitt Associates Limited.Hewitt Associates Limited does not accept or assume any responsibility for any consequences arisingfrom any person, other than the intended recipient, using or relying on this material.Copyright 2011 Hewitt Associates Limited. All rights reserved.Hewitt Associates Limited, 6 More London Place London SE1 2DA Registered in England No. 4396810
Hewitt Associates Limited, 6 More London Place London SE1 2DA Registered in England No. 4396810 To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the prior written consent of Hewitt Associates Limited.
