Who Pays For Aging?

How the older population’s needs are funded and why opportunity exists for insurers

May 5, 2017 — There’s no doubt that our growing aging population could represent a major market opportunity for financial services. Of all the sources that help fund a longer life, insurance has only a single-digit share.

If insurers want to increase their aging business, they will need to find new ways to provide relevant and attractive new paths to financial security for older people, rather than purely fight for market share among traditional competitors.The aging wallet analysis shows the starting point for insurers to win the hearts and minds of older consumers and their families, and become a larger part of the funding solution.

The study considers everyone who pays, across these three major sources:

• Society
  Care provided by the family and funding by the stateSociety bears the largest portion – approximately 70% (60% state; 10% family). Each of the six markets has a different mentality towards, and reliance upon, state provision. However, the costs of public provision are projected to become unsustainable if current policies don’t change in the face of demographic shifts and other factors, such as high sovereign debt.
• Savings
  Private pension assets and housingSavings account for a quarter of the aging wallet. Though small in comparison to society’s share, private savings are increasingly important. As wealthier people tend to preserve their savings to guard against uncertainty and unknown long-term needs, they often don’t reinvest in, and benefit the overall economy directly.
• Insurance products
  Annuities and medical coverInsurance has a fractional share of the aging wallet – around 5%. Today the industry is generally focused on selling products like annuities and attempting to create a market for traditional long-term care insurance.These results differ by market, from more social reliance in Germany, to more family focus in China, to more private savings in the US. Nevertheless, society holds the lion‘s share across all markets.

Society’s share is likely to fall

There’s a common misconception that families – particularly in western cultures – have little interest in caring for their elderly. However, the share of wallet analysis reveals a much stronger sense of reciprocity in society. Demand for informal care is quickly outpacing the supply due to several factors such as:

• People are living longer
• There are fewer children to provide care
• More women (who traditionally provide care) are in the workforce

In the face of these challenges, insurance can act as an enabler for alternatives.The ratio of working-age to elderly people will decline substantially, which will impact the ability of governments to provide benefits. Across the six markets, the average number of workers per person over 65 will fall from 4.2 to 2.6 between 2015 and 2035.

Passing on more responsibility to the individual provides the potential for an insurance market to grow its share of wallet, acting as an enabler for alternatives. In addition, there is potential for risk sharing between the government and the re/insurance industry. An example is the large longevity transaction between Swiss Re and the UK’s Royal County of Berkshire Pension Fund in 2009.

Savings set for a substantial riseLower interest rates and fewer productive people of working age are both likely to impact the growth of savings at an individual level, although their share of the aging wallet will grow as more people save. That’s because more governments need to reduce their expenditure, making it highly likely they will pass on more risk from their balance sheet to individuals, eg by introducing various levels of compulsion for retirement savings.

Life Expectancy & Decumulation

If life expectancy continues to grow as predicted, the need to decumulate this increased savings wealth will be spread over more years. This in turn puts the ability to fill the gap at risk and makes it harder to pass wealth along to future generations.Some insurers issue savings products, but already face intense competition which is likely to grow. Other providers can partner with insurers to help savers protect themselves against unforeseen events.

The need to smooth consumption and encourage decumulation in retirement is important for the wider economy. Insurance can help make it happen by expanding the product range that gives people greater security and the confidence to be able to spend without fear of outliving their income source. This will stimulate better equality across generations, which is important for society at large and helps insurers grow their share of the aging wallet.

Insurance can grow its small share if it evolves the current approach

The potential for more years of poor health or disability and the uncertainty surrounding those scenarios could lead to a more important role for insurance in private market provision. Success depends on striking the right balance between risk access, mitigation and compensation for both consumers and re/insurers:

If it only offers up the same “old” style solutions, the re/insurance industry will have limited success in increasing its share of wallet. Growth in areas such as annuities and mortality is currently hampered by a prolonged low interest rate environment and more years of retirement to fund, which make products appear less attractive. In addition, successive attempts at growing traditional long-term care insurance have seen limited success, at best. For those with a savings offering, there is potential for growth albeit in a price-driven, increasingly regulated market.Re/insurers can view themselves as one of the important lines of defense in protecting people against the financial risks of aging.

Lines of Defense: The State & The Family

In all markets, the largest line of defense is society, including the state and the family. Welfare approaches are at differing levels of maturity throughout the world. There are various models of societal support: those that are more family oriented, those that provide universal benefits where everyone receives the same minimum level of healthcare or income for example, and those that only support the people least able to afford private solutions.

This report shows that no single system dominates in a market, but instead they follow different “hybrid” approaches. The next line of defense is savings, accumulated over an extended working life. This can help provide a more comfortable lifestyle and fund the aspirational aspects of people’s senior years. Savings can also be used to “top up” where societal support is insufficient or to purchase services where family or state services are lacking.

However, savings are highly prone to shock events in later life and will be insufficient for the majority who live longer.Insurance should largely kick in during the decumulation stage and protect against the peak risks to which older people are more vulnerable across the needs spectrum to “live secure, live well and save something to bequeath“. For example:Outliving one’s incomeMajor health eventsRequiring care, either at home or in an institutional settingEnsuring funeral expenses are coveredThese defense lines correspond to funding sources and people’s needs.

The trends indicate society’s lion’s share of the aging wallet will decline over time. Insurance has an opportunity to enhance products that smooth consumers’ risks, acting as a viable alternative or complement to savings.Growing an aging insurance marketInsurance should largely kick in during the decumulation stage and protect against the peak risks to which older people are more vulnerable.

Read the entire report, Who Pays For Aging?, here.