The risk management
solutions company said the approach was used to address problems previous
longevity models for The Netherlands had faced with incorporating future
developments in medical science into mortality improvement projections.
Its analysis, which incorporates
estimates of lifestyle trend changes, medical advances and future healthcare
environment specific to the Dutch population, is intended to help capital
market investors quantify Dutch longevity risk.
Among the specific
challenges the Dutch exercise posed for modelling future mortality improvement
solutions are the high mortality improvement rates – up to 4% a year – recorded
in The Netherlands over the past decade.
The country has
higher smoking rates than other European countries, but slightly fewer deaths
from cardiovascular disease, lower obesity levels and higher standards of
healthcare. It also has a marked birth cohort effect around the birth year of
1936 – six years later than the similar effect in the UK.
With uncertainty over
future life spans of retirees drawing pensions, funds, annuity providers and
insurers are increasingly looking to protect themselves from potential funding
According to RMS, longevity
risk transfer to the capital markets has proved difficult in the past due to
uncertainties inherent in longevity risk. Its modelling is intended to underpin
investor confidence in risk assessments.
The Netherlands has
seen increasing demand for longevity protection as a result of the major revision
of actuarial tables by the Dutch Actuarial Society in 2010 which was prompted
by the mortality improvements seen earlier in the decade. This caused a
significant increase in liabilities for many pension funds.
RMS believes its approach to longevity risk modelling is ‘more
transparent’ than a statistical model. Instead of extrapolating historical mortality
rate volatility out into the future, its model begins with current mortality
levels and trends and then explores scenarios for future trends in the
different causes of mortality improvement. These incorporate likely timelines
for medical developments in the lab or new drugs that are yet to be approved.
The company now has models in place for the UK, US,
Canada, The Netherlands, France and Germany.
Andrew Coburn, senior vice president of LifeRisks at RMS,
said: ‘There are very interesting, different local market conditions for the
variation in longevity risk from country to country.’
‘Demographics, social structures, and lifestyle patterns
are very different in each country, and the national health care systems result
in some very different health outcomes for local populations. These need
careful adaptation to model life expectancy projections in each territory.’
Peter Nakada, managing director RiskMarkets at the
company, added: ‘Longevity is one of the most difficult risks to take to
market. There is clearly strong demand for longevity de-risking solutions, but
there is such a wide spread of opinion and disparity of expectations around the
‘We believe that RMS can help facilitate the growth of
this market by providing an objective, verifiable benchmark assessment of the
risk that has the respect of investors.’