Longevity risk

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The longevity risk referred to in the actuarial risk of pensions insurer that an insured person lives longer than expected. Since the premium calculation of a private pension insurance takes into account the likelihood of a premium or pension payment, this can lead to insufficient coverage of the insurer.

Usually the longevity risk is offset by the insurance collective . This works all the better, the larger the inventory. So the risk decreases with larger stocks.

In the case of life insurance companies (but not in the statutory or company pension insurance), a certain amount of compensation is provided by the fact that they have both pension insurance (for which a longer service life increases costs) and life insurance (where a longer service life reduces costs) in their portfolio.

Regardless of the size of the herd, the risk of longevity can be increased through anti-selection. Anti-selection occurs, for example, when insurance policies are preferred for more dangerous risks, while people who consider themselves less at risk tend not to take out insurance. An example of this is pension insurance that starts immediately. These are mainly taken out by people who expect to be able to draw the pension for a very long time, i.e. who feel healthy. The proportion of people who actually live long is higher in this group than in the general population. For this reason, different calculation bases are used for pension insurance ( elimination order with lower assumed mortality than the average for the population) than for insurance in the event of death.

However, it has been observed for decades that the life expectancy of the population as a whole is increasing. This has the same effect on all pension insurances (accumulation risk). In order to be able to provide the promised services over the long term, the insurer must make financial provisions for this. This is mainly done through particularly careful premium calculation that takes into account the constant increase in life expectancy. Nevertheless, the actual development has overtaken expectations to the extent that the previous assumptions are still sufficient, but no longer sufficiently cautious, in order to meet the security requirements that are placed on insurers . Insurers must also be able to withstand further significant increases in life expectancy that are not yet foreseeable, but definitely possible. To do this, insurers must improve their financial provisions. According to German commercial law, the actuarial reserve for future obligations must be measured with particular care. For this reason, the calculation had to be designed more carefully several times in the past (colloquially referred to as "additional reservations").

The longevity risk, possibly combined with the selection risk, does not only arise with insurance contracts, but also

  • In the case of company retirement provision in the form of a pension: Here the risk is borne by the employer or - in the case of insurance-like implementation channels - by the provider of the pension. There is a risk of selection if the employee can choose between a one-off lump-sum payment and a lifelong annuity payment.
  • When selling economic goods (especially real estate and companies ) for an annuity : Here, the buyer bears the longevity risk, and there is always the risk of selection, as this type of contract is preferred by healthy people.
  • This is very important in the statutory pension insurance and statutory health insurance , which, because of the pay-as-you-go financing, do not provide for the increasing life expectancy of the population. Therefore, the lead generation contract with increasing life expectancy and at the same time declining number of young workers because of the declining birth rate mean that the now rising generation with significantly lower own demands much higher parts of the future own income on the supply of retirees and their health care must muster.

The term was shortlisted for the bad word of the year in 2005 because users of the term signal that they rate it negatively when someone lives long.