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Strategies and technologies to boost behind-the scenes efficiencies

need to better understand how these seemingly disparate risks interact. In order to maintain proper capital requirements, he says, carriers will have to project stochastically for a broader range of economic conditions. “ Thirty years ago it was mainly mortality risk for life insurers, but now the products being sold are asset accumulation products, so life insurers are now much more exposed to the capital market risk.”

Risk and Opportunity

Donna Kinnaird
Swiss Re & Health America

losses recognized throughout industry investment portfolios.

Another under-appreciated risk specific to life insurers was the complexity engendered by living benefits guarantees contained in many variable annuities. Some insurers poorly designed these contracts with insufficient hedges, so when the stock market tanked, policyholders selected against them and put them in a tough spot. Even now as the stock markets recover, insurers need to account for the impact a prolonged low interest rate environment will have on bond yields. “If we go through five or six years of potentially low interest rates, what does that do to portfolio rates?” asks Greg Smith, VP Insurance Research and Consulting, for Hartford, Conn.-based Conning Research & Consulting.

Bennett says the crisis drove home the widening breadth of financial risk for life insurers and underscored the

THE WILDCARD

In addition to a better understanding of these capital-market incurred risks, life insurers are also looking to better account for their traditional antagonistic risks—mortality and longevity. While the risk of a short spike in mortality claims presents near-term risk to life insurers, the corollary of populations with increasing life expectancies also presents risk management challenges. Traditionally, insurers could hedge one against the other, because the 40-year old making premium payments on a life insurance policy was not likely to be receiving annuity benefits. However, this balance has become an increasingly difficult one to achieve. An insurer overestimating longevity risk may hold too much capital in reserve, instead of employing it to better effect elsewhere in the business. Underestimation brings its own set of problems.

A recent report from Zurich-based Swiss Re, “A Short Guide to Longer Lives: Longevity Funding Issues and Potential Solutions,” notes that underestimating life expectancy by just one

With life expectancy increasing, life insurers, pension plans and
governments are confronting a growing longevity problem. individuals are also incur-
ring greater longevity risk as they outlive their savings. “you are seeing longevity risk
being transferred back over to the individual and it’s a pretty sophisticated risk for
individuals to handle on their own,” says donna Kinnaird, president of swiss re life &
health america.
thus, the longevity problem also presents an opportunity. reinsurers are well po-
sitioned to help mitigate longevity risk, Kinnaird says. “We are going to have to find a
way to help people handle this exposure.”
however, one concern is finite capacity in the reinsurance market as swiss re esti-
mates that globally more than $17 trillion worth of pension assets are exposed to
longevity risk. “We’ll eventually get to the point where there’s just too much risk for
reinsurers to be of assistance,” she says.
accordingly, Kinnaird says cooperation between governments, employers and the
financial services industry will be needed in order to create the mechanisms to share
this risk with the broader capital markets. to this point, a group of insurers, reinsurers
and banks have set up the life and longevity Market association to promote a dedi-
cated capital market for longevity and mortality-related risk.

year can increase liabilities for insurers or pension plans by up to 5%. “One thing that is the wildcard is systemic longevity risk,” says Donna Kinnaird, President of Swiss Re Life & Health America.

Since a universal base table for life expectancy does not exist today, life insurers will need to develop internal models to get a better grasp on life expectancy.

“Our ability to model the risk is
certainly improving,” Kinnaird says.
“Reinsurers and actuarial societies
that have access to large amounts of
data are doing the things we need to
do to model longevity risk.”
Conning’s Smith also perceives
modeling techniques advancing. “The
state of practice for modeling has im-
proved quite a bit,” he says. “The
models are well aligned to blocks of
business that people are projecting
with them.”
Andrew Coburn, VP for the Emerg-
ing Risk Solutions business unit of
Newark, Calif.-based Risk Management
Solutions Inc., says life insurers are be-
ginning to catch up to property/casu-
alty (P&C) and reinsurers in blending a
number of scientific and engineering
disciplines together with actuarial sci-
ence. Much as catastrophe modelers
have incorporated the research of me-