Authors: Servaas Houben
Link: http://theeuropeanactuary.org/downloads/TEA%206-1-screen.pdf (pages 10-11)
Publication date: 2015-10
——————————————————————————————————————————
For the past decades, longevity risk has been a concept which seemed to circumvent the Caribbean: lack of adequate healthcare, natural disasters, and the joy of life have all been suggested as explanation for this phenomena. (Un?)fortunately, also life expectations have improved in the Caribbean leaving pension funds and insurance companies with significant challenges: due to lack of data and relatively small populations, the impact of random events, and sample error can be significant. Furthermore, distinguishing between life expectancy of the insured and uninsured parts of the population becomes even harder when taking into account the relatively high level of immigration. How can governments, insurance companies and pension funds prepare for these upcoming changes?
Historical developments
Despite the geographical distance between Western Europe and the Caribbean, both regions share several striking similarities when it comes to life expectancy: both regions haven’t suffered the tragedies from war or public revolt after 1960 and there haven’t been any major regime shifts. The downfall of the Soviet union and Comecon, had a significant impact on the life expectancy in Central and Eastern Europe:
Figure 1: life expectancy in Central and Eastern Europe over the past 50 years
On the other hand the relative stability in both the Caribbean and Western Europe resulted in a steady increase in life expectancy since 1960:
Figure 2: life expectancy in Western Europe over the past 50 years
Figure 3: life expectancy in the Caribbean over the past 50 years
Especially the steady increase in life expectancy in Western Europe across the entire area is quite remarkable: the five countries shown in the graph above show correlations in the range of 0.986 and 0.998, despite the variety in social economic policy. For example the GINI index of the most “equal” country in this region, Sweden, varied between 1960 and 2013 between 25.4 and 27.4, while the most “unequal” country, United Kingdom, showed values in the range of 36.2 and 38.0. Despite these differences in views regarding social equality, this hasn’t reflected in material differences in life expectancy trends reflecting a correlation of 0.997 between the two countries.
The Caribbean on the other hand have also witnessed a steady increase in life expectancy. However, the progress has been less homogeneous throughout the region: fast growers like the Dominican Republic and St Lucia have witnessed substantial increases in life expectancy of +20, and +15 years respectively, while Trinidad and Tobago has experienced a rather modest increase of +7 years throughout this period. Apparently throughout the Caribbean region, country specific circumstances play a more essential role than is the case in Western Europe.
Preparing for the future
Fortunately, most Caribbean countries have already taken steps to prepare for this increased life expectancy by changing their basic pension age for government pension schemes, in line with their Western European counterparts, although the percentage of GDP spend on pensions does not always seem to be in line with this:
Table 1: government basic pension scheme retirement age and % pension spending of GDP
However, table 1 above also confirms the heterogeneity within the Caribbean region: while some countries like Barbados have already implemented significant changes in their retirement age (which even exceed some Western European countries), it seems like other countries like the Dominican Republic haven’t kept up their state pension retirement age with developments in life expectancy. As long as the working population is still significantly outnumbering the retired part of the population, this should not result in immediate issues in the short run, however changes in the retirement age in the long run might be inevitable.
Conclusion
Recent data indicates that longevity is also affecting the Caribbean and fortunately some governments have already been pro-actively preparing for these effects. However, pension funds and insurance companies have less flexibility changing either participants’ contributions, retirement income, or retirement age and hence need to start preparing for these developments. The lack of longevity reinsurance at present, and relatively small insured populations (resulting in additional statistical uncertainty) make this task even more challenging. Product innovation like flexible annuities based on indexation or profit sharing may share the longevity risk between insurance company and policyholder. Nevertheless, for the moment the basic but crude tool of additional capital requirements and buffers might be the most practical solution for a development which remains very difficult to predict in a diverse region.
References
OECD, Pensions at a Glance 2013 OECD and G20 indicators, 26 November 2013
OECD, Public Expenditure on Pensions, in Pensions at a Glance 2011: Retirement-income Systems in OECD and G20 Countries, 2011
OECD, IDB, The World Bank, Pensions at a Glance Latin America and the Caribbean, 1 December 2014
World Bank data on life expectancy at birth, total (years) http://api.worldbank.org/v2/en/indicator/sp.dyn.le00.in?downloadformat=excel
ActuaryAbroad 