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In late 2002 signs of a new flu pandemic emerged in Asia. The first reported case of the often-fatal virus occurred in China, spreading as doctors and other health care workers traveled throughout Asia and beyond. By early 2003 severe acute respiratory syndrome, or SARS, had infected hundreds of people in 37 countries.

At about that time, Peter Nakada received a call for help. Several global reinsurance companies asked Nakada, a risk management expert who specializes in catastrophic events, to create a computer model that would help them evaluate the transmission and lethal potential of the new virus.

Nakada, who heads the life risks and capital markets units of Risk Management Solutions (RMS) at the firm’s Hoboken, New Jersey, office, built and delivered the software to his reinsurance clients, then decided to shop it to the life insurance market. That was when Nakada, sitting across a table from the chief actuary of one of the largest U.K.-based life insurers, learned of a new catastrophe. Though the flu software was very interesting, the actuary said, SARS “isn’t what keeps me awake at night.”

What disturbed the actuary’s slumber was not death but life: catastrophic longevity. The risk that many more people would live a lot longer than anyone had imagined had become the scariest scenario in life insurance.

There is no doubt that over the past century life spans have increased — a trend that has accelerated in recent decades. But when it comes to planning for retirement income security, budgeting economic resources or even creating shareholder value in public companies, expanding life expectancy is wreaking havoc on balance sheets and heightening financial risk for governments and individuals alike. “It’s been recognized that mortality is improving,” says Zorast Wadia, principal and consulting actuary on the pension-risk management team in the New York office of actuarial consulting firm Milliman. “There’s no hiding that fact.”

After his encounter with the actuary, Nakada returned to RMS with a new mission: to build a risk model that would project life expectancy for a given population. After two years of research and engineering, RMS released a program with 10,000 hypothetical paths that could influence longevity. One key finding revealed by the new model: There is a one-in-100 chance that the average pensioner in the U.S., Canada and 13 other developed countries will live five years longer than currently projected by actuarial tables. Though the families of these European, Australian and North American retirees will likely welcome having them around, this unanticipated decline in mortality will cost defined benefit plans a cool $1 trillion.