Companies like Challenger, which insure retirees against the risk they will live longer than they expect via products such as annuities, need to source capital from investors who believe improvements in mortality will not rise dramatically.
Mr Howes, who spoke at an Institute of Actuaries of Australia Summit in Sydney yesterday about the ‘Demographic Time Bomb Ahead’, said there has been a tendency in the Australian financial services industry to assume such capital is not available.
“The longevity component of the capital requirements of an immediate CPI-linked annuity for a 65-year-old is about 8 per cent,” Mr Howes said.
At present, the annuity market only captures 4 per cent of the $60 billion in superannuation funds that move from the accumulation phase to retirement every year, he said.
Even if the annuities market captured 25 per cent of the market, the sector would only require $1.2 billion in capital, said Mr Howes.
“That is considerably less than the market capitalisation of the ASX200 [$1.5 trillion], the financial services sector and even one of the big four banks,” he said, adding that this doesn’t take into account the offshore capital that is currently “craving” some Australian longevity risk.
Concerns about ‘super bugs’ and other unpredictable events which could result in large numbers of people dying prematurely represent ‘mortality risk’ on the balance sheets of global insurers, he said.
“The global insurance market has a near insatiable appetite for longevity risk to offset what is a much larger portfolio of mortality risk,” said Mr Howes.
He played down concerns from other speakers at the summit that new medical technologies – such as 3D printing of human organs and cheaper mapping of the human genome – could see sudden spikes in improved longevity, which could potentially bankrupt companies like Challenger.
“We won't cure cancer in one magic step. There won't be a single nanotechnology which all of a sudden ends the ageing process and makes us all immortal,” he said.
Improvements in longevity will be gradual, and the science that will drive mortality improvements over the next decade is largely known, said Mr Howes.
“To protect against population longevity risk we don't need a crystal ball … we need capital,” he said.
Mr Howes urged those involved in policy discussions “not to try and solve a problem that we don't have”.
“A knee-jerk reaction [to longevity risk] would be to ask for… taxpayer-backed longevity bonds or an aged pension top-up scheme,” he said.
“Transferring longevity risk to the government doesn't make it go away; it just puts the problem back on taxpayers. And tomorrow's taxpayers – our children – already hold too much longevity risk.”
