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towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2012 Towers Watson. All rights reserved.
Information OverloadSteven RimmerTowers Watson
Information overload:Setting mortality assumptions in the modern eraSteven Rimmer, Towers Watson
3
What we promised to talk about
4
What we are going to conclude
New data can help
Markets change risk
Context matters
5
A brief history of base assumptions
Single assumption
• Own experience
• Industry standard tables
• Adjusted for industry / amount
6
A brief history of base assumptions
Postcode rating
• Everyone is ‘different’?
• Postcode vs individual
• Data quality
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Quick aside – Knightian uncertainty
© 2012 Towers Watson. All rights reserved.
“The essential fact is that 'risk' means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating”
Risk, Uncertainty, and Profit (1921)
Frank Knight (1885 – 1972)
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Quick aside – Ellsberg paradox
© 2012 Towers Watson. All rights reserved.
Set-up
• 90 sweets in a jar• 30 are red• 60 are either yellow or black
Wager 1
• £100 if you draw a red; or• £100 if you draw a black
Wager 2
• £100 if you draw a red or yellow; or• £100 if you draw a black or yellow
9
A brief history of base assumptions
Postcode rating
• Everyone is ‘different’?
• Postcode vs individual
• Data quality
10
A brief history of base assumptions
£10,000 pensionSmoker
Heart attackNo financial dependants
Individual underwriting
• Current hot topic
• Role for Trustees?
• Insurability?
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Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Quick aside – The market for lemons
© 2012 Towers Watson. All rights reserved.
“This paper relates quality and uncertainty. The existence of goods of many grades poses interesting and important problems for the theory of markets…… good cars may be driven out of the market by the lemons.”
The Market for “Lemons”: Quality Uncertainty and the Market Mechanism (1970)
George Akerlof (1940 – )
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Quick aside – The market for lemons
© 2012 Towers Watson. All rights reserved.
Sellers Buyers
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Quick aside – The market for lemons
© 2012 Towers Watson. All rights reserved.
Sellers Buyers
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Quick aside – The market for lemons
© 2012 Towers Watson. All rights reserved.
Sellers Buyers
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Quick aside – The (annuity) market for lemons
© 2012 Towers Watson. All rights reserved.
Pension schemes
Insurers
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Quick aside – The (annuity) market for lemons
© 2012 Towers Watson. All rights reserved.
Pension schemes
Non-underwritten
Medical underwriting
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Quick aside – The (annuity) market for lemons
© 2012 Towers Watson. All rights reserved.
Pension schemes
Non-underwritten
Medical underwriting
18
A brief history of base assumptions
£10,000 pensionSmoker
Heart attackNo financial dependants
Individual underwriting
• Current hot topic
• Role for Trustees?
• Insurability?
19
What next?
£10,000 pensionSmoker
Heart attackNo financial dependants
Genetic profiling
• Next step?
• Explains a lot of variation at oldest ages
• Would we want to gather the information?
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
especially about the future.”ZZZ
“It's hard to make predictions,
© 2012 Towers Watson. All rights reserved.
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2012 Towers Watson. All rights reserved.
Actual and projected period life expectancy at birth, males, 1961-2031
65
67
69
71
73
75
77
79
81
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1961 1971 1981 1991 2001 2011 2021 2031
Year
Exp
ecta
tio
n o
f lif
e at
bir
th (
year
s)
Actual 1987-based 1992-based 1996-based
2000-based 2004-based 2006-based 2008-based
Sources: ONS, Human Mortality Database
“Trend risk”
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Deaths by quarter
© 2013 Towers Watson. All rights reserved.
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22
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
CMI Working Paper 69
© 2012 Towers Watson. All rights reserved.
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Male life expectancies
© 2012 Towers Watson. All rights reserved.
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Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Female life expectancies
© 2012 Towers Watson. All rights reserved.
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Deaths in England & Wales 2001 to 2012
© 2012 Towers Watson. All rights reserved.
Total Change from previous year
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Ten most prevalent causes of death in E&W 2001
© 2012 Towers Watson. All rights reserved.
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Ten most prevalent causes of death in E&W 2001
© 2012 Towers Watson. All rights reserved.
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Nine of Top 30 are diseases of the circulatory system
© 2012 Towers Watson. All rights reserved.
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Twelve of Top 30 are malignant neoplasms
© 2012 Towers Watson. All rights reserved.
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Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Other nine of Top 30
© 2012 Towers Watson. All rights reserved.
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Ten most prevalent causes of death in E&W 2001
© 2012 Towers Watson. All rights reserved.
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Ten most prevalent causes of death in E&W 2001
© 2012 Towers Watson. All rights reserved.
towerswatson.com
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Ten biggest increases over last 12 years
© 2012 Towers Watson. All rights reserved.
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Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Ten biggest fallers over last 12 years
© 2012 Towers Watson. All rights reserved.
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Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Biggest risers and fallers 2011 to 2012
© 2012 Towers Watson. All rights reserved.
Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Differentiating rates of improvement
Source: Article in The Actuary by Piero Cocevar and Luigi De Falco
Low pension High pension
Evidence from Italy
© 2013 Towers Watson. All rights reserved.
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Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2013 Towers Watson. All rights reserved.
38