Capital markets must absorb longevity risk, insurers say
GLOBAL - Capital markets will have to help governments and the insurance industry absorb some longevity risk, insurers have said.
They said the most likely solution to dealing with the massive increase in public debt due to age-related liabilities was that people would have to work longer.
Speaking at the launch of Global Risks 2011, Sixth Edition - the annual report by the World Economic Forum and its Global Risk Partners that analyses the likelihood and impact of 37 risks - Christian Mumenthaler, chief marketing officer for reinsurance and a member of the executive committee at Swiss Re, said society was not yet ready for that conclusion, however.
"Cultural changes will be necessary to absorb this old population in society," he said. "The question is who will ultimately bear the longevity risk. The insurance and reinsurance industry is starting to absorb some of that risk, but it is much too small to absorb it in a meaningful way on a global scale. So potentially we will have to have capital markets absorbing some of these risks at a price."
Daniel Hofmann, group chief economist at Zurich Financial Services, agreed.
"It is vitally important the insurance industry has the financial markets tools to cope with the longevity risk. That implies, for instance, an ability to access long-dated bonds, which are not here yet, and relates to the ability of producing structured products that would shift some of that risk to the capital markets.
"Unfortunately, with the financial crisis, the pace of financial innovation has almost come to a standstill."
The report concludes that the crisis has drained the world's capacity for dealing with shocks and increased its vulnerability.
It has identified economic disparity and global governance failures as central risks in the global risk landscape, exacerbating and driving a range of other risks.
Three key clusters of risk - macroeconomic risks, the illegal economy and resource limits to growth - create significant liabilities for the coming decade.
Other risks to watch, according to the report, are cyber security, demographic challenges and opportunities, resource security, retrenchment from globalisation and weapons of mass destructions.
Global Risks 2011 will form the basis of a number of formal sessions and informal discussions at the World Economic Forum's annual meeting in Davos-Klosters, Switzerland, later this month.