Pension policy returns to dip as people live longer

Policyholders `living a long life’ have increased dramatically for insurance companies. It is being observed that life expectancy has increased in the last ten years compared to the whole of last century. The implications of this for policyholders are that post-retirement, regular income through pension schemes will become much more expensive. A 65-year old man in UK was expected to have a life expectancy of 18 more years 10 years ago. This has now gone up to 22-23 years. Life expectancy for the older section of the society is growing up at the rate of five hours a day. In India though, there is not much demand for annuity products — policies that provide a stream of regular income against a lump sum payment — because of relatively low returns. A bank deposit gives a return of 9.5% capital returns. Life annuities, in contrast, without return of capital provide less than 9.5%. The demand, however for annuities will exceedingly rise in years to come. A fourth of premium for life insurers comes from sales of pension policies. As per law, policyholders are required to use the proceeds of the policy to buy annuities on maturity. Greater the increase in life expectancy, the less is the annuity the policyholder will get.

The longevity has improved because of development in medicine, especially related to heart disorders. In the past, most of the development was centralized to reducing infant mortality and developing a cure against infectious diseases that harmed the younger population. Mr. Willet has reported this

There has been an increased expenditure in Statin. Statin is a blood-thinning drug that curtails the chances of stroke. Statin usage has been increasing 30% every year, in UK, with total prescriptions crossing 30 million doses for a population of 60 million. Similarly, breast cancer mortality has been reduced despite an increase in the number of cases. Nationwide screening campaigns have resulted in this.

Mr. Willets is the longevity director of Paternoster, a newly formed life insurance company in the UK, which has offshored its actuarial work to India. According to Paternoster India CEO V Balamurugan, it is apt to go down to individual levels because of two advantages India holds. First is the access to a large pool of actuarial talent, and second is the cost efficiency.

While the good side of life expectancy is that life insurance premium drops, most people are not in a position to face the downside. Studies have put forth that people tend to undershoot life expectancy by five years. By doing this, they underestimate their savings requirements.