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ECONOMY| 07.09.2022

Increased longevity and its consequences for our financial well-being

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As the old saying goes, money can’t buy happiness. This may be true, but it’s not the whole story either, because when your money begins to run out, some serious headaches are likely to follow.

This is the basis for the concept of financial well‑being, which refers not so much to the our ability to buy things, but rather to an absence of economic worries, about our present situation and our prospects for the future. In the search for financial stability for individuals and their families, life insurance can be part of the solution to address recent trends that are putting that stability at risk.

What do we mean by financial well-being?

The authors of a publication from the University of Bristol have presented a working definition of this term, which is one widely quoted by entities and companies: “a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and is able to make choices that allow enjoyment of life”. And although there is really no universally accepted definition, the basic principle that underlies this concept is the relationship between general well‑being and the need for a financial cushion.

At the same time, financial well-being is a concept that continues to evolve in parallel with society itself, and the change that will have the greatest impact on the financial needs of people worldwide is increased longevity. This is explained in a recent report from the Geneva Association, which is a global organization of insurance companies, produced in collaboration with the Global Ageing Institute, a think tank dedicated to research in this field.

Among other data presented, that report points out that according to the United Nations, global life expectancy has increased by 6 years during the last two decades, to now reach an average of 73.3 years. By the end of the century, this figure will have increased to 81.7 years, even becoming as high as 88.8 years in Europe and 93.5 years in Japan.

Longer lives, more vulnerability

One of that report’s main conclusions is that as a result of this increased longevity, there is growing insecurity in relation to retirement. In developed countries, the combination of populations that are living longer and slower economic growth is putting pressure on the sustainability of public pension systems. The majority of these are universal systems, which were created or expanded in the decades following World War II. Governments are implementing a variety of measures to address this reality, but in general these responses have involved reducing pension benefits and postponing retirement ages.

In developing countries, high rates of informal employment translate into limited coverage for state pension systems, in terms of both the percentage of the population receiving benefits and the amounts being paid. This means that many citizens must still rely upon family or community support as they reach advanced age. However, as these countries modernize and average family sizes become smaller, these informal support networks tend to become weaker.

New conditions require new forms of saving

Aging is not the only socioeconomic factor endangering the financial well-being of younger generations. For example, members of the generations known as the Millennials and Generation Z, who are now about 16 to 40 years old, change jobs much more often than their parents and grandparents did. In fact, it is estimated that they will have an average of 12 different employers throughout their working life. 

According to experts from the Geneva Association and Global Ageing Institute, these are trends that present challenges to traditional models based on long-term savings. In the public sector, the governments of countries at all income levels are launching new initiatives to promote expansion of pension plans, including those for individuals and those linked to employment. For example, these approaches may be based on enrollment by default, or on systems where companies match the contributions made by their employees, or on agreements that make contributions more flexible and allow retirement even for those who have worked in the informal economy.

Although the study concludes that all of this has led to “notable success in some countries”, it also warns that “retirement savings remain inadequate almost everywhere, with many people facing impoverishment in old age”.

What contribution can the insurance industry make?

In the private sector, the main objective of life insurance is to support financial well‑being. This can be done either by covering risks, which helps individuals and their families feel more secure about the future, or especially through savings-based life insurance products and pension plans.

In developing countries such as China and Brazil, the life insurance business has grown rapidly during recent decades, and it has now reached a penetration level of about 2.5% (the ratio between premium volume and GDP). To the contrary, this level has been decreasing for years in the majority of the more advanced economies, although life insurance still has a much higher economic weight. In the USA and Japan, penetration of the life insurance business has fallen to its lowest levels in 35 years, and in the UK, Germany, and Switzerland, it has fallen to the lowest levels seen in 20 to 25 years.

Unfortunately, this trend has emerged at the same time when the need for long‑term savings has been increasing. The report from the Geneva Association entitled Financial Wellbeing: Is it the key to reinventing life insurance? explains some of the reasons behind this trend, including a period of low interest rates that made it hard for savers to earn yields, an increase in chronic illnesses, and reduced security in the employment market.

In this scenario, where a variety of factors are putting the financial well‑being of millions of citizens at risk, there are many ways for the insurance industry to make a positive contribution. In addition to offering more flexible and personalized products adapted to new emerging needs, some of the solutions proposed by the global association of insurance companies include promoting financial education for young people; collaborating on development of risk prevention measures in fields such as health care, by analyzing the valuable data these companies possess; and exploring possibilities for the “silver economy”, where MAPFRE is already playing a leading role through its Ageingnomics research center.