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 firms 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 isnt
what keeps me awake at night.
What disturbed the actuarys 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.
Its 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.
Theres 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