8th July 2008Living Longer – At What Price?Introduction to Longevity
ContentsIntroduction to LongevityContents• Introduction 3- Living longer 4- Why 65? 6- Aging Population 7- Demographers’ v...
Introduction to LongevityIntroduction3
What is Longevity Risk?Jeanne Louise Calmenton her 119th birthday.• Jeanne Louise Calment is the oldest person on record, ...
Japan, Italy, USAPeople live longer in these three places than anywhere else in the world.5 in 1,700 peopleare centenarian...
• Germany was the first nation in the world to adopt an old-age social insurance program in 1889,designed by Germany’s Cha...
Aging PopulationSource: U.S. Census BureauIntroduction to LongevityFacts• The Old-Age dependency ratio measures the ratio ...
Demographers’ Views on LongevityIntroduction to LongevityDemographers Views on LongevityCarbon Dioxide Loladze (2002) and ...
Introduction to LongevityThe Basics9
The risk that a specific population will live longer than anticipated (Blake et al, 2006).Introduction to LongevityThe Bas...
From the most commonly used PMA 92 table produced by the CMI (Continuous Mortality Investigation),= 0.001315.This means a ...
Mortality base table is the table setting out where x ranges 0 to 120.xqMortality Base Table• Mortality just after birthis...
Mortality and Longevity RiskMortalityRiskPooling RiskLongevityRiskSystematicLongevity RiskLongevityBasis RiskCatastrophicM...
• Pooling Risk: represents the random fluctuations of realised mortality rates around theexpected trend line.• Catastrophi...
• Systematic Longevity Risk: The life expectancy of the population increasing faster than expected.Mortality Risks15Introd...
Longevity Basis Risk – Example 1: Region• Significant difference in life expectancy bygeographic areas.•This may be partia...
• Life expectancy differs bysocial class.• Difference in life expectancycan be as large as 4.2 years• The trends of improv...
• People with insurancepolicies exhibit differentmortality rates from thegeneral population.• Annuity holders onaverage te...
• As the 3 examples above shows, the different mix andcomposition of a pension scheme leads to differences inmortality exp...
Introduction to LongevityDeterminants of Future Mortality20
Future Mortality Rate DeterminantsAge Effect: In general, the older the person the higher the mortality rate. Exceptionall...
Age effectAge effect describes the relationship between ageand mortality rates. The probability of dyingincreases as peopl...
Cohort Effect• “Cohort effect” describes the phenomenon that different cohorts exhibit different rates of mortalityimprove...
Impact of this Golden CohortThe significantly high mortality rate improvement for this cohort has had the followingimpact ...
Possible Causes of this Golden Cohort• World War II (adverse conditions applying to the previous generation)• Diet (more v...
Smoking Ban 01 July 2007 in England• At least 400,000 people have stopped smoking because of the ban.• The smoke free legi...
ContactsDawid Konotey-Ahulu | Partner Direct: +44 (0) 207 250 3415dawid@redingtonpartners.comRobert Gardner | Partner Dire...
Upcoming SlideShare
Loading in …5
×

Living Longer At What Price- Introduction to Mortality and Mortality Rate Determinants

238 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
238
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
5
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Living Longer At What Price- Introduction to Mortality and Mortality Rate Determinants

  1. 1. 8th July 2008Living Longer – At What Price?Introduction to Longevity
  2. 2. ContentsIntroduction to LongevityContents• Introduction 3- Living longer 4- Why 65? 6- Aging Population 7- Demographers’ views on future longevity 8• The Basics 9- Mortality rate, survival probability and mortality base table 11- Different types of mortality risk 13• Determinants of Future Mortality 20- Age effect 20- Period effect 21- Cohort effect 23Smoking Ban in England 262
  3. 3. Introduction to LongevityIntroduction3
  4. 4. What is Longevity Risk?Jeanne Louise Calmenton her 119th birthday.• Jeanne Louise Calment is the oldest person on record, living for122 years and 164 days. (Feb. 21, 1875 – Aug. 4, 1997)• At the age of 90, Jeanne signed a deal to sell her apartment to aman named Raffray, then aged 47, who agreed to pay a monthlysum until she died (reverse mortgage).• Big mistake by Raffray. Jeane Calment refused to die and he hadto make mortgage payments for 30 years. He never moved intothe apartment.• Raffray himself died in Dec 1995, leaving his widow to continuethe payments for twenty more months.• That is Longevity Risk.Source: The New York TimesIntroduction to LongevityFacts4
  5. 5. Japan, Italy, USAPeople live longer in these three places than anywhere else in the world.5 in 1,700 peopleare centenariansSource: BBC900 in 1 millionpeople arecentenariansDiet Genes FaithIndividuals live between 5 and10 years longer than fellowcitizensIntroduction to LongevityFacts5
  6. 6. • Germany was the first nation in the world to adopt an old-age social insurance program in 1889,designed by Germany’s Chancellor, Otto von Bismarck.Why 65? The Origins of the Retirement Age in Social SecurityUK Retirement Age• Normal retirement age set at 65 in 1925 by the ContributoryPensions Act. This Act established a pension of 50p a week formanual workers and any others earning up to £250 a year.• In 1925, the life expectancy at birth was 59 years.“Call it Socialism or whateveryou like. It is the same to me.”----- Bismarck during the1881 debates• The act was initially designed to provide a pension annuity forworkers who reached the age of 70 years. Note that in 1889, theaverage life expectancy at birth of a German citizen was 45 years.• In 1916 (27 years later) the retirement age was lowered to 65 years.Source: U.S. Social Security AdministrationIntroduction to LongevityFacts6
  7. 7. Aging PopulationSource: U.S. Census BureauIntroduction to LongevityFacts• The Old-Age dependency ratio measures the ratio of the population over age 65 per person ofworking age (15 to 64 years) as percentage.• The Old-Age dependency ratio is an indicator used to measure the portion of the population thatis economically dependent on the active age group.• France, which has one of the highest “number of children per mother” (1.9) in Europe, has a“third child policy”, for which the benefit paid for the third child and subsequent children isgreater, and no allowance is paid for the first child.• In Italy, there is a “Baby Bonus” of €1,000 for the second child.Country No. of people aged 65+ % of total populationJapan 26,759,722 21.00%Italy 11,564,416 19.89%France 10,315,266 16.19%UK 9,622,004 15.83%USA 37,849,672 12.57%China 104,040,756 7.87%Old-AgeDependency Ratio 2000 2050WORLDWIDE 11% 25%ASIA 9% 26%UK 24.3% 45.3%EU - 25 23.4% 52.8%Source: Journal of Population Research and EuropeanUnion Public health Information System7
  8. 8. Demographers’ Views on LongevityIntroduction to LongevityDemographers Views on LongevityCarbon Dioxide Loladze (2002) and Obesity Mizuno et al. (2004)Future life expectancy might level off or even decline due to lifestyle andenvironmental factors, such as obesity and the decreased food-derived health benefitsassociated with higher levels of atmospheric CO2.IncreasingMortalityImmortalityEntropy in Life Table S. Jay Olshansky et al. : (2001)Given the presence of entropy in the life table, a life expectancy at birth of 100 years, ifit ever occurs, is unlikely to arise until well past the time when everyone alive todayhas already died.Slow Down in Obesity Olshansky et al. (2005)Increase in obesity will likely slow, or even reverse, increases in life expectancy in the USGenetic and Non-genetic Changes Vaupel et al. (1998)Non-genetic changes and discovery of genes and other survival attributes affecting longevity,will lead to even longer lives.Biomedical Development Aubrey de Grey“The first 1000-year-old is probably only ~ 10 years younger than the first 150-year-old”8
  9. 9. Introduction to LongevityThe Basics9
  10. 10. The risk that a specific population will live longer than anticipated (Blake et al, 2006).Introduction to LongevityThe BasicsFacts• Life expectancy is increasing 5 hours a day.• The most frequently used life expectancy byFTSE100 DB pension schemes for a 65 yr old man is20 years.• The Pension Protection Fund (PPF)’s latest S143 andS179 valuation assumptions set life expectancy for a65yr old man as 22 years.• “If the life expectancy for a male currently aged 60 isunderstated by two years, depending on theassumptions adopted, this could understate thevalue of his pension by around 5%.”The Purple Book (2007).Definition of Longevity Risk05101520251920 1940 1960 1980 2000LifeExpectancyIncrease in Life Expectancy65 year old in England & WalesMale Female10
  11. 11. From the most commonly used PMA 92 table produced by the CMI (Continuous Mortality Investigation),= 0.001315.This means a man aged exactly 50 on 1st Jan 1992 had about 0.13% probability of dying during that year.is the probability that this man will reach his 51st birthday.In this case = 1 – 0.001315 = 0.9986950 501p q Mortality Base Table – Mortality Rate and Survival ProbabilityMortality rate : the probability an individual age “x” will die the following year.Survival probability : the probability an individual age “x” will live at least another year.Cumulative survival probability : the probability an individual age “x” will live at least another t years.Life expectancy: The average number of years a person of a given age would live under a given set ofmortality conditions.xqxpExample:50qt xp11Introduction to LongevityThe Basics
  12. 12. Mortality base table is the table setting out where x ranges 0 to 120.xqMortality Base Table• Mortality just after birthis very high.• Mortality falls during thefirst few years of life.• “Accident hump” formales at ages around 18-25.• No discernable “hump”for females.• From middle age onwardsthere is a steep increase inmortality rates.0.00000.00100.00200.00300.00400.00500.00600.00700.00800.00900 10 20 30 40 50MortalityRateMortality TableEngland Males produced by the GADMale Female12Introduction to LongevityThe Basics
  13. 13. Mortality and Longevity RiskMortalityRiskPooling RiskLongevityRiskSystematicLongevity RiskLongevityBasis RiskCatastrophicMortality RiskMortality risk: The randomness of mortality rates causes fluctuations in liabilityvalues of pension schemes. This risk is defined as mortality risk.13Introduction to LongevityThe Basics
  14. 14. • Pooling Risk: represents the random fluctuations of realised mortality rates around theexpected trend line.• Catastrophic Mortality Risk: defined as sudden and unexpected spikes in mortality as a resultof human made events such as wars, or natural disasters like earthquakes, tsunamis orpandemics.Mortality Risks14Introduction to LongevityThe Basics
  15. 15. • Systematic Longevity Risk: The life expectancy of the population increasing faster than expected.Mortality Risks15Introduction to LongevityThe Basics
  16. 16. Longevity Basis Risk – Example 1: Region• Significant difference in life expectancy bygeographic areas.•This may be partially due to naturalenvironment, climate. Also, it reflects thedifferent mix of industries and occupations.•Life expectancy is reducing, in general, fromsouth to north. But certain areas show veryhigh mortality rate. e.g. Central London.Source: Department of Health16Introduction to LongevityThe BasicsLongevity Basis Risk: People in a sub-population, such as a pension scheme, showingdifferent improvement trends than the referenced population.
  17. 17. • Life expectancy differs bysocial class.• Difference in life expectancycan be as large as 4.2 years• The trends of improvementare similar.• But the gap between topand bottom classes arewidening through time.• Should we anticipate acatch up in life expectancy ofunskilled manual in future?Longevity Basis Risk – Example 2: Social ClassesSource: ONS17Introduction to LongevityThe Basics
  18. 18. • People with insurancepolicies exhibit differentmortality rates from thegeneral population.• Annuity holders onaverage tend to bewealthier and in highersocial class.• Mortality rates can besignificantly different.Longevity Basis Risk – Example 3: Insurance vs. General Population18Introduction to LongevityThe Basics
  19. 19. • As the 3 examples above shows, the different mix andcomposition of a pension scheme leads to differences inmortality experience.• Factors including occupation, socio-economic grouping,smoking, and eating habits all influence the mortalityexperience of the pension scheme.• Even within the same scheme, the demographic structure canchange over time. So the mortality experience this year maybe different from that 10 years ago.• Therefore, understanding scheme specific mortalitycharacteristics (and whether the scheme is large enough touse “experience data”) is the key to managing longevity risk.Longevity Basis Risk – No two schemes are the same19Introduction to LongevityThe Basics
  20. 20. Introduction to LongevityDeterminants of Future Mortality20
  21. 21. Future Mortality Rate DeterminantsAge Effect: In general, the older the person the higher the mortality rate. Exceptionally however:• New-borns exhibit higher mortality rates than, say, 2 year olds.• “Hump Effect”: young male adults see a localised peak in mortality (mainly due to accidents).• After this point, mortality rates increase exponentially.Period Effect: Captures mortality rate improvements for the same age group (e.g. 65 year olds) acrosstime.• Advances in medical science, education and sanitary conditions are major reasons for people livinglonger than previous generations.• For example: a person aged 65 in twenty years time is likely to have a lower mortality rate than aperson aged 65 today.Cohort Effect: Captures mortality rate improvements for people born in a particular year.• For example: Mortality rates improved faster for groups of people born in the first half of 20thcentury than those born in other periods.Introduction to LongevityDeterminants of Future Mortality21
  22. 22. Age effectAge effect describes the relationship between ageand mortality rates. The probability of dyingincreases as people becomes older. These mortalitytrends exhibit an exponential behaviour.Period effectPeriod effect captures the impact that time-specificevents and changes have on the number of deaths.The time period may span one year or multipleyears.0.000.100.200.300.4020 40 60 80 100mortalityrateAgeAge Effectmortality rates for male aged 20 to 100 in E &Win 2003realised mortality rates for male aged 20 to 100 in year 200300.010.020.030.040.051920 1940 1960 1980 2000mortalityratePeriod Effectmortality rates for male aged 65 in 1920 to 2003realised mortality rates for 65 years old male22Introduction to LongevityDeterminants of Future Mortality
  23. 23. Cohort Effect• “Cohort effect” describes the phenomenon that different cohorts exhibit different rates of mortalityimprovement.• In the UK, it is observed that people born between 1925 and 1945 (and centred around 1931) haveexperienced a higher improvement in mortality rates than people born before or after thisgeneration. And this group of people are referred as the Golden Cohort.Source: GAD 23Introduction to LongevityDeterminants of Future Mortality
  24. 24. Impact of this Golden CohortThe significantly high mortality rate improvement for this cohort has had the followingimpact on DB pension schemes,- This cohort of people are living longer than expected.- People born after this cohort are living even longer thanks to the raised improvementbasis.- The impact of the cohort effect on pension payout is sustained from the first payment,as for each and every year of pension in payment, there are more people surviving thanexpected.Life expectancy for 65 years old male:= 19.78 years assume no cohort effect.= 23.66 years under Long Cohort projection24Introduction to LongevityDeterminants of Future Mortality
  25. 25. Possible Causes of this Golden Cohort• World War II (adverse conditions applying to the previous generation)• Diet (more vegetable and bread, less cheese, sugar and soft drinks)• The Welfare State (free secondary education and launch of the NHS)• Smoking Behaviour (cigarette consumption fell steadily from 1960s)• Birth Rates: the golden cohort is a period of low birth rate, just between two babybooms. There may be a larger proportion of this cohort in higher socio-economic groupthan previous generation.Source: R.C. Willets (2004), The Cohort Effect: Insights and Explanations• However, there is no concrete evidence that the factors discussed above are the directand true causes of significant mortality improvement of this golden cohort.25Introduction to LongevityDeterminants of Future Mortality
  26. 26. Smoking Ban 01 July 2007 in England• At least 400,000 people have stopped smoking because of the ban.• The smoke free legislation could prevent 40,000 people dying overthe next decade.• These figures show the largest fall in the number of smokers onrecord.• This smoke-free law protects people from the harmful effects ofsecond hand smoke as well as helping people to quit smoking.• Total sales of alcohol fell 8%, which also contribute to longer life.• Does this leads to accelerating mortality reduction?• Is another Golden Cohort forming?Source: Cancer Research UK 26Introduction to LongevityDeterminants of Future Mortality
  27. 27. ContactsDawid Konotey-Ahulu | Partner Direct: +44 (0) 207 250 3415dawid@redingtonpartners.comRobert Gardner | Partner Direct: +44 (0) 207 250 3416robert.gardner@redingtonpartners.comRedington Partners LLP13 -15 Mallow Street London EC1Y 8RDTelephone: +44 (0) 207 250 3331www.redingtonpartners.comTHE DESTINATION FOR ASSET & LIABILITY MANAGEMENTContactsDisclaimerDisclaimer For professional investors only. Not suitable for private customers.The information herein was obtained from various sources. We do not guarantee every aspect of its accuracy. The information is for your private information and is for discussionpurposes only. A variety of market factors and assumptions may affect this analysis, and this analysis does not reflect all possible loss scenarios. There is no certainty that theparameters and assumptions used in this analysis can be duplicated with actual trades. Any historical exchange rates, interest rates or other reference rates or prices which appearabove are not necessarily indicative of future exchange rates, interest rates, or other reference rates or prices. Neither the information, recommendations or opinions expressedherein constitutes an offer to buy or sell any securities, futures, options, or investment products on your behalf. Unless otherwise stated, any pricing information in this message isindicative only, is subject to change and is not an offer to transact. Where relevant, the price quoted is exclusive of tax and delivery costs. Any reference to the terms of executedtransactions should be treated as preliminary and subject to further due diligence .Please note, the accurate calculation of the liability profile used as the basis for implementing any capital markets transactions is the sole responsibility of the Trustees actuarialadvisors. Redington Partners will estimate the liabilities if required but will not be held responsible for any loss or damage howsoever sustained as a result of inaccuracies in thatestimation. Additionally, the client recognizes that Redington Partners does not owe any party a duty of care in this respect.Redington Partners are investment consultants regulated by the Financial Services Authority. We do not advise on all implications of the transactions described herein. Thisinformation is for discussion purposes and prior to undertaking any trade, you should also discuss with your professional tax, accounting and / or other relevant advisers howsuch particular trade(s) affect you. All analysis (whether in respect of tax, accounting, law or of any other nature), should be treated as illustrative only and not relied upon asaccurate.27

×