Changing demographics present a major emerging risk for life (re)insurers. Helen Yates considers the challenge of insuring Asia’s aging population.
Life insurance and reinsurance has traditionally focused on mortality, but this is changing. Shifting demographics means products for retirement and long-term care are increasingly important. As the “baby boomers” reach retirement age, life insurers and reinsurers are searching for ways the industry can respond.
“Over half of the world’s older people will live in Asia by 2025,” says David Fried, group general manager and regional head of insurance Asia-Pacific at HSBC. The perception of age is changing in the world. “What is old age?” he asks delegates at the East Asian Insurance Congress (EAIC) in Hong Kong, and shows them a magazine cover photo of Italian film legend Sophia Loren at 73. “She still looks vibrant and full of life.” Helping people lead longer and healthier lives is one of mankind’s greatest achievements, but it also poses considerable challenges.
According to The Future of Retirement, a study by HSBC Insurance and Oxford University’s Institute of Aging, birth rates are dropping and people are living longer. In Asia, people will be wholly unprepared and always struggle in retirement, it warns. “You don’t need to be a mathematician to realise that sooner or later there will be a crunch of some sort,” says Fried. He warns that spending on public pensions will reach 20% of GDP in many countries.
With the average length of retirement expected to span more than two decades in the future, there is growing concern that people will outlive their money. The insurance industry is ideally positioned to alleviate that possibility, says Fried. “People have the health and longevity to lead long and rewarding lives but not the money to see them through,” he says. “Financial markets are proving unreliable... so the burden comes down to us. Insurance has a vital role to play.”
The typical Asian approach to retirement, which is to rely on children’s support, will be put under stress as birth rates drop and people live longer. “Normally families look after families, but now individuals can get into financial problems,” explains Rudolf Lenhard, CEO of international life reinsurance at Munich Re. “There are less children looking after elderly parents and with people living longer, at age 90 the children themselves might be old.”
One solution is for insurers to provide new products, says Fried. But the industry should also work with governments. Life insurers and reinsurers have access to an “extraordinary pool of data” which should be shared. Insurers could also partner with employers to provide better pension solutions, he suggests. Enforced savings are also seen as a way to fund longer retirement years.
Annuities are becoming a popular solution. An annuity unlocks the cash an individual has saved in a pension scheme and uses it to provide an income through retirement. The problem in Asia is that annuities have never proved particularly popular. “There are no tax incentives and it’s hard to find suitable investments because there is no long-term bond market in Asia,” explains Michael Huddart, executive vice president and general manager of Manulife International. “People in Asia generally like to get a lump sum and deal with the money themselves.”
He sees variable annuities as a better alternative. “These are really just wealth management funds, but on top of that the company gives you special guarantees,” explains Huddart. “The guarantee is that you will continue to receive an income even if the money runs out. So you can get a lifetime income guarantee.” Variable annuities grant policyholders much greater control over their assets.
Compulsory annuitisation – which is currently being discussed in Singapore – could help drive the Asia population towards annuities or variable annuities. Asian life insurers are busy developing products around variable annuities, but there are also opportunities for life reinsurers, explains David Gott, managing director of life and health at Swiss Re in Hong Kong. “This is one of those areas where you’ve got a combination investment-oriented financial market risk but also policyholder insurance-based risk,” he explains. “It is definitely a space for insurance and reinsurance companies to provide a combination of financial market protection and insurance protection.”
The financial market has introduced a huge amount of volatility however, and that is making pricing difficult. “We run the funds through thousands of scenarios and come up with a curve of all the likely scenarios – and then looking at the really bad risks we can do some hedging,” explains Huddart. “But they are difficult to price and they’ve been challenged recently by the high levels of volatility in the market. We’ve not seen volatility like this before – particularly in the US – so the models are all being recalibrated.”
Another challenge is that variable annuity products are currently limited to the more developed Asian markets. “To risk manage these products you need a sophisticated financial market to provide the hedging instruments for the insurance and reinsurance companies to manage that market risk,” explains Gott. The Asian market is still relatively immature in its approach to longevity products, he adds. “It’s not an immediate future – there’s a lot of education on the policyholder side and a lot of learning for the insurance industry in how to structure these products and manage them efficiently.”
Working with governments
As part of a public private initiative, Munich Re is addressing the more specific issue of paying for care in old age. The ElderShield project was introduced by the Singapore Ministry of Health in 2002 to help people who become severely disabled. The Singapore government put the scheme out to tender with the intention of increasing private sector involvement in providing long-term care. Munich Re reinsures the three main companies – NTUC Income, Great Eastern and AVIVA – that offer this cover in Singapore.
Lenhard thinks ElderShield is potentially a good model for the rest of the region. Using its own ranking, Munich Re has established that four of the five top countries with the highest long-term care insurance needs are in Asia – Japan, South Korea, China and Hong Kong (Canada is the exception). Long-term care cover can be provided via life and health products. “The life products provide lump sums and they have guarantees, whereas health products are often a reimbursement product and can be re-priced every year like other health covers.”
A public private approach is one way of ensuring success, believes Lenhard. “We see our task as being mainly with the private industry and the industry has influence in government. We might lobby for state covers, but we see a possibility by the private sector to come up with solutions.” Governments can work with the private sector to encourage take-up of long-term care products, by introducing tax advantages or even imposing compulsory cover.
Government tax relief or contributions can help make cover available to a broader part of the population. Lenhard thinks governments and the private sector have both got responsibilities to help aging populations. “The Japanese government and industry has already seen this challenge and have introduced long-term care products and covers,” he says. “They have already taken the first step of providing a basic cover to the population plus the possibility to increase that cover by private insurance.”
There is a long way to go before retirement and long-term care products become more accessible in Asia. But insurers and reinsurers are busy developing products that could help to solve some of the problems posed by an aging population. Not addressing the issue now could place an enormous burden on future generations, warns Lenhard. “The consequence will be a very heavy burden on future children to look after their parents or even more poverty and no quality of life in old age.”
Helen Yates is a freelance journalist.