The real risk of longevity? A crisis in public finances

If the prospect of significantly longer life expectancy were to become a realistic possibility, the value of pension and insurance liabilities would, in fact, be recalculated immediately. According to the simulations presented by Coughlan, the cost of pensions and life annuities could rise by between 30 per cent and 60 per cent. In the case of the United Kingdom, unfunded public pension liabilities could increase by 2–2.5 trillion pounds.

This led to the strongest warning issued during the conference.

“Without changes to public policy, we could end up with a sovereign debt crisis,” said Coughlan.

Whilst the scenario outlined by Coughlan remains hypothetical at present, the debate that took place in Rome highlighted a more immediate issue. In order to assess the impact of any changes in life expectancy, the sector must first be able to measure them accurately.

“It is not merely a question of economic valuation. It is also, and above all, a question of risk,” remarked Nino Savelli, President of the National Council of Actuaries.

Savelli pointed out that mortality and longevity risks share a characteristic that makes them particularly complex: they are systemic. Unlike other insurance events, they do not affect individual people or small groups, but entire populations. This makes them more difficult to price, underwrite and transfer.

According to the president of the actuaries’ association, the market still has few instruments that are truly capable of absorbing demographic risks. “We probably need to develop this type of cover much further,” he said.

Rita D’Ecclesia, a member of the IVASS board, urged the sector to follow a rigorous process. “We must first understand how to measure this risk. Only then can we consider how to transfer it,” she said.

For D’Ecclesia, the priority is not, in fact, financial innovation in itself, but the quality of the information on which it is based. ‘Mortality risk can only be assessed using high-quality data and properly tested models.’

The caution shown by actuaries and regulators stems from a simple consideration: the entire system is based on demographic projections. In many countries, however, historical mortality data remain incomplete or insufficient to build fully reliable models. Yet decisions that affect the financial statements of pension funds, insurance companies and governments depend precisely on those estimates.

The issue is far from theoretical. Over the last two decades, the market for longevity risk transfer has grown rapidly, primarily involving the United Kingdom, the United States and Canada. The aim is to enable pension funds and insurance companies to transfer part of their exposure to reinsurers and institutional investors. However, to expand the market further, the problem of risk measurement must first be resolved.

It is precisely here, according to D’Ecclesia, that the challenge of the coming years lies. “We must identify the risk, measure it, ensure that adequate governance mechanisms are in place, and only then assess whether it is appropriate to retain it or transfer it,” he said.

“The risk of mortality lies at the intersection of science, actuarial practice, financial management, financial markets and public confidence,” he concluded.

This is probably the image that best sums up the debate that emerged at Longevity 21. For years, ageing has been regarded primarily as a health and social issue. Today, however, advances in medicine are also being assessed for their economic implications. And the question that actuaries, regulators and investors are asking is not whether we will live longer, but whether the systems built around current life expectancy figures will be able to adapt quickly enough.