Investment Magazine

Actuaries warn of longevity risk and market usurpers

  • 1 May, 2012
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This is an archived article originally published on I&T News

How to plan for longevity risk in the future if someone’s brain can be kept alive long after their body has wasted away is one of the more unusual questions posed in a new discussion paper released by Australia’s peak actuarial body.

While engaging in some science fiction theorising, the Actuaries Institute has a harsh reality check for the financial services industry, saying that longevity risk is a potential “black swan” that needs to be comprehensively managed.

The paper, Living until 120: The Implications for Absolutely Everything, also has a stark warning for financial product providers, saying they could lose their positions in the market to potential usurpers like Google and Apple.

Authors Melinda Howes and Barry Rafe say financial service providers may be reduced to cut-price wholesalers of financial products having to go through “gatekeepers” such as Apple and Google.

“These financial services organisations, including super funds, need to take a good hard look at themselves and look over their shoulders at how some of the non-financial services organisations might come in and snatch the main relationship with their customers out from under their noses,” says Howes, chief executive officer of the Actuaries Institute.

“If you have a situation where you are getting your financial information and key decisions from some sort of app provided by a non-financial services organisation, then they will become the gateway… The current big investment houses become a wholesaler, not a retailer, and [sell] just one product on a platform.”

When it comes to longevity risk, Howes says that the market has tried and failed many annuity-type products but that regulatory changes are needed to make these products viable and attractive.

Financial product providers should look to work with the government and others in the investment industry to design insurance-type products that deal with the major risks faced by members, namely,  a major market downturn and or that they will outlive their savings.

Howes and Rafe predict that financial products of the future will integrate ideas of behavioural finance and psychology, and be designed to provide a sense of security to people as they age.

While acknowledging that longevity risk was on the radar of many in the financial services industry, Howe says the potential volatility of this type of risk is not something widely considered.

“If we crack things like cancer or certain viruses, longevity could kick out really quickly and really suddenly,” she says.

“A lot of financial services organisations are aware of longevity risk and are looking at it. But I think what is not realised is how fast it could change. We could get a real jump, or discontinuity, and we could all be living 10 years longer – just like that.”

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