The actuarial profession needs fundamental changes if it is to preserve its reputation in future. That is the warning underlying A window into the future: Understanding and predicting longevity, a new report from Swiss Re.
Report author Daniel Ryan, head of R&D for life and health research at Swiss Re, believes actuaries across the board need to up their game if they are to preserve the reputation that is so important to making their voice one that is listened to.
Ryan has two key areas of concern. First, he thinks the majority of actuaries are using outdated modelling techniques based on sub-standard data sets that risk underestimating life expectancy. Second, he believes the profession as a whole needs to interact more efficiently with government and medical agencies to ensure all the expertise in the industry can be focused on making longevity data as efficient as possible.
The stakes are high. Back in 2003/04, when life offices were required to revise their capital reserves for back books of business, increased longevity led to payments of around 8 per cent. Perhaps more importantly for the profession itself, the reputational damage caused by its failure to spot the massive longevity increases of the last three decades could have been avoided if better techniques had been used sooner rather than later.
Ryan says: “If you look historically, things could have been different. If we had started looking at underlying diseases back in the 1980s we would not have had to wait until 2000 to be aware of the cohort effect. Things would have been much more gradual.”
While hindsight is a wonderful thing, Ryan believes similar risks are still being run today.
“We are not saying that actuaries are necessarily short in their longevity assumptions but that their approach is flawed” he says.
Ryan’s argument is that too many actuaries are simply extrapolating lines of historic mortality improvements without taking sufficient care to make sure these predictions are based on the best facts we have.
His report cites the fact that longevity projections rely far too much on what happened before happening again. The longevity improvements of those born in the 1930s because of greater awareness of the damage caused by tobacco, and subsequent regulation, for example, cannot happen again because they have already largely happened.
Part of the problem for Ryan is the fact that too simple a view is being adopted, in part because UK death certificates are too simplistic, only recording a single illness as the cause of death when often it is a combination of diseases that finally pushes us into the afterlife. This means that actuaries relying on this data are not in a position to make realistic predictions about what future medical advances could do to mortality statistics.
“So if someone has lung cancer and heart disease when they die and we come up with a cure for lung cancer, they are not suddenly freed because they may still die of the heart disease,” says Ryan.
Ryan points out that people who think we are going to find a cure for everything eventually are misguided. “We barely cure anything, we just treat it. We have managed to cure smallpox and cervical cancer, because we have located the clear initiator and removed it, for example the smallpox virus.
“But for the majority of other conditions we are talking about prolonging life through treatment,” he says.
Conversely, he thinks the recent DWP predictions of 25 per cent of people born today living to 100 are overcooked. “We may see average life-spans in the low 90s, but these figures seem a bit high to me,” he says.
Ryan believes actuaries need to place greater emphasis on disease-centred mortality models that attempt to understand the interaction of several different diseases on an individual’s lifespan.
He is exasperated that the clinical data to carry out such work exists, pointing to the General Practice Research Database (GPRB) a set of data collated by the NHS which is constantly updated on over five million patients in the UK. This database provides high quality information on individuals’ previous medical conditions.
The UK is in a state of dynamic equilibrium, so there is an increase in the time you will be in care but you can work longer to pay for it
But to date, only Swiss Re, Towers Watson and Legal & General have felt the need to fork out the £50,000 required to access the data, Ryan understands.
“The reasons why people have not bought it tend to be budget or because they do not have the manpower to be able to make full use of it,” he says.
By inference, Ryan could well be seen to be suggesting those who do not get hold of it are not using all the information available to them when making their longevity assumptions.
By accessing this data, actuaries would be able to build better models of cause of death, argues Ryan.
He believes more collaboration across the industry would improve predictions’ accuracy too. He points to the fact that the expert panel that meets with government to give predictions of longevity only meets every two years.
“Imagine if we had regular meetings with actuaries, scientists and other experts to pool expertise, in the way they do for infectious diseases. Actuaries’ reputation would be enhanced, individuals would understand better why they were being asked to work longer and people would be able to better know whether their longer retirement was going to be healthy or not.
“We have all these experts in different areas of the community, so why not bring them together in to a group to improve the quality of the predictions the industry is making,” he says.
The question of whether our improved longevity is being matched by increased healthy old age or as is the case in Japan where elderly people are living longer but are in ill health for longer is relevant for retirement planners, care funding providers and UK policymakers alike.
The good news is that in the UK ill health is remaining constant as a proportion of life, getting longer, but only by the same degree that lives are getting longer.
Ryan says: “The UK is in a state of dynamic equilibrium, so there is an increase in the time you will be in care but you can work longer to pay for it.”
But the way the healthcare system in the UK is set up means there is a risk we could be more ill for longer in future.
“Our healthcare system is disease management rather than prevention, which means the improvements are there for those with diseases rather than the rest of the population,” says Ryan.
He points to diabetes as an area where there is a risk annuity providers could end up getting it wrong. “We are seeing survival rates of diabetics improving more rapidly than non-diabetics. So if we assume that underwriters have picked up the correct level of severity in the past, then the fact we are treating them better now means we are underestimating their life expectancy, which means providers could be paying them more than their premium could support.”
Ryan cites this as one reason why relatively few companies have been happy to move into offering impaired lives for less serious diseases.
“The closer you get to the mid-point of a population, the uplift you are giving may end up getting smaller and smaller. If you are already underwriting on postcode, then postcode is already accounting for medical conditions to an extent anyway,” he says.
For this reason, he sees an increasing number of annuity providers getting into offering a greater number of underwriting options.
“When you have got 30 per cent of the population that you cannot price, your standard annuity proposition is difficult,” he says. “But standard annuity rates will continue to fall as more of the market is underwritten individually.”
But while premiums will go up, Ryan does not see big problems for the enhanced market on account of the gender underwriting ban that takes effect from the end of next year.
He says: “It is not necessarily clear that you will have to underwrite on a unisex approach for people with particular diseases. You have to offer the rates to everyone with that condition, though. So take testicular cancer, for example. You will price it on the basis of the data you have for people with testicular cancer, and will be able to market it to people with the disease.”
Similarly, for heart disease, for example, actuaries will be required to pool the experiences of women and men and then offer both sexes with that condition the same rates, he adds.
Swiss Re has been investing in understanding future drivers to mortality and longevity, and Ryan leads a multi-disciplinary group focused on the development and evaluation of forward-looking scenarios. As one of the few reinsurers that takes longevity risk directly from providers, Swiss Re doubtless has an interest in making sure actuarial predictions are as accurate as possible.
But given the reputational damage the actuarial profession has suffered for its failure to spot the pensions timebomb earlier, his words could stir future action.
- Daniel Ryan is Head of R&D for life & health at Swiss Re, having joined in August 2010.He was previously head of mortality consulting and research at Towers Watson and was the principal investigator for eight years and founder of an innovative research group that addressed a wide range of key issues on mortality and morbidity.
- He is an advocate of closer links between the actuarial and medical profession and is a member of World Economic Forum’s Global Agenda Council for Ageing.
- He is also the chair of the technical committee for the Life and Longevity Market Association, a non-profit venture to promote a liquid traded market in longevity and mortality risk that would assist pension funds that are interested in transferring risk to the wider capital markets.