Matthew Edwards reviews Longevity Risk, edited by Emma McWilliam
Our profession can claim no monopoly ?in its interest in death. Writing towards ?the end of the sixteenth century, the French sage Montaigne urged his readers, "Let us frequent death, let us get used to it; let us have nothing more often in mind than death." The great improvements in post-retirement longevity over the last 30-40 years have led many of us to follow Montaigne's advice, and longevity has become an absorbing topic with substantial ramifications across many parts of the insurance, reinsurance, pensions and capital markets.
Longevity Risk is a wide-ranging book that seeks to summarise the latest longevity thinking in these areas. The book is a compilation of the fruits of over 20 authors, many of whom are common names in the field of longevity. The chapters are organised into sections on general background, longevity pricing, reserving and capital, risk management and the capital markets.
The initial chapters, as well as summarising the general statistics on longevity improvements, provide some introduction to the associated medical issues in particular, causes of death and the nature of biological limits to longevity. Some readers may be glad to learn that history's oldest recorded human, the French woman Jeanne Calment who died at the age of 122, had smoked daily.
The pricing section provides excellent pieces on estimating base mortality levels, albeit with relatively little on two aspects of recent topicality multivariate analyses and postcode rating, and mortality projections. A chapter on the pricing of longevity risk provides an overview of that subject but falls into the trap of some overlap with previous chapters; what remains is high level in places, and the currently vital topic of the effect of the impaired annuity market on standard annuities receives little attention.
The two chapters on reserving and economic capital modelling disappoint somewhat owing to their emphasis on describing the current and imminent UK/EC solvency regimes, with little longevity-specific material of any depth. Actuaries developing internal models and puzzling over how to convert their 'fingers in the air' into expert judgment will find little help.
The section on risk management provides a thorough discussion of the main de-risking vehicles and associated issues, although the actual topic of 'risk management' at least ?as a 'second line of defence' group risk actuary might understand the term ?is almost skated over. The possibility of ?bad mortality events as a hedge for the risk of longevity improvements is interesting and is dealt with well by a dedicated chapter, which left me wishing for a section on how investment in 'positively exposed to longevity' assets might also help as a ?risk management tool.
The book ends with a helpful section on the capital markets and current issues therein, with particular focus on longevity indices and a chapter devoted to the legal aspects of longevity transactions.
Overall, Longevity Risk provides a ?well-structured reference source for many of the longevity topics of greatest relevance to actuaries today. The only significant gap, other than the lack of depth in some areas as noted above, was in the field of medically informed modelling, for instance, disease-based mortality models. Although not a panacea to the many vexing uncertainties in the field of longevity, such models are surely a vital adjunct to the purely statistical techniques with which actuaries are familiar, especially in the area of capital modelling. Congratulations to Emma McWilliam and the many contributors for this generally very useful work.
Matthew Edwards is senior manager of European Actuarial Services at Ernst & Young LLP