Longevity risk is the risk that you live too long. Not a problem, most people would think. But there’s a financial risk – if you live longer than the money you have saved during your lifetime will last. Most actuaries fervently believe that this a risk that you should insure against. But very few people will voluntarily buy the product that will insure you against it – a lifetime annuity. A simple product – you hand over a lump sum, and in return, you receive a defined income for as long as you live.
In Australia, the market for true lifetime annuities is unbelieveably tiny. Say 1% of all post-retirement products (I’ll check that stat if I get the time – it’s so small, that most people don’t bother recording it).
The market is bigger in the US and UK, but mostly due to compulsion in the tax and retirement savings system.
So why won’t people buy this product? Many industry professionals say it’s because you can only get a fixed interest return – the way the rules work, it is practically impossible to create a product that will give you both longevity insurance and some exposure to the booming stockmarket.
But I believe that it is a fundamental issue with the product. It’s a bet with a life insurance company. If you live a long time, you win. If you die quickly, you lose. And it feels to most people that you’ve already lost that bet once by dying quickly. You really don’t want to lose twice – not only have you died young, but you’ve handed over your life savings to a nasty insurance company.
So will this product ever be more than a tiny niche product, sold to actuaries, and people who expect to live to 100?