The Asian Longevity Risk Transfer Market Is the Next Emerging Market
Life expectancy is on the rise everywhere around the world, and Asia is no exception. In fact, in the last 30 years or so, life expectancy in Asia has risen faster than any other region in the world. While it has taken about 75 years for the elderly population in Western countries to reach over 20% of the population, it is estimated that this increase will take only 25 years in China and India. According to a recent report by Deloitte, by 2030, 60% of the world’s elderly will be in Asia - more than the total population of Europe and North America combined! Needless to say, this presents huge challenges to the countries in the region, most prominently the countries that have low birth rates such as Hong Kong, Taiwan, Singapore, South Korea and Japan.
In the majority of Asian countries, national pension schemes and financial support systems for the elderly are sorely underdeveloped, far below the OECD average, though Japan, Singapore and South Korea are notable exceptions. Corporate pensions were only introduced in Asia in the late 90s, and South Korea has only been implementing them since 2005. DC-style pension schemes have been introduced in India and China in the past decade, but in most of the Asian countries with higher birth rates (Vietnam, India, Indonesia, China) pension schemes are available for only a fraction of the population.
Caring for elderly parents is becoming an unsustainable burden
It is interesting to note, that in many countries in Asia it is customary to care for parents in their old age, and is part of cultural heritage. It is a form of intergenerational risk sharing that is passed on through the family to substitute formal pension systems. In China, it is a law - parents can demand support from their children if it is not provided. In Singapore and Hong Kong, for example, well over 60% of old age funds come from family support. But as birth rates go down, it is becoming more and more difficult for children to bear the weight of supporting their parents. In China, the infamous “4-2-1” family structure, in which couples support 4 parents and one child, is becoming increasingly unsustainable. Furthermore, the middle class is expanding rapidly, increasing the need for a sustainable solution for retirement funding in old age.
The private sector is growing fast
Governments and private companies are finally starting to understand the sore need for solutions for retirement funding, opening a whole world of opportunities for insurers and pension providers in this untapped market. Life insurance premiums grew over 25% between 2005-2009, compared to 13% worldwide, as the growing middle class is finding solutions in the private sector where the public sector is lacking. In Singapore, Hong Kong, South Korea, the life/pension sectors have been growing steadily over the past decade and have passed the world average of percentage of GDP. In China, market penetration is forecasted to rise to 5.2% of the GDP by 2020.
As the sector grows, insurance and pension providers will be exposed to increasing longevity risk. Furthermore, the rapid and unexpected increase in life expectancy, along with limited access to remote populations and big differences between populations present great challenges for longevity and mortality forecasting. Risk valuation, modeling and pricing, based on those forecasts, is inaccurate and inefficient, exposing insurers and pension providers to additional layers of risk. There is an acute need for de-risking solutions.
Indeed, as the reinsurance sector is nearing saturation in the West, it is still showing strong growth in Asia and the Pacific (and rose from 25% penetration to 29% between 2016 and 2017), and is estimated to continue to outpace the West in the growing economies of Asia, showing long-term growth potential.
The Longevity Risk Transfer Market shows great potential
As we mentioned in previous articles, traditional reinsurance cannot possibly begin to cover all of the risk insurance and pension providers are exposed to. Longevity Risk Transfer solutions can step in to de-risk on a much larger scale through the capital markets, though the Longevity Risk Transfer markets have seen very little development in Asia to date. Even countries with a large private sector such as Japan have seen very few Longevity Risk Transfer solutions. Singapore launched its first CAT bond in 2018, signalling the readiness of the market there and infrastructure needed for more elaborate solutions.
In conclusion, the Longevity Risk Transfer Market shows enormous potential in Asia. There is a great need for insurance/pension solutions for the ageing population, and many Asian governments have been very slow to provide them, if at all. The private life/pension sectors are growing rapidly with demand from the growing middle class, increasing the need for de-risking solutions to transfer risk off balance sheets onto the capital markets. The GDP in Asia is growing at a faster rate than the west and forecasted to continue that trend in the near future, ensuring a stable market. This is an untapped market just waiting for innovative and creative solutions for the Longevity Risk problem.
Vesttoo has developed advanced technologies for data-driven risk management, transferring actuarial risk to financial risk through the capital markets. Vesttoo specializes in risk modeling and alternative risk transfer for the Life and P&C insurance markets, providing insurers with a low-cost strategic risk management solution for immediate capital relief, value enhancement and liability hedging.