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The Actuary The magazine of the Institute & Faculty of Actuaries

Mortality: Longevity uncertainty

An Institute Sessional Meeting was held at Staple Inn on 22 September 2008 to discuss the Mortality Research Steering Group’s paper ‘Scoping Mortality Research’ by C. Macdonald. The aim of the study was to map research relevant to mortality developments across a wide range of disciplines, including biomedicine and public health.

Looking broadly at possible future scientific developments and changes in lifestyle, increases the uncertainty associated with mortality projections, compared with standard actuarial techniques for projecting past trends into the future. A better understanding of these uncertainties is a good thing if further research serves to narrow the range of likely outcomes. However, in the medium term, the scientific uncertainty is likely to increase.

Medical advances have been important in recent years in increasing life expectancy, particularly in the prevention and treatment of circulatory and respiratory disease, but there has been limited impact on mortality from cancers. The main causes of mortality and morbidity are subject to active investigation, both by the academic biomedical research community and the pharmaceutical companies. A complementary approach to tackling age-related disease has been recognised for some time and is now beginning to acquire some momentum; the idea being that if we have a better understanding of the underlying biological basis of ageing, we would be more able to devise interventions to counter the diseases and conditions that contribute to late life frailty of body and mind.

Researchers are now moving into the study of the basic science of ageing and research funding is growing. The prizes for success are glittering, both reputational and commercial, but until we understand the science better, the prospects for practical application will remain unclear. So I expect early research progress to raise possibilities, but some time to elapse before we can judge the benefits to the population at large. In the meantime, a considerable uncertainty hovers over the parts of the financial services sector for which longevity is an important determinant.

Another source of uncertainty lies in the success or otherwise of public policy and of personal effort. There are large differences in life expectancy between population subgroups in quite close geographical proximity - for instance, the eleven years increase in male life expectancy on travelling four stops up London’s Northern Line, from King’s Cross to Hampstead. It is a key policy for the National Health Service to reduce such inequalities, although the prospects for making an impact are unclear. At best, the ‘clean living’ adopted widely by the professional class will diffuse to the lower income socio-economic groups, so that the gap will narrow. At worst, the better educated will increasingly take up health-seeking behaviours, while the others will prove reluctant adopters and the disparity will increase.

Uncertain prospects for success of both scientific research and policy-driven interventions mean that there is a substantial uncertainty in mortality to be managed. Such uncertainty is a particular problem for financial services that promise benefits over an extended period of time.

The financial services sector has a mixed record when it comes to managing new kinds of risk and uncertainty in the face of commercial pressure to do business, as the recent crisis in banking demonstrates. The sector readily generates new investment products, a not uncommon characteristic of which is failure at the outset to fully identify and disclose the risks involved. Consequently, new products seem more attractive in terms of reward for risk than more established and understood lines. Initially, these innovative products sell well and big profits and bonuses are earned, at least until market conditions change and the latent risks are exposed. Disappointment and recriminations follow, with complaints of mis-selling and compensation being paid, as we have seen in retail markets with endowment mortgages and split-capital investment trusts. We used to think that this was a problem particular to the retail sector where unsophisticated consumers couldn’t or wouldn’t read the small print and that professional investors in wholesale markets could be relied upon to make sound judgements after due diligence - but as we have seen, that is far from the case.

Failure to manage the uncertainties associated with longevity prospects has the potential to do a serious damage to society. There is the same conflict between the urge to write business in a competitive market and the need to maintain substantial prudential allowance against uncertainty. The more players in a market, the stronger the competitive pressures are - which generally would be a good thing for consumers, but not necessarily so when uncertainty has to be managed. Boards of companies need to be strong and well-informed, supporting risk managers and holding marketing staff to account. For the life insurance and pensions industries, actuaries are in a position analogous to risk managers in investment banks and credit rating agencies, who all too often have performed poorly. We need actuaries to do a much better job, helped by professional status and the developing regulatory framework. In my view, the central challenge for both the Profession and the Board for Actuarial Standards is to manage longevity uncertainty. In this context, actuaries of particular importance are those who advise the regulators - the FSA and The Pensions Regulator - as well as Government. They need the support of professional colleagues.

Thought needs to be given to how to stress test against, for example, a step change improvement in longevity resulting from scientific progress. It is helpful that it takes a number of years from a research breakthrough to bringing a new drug to market on a significant scale. Consider statins, now widely used to lower cholesterol levels and reduce the risk of cardiovascular diseases. The first biologically active agent was isolated in 1976, and the outcomes of successful large clinical trials were reported in the early 1990s. Sales grew rapidly thereafter, such that statins are now the largest selling class of drugs in the world, with some three million people in Britain in receipt of prescriptions.

A breakthrough in ageing research that pointed to a drug with an impact on age-related disease would doubtless be taken up at least as fast as statins; subject to a lack of toxicity which has been a virtue of this drug class. Such is the interest in anti-ageing remedies and the commercial potential, that the marketing of a genuine innovative treatment would proceed with considerable expedition. Would those parts of the financial services sector that routinely take on longevity risk be able to cope with such a scenario?

The uncertainty associated with future longevity prospects requires active engagement by the profession as a whole.

David Metz is a visiting professor at University College London and a member of the Consumer Panel that advises the Financial Services Authority. He is co-author of the book Older richer fitter: identifying the customer needs of Britain’s ageing population, Age Concern Books, 2005.