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Nov 2017

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The Geneva Association - Longevity Risk: Changing the environment to encourage solutions

Source: Asia Insurance Review | Nov 2017

Asia Taiwan Pensions & Annuities Conference Reports

Asia is ageing faster than the rest of the world. Solutions proposed at a recent conference include investment in human capital, getting older people to work longer, encouraging increased fertility rates and more cooperation between regions in Asia. Mr Ronald Klein of The Geneva Association reports.
 
 
By now, it is a well-known fact that people are living longer and fertility rates are at record lows. This causes a huge strain to social insurance schemes. Add to this, the persistently low interest rate environment which causes retirement savings to grow at a much slower pace and makes lifetime annuities much more expensive, and you have a pension gap that will be difficult to fill.
 
   To make matters even worse for society is the switch from defined benefit plans to defined contribution plans for corporate or Pillar II savings plans. This change seemed to have occurred overnight with very little education to workers to equip them with the tools necessary to make the proper decisions.
 
Experts meeting in Taipei 
From 21-22 September, a group of industry and academic experts convened in Taipei to discuss these and other related issues at the 2017 International Longevity Risk and Capital Market Solutions Conference. It was the 13th such annual conference and has grown to a “not-to-be-missed” event for people in this field of study.
Since the conference was held in Asia this year, presenters focused their discussion on this region of the world. While most attendees were from related industries or academia, it was nice to see a relatively large number of students in the audience. Some of these younger participants will help shape future solutions to the aforementioned issues.
 
Refreshing focus on solutions
Certainly, the problems with longevity were clearly expressed by many of the speakers, and there was also a refreshing focus on solutions. I had the privilege of moderating the session Changing the Environment to Encourage Solutions – A panel discussion from a public policy perspective, which highlighted three expert speakers: Dr Wonshik Kim, Professor of Economics at the College of International Business, Konkuk University; Dr Jennifer Wang, Vice President of National Chengchi University; and Dr Donghyun Park, Principal Economist at the Asian Development Bank.
 
   As is typical for the sessions that I moderate, the session began with an audience response question (see below). This is done to set the stage on the topic and get the session attendees involved in the presentation. 
 
   Question: According to the International Labor Organization (ILO), what region has the highest percentage of people receiving pensions?
  1. Asia and the Pacific
  2. Sub-Saharan Africa
  3. Middle East
  4. North Africa
  5. Latin America and the Caribbean
  6. North America and Europe
 
   It was surprising that many participants, including the speakers, answered this question incorrectly as North America and Europe far exceed any other region with 90% of its older population receiving some type of pension. Latin America and the Caribbean come in second place at 56%.
 
Pension system in Korea
Now that the audience was fully awakened, Professor Kim took the stage and gave a quick tutorial of how the pension system works in Korea, described the issues with pensions and quickly moved to proposals to assist with strengthening the pension system.
 
   What was most interesting to me was the comment that favourable tax treatment for individual pension savings does not benefit the poor as much as the rich. Professor Kim emphasised the other incentives must utilised to encourage poorer citizens of Korea to save more.
 
   Finally, one of the recurring themes of all presentations at this session as well, as at other sessions, was highlighted – there is a strong need for financial literacy at very young ages and throughout the public education system.
 
Long-term insurance as a solution for Taiwan
It was now time for the next audience response question.
Question: According to Swiss Re Sigma, which country has the highest insurance penetration rate in the world?
  1. Taiwan
  2. Hong Kong
  3. United States
  4. United Kingdom
  5. Japan
  6. Netherlands
 
   With Taiwan as the host company, many of the attendees chose Taiwan as the answer to this question – and they were correct. Taiwan has an insurance penetration rate of 19% followed by Hong Kong with 16% and then Japan with 12%. It is interesting that the Asian countries on this list were the top 3 considering how mature insurance markets are in the other listed countries.
 
   Professor Jennifer Wang focused on the local market in Taiwan. Professor Wang described the ageing and low birth rate issues in Taiwan and continued into an excellent explanation of the pension system in Taiwan. 
 
   However, she was extremely focused on long-term-care insurance as a solution to filling the social insurance gap. With a strong long-term-care market subsidised by the government, there would be less need for other benefits.
 
   Professor Wang described how she would change the benefits and structure of the long-term-care marketplace – from health management services all the way through funeral services. In conclusion, she emphasised that the time to act is now. Reform will only get more difficult each year to come.
 
Speed of ageing in Asia is much greater that most of the world
The last audience response question was:
Question: According to Swiss Re Sigma, which country spends the most money on life insurance premiums per person?
  1. Japan
  2. China
  3. Hong Kong
  4. Taiwan
  5. Singapore
 
   Many of the audience again went with the “home team” and answered Taiwan when the correct answer is actually Hong Kong, with US$5,400 in premiums per person. Taiwan came in second at $3,200 per person. 
 
   Dr Donghyun Park focused on the Asian markets in general. While Dr Park also described demographic issues, he covered multiple countries so it was interesting to see that dynamics change by region within Asia. For example, Southern Asia is much younger than Eastern Asia. Both regions are ageing, but at different rates. He pointed out that the speed of ageing in Asia is much greater that most of the world which presents its own issues.
 
Family support is changing in some countries
A model that is changing quickly in Asia is that families typically took care of their elderly parents. Social benefits, globalisation and lower birth rates have changed this. 
However, in some regions, private family transfers continue to remain extremely important as a source of income. Therefore, personal savings is extremely important in these regions. (See Chart 1) 
 
Family support is declining in Asia, but public transfers are underdeveloped
 
Solutions
One solution that Dr Park proposed that was not previously mentioned was an investment in human capital. However, it is difficult to draw a direct link to human capital investments and economic growth so these investments have been low.
 
   Other solutions proposed were a de-emphasis on the old-age support model with older people working much further into their lifespans, somehow encouraging increased fertility rates and more cooperation between regions in Asia. Finally, Dr Park called for less mature markets to carefully study their neighbours in an attempt to learn from their mistakes.
 
   While it is not in the Asian culture to ask many questions at a presentation, especially when the presentation was not in the local language, there were enough Westerners in the audience to create a lively debate.
 
   I would like to congratulate the organisers, sponsors, speakers and attendees for jointly creating a fantastic environment to transfer knowledge and stimulate ideas. I look forward to Longevity 14 in Amsterdam. A 
 
Mr Ronald Klein is Director of the Global Ageing research programme at The Geneva Association.
 
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