Pension policy returns to dip as people live longer

Pension policy returns to dip as people live longer
The risk of policyholders `living too long’ has increased dramatically for insurance companies. Trends show that life expectancy has increased sharply in the last decade compared to the whole of last century. The implications of this for policyholders are that post-retirement, regular income through pension schemes will become much more expensive. According to Richard Willets, UK’s leading expert in mortality, the last decade has seen the sharpest rise in longevity. In the UK, for instance, a 65-year old was expected to have a life expectancy of 18 more years 10 years ago. This has now gone up to 22-23 years. For older people, life expectancy is growing up at the rate of five hours a day. Today, in India, there is not much of a demand for annuity products — policies that provide a stream of regular income against a lump sum payment — because of relatively low returns. A bank deposit fetches a return of 9.5% along with return of capital. As against this, life annuities without return of capital provide less than 9.5%. But, the demand for annuities will pick up sharply in coming years. A fourth of premium for life insurers comes from sales of pension policies. According to the law, policyholders are required to use the proceeds of the policy to buy annuities on maturity. The more the increase in life expectancy, the less is the annuity the policyholder will get. According to Mr Willets, the longevity has improved because of advances in medicine, particularly those pertaining to heart ailments. “There has been a significant shift in focus in respect of deployment of resources. In the past, most of the resources have been towards reducing infant mortality and fighting infectious diseases that killed young people,” said Mr Willet. “In the last decade, there has been substantial progress in addressing ailments that affect mortality as people get older,” he added. An indication of this is the increased expenditure in Statin — a blood-thinning drug that reduces chances of stroke. In the UK, Statin usage has been growing 30% every year with total prescriptions crossing 30 million doses for a population of 60 million. He points out that Richard Boyle, the National Director for Heart Disease and Stroke in the UK, has forecast that premature death on account of heart ailments can be eliminated in 10 years. Similarly, the impact of breast cancer on mortality has been reduced despite an increase in the number of cases. This is because of a nationwide screening campaign that has helped in early detection. Mr Willets is the longevity director of Paternoster, a newly-formed life insurance company in the UK which has offshored its actuarial work to India. He is currently engaged in helping Paternoster identify life expectancy for each individual customer that would help the company price products more efficiently than if it were to go by general mortality tables applicable for the general population. According to Paternoster India CEO V Balamurugan, it is feasible to go down to individual levels because of two advantages India has. First is the access to a large pool of actuarial talent, and second is the cost efficiency. While the positive side of life expectancy is that life insurance premium comes down, most people are ill-prepared to meet the downside. Studies have shown that people tend to undershoot life expectancy by five years. By doing this, they underestimate their savings requirements.


Source:TIMES NEWS NETWORK

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