Navigating longevity risk in life and health (re)insurance with Cord-Roland Rinke

00:00:00: RePlay by Hannover Re, expert insights on life and health insurance.

00:00:15: How primary insurance can navigate the complexities of longevity, which advancements in technology

00:00:21: and public health are reshaping the approach to longevity and why effective collaboration

00:00:27: can enhance risk management strategies.

00:00:30: Welcome to Replay by Hannover Re.

00:00:32: I'm your host Susanne Loomis and today we'll talk to Cord-Roland Rinke about longevity.

00:00:41: This podcast is for general information only, no professional advice and is subject to change.

00:00:46: You can find the full disclaimer in our show notes.

00:00:49: Welcome to our podcast, Cord.

00:00:51: Good afternoon.

00:00:52: Cord is Managing Director, Life and Health Analytics and Longevity here at Hannover Re

00:00:56: and has been with the company in different roles since 1990.

00:01:00: Throughout his career, he was instrumental in designing Hannover Re's Solvency II internal

00:01:05: model for life and health reinsurance and he transformed impaired and enhanced annuities

00:01:10: into a profitable business.

00:01:12: Hannover Re has since established itself as leading provider of longevity solutions.

00:01:18: So without further ado, let's start with the fundamentals.

00:01:21: How would you define longevity and what do you see as the biggest associated risk?

00:01:27: Longevity pertains to living a longer life.

00:01:31: While our living the average lifespan of one's generation is undoubtedly a blessing, it also

00:01:37: requires additional financial resources to sustain a desired standard of living during

00:01:41: an extended retirement.

00:01:43: The unpredictability of one's lifetime creates uncertainty regarding the necessary funding,

00:01:49: which is essentially what longevity risk entails.

00:01:52: And what are some ways to fund retirement?

00:01:55: In many countries, life insurance companies, pension funds and government programs play

00:02:01: a vital role in ensuring financial security during retirement.

00:02:05: They provide funding for retirement and guarantee that individuals receive sufficient support

00:02:12: even if they live longer than anticipated.

00:02:14: That makes me think of F. Scott Fitzgerald's short story about Benjamin Button.

00:02:19: So this fictional character aged in reverse and he was in his 70s at birth.

00:02:25: If you were aware of your life expectancy right from the time you were born, do you think

00:02:31: that would change the way you plan for retirement?

00:02:35: That's an interesting thought.

00:02:37: Certainty about my lifetime would clearly make the financial planning for retirement much

00:02:41: easier.

00:02:42: I didn't need to plan for an unexpectedly long life.

00:02:45: However, somehow I wouldn't like to know if my life expectancy was rather short.

00:02:50: I'd prefer to know that I'd surpass 100 years, like my great-grandmother-in-law who became

00:02:55: 107 years old.

00:02:57: In essence, I guess I prefer a bit of uncertainty about my lifetime, but not about the funding

00:03:03: of a long life.

00:03:04: Yeah, that makes sense.

00:03:05: And we should keep in mind that unpredictability of life affects not just individuals but also

00:03:11: the institutions that support them.

00:03:14: So who really feels the impact of increased longevity and what are some of the broader

00:03:19: implications?

00:03:20: Well, in one way or another, everyone can be impacted by longevity, particularly on a

00:03:26: personal level.

00:03:27: I mentioned earlier that living longer is a gift, but it requires extra funds to preserve

00:03:32: one's quality of life in retirement.

00:03:34: Thus, longevity has positive and negative implications and might require changes in

00:03:40: retirement planning or lifestyle adjustments.

00:03:43: Beyond affecting individuals, institutions that fund retirement, such as governments,

00:03:48: pension schemes, insurance, and re-insurance companies, also experience significant impacts.

00:03:54: Also industries that engage with consumers, the health industry, but also areas like marketing

00:03:58: and technology, they're all influenced by the implications of longer life spans.

00:04:05: Like someone has said, it's not just about adding years to life but also life to years.

00:04:10: That's nicely put.

00:04:11: The effects of longer life expectancy on society as a whole are deeply interconnected.

00:04:18: So at its core, longevity means living longer than most, which can be a blessing but also

00:04:23: a financial challenge.

00:04:25: And this uncertainty creates longevity or risk, impacting not only individuals but also institutions

00:04:31: like insurance companies and pension funds.

00:04:34: I'm curious about your journey in this field.

00:04:38: Take us back to your early days in the industry and tell us what were some of the initial

00:04:42: challenges you faced?

00:04:44: When Hannover Re entered the market of medically underwritten annuities, the biggest challenge

00:04:50: was that act trees and medical doctors needed to develop a common language, an understanding

00:04:56: of mortality and survivorship.

00:04:59: Simple questions like what constitutes a normal life in terms of average mortality as

00:05:04: referenced by mortality tables for annuities?

00:05:07: And just to clarify, is it correct to say that standard mortality tables reflect the

00:05:11: mortality rates of the average healthy individual?

00:05:15: Correct.

00:05:16: Correct.

00:05:17: Mortality tables do reflect the average, not the healthy life.

00:05:22: Healthy is not average.

00:05:23: Just because someone has high blood pressure doesn't automatically mean their mortality

00:05:27: is higher than average.

00:05:28: After all, almost everyone has some sort of condition.

00:05:31: Got it.

00:05:32: It's important to understand the distinction between average mortality and healthy life.

00:05:37: What additional challenges did you come across?

00:05:40: Well, questions like how can we translate mortality differentials found in clinical studies to

00:05:46: our real world where information is gathered through insurance application forms?

00:05:51: How does the situation change for different ages or males versus females?

00:05:56: What is the interaction between the different factors influencing mortality?

00:06:00: Relations between different diseases, between medical conditions and socioeconomic parameters?

00:06:06: And last but not least, how can we translate all that into a successful product and a sales

00:06:11: process?

00:06:12: Right.

00:06:13: When we started covering pensioners in defined benefit schemes, the challenge was different.

00:06:17: It was more to find the relevant non-medical features that drive mortality.

00:06:22: I was surprised how substantial these variations can be.

00:06:25: Something without considering the medical status or different ages or sex, mortality

00:06:30: of two lives can differ by a factor of four.

00:06:32: All of this just goes to show how complex this topic is.

00:06:36: Cord, you helped establish the longevity business from the very beginning and have accompanied

00:06:42: the development over the past couple of decades.

00:06:45: I'm sure you've witnessed plenty of change along the way and one specific change that

00:06:50: of course stands out is the rise in life expectancy.

00:06:54: What do you think are the key factors driving it?

00:06:57: It's a remarkable achievement of the past decades and even centuries that everyone can

00:07:02: expect to live longer than previous generations.

00:07:05: A multitude of factors has contributed to the increase in life expectancy.

00:07:11: Three major areas are medical advances, changes in behavior and a better environment.

00:07:16: They have all played a role.

00:07:18: As example, the discovery of antibiotics, vaccinations and improved treatments of heart

00:07:23: diseases, they have all been important contributors.

00:07:27: Our life is so important to us that humanity has spent considerable resources on understanding

00:07:32: the drivers of healthiness and longevity.

00:07:35: In a way, science and education have been and will be the key drivers.

00:07:39: And how do you see technology and lifestyle changes and public health initiatives influencing

00:07:44: longevity?

00:07:46: Technology has significantly driven longevity by improving disease, diagnostics and treatments.

00:07:52: Think of x-rays, the use of microscopes or decoding the human genome and even outside

00:07:58: the medical area.

00:07:59: Technology has made our life much safer.

00:08:01: 50 years ago, 20,000 lives were lost on German roads.

00:08:04: However, last year, there have been not even 3,000 traffic fatalities in Germany.

00:08:10: Smoking, cessation and healthier diets such as the well-known Mediterranean diet have

00:08:16: also contributed to mortality improvements.

00:08:19: Longevity screenings, mandatory diagnostics for newborns and vaccinations, all examples

00:08:24: where public health can make a real difference.

00:08:27: And how would this impact the product range and pricing, if at all?

00:08:32: OK, pricing of longevity business is definitely impacted by the advances in longevity.

00:08:39: Aging societies influence the demand for retirement products, leading to evolving offerings that

00:08:44: better meet the needs of retirees.

00:08:48: While life insurance previously focused on accumulating savings, there is now a shift

00:08:54: products for the decumulation phase, allowing pensioners to manage their assets throughout

00:08:59: their lifetime, increased longevity may drive higher prices.

00:09:04: What we've seen is that despite the long-term nature of the product, actuaries' views are

00:09:10: often influenced by recent events, like the Covid pandemic or very high mortality improvements

00:09:16: at the beginning of the century.

00:09:18: This myopic behaviour very often surprises me and it leads to a bit of a cyclic pricing.

00:09:24: And this does highlight the need for more forward-thinking approaches.

00:09:28: What are some innovative strategies that have emerged within the reinsurance sector?

00:09:34: In the early days, Hannover Re focused on reinsuring longevity risk of individuals with a shorter

00:09:40: life expectancy.

00:09:42: We played a key role in introducing impaired life annuities, enhanced annuities or underwritten

00:09:47: annuities, however you want to call them.

00:09:50: Over the years, we've expanded our offerings to cover essentially all longevity risks worldwide,

00:09:57: whether for healthy or impaired lives.

00:09:59: One important step was certainly separating the longevity risk from the asset risk, such

00:10:04: that companies specialising on asset risks and companies specialising on longevity risk,

00:10:10: for example, Hannover Re, can work together to the benefit of the total solution.

00:10:15: Some companies have also developed innovative structures like insurance-linked securities

00:10:21: to transfer longevity risks to the capital markets.

00:10:24: Hannover Re has also participated in many of these transactions.

00:10:28: And then how are advancements in data analytics and artificial intelligence reshaping the

00:10:34: way insurers approach and manage longevity risk?

00:10:38: When Hannover Re started reinsuring longevity risk 30 years ago, there was only aggregate

00:10:44: data available about mortality of pensioners.

00:10:47: Over the years, insurance and reinsurance companies have collected detailed data about

00:10:53: pensioner mortality and have identified a number of factors that explain mortality.

00:10:58: We call them covariates.

00:11:00: With new machine learning models, we can identify the drivers of mortality and the importance

00:11:06: of different factors explaining mortality.

00:11:09: One of my first experiences was when my former university professor recommended that I use

00:11:14: the software R to study the survival rates of a block of pensioners.

00:11:18: Was that in Hannover or during your time in Ireland?

00:11:22: That was when I was seconded to Dublin to help set up our subsidiary to write financial

00:11:26: solutions business.

00:11:28: An Irish colleague and I quickly got a lot of insight into the mortality of a pensioner

00:11:32: portfolio.

00:11:33: Today, this software and much more sophisticated models are used by Hannover Re's data scientists

00:11:39: to get an understanding of the risks that we reinsure.

00:11:43: At the end, this allows us to better assess the mortality or longevity of an individual

00:11:48: life.

00:11:49: Obviously, this doesn't mean we can exactly predict when a person will die, but our models

00:11:55: are a very good reflection of the pattern of survival.

00:11:58: Well that's great insight into how your Dublin experience shaped the models we use today.

00:12:04: And looking ahead, what's your view on longevity risk management over the next decades?

00:12:10: As populations are aging around the world, the African continent being a notable exception,

00:12:16: the proportion of people in retirement is increasing.

00:12:20: This demographic shift requires our industry to address the diverse needs of retired or

00:12:26: retiring consumers.

00:12:27: There is a clear need to develop new products that incorporate longevity risk in different

00:12:32: forms.

00:12:34: Different societies have different needs for insurance cover that may or may not include

00:12:38: payout guarantees or for covers that allocate asset risk and return differently.

00:12:43: Our industry needs to address these different needs, requirements, products and longevity

00:12:48: risks.

00:12:50: Reinsurers are open to develop new products together with primary insurers and moreover,

00:12:56: once the longevity risk is covered, asset managers can concentrate on maximising investment

00:13:01: returns without being unduly burdened by unexpected liquidity needs arising from extended life

00:13:07: expectancy.

00:13:08: Thank you for sharing that.

00:13:09: And shifting gears, I'd like to discuss another aspect that you mentioned in our ReCent

00:13:14: Perspectives newsletter and I'll link to that in the show notes.

00:13:18: The importance of collaboration between different parties to achieve the best possible outcome.

00:13:25: How can primary insurers work more effectively with re-inturers to tackle upcoming developments?

00:13:31: Bringing the knowledge and ideas of both parties together should lead to the best result.

00:13:36: Hence, open and regular communication will help.

00:13:39: Exchanging ideas and reflecting together on past experience will create a common understanding

00:13:44: and an agreement on common goals.

00:13:46: What is best for the consumer or the member of the pension scheme?

00:13:50: For example, primary insurers have a very good knowledge of the primary insurance market

00:13:54: and their distribution.

00:13:56: This knowledge about distribution is necessary and very important.

00:14:01: Exchangers may have product knowledge from other international markets or technical

00:14:05: expertise but amalgamating all this in a collaboration is particularly helpful during

00:14:11: the early stages before a new product is launched to a market.

00:14:15: As I said before, sometimes the best ideas are created when people and teams work together.

00:14:21: Absolutely.

00:14:23: Since you have been at the forefront of this field from the very beginning and given your

00:14:27: extensive experience and expertise, could you share three reasons why primary insurers

00:14:34: should consider reaching out?

00:14:35: Okay.

00:14:36: Number one, longevity is unpredictable.

00:14:39: Supported by a slowdown in the mortality improvement trend and the impact of COVID-19 pandemic,

00:14:45: longevity has proven to be a very profitable risk in recent years.

00:14:50: However, longevity risk is inherently a long-term risk.

00:14:55: And the pandemic I think has shown how difficult it is to forecast mortality even over short

00:15:00: periods of time.

00:15:02: While many countries have recently experienced limited or no improvements in mortality, the

00:15:09: outlook may be very different.

00:15:12: It is impossible to predict longevity and the risk will materialize over a long feedback

00:15:17: cycle.

00:15:19: Secondly, reinsurers of advice to primary insurers.

00:15:23: Not only advice with respect to products and risks.

00:15:27: In addition, reinsurers offer a lot of advice in other areas like product design, claims

00:15:33: or application assessments, analyzing past experience.

00:15:37: So you can talk to the reinsurer on all different things.

00:15:41: Number three, reinsurers are prepared to share the risk.

00:15:45: Reinsurers put their money where their mouth is by accepting the financial risk that the

00:15:50: unexpected happens.

00:15:52: In their traditional role, reinsurers simply take over the primary insurers longevity risk

00:15:57: with all the consequences like stability of results or reduction of required capital

00:16:02: for the insurer.

00:16:04: At Hannover Re, not only do we consult regarding pricing, but we also take responsibility when

00:16:10: things do not go as expected.

00:16:13: We listen to our clients and we want to address their needs even if this requires more complex

00:16:19: reinsurance structures and assuming new types of risks.

00:16:23: Especially when an insurance company is looking for reinsurance cover for the odd risk, we

00:16:29: can make a difference.

00:16:30: Great, thank you.

00:16:32: Those are very powerful words to wrap up our conversation.

00:16:37: Today we discuss the intricate world of longevity and its implications for the insurance industry.

00:16:43: We spoke about ways for primary insurers to effectively navigate longevity risk and how

00:16:48: understanding these dynamics is crucial for adapting to consumer needs while managing

00:16:53: risk.

00:16:55: Thank you for joining us, Cord.

00:16:56: It's been a pleasure.

00:16:57: It's been a pleasure.

00:16:58: Thank you.

00:16:59: And thank you for listening to RePlay by Hannover Re.

00:17:02: We hope you found this conversation helpful and if you would like to learn more about longevity,

00:17:07: check out Cord's interview as part of our ReCent Perspectives newsletter.

00:17:10: It's linked in the show notes.

00:17:12: Don't forget to subscribe for more episodes, leave us a review if you enjoy what you've

00:17:16: heard and stay connected with Hannover Re on LinkedIn.

00:17:19: Until next time.

00:17:20: the thoughts, ideas, documents and other content discussed or shared in this podcast

00:17:36: are not intended to constitute any professional advice.

00:17:39: Hannover Re and the participants are not liable for any damages resulting from the usage of

00:17:43: the content of this podcast.

00:17:44: For further information, please see the show notes.

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