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Longevity Risk

(Article published in the June 13, 2007 issue of Manila Standard Today)  
      It had to be Reynaldo A. de Dios who, to the best of my knowledge, is today’s oldest living icon of the insurance industry in the Philippines.  Only he, who has been in insurance for almost 60 years, could have convinced me that, at my age of 63 next month, I need life insurance. 

His case was very compelling.  Succinctly expressed in a short paper clearly designed for publication and explained at the Baron’s Bar of the Tower Club last week over a delicious lunch of vegetarian sandwich escorted down by three bottles of cervesa negra, his message was that he sees the growing need for longevity insurance. Longevity insurance is a type of life insurance designed to manage the risk of living too long, and too well into years of hospital, medical, and geriatric expenses way beyond the capacity of one’s savings and investments to answer for. 

 A summary or paraphrase, no matter who accurate, however robs the message of the persuasive force of its medium.  Hence, here is the unexpurgated paper entitled “LONGEVITY – LIVING TOO LONG IS ALSO A RISKby Reynaldo A. de Dios, Risk & Insurance Management Consultant:

 “Webster’s dictionary defines longevity as a long duration of individual life. Thus having a long life is deemed a gift from God. But in the present economic and social environment living too long has become a risk not only to the individual but also to one’s family and society in general.  From another perspective, longevity risk is the possibility that people will outlive their savings. Those specially affected are pensioners and retirees depending solely on the monthly benefit payments from the Social Security System and who have not been able to build up resources to fund the costs of living too long which require medical, hospitalization and caregiving services. As a consequence, one either has to continue working or depend on their children or relatives. At present, responsibility for meeting the risk of old age is shifting to the ageing individual with governments encouraging citizens to save for their own protection as relying on family members may be too much of a burden on them. However, there is an upside, as homes for the aged and pharmaceutical companies producing life prolonging drugs benefit if the trend towards longevity continues.

In the developed countries life expectancy has not only risen but there is even an acceleration in the rate of increase which puts social security systems and corporate pension schemes under heavy strain.

 As the number of pensioners and retirees rise coupled with a shrinking workforce, this development is having a profound impact on society including economics and politics. To fully appreciate the effects of adverse demographic profiles, Japan is a case in point as projections indicate that its population will shrink from around 127 million in 2006 to 100 million in 2050. This means that the dependency ratio of workers to retirees will rise to 50 percent. It is also projected that by 2050 the percentage of the world population of age 60 plus will have doubled. Thus, the cost of providing retirement income, healthcare and housing to the elderly will increase significantly – a most critical issue.

 There is definitely an ageing trend in the Philippines as data from the National Statistics Board Office shows that the number of senior citizens is expected to increase in 20 years from 5.3 million to 7 million by the year 2025 which includes over a million Filipinos age 80 and above.  Furthermore, at present the average mortality age of the Filipino male is around 66.1 whilst the lifespan of the Filipina is 71.6 years or a 5 year longer period. This is validated by the rates of the life insurance companies which charges higher premium on male lives vis-à-vis female lives at the same age. So far, the Filipino tradition of caring for ageing parents is still being practiced but the information age and changing values are starting to influence the young professionals especially in the urban cities who oftentimes may not be able to give sufficient time, attention and the resources to care for elderly relatives.

 To cope with the high cost of meeting all the expenses associated with living too long, life insurance companies in certain developed countries like the United States United Kingdom, France, Canada Israel, Japan, and recently Singapore, have introduced long term care insurance which pays for services and support to help policyholders who are unable   to perform certain activities of daily living such as bathing, dressing and feeding.

 While the primary objective of life insurance is to meet the risk of premature death and to build up funds for retirement, long term care insurance instead is a preparation for the expenses that will be incurred if the policyholder lives too long and becomes a great burden to his family especially if he/she develops a cognitive impairment such as Alzheimer’s disease.

It is unfortunate but this type of insurance is not yet available in the Philippine life insurance market. In fact, there is now being introduced in the United States “longevity insurance” which is a new type of deferred annuity that allows investors to pay a lump sum upon retirement in return for the guarantee of an annual payment upon reaching a certain age. However, this product is not yet being fully marketed.

 Mr. Bill Hogan of Metropolitan Life, USA, designed a Global Product-Life Cycle chart which could serve as guidelines for the present young generation in preparing to meet the risk of longevity. This chart is reproduced for their benefit to appreciate the various stages of life and the need to save for their old age.”

 I cannot see why the big boys of the Philippine Life Insurance industry, like PhilAm, SunLife and Federal Phoenix, could not design a longevity insurance policy for Philippine residents.  The figures on Filipino longevity are already with them.  All they need is to refine the data, from information on deaths at the National Statistics Office, to determine how many are and will be living but, as Rey de Dios who turns 80 next month considers himself, “officially dead” at least per actuarial tables.  The major variable, of course, is the cost of old age medical care.  But then, quantifying that risk and spreading it around is the job of insurance.

 There is already a need for longevity insurance.  Soon that need will be a demand.  The private sector would do well to fill the breach voluntarily, rather than wait for legislation to force its hand.