Wednesday, April 11, 2007

Longevity risk

Fred Hansen of The Adam Smith Institute Blog says that "Thanks to medical progress, the long term trend is clearly towards more longevity. The insurance industry is already calculating the additional costs of living longer – especially for the baby boomer generation. According to findings from Swiss Reinsurance Co, the world's largest reinsurer by premium income, the "longevity risk" could hurt the global economy and the standard of living in Western countries."

Needless to say, low birthrates and the aging of Western populations means less workers to fund pensions and healthcare. Hansen says that

"As a result Swiss Re is focusing on annuities to fill the growing gap. These are meant to allow individuals a fixed income after retirement in exchange for a lump sum or lifelong premium contributions. The problem is that these annuities saddle insurers with high risks, such as people living much longer than expected or long periods of poor economic performance.

However, there may be an unexpected consolation. Because of the poor health of the soon-retiring baby boomers, some experts expect a fall in life expectancy during the next couple of decades. Compared to the war generation which suffered from food shortages and saw a surge in smoking habits, the baby boomers have enjoyed an even more hazardous lifestyle with multiple drug abuse, unprotected promiscuous sex, and a love of ineffective alternative medicine. For insurance companies, this could create huge benefits and even profits – something most baby boomers may not appreciate."

I agree with this conclusion 100%; the "hope I die before I get old" generation is likely to get their wish due to the activities that Hansen mentions. However, the risks mentioned that are associated with annuities are no different than any other type of investment; long periods of poor economic performance damage the returns on just about any investment.

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