You are here

Longevity Risk Framework

The risk management of longevity is still in its infancy and there are a number of aspects that could improve this:

  • Creation of an industry-standard definition of all the risks behaviours underlying longevity risk.
  • Development of a method to benchmark the output of different risk models used by individual companies using this standard definition.
  • Identification of new ways to reduce risk using this standard definition to identify the intrinsic and avoidable risks.
  • Consideration of the differing longevity risk exposures of different kinds of beneficiaries

The MRSC has published for consultation an IFoA Longevity Risk Framework that is intended to address the first bullet.

The consultation period is open until 31/3/21 and we would welcome any comments or suggestions relating to the proposed framework or the document more generally. Please send any comments to research@actuaries.org.uk.

Summary of Framework

The proposed framework has been designed to achieve the following qualities:

  • The taxonomy should be applicable to both “economic” and “one year” assessments of risk
  • It should differentiate between the systemic population risk (to which all providers are exposed albeit to in different extents) and the specific portfolio risk (to which individual providers may have materially different exposures)
  • It should be applicable to all forms of longevity exposure and longevity risk management approaches

It contains 10 risk components split between those affecting the general population and those that would affect the specific portfolio. The risk components are described in the table below.

 

Risk Component

Definition

Example

Population Risks

Event Risk

Risk of future longevity events occurring at times or with effects not consistent with the assumptions

Reduction in smoker propensity since the 1970s

Population Modelling Risk

Risk that modelling choices or interpretations made regarding the reference population are incorrect (or change) without the data or information changing

Recognition of the cohort effect

Population Mis-estimation Risk

The risk that the reference population assumption mis-estimate the correct level of the population mortality rates

Overestimation of mortality improvement in the late 00s (realised following the 2011 census)

Population Volatility Risk

Risk of short-term deviations in reference population mortality improvements from the underlying level of mortality improvement owing to systemic effects

Poor performance of 2015 flu vaccine

Portfolio Risks

Heterogeneity Risk

The risk that lives with materially different longevity profiles are considered homogenous within a classification group

Lack of behavioural or mental well-being information when determining assumptions

Classification Risk

The risk that lives are misallocated to a classification group  within the mortality basis and utilise assumptions that are not appropriate

Inaccuracy of assumed impairment level based upon individual medical information

Basis Risk

The risk that the assumptions derived are not relevant to the lives in the portfolio (including geared impact on the portfolio exposure to future longevity events)

Uncertainty in relevance of the slowdown in population mortality improvements since 2011

Portfolio Modelling Risk

Risk that modelling choices or interpretations made regarding the portfolio are incorrect (or change) without the data or information changing

Uncertainty in the shape and duration of anti-selection effects

Portfolio Mis-estimation Risk

The risk that portfolio adjustment assumptions derived from external evidence and/or empirical experience  mis-estimate the correct level of the assumption

Limited credibility of experience at older ages

Portfolio Volatility Risk

The risk that even if the classification and the assumptions are correct the specific mortality and morbidity events that occur cause the pattern of future cashflows to change

The number of actual deaths that occur over a period may differ from the expected number of deaths though random variation

Filter or search events

Start date
E.g., 24/02/2021
End date
E.g., 24/02/2021

Events calendar

  • Sub-Saharan Africa Town Hall

    26 February 2021

    Spaces available

    IFoA Immediate Past President John Taylor would like to invite you to the Institute and Faculty of Actuaries’ (IFoA) virtual SSA Town Hall 2021, hosted by John Taylor with IFoA Council Members Mukami Njeru, Prosper Matiashe and IFoA Chief Executive, Stephen Mann.

  • MENAP Town Hall

    2 March 2021

    Spaces available

    IFoA Immediate Past President John Taylor would like to invite you to the Institute and Faculty of Actuaries’ (IFoA) virtual Middle East, North Africa and Pakistan (MENAP) Town Hall 2021, hosted by John Taylor and IFoA Chief Executive, Stephen Mann. 

  • Spaces available

    COVID-19 has seen a marked increase in mental health issues. We all have mental health and poor mental health has serious consequences for individuals and our workplaces, with it costing UK businesses £33-42 billion annually.

  • The price is righter

    16 March 2021

    Spaces available

    This webinar provides an overview of the state of the UK protection market, and how different insurers are using different levels of sophistication to price (such as using customer demand models). It considers how insurers have implemented these sophisticated pricing techniques, and the practical challenges they have faced.

  • Spaces available

    This discussion will revolve around the latest industry developments including and introduction to Part VII transfers and Schemes of Arrangement (process, parties involved and recent events), insights and lessons from recent with-profits transactions and restructurings (including Equitable Life and Pru-Rothesay), how firms can apply these learnings to future arrangements, and the outlook for future with-profits transactions and restructurings (including the impacts of Covid-19 and Brexit)

     

  • Spaces available

    What is stewardship and how has the landscape changed under the 2020 UK Stewardship Code?

    • How does effective stewardship create long term value for beneficiaries?
    • What roles do asset owners and asset managers play in active stewardship?
    • A practical approach to stewardship reporting
  • Spaces available

    Income drawdown products offer an investment strategy to generate an income in retirement.  However, for those needing to decumulate their capital to provide a sufficient income in retirement, sequencing risk is high.  This is the risk that poor returns are experienced when capital is highest (in the first part of the decumulation phase) and good returns when capital is lowest (in the last part).   It is very difficult to recover from this risk, if it is realised.  This means that income drawdown products are not very resilient for those needing to decumulate their capital.