Risk industry can alleviate demographic pressure on budgets, say experts

One of the key risks to watch in the World Economic Forums’ Global Risk 2011 report is demographic change and a key problem within the risk cluster is an ageing worldwide population. Its predicted rise means that current age-related liabilities, including social provision promises made by governments such as pensions and health care, will not be met, experts warn. According to figures given by Christian Mumenthaler, Chief Marketing Officer of Reinsurance and Member of the Executive Committee at Swiss Re, the percentage of people above 65 years of age in the EU will rise to 28% by 2025, up from 16% today. On a worldwide scale this figure will rise to 16% from 8%. “It is absolutely clear these current paths are unsustainable and governments will not be able to honour these promises...there will have to be cuts and there will have to be solutions,” warned Mr Mumenthaler, speaking at the WEF’s report launch last month. hideA paper last year from the Bank of International Settlements (BIS) entitled ‘The future of public debt: prospects and implications’ agrees. “As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. The related unfunded liabilities are large and growing, and should be a central part of today’s long-term fiscal planning.” The BIS report cites two studies that have attempted to put a figure on the costs. Looking at the present value of unfunded liabilities arising from ageing, Hauner et al (2007) estimated the change in the primary balance required to equate the net present discounted value of all future revenues and non-interest expenditures to the debt levels that existed at the end of 2005 for seven major industrial countries—Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. The authors report that in order for these countries to pay off all their financial liabilities, they would require an average improvement in their budget balance, excluding interest payments, of 4.5% of GDP. For the United States and Japan, the estimate is 6.9% and 6.2%, respectively. Gokhale (2009) presents a measure of the long-term fiscal imbalance faced by 23 industrial countries. His estimates suggest that, for financing future benefits without future tax increases, the United States and major European countries would be required to generate an annual present value surplus of the order of 8–10% of 2005 GDP over the period to 2050. Put simply the solution to pension provisions is to either ask the elderly to work longer or the younger to pay more. “But in my view today society is not ready, you see lots of protest around that. Changes will not be just intellectual ways to solve it, there will be cultural changes necessary,” warned Mr Mumenthaler. A further risk encompassed by demographic change is population growth. Further, a growing middle class is predicted to put huge stresses on food production. “There is a growing middle class in emerging markets that expects different foods. In particular if you go from crop to meat you need a lot more energy, water and land and that is sort of a kicker on top of population growth,” continued Mr Mumenthaler. This is why there are current estimates that a 70% increase in food production will be necessary to feed 9.1 billion people by 2050, he explained. One solution to this is to increase productivity per acre around the world, especially in developing countries. For example productivity in Africa is three to 4 four times lower than in developed western markets. But to bridge the gap insurance solutions are needed and they are lacking in certain key geographies. Investment will not happen without insurance solutions in place, explained Mr Mumenthaler. “If there is no possibility of insurance against significant risks, volatility in food prices, droughts, floods and all of these things, then there is very little incentive to invest in these regions...In all these areas where we need massive investment there are no insurance pools, or very often insurance, available. One of the key issues is that traditional insurance is just very expensive to buy or create,” he continued. One solution, which enables the whole claims process to be massively reduced and thus cuts key costs for the insurer and buyer, involves index-based solutions. “Last year with the government of Vietnam we (Swiss Re) developed this scheme where instead of checking every single field you basically rate an index that can be checked,” explained the Swiss Re man. Payouts will then be defined by an independent ‘area-yield index’ based on data from the Vietnam’s Bureau of Statistics. It covers loans to rice farmers in up to 10 provinces in Vietnam, with the potential to extend the scheme across the country. It insures the rice farmers against the inability to make loan repayments due to low yields, explained Mr Mumenthaler.

Risk industry can alleviate demographic pressure on budgets, say experts

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