Demographics and Longevity Risk

The CFA Institute recently published an interview with Amlan Roy in the March/April issue of CFA Magazine.

Amlan Roy is the head of global demographics and pension research at Credit Suisse in London.

Roy believes that most investors and policy makers lack understanding of the implications of demographics.  Roy relates demographics to interest rates, equity premiums, economic growth, mortality and longevity risk, geopolitical risk, retirement, pensions, health, inflation, commodities and society in general.

Roy believes that the current capital in the insurance and reinsurance sectors is inadequate to address longevity risk, and that governments should support the development of life capital markets and longevity bonds in order to “help avoid individual poverty, sponsor pension provision withdrawal, and a near total collapse of annuity markets.”

Roy is able to clearly articulate the relationship between demographics and economic growth:

• There are three components of GDP growth in any country: 1) working age population growth; 2) labor force productivity growth, and; labor force utilization growth.
• Population growth rate declines are followed by labor force declines and GDP growth declines.
• With the lowest birthrate in the world and highest GDP growth rate per capita, South Korea is set to age very rapidly.
• According to Roy, there are a handful of countries keeping the world out of a global recession.  These countries include Brazil, China, India, Mexico, Russia, and Turkey.  “They are doing this by using fiscal stimulus to create jobs for young people—i.e. they’re reducing their youth dependency ratios to create labor productivity growth that funnels into GDP growth.”

The interview is filled with eye-opening statistics such as:

• In Europe, 82 percent of taxes are going to old-age survivors, sickness healthcare and disability payouts.
• In Europe, the older population costs society 14-19 times more than the younger generation.
• In the United States, the older population costs society 26.5 times more than the younger generation.

Source: CFA Magazine