Longevity risk is a financial term that is used to describe the risks faced by insurers and those who offer pension plans due to increases in the average life expectancy. This also applies to those who may be saving money to retire since an increased life expectancy might have an impact on the ability of their savings to sustain them in later years. Longevity risk is a relatively modern concept that flows from the improvement in life expectancy of the average individual.
Such increases in life expectancy are due in part to the improvement in both preventive and managerial healthcare. Diseases that used to be considered a death sentence can now be effectively managed through more competent healthcare and better access to it. Better geriatric care is also an important factor. In modern times, most of the plagues and diseases of the past have been eliminated or controlled due to better understanding and the development of better methods for controlling or preventing them. Improved lifestyles also have a role in the rise in human life expectancy and the consequent emergence of the concept of longevity risk.
The application of all these factors to insurance companies and employers who pay pension is that the increased life expectancy affects their bottom line. This is the reason why longevity is perceived as a risk by such companies. Where the average life expectancy of an average male in a location is pegged at 65, such companies must formulate their policies and base their premiums on this figure. This figure is just an estimate since emerging health-related breakthroughs make it possible for people to live longer than previous averages. For instance, if a 21-year-old man applies for health insurance, the insurance company would probably charge him a lower premium than it would a 50-year-old man.
The consideration is based on the longevity risk associated with the older man. A younger man with no preexisting condition who is in his prime is considered a lower risk than a much older man who may be susceptible to age-related conditions. This type of a situation is also affected by the fact that the older man may have many more years to live, and the insurance company may have to continue paying for treatments for an unidentified period. Even people who save money for retirement are affected by longevity risk since the money they save may not be enough to live on forever due to increased life expectancy.
