Longevity risk stems from the fact that improvements to medicine and lifestyles mean that there is a growing financial dependence from people living longer and spending a greater amount of time in retirement. This will create challenges for societies in funding retirement income provision – along with increases in healthcare requirements – in the face of a declining working population.
More and more European governments are starting to take action through raising retirement ages and looking at ways to transfer the burden of pension provision from the state to the individual. What's more, there are many examples of European employers who once provided defined-benefit pension schemes are now looking at ways they can transfer the risk of funding a retirement income to the individual through defined-contribution plans.
These trends will, over time, increase the demand for private solutions such as annuities, which promise to pay an income for life in return for a lump-sum payment at the beginning of the contract. Life insurers will welcome the opportunity to offer these products to both individuals – through traditional annuities – and employers – through bulk annuities – as their expertise in providing longevity risk mitigation strategies becomes increasingly sought after.
It is only through governments, employers, the insurance industry and other interested parties working together that the issue of longevity funding will be solved. Only by insurers working with reinsurers – and, in the wider world, with pension plans and governments – can the trend for increasing life expectancy be addressed financially; thereby remaining a positive aspect for society as a whole.
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