How short-term insurers think about age
Concepts like ageing, longevity and mortality are more commonly encountered in the world of life and health insurance; but it turns out they matter to short-term insurers too, especially when it comes to product design and pricing. In his presentation to Insure Talk 54, Saqib Hossain, Head of Technical Underwriting at Discovery, said that the latest research by Capgemini and McKinsey shone light on some trends worth noting.
Behaviour, demographics and urbanisation
‘Longevity in motion: why an ageing world demands new short-term solutions,’ identified three trends that are of particular interest to non-life insurers including demographic shifts, shifts in consumer behaviour and urbanisation. “The leading research from bodies like the United Nations and World Health Organization shows definite ageing trend, and it is going to have some serious implications,” Hossain said.
Globally, one-in-six people will be over the age of 65 by 2050, up from one-in-11 as measured in 2019. And the cohort of people aged 80 and over is forecast to triple by that date. What this means is that insurers across the health, life and non-life segments will have to adapt their risk modelling for a world where average life expectancy creeps up from 73 years today, to 77 years by 2050.
These longevity and mortality statistics occur against the backdrop an ongoing decline in global fertility rates. “Global fertility rates are falling to below replacement levels,” said Hossain. “We have fallen from 3.2 births per woman in 1990 to just 2.3 in 2021.” To make matters worse, half of the world’s developed population have fertility rates of below the consensus population replacement rate of 2.1. And it will not be long before many other developed market economies echo Japan, a country in which a third of the population is 65 or older.
The result, according to Hossain, is that the old-age dependency ratio, which is the ratio between working people and retired people, will double. These statistics should concern financial and risk advisers, many of whom work with clients caught in the so-called sandwich generation paradigm: adults who are financially supporting both their ageing parents and their dependent children. To be fair, if these trends hold, the lower slice of this sandwich will get thinner with time.
26 pensioners per 100 workers looms
The presenter spent some time on the old-age dependency ratio, warning that it was primed to inflate beyond 60%. This means going from today’s 16 seniors per 100 working people to around 26 seniors per 100 by 2050. If you strip Africa out of this forecast, then the global average shifts to 31 seniors per 100 working people by the same year. “This is not to say that Africa is immune from some of these trends; the effect will materialize further down the line, and is definitely a trend worth keeping an eye on,” Hossain said, adding that the key opportunity in this trend would be for Africa to establish itself as a global leader in human capital.
Urbanisation, the second trend up for discussion, will be familiar to most non-life insurance stakeholders. Insurers care because their on-the-ground risk exposures to perils such as fire and flood increase significantly as people move from rural to urban areas. “Urbanisation is not new, but the scale at which it is happening, and the level at which it is projected to end up is concerning,” Hossain said. The latest estimate points to 70% of the global population living in cities by 2050, with more than half of those urbanites being 50 or older. In insurer talk: “this is quite an unprecedented concentration of people and wealth in a very narrow geographic location.”
Consequences of urbanisation
The presenter noted that growing urban populations place pressure on already-stressed infrastructure, heightening the chance of failure. South Africa already exhibits a strong preference for urban living, though one might argue that the concentration risk exposure varies deeply between formal and informal housing developments. The bottom line is that concentration and urbanisation amplify insurers’ natural catastrophe exposures, as evidenced by the April 2022 floods in KwaZulu-Natal which racked up over R15 billion in insured losses.
The hope is that the widespread adoption of technology will help offset some of this exposure. “Artificial intelligence (AI) is going to play an important role in [areas] like geospatial data and its use in underwriting,” Hossain said. Generative AI is being used to improve underwriting decision-making and pricing thanks to its ability to process reams of data including historical flood data, satellite imagery and topography. “In a world where urban concentration is a reality, if we are not improving the granularity of underwriting and risk management, insurance tends to become uneconomical,” the presenter said.
The shift from ownership to experience is a key consumer behaviour trend flagged in the Capgemini and McKinsey reports. According to the presenter, “the recent research is showing that 45% of consumers are planning to increase spending on experiences rather than on assets.” Another interesting change is that consumers are purchasing homes later in life, with the average age of first-time buyers in the Germany and USA up by three years. Non-life insurers that fail to identify and respond to these trends may find their premium dwindling.
From asset ownership to experience
“The world that is taking shape is one where risk is far more concentrated, where risks are becoming increasingly intangible, and the shift is away from asset ownership to experiences,” said Hossain.
In this context, the challenge facing short-term insurance stakeholders is how to reshape the product and advice framework to be appropriate for the emerging risk landscape. You have to realise that some of the risk assumptions underpinning traditional models no longer hold. “An ageing society is redefining who we insure, what we cover and actually how we price that risk in a non-life insurance setting,” he said. To support this statement, he described the typical insured client today versus 25-years hence.
Today, you might be advising a mid-30s dual income family with a primary residence and two motor vehicles. These individuals are digitally informed and while many still rely on a broker to find need-appropriate cover, they are increasingly going online. By 2050, your average client may be in his or her late 50s. They may have a bond due to their later entrance to the property market, or they may have continued renting to fit that experience versus ownership trend. And they may have abandoned vehicle ownership altogether, in favour of ride-sharing, robot-taxis or Uber.
Insurers will need to rethink how they structure benefits to support older clients who plan to stay in their homes for longer. As the average South African property now exceeds 30 years in age, there is a rising need for modular policies that address gradual wear and tear and damage due to damp, mould, faulty electrics and rusted pipes, perhaps through targeted repair services. According to the speaker, the idea of “resilience first” cover is gaining traction, with optional benefits like home repair assistance and service provider referrals moving to the centre of product design.
Transforming motor insurance
Motor insurance, too, is in the midst of transformation. Data shows that older clients drive significantly less, rely more on e-hailing and eventually opt to sell or decommission their vehicles. This means that usage-based pricing models that reward low-mileage drivers will become more appealing. Older clients may also value features such as stolen vehicle recovery, crash alerts and impact notifications to family members more than traditional damage cover, prompting a rethink of how value is communicated in policies.
A final frontier in this conversation is the convergence between personal and commercial insurance in the age of automation. Partial vehicle automation is already commonplace, with adaptive cruise control and lane-keep assist making autonomous driving a reality for longer trips. By 2035, more than half of all vehicles on the road will offer this capability. As the technology matures, liability will shift from drivers to manufacturers, prompting structural changes to how risk is pooled and priced.
In this environment, the value of advice is in simplifying complexity and guiding meaningful choices. “Being a trusted translator is going to be the ultimate kind of role that the adviser is going to play,” concluded Hossain.
Writer’s thoughts:
As the global population gets older, insurers are noticing distinct changes in claims, cover choices and customer expectations. Have you considered how ageing trends are shaping your short-term insurance book? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
