Changing demography offers opportunities for insurance products to cover longer, healthier lives. By Peter Maynard
Demographic trends have caused quite a stir in recent years: greater longevity, falling birth rates and baby-boomer bulges have been conspiring in developed countries to produce population ageing that has profound implications for pension and welfare funding. These trends have led to some weakening of state provision, although some countries have yet to address the issue head-on and the longer-term consequences of delayed action have yet to be seen.
But the longevity component of these macro-demographic trends is worth a closer look. Over the past 150 years, life expectancy in developed countries has roughly doubled, with particularly strong improvements since the turn of the century. Much of this improvement, of course, has been due to reductions in infant and child mortality, but mortality rates for the elderly have been improving and, indeed, accelerating over the course of this century (see Figure 1).
Can these improvements be sustained? Can they be accelerated further? It seems likely that they can. A great deal of medical research is now devoted to the health of older people, and advances in genetic science seem likely to offer benefits too. The not-too-distant future should see significant advances in the treatment of cancer, heart disease and arthritis and, maybe more exotically, but not any less realistically, the prospect of spare-part surgery is coming ever closer. (Ironically, the biggest barrier to these developments is public concern that science is advancing too quickly, resulting in pressure on governments to put a brake on research. There is a need for more informed and balanced public debate about the issues.)
Even so, it is far from clear how much life expectancy can be improved, and how quickly. On current estimates, numbers of the very elderly will increase sharply - in some countries the 100-plus group by around 250%. But a team at the United Nations has estimated that with substantial falls in deaths due to the major causes, the subsequent new levels of mortality would result in life expectancies of 90 or so years. They calculate that by 2020 14% of the population of Western Europe could be aged 75 and over - nearly double some official forecasts for individual countries.
The big question, of course, is whether each successive generation sustaining a longer life can enjoy a longer, healthier life. At the same time as years are added to life, can life be added to years? One school of thought believes that extending life significantly must generally be at the expense of quality of life; Alzheimer’s disease is far more common than it used to be, for example. But research in the US suggests we are seeing increases in healthy and active life expectancy, and data from around the world seems to support the hypothesis that, as life expectancy increases in societies, the proportion of that time spent in good health increases too.
So it looks as though future generations will benefit from a double whammy: longer life and a healthier one at that. But it is not all good news – at least not without some careful forethought by individuals and societies: there are some major implications for personal finance and for work.
Longer, more active lives have to be paid for, and it is not difficult to calculate that people living to 100 or beyond will have to work well beyond the classic 60 or 65 that we are familiar with today. The plain truth is that many of those approaching retirement now will find it difficult to maintain their lifestyles owing to inadequate pensions. That problem will be magnified in future. And the trend in developed countries is for people to retire earlier (see Figure 2). That will have to be reversed.
We will all have to learn a new approach to managing finance over the longer term. (And, of course, if people save more, that will cut consumption, which will have knock-on effects for economies. Nations will have to come to grips with longevity too.)
How will people cope with working to 75, 80 or even beyond? Currently, the classic perception in developed societies of an ideal career is that of progressively increasing responsibilities coupled with commensurate increases in remuneration, culminating in retirement on a pinnacle of achievement. It is highly unlikely that that model is generally viable in an extended working life (unless genetic science can intervene). Given that most people reach an optimum combination of experience, mental agility and physical ability before age 50, it is arguably unrealistic now.
The future looks as though it will need a whole new approach to work, enabling the majority to maximise the potential of their skills and abilities with due rewards over a longer working life.
Employers, of course, have a role to play in helping society adapt to the challenges of living longer. At a very basic level they will need to adjust employment policies, and remuneration packages in particular. Pension plans will need to be ultra-efficient, flexible and portable - even now young people in the UK, for example, say that staying with one employer for a long time is not on their life agendas.
But might the new imperatives for managing lifetime finances involve a blurring of the traditional distinctions between risk and savings? Might we not see new compound products and a disappearance of the familiar life, health and medical insurances?
In an era of exceptional longevity, covering premature death may be less relevant than covering ‘life and its problems’, suggesting new designs of adaptable products, coverage of new risks and solving problems rather than paying out cash.
And such enlightened, effective products will be attractive to employees as individual buyers; why not make them available too as ‘top-ups’, perhaps paid for by payroll deduction? Here, surely, is an opportunity for worksite marketing of financial services to come of age in those markets, where it has as yet failed to make any real impact.
It looks as though a major reappraisal of life and life courses could be needed. It looks as though growing old means excitement, not trepidation. But then maybe we need to redefine old age.
Peter Maynard is head of research at Swiss Re in London. The article draws from the group’s recently issued ‘Insurance report 1999’