Underestimating life expectancy by just one year can increase a pension plan’s liability by up to 5%, according to Swiss Re. And, this poses a problem for many parties involved, especially since people’s life expectancy has risen substantially over recent years, and likely will continue to rise.

In its report, “A short guide to longer lives: Longevity-funding issues and potential solutions,” Swiss Re examines what (re)insurers and other parties can do to help address the challenges faced by societies as a result of increased life expectancy.

“While life expectancy is on the increase, the time required for implementing effective longevity-funding solutions is running out,” says Christian Mumenthaler, Head of Life & Health Products and member of Swiss Re’s Group Management Board. “Insurers, governments and pension providers must act now to ensure that living longer remains a benefit to society, rather than a financial burden.”

Insurers and pension funds have an obligation to pay and reserve for accumulated pension benefits. A well-diversified (re)insurer will have a combination of mortality risk and longevity risk along with other non-correlated insurance perils, such as property/casualty, Swiss Re says. This type of diversification means insurers are often the “natural home” for longevity risk. The recent development of insurance-based (or “indemnity”) solutions are an important factor in transferring longevity risk to these natural holders.

The reinsurer’s report also includes recommendations for the key parties involved in addressing longevity-funding issues. The insurance industry, in particular, must encourage the development of more sophisticated risk models that recognize potential future longevity trends, especially in light of Solvency II and similar regulatory initiatives.

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