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Longevity: The final frontier

These are the musings of a working party. Its continuing mission: to explore strange new scenarios, to seek out new drivers and new cohorts, to boldly go where no actuary has gone before…so that we, as a profession, can continue to “live long and prosper”.


04 OCTOBER 2013 | KHURRAM KHAN


Most current approaches used by actuaries for the assessment of future mortality trends are heavily reliant upon reference to historical data. This is not without foundation, but:

•Drivers underlying past trends are often ‘one-off’ type events with limited scope to recur (like the birth of the NHS)

•Mortality trend assumptions are slow to react to ‘real world events’ delaying recognition until the associated effects on lifespan have clearly revealed themselves in past data

Consider the second of these observations.  

An illustration of this point is given below using the recent (2007) public ban on smoking in England and Wales. How many of us changed our future improvement assumption in light of the ban? 

The final frontier

The above framework can be applied to virtually any improvement driver and demonstrates that despite a number of strong ‘early warning indicators’, our existing framework delays acknowledgement of the impact, potentially for decades.

This fundamentally reactive approach underpins “Actuaries revise life expectancy assessment yet again” type headlines that have been common the past few decades. 


Can we do better?

The Longevity Catalysts Working Party has been set up within the profession to answer one simple question:

“What future events are we aware of today whose occurrence is likely to be coupled with a significant impact on UK longevity?”

We refer to these as “Longevity Catalysts”. We extend this to cover events in the recent past whose impact on longevity is yet unknown such as the NHS Bowel Cancer Screening Programme. This forms the foundation of an approach that is more forward-looking in nature and can co-exist alongside current practice.

How can catalysts help?

Consider for a moment a scenario in which a well-defined schedule of Longevity Catalysts exists. How exactly could one make use of this? A few thumbnail sketches of possible uses are provided below with more detail on the Longevity Catalysts working party website (see details below). The schedule of catalysts is intended to represent a set of building blocks and it is the ingenuity of end-users that will ultimately govern wider use – not limited to the ideas presented here.

Risk-Based Capital

Risk-based capital requirements for longevity trend risk have been the subject of much recent discussion. The time horizon of assessment (forthcoming year or run-off) has been a key element of this debate.

The Longevity Catalysts framework provides both regulators and member firms a platform for consideration of:

•those Longevity Catalysts (or combinations thereof) which are consistent with a long-lived capital scenario

•the occurrence of a Longevity Catalyst over the next year together with the corresponding anticipated change in mortality improvement expectations

•the occurrence  of a Longevity Catalyst over the next year together with the extent to which this represents ‘new information’.  Publication of an additional catalyst could also represent ‘new information’.

•an allowance for unknown Longevity Catalysts

Assumption setting

The setting of best-estimate trend assumptions can also benefit by consideration of what (if any) Longevity Catalysts are (already) implicitly allowed for within a given trend assumption.

Pension scheme trustees, employers and insurance company boards would all benefit from an ‘approach’ to setting best estimate assumptions which is based on a set of anticipated reactions to real world events rather than a single, infrequently changed point estimate.

Cause of death modelling

Causal approaches have their advocates and opponents within the profession. Nevertheless, they are increasingly being adopted either directly or to inform assumptions by providing an independent view. The Longevity Catalysts framework can help to directly inform projection pathways for a given cause of death. Furthermore, given that individual causes are often ‘grouped’ for this purpose, the Longevity Catalysts framework could be used to help inform this grouping.



Common currency

Some practitioners use the CMI mortality projections model directly to formulate their trend assumption, whilst others craft their assumption using alternative means but communicate it in terms of equivalent CMI model parameters. Either way, the CMI model is a common currency used to express trend assumptions. This common currency idea translates to Longevity Catalysts. The inherent subjectivity in the formulation of future events or catalysts is mitigated (to a degree) by arriving at a community or consensus view.

Monitoring of key indicators

As shown in Figure 1 the journey from ‘Big Bang’ to revelations in the data is punctuated by a number of clear road signs. This can lead to monitoring of key indicators (such as clear, measurable changes in social behaviour) that will help to trigger a much faster appreciation of the otherwise long unseen process that is going on around us.

Hedging

Well voiced drawbacks of finite term longevity hedges (culminating in an exchange of liability value proxies at the end of the term) can include basis risk and ‘roll forward’ risk but also ‘event’ risk. This is the risk that one or more events over the term of the contract cause universal increases to longevity expectations without any impact on the hedge pay-off (which is based only on visible signals within national population data at the time).

The existence of a well-defined, objective and widely accepted set of Longevity Catalysts can provide a platform for assessing event risk. It can also be embedded into the contract to help mitigate this risk. For example the final pay-off from a 10 year hedge could be structured so that it is (at least in part) linked to the occurrence of one or more Longevity Catalysts. Objective definitions thereof could lend themselves to simple unadjusted inclusion within legal agreements.


So what are these catalysts?

We present a couple of brief outlines here 

1.Production of an orally administered Influenza vaccine 

Current take-up rates for the flu-vaccine (administered via injection – the “flu-jab”) in England sit well below the 75% target set by the WHO.  If an oral vaccine tablet could be developed this would greatly simplify the logistics of annual flu vaccination campaigns and could dramatically increase take-up.


Genetic screening

2.How predisposed are you to to the onset of certain diseases? Genetic screening for BRCA1 / BRCA2 mutations can help identify those at high risk for breast and ovarian cancer.. The explicit trigger in question here is the cost of such screening (plus the associated counselling) falling to or below a level that is universally affordable throughout the UK.

Others are listed at www.longevitycatalysts.com and have been formulated following discussion with a number of third parties.


Conclusion

It is clearly impossible to foresee all future catalyst events that will significantly impact human lifespan. So any schedule of Longevity Catalysts will not capture all possibilities and is thus imperfect.  Yet this serves to illustrate the even greater imperfection of ignoring future catalyst events that are now known – this characterises the current situation. Furthermore, this addition to the actuary’s toolkit has a wide range of potential uses.

The current widespread approach to improvements in mortality adopted by actuaries has sometimes been likened to ‘driving whilst looking primarily in the rear view mirror’. This initiative might then be regarded as driving whilst looking through a murky windscreen, without forsaking those all-important, regular glances in the rear view mirror that we currently rely on.

The final frontier

More information on our initiative, including examples of other catalysts, can be found on our website (www.longevitycatalysts.com). The spirit of this exercise is very much one of collaboration so we would be interested to hear from you via the contact section of the website.

Khurram Khan is chair of the Longevity Catalyst Working Party and Head of Longevity Risk at Pension Corporation

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