The FSA says increases in longevity is a major long-term threat to financial businesses.
The regulator says: “Actual improvements in life expectancy may soon exceed the assumptions used in mortality tables produced by actuaries and there is not yet a way to hedge comprehensively against this uncertainty”.
The warning comes in the FSA’s Financial Risk Outlook 2007, which urges firms to stress-test their businesses to see how they respond to various financial, economic and political risks.
It says the main risks facing businesses in the short or medium term are promotion of efficient, orderly and fair markets, the threat of terrorism, the steady increase in use of complex and illiquid financial instruments, the outstanding trade confirmations for credit derivatives, the increase in financial crime, and the substantial volume of international regulatory reform.
Other risks to financial stability include growing signs of consumer distress, such as late credit card payments and record levels of insolvencies.
Chairman Sir Callum McCar-thy says: “To avoid a shock, firms should employ stress-testing to evaluate the effects that risks could have on businesses. I would encourage all firms to consider the risks outlined in the FRO and to plan.
“Stress-testing and scenario-analysis enable firms to assess and mitigate risks. It is important that firms use this period of relative stability to identify risks that could arise in less benign times.”
Faculty of Actuaries president Steward Richie says it is impossible for actuaries to predict with absolute accuracy increases in longevity.
He says: “For many years, actuaries have been assuming increases in longevity. The question is, are they assuming high enough longevity?”