Longevity, Systemic Models and Business Risk

Who would be willing to bet on a reverse of increasing life expectancy in western countries, even in a far distant future? Rather, there is a need to understand whether we are approaching the genetic limits of the increase in life expectancy, and many researchers believe that this is still not the case (e.g. J.W.Vaupel of the Max Planck Institute2).
As was mentioned above, the phenomenon of ageing is typically multidisciplinary, particularly in its macroeconomic and social content, and a correct approach must begin from the growing situation on which insurance companies world-wide can be said to have little, or perhaps more correctly, no influence whatsoever.
Structural ageing progressively generates new needs: the demand for health care increases — or rather it explodes — which may or may not be connected to the dynamics of the non self-sufficient population, as is suggested by trends in all advanced countries.
If micro-aspects are considered, the customer life value tends to change, i.e. it increases sharply. Older customers do not easily change the loyalty relation developed over time and they have savings already allocated, to be allocated or to be mobilised.
Statistically, the average age of service buyers changes; and with it some of their decision making propensities, e.g. their propensity to risk taking. In the case of contracts in force over very long periods of time, the function, and role of the prospective solvency of insurance companies become much more important as does its monitoring. The few remarks made so far already help us understand the pervasive importance of the phenomenon. The impact of ageing on the social and economic balance varies from country to country. In 2003 the Centre for Strategic and International Studies in Washington (CSIS) published a detailed report3 in which a vulnerability index to ageing phenomena was set out: together with France and Spain, Italy was shown to be one of the highly vulnerable countries4.
In this article we would like to focus on longevity and the related risk consisting in a lack of resources due to an actual longer than expected life span, on which expectation the savings-consumption life cycle had been planned. Using a classification of societies according to demographic risk management approaches, we obtain a four-pillars longevity risk allocation model partially mirroring the traditional four pillars focusing on the accumulation side; then, the tools and procedures for managing the risk on the part of insurance companies and the role they can realistically play will be identified. Finally, we shall claim that financial markets — with their intrinsic structural creativity and allocating dynamics — may also play a vital role within the system.
In Italy at least, it will, it appears, take a long time before a real pension market can be developed, but taking action now is vital. Implicitly, we maintain that we are faced with a problem of supply rather than of demand, not so much because ‘insurance is sold, not bought’, as the old saying goes, but rather because today the supply side seems to be more markedly obstacle-ridden. To paraphrase Say, the demand will also be created by an adequate supply and effective public (tax and statutory) policies, although the inertia pull of some passive behaviours should not be underestimated5.
Our basic conviction is that wherever a widespread cultural deficit occurs in either demand or supply, an interdisciplinary debate needs to be progressively and continuously stimulated in order to overcome this deficit in the medium term, (while resisting the temptation of scientific specialisation) to the benefit of a conscious demand, an adequate and effective supply and, finally, a market leading social well-being.

2 Quoted in Reday–Mulvey, G.,Working beyond 60.
3 Cited in Corneli, A., Invecchiamento: la sfida del XXI secolo.
4 The least vulnerable country identified by the research was Australia, thanks to its good demographic flows, flexible public sector and effective old-age insurance schemes.
5 Elsewhere, with reference to the accumulation stage, we coined the phrase ‘diet syndrome’: it can always start next Monday.

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