Primary navigation:

QFINANCE Quick Links
QFINANCE Reference

Home > Insurance Markets Best Practice > Longevity, Reserves, and Annuities—A Difficult Circle to Square

Insurance Markets Best Practice

Longevity, Reserves, and Annuities—A Difficult Circle to Square

by Paul Belok

Executive Summary

Increasing longevity increases funding costs and adds risk to the business of providing annuities. This article looks at a range of pressures that determine annuity pricing and the impact of pricing on the annuities market. Topics covered are:

  • The difficulty of estimating longevity accurately.

  • The impact of longevity on annuities, and why falling annuity rates represent a major risk to those about to retire.

  • The role of corporate bond pricing on annuities.

  • Quantitative easing and annuities, and the way inflation affects bond prices.

  • Stresses and strains in the annuities market.


According to best estimates from the actuarial profession, longevity is currently increasing at the rate of 12 minutes an hour. This may be good news for most of us, but it is not particularly good news for the sponsors and trustees of pension schemes, since it increases the cost of funding pensions very substantially. Moreover, the most unsettling thing about longevity creep is that no one knows how far the gains in the average length of the human life span will go, or whether the rate of gain will speed up or slow down. What we can say with certainty is that the current rate of increase is beyond what the originators of annuity policies considered 20, or even 10, years ago.

That said, life insurers—and annuity providers by and large are life insurers—have a huge amount of data to draw on when forming their view about probable mortality figures. The UK entity called the Continuous Mortality Investigation Bureau analyzes data tracked by life insurance companies, and publishes standard mortality tables for use by the actuarial profession. These give the profession a very good handle on the mortality implications of particular lifestyles and employment. This information is then matched with data from consumer databases on what people resident in a particular postcode area tend to earn and eat, how much they exercise, gym membership, and so on.

However, what these figures track is how the past has affected things up to this point in time. What is much more difficult to track is what the impact on longevity will be of changes in diet and general health, as well as medical breakthroughs yet to happen. The life insurance companies pay a great deal of attention to research that looks at trends in the underlying causes of death, with the big killers being heart attacks, strokes, and cancers. They take input from the medical and pharmaceutical industries about leading-edge developments and their likely impact, to see if anything is known that could cause a step change in our mortality assumptions.

From the standpoint of an employer with a final salary scheme, the risks associated with longevity, which only ever seem to make such schemes more expensive, are one of many factors that are pushing companies to abandon them. The government, too, would love to be able to move away from guaranteeing a set level of benefit but, so far, moving the public sector away from final salary schemes to a more affordable money purchase style of arrangement has proved impossible for politicians to achieve.

Back to Table of contents

Further reading


  • Aon Consulting. “Flexibility key to managing pension burden as pensions deficits soar again.” News release, March 2, 2009. Online at:
  • Aon Consulting. “Market slump prompts record pensions losses.” News release, March 5, 2009. Online at:
  • Testimony of Cameron Findlay, Executive Vice President and General Counsel, Aon Corporation, on behalf of the Council of Insurance Agents and Brokers before the Committee on Financial Services, London, November 18, 2008. (A short document that is of interest in that it is about the difficulty of pricing risk in markets where there is insufficient transparency, a state of affairs that typifies the present pensions market.) Online at:

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share