WINNER – 2014 ALUCA TURKSLEGAL SCHOLARSHIP

Australia 2050

Lara Neate – BT Financial Group

Question 10

According to the treasury, over the next 40 years the proportion of the population over 65 years will double to around 25 per cent. At the same time, growth in the population of traditional workforce age is expected to slow to almost zero.

The demographics are therefore changing significantly in the core market for risk insurance products. How is the industry going to adapt to these changes? Describe what the industry should be offering older Australians both in pre- and post- retirement phases of their life.

To the extent there are problems with the current mix of government policy and regulation holding back the development of insurance products in this space, outline both the problems and describe the legislative and other changes that need to be made to enable the industry to provide useful products that meet the needs of this sector of the community.

Introduction

Increased life expectancy and decreased birth rate have introduced a societal challenge – a rapidly aging population. The needs of aging societies are complex and require cooperation between individuals, companies, industry and government.

The aging population slows economic growth due to the decreasing workforce and lower discretionary spending by retirees, creating a lower tax pool from which to fund increasing government spending on the age pension and health care (Dragan Savic, 2013).

To reduce the impact of the aging population, the goal of government and the insurance industry should be to maximise private retirement savings, increase the incidence of self-funded retirement and ensure superannuation savings are used appropriately post retirement (Dragan Savic, 2013).

Who are Older Australians?

People older than 65 years of age account for 13% of the almost 20 million Australians, with projections suggesting an increase to 26%–28% by 2051 (ABS, 2008). Those older than 85 years currently represent 1.6% of the population but will increase to 7%–10% by 2101 (ABS, 2008). Australians enjoy one of the longest life expectancies, 79 years for men and 84 years for women (AIHW, 2013), projected to rise to 100 years by 2060 (Oeppen & Vaupel, 2002).

Winner – 2014 ALUCA TurksLegal Scholarship 1 Lara Neate, BT Financial Group As the population ages, the prevalence of chronic diseases increases. Currently, there are approximately 330,000 Australians diagnosed with dementia (Samsung Life Insurance, 2013). Within the next 5 years, it is expected that dementia will be the leading cause of disability within Australia, surpassing cardiovascular disease, cancer, and depression (Department of Health and Ageing, 2006). About 60% of individuals aged over 65 will require at least some type of long-term care services in their lifetime (National Care Planning Council, 2014)

Growth of the workforce

The growth in the number of people of workforce age is expected to fall from around 1.2% per annum over the last decade to almost zero in forty years time. In 2002, there were more than five people of working age to support every person aged over 65. By 2042, there will only be 2.5 people of working age supporting each person aged over 65 (Commonwealth of Australia, 2004).

This increase in older Australians and reduction in the population of workforce age presents a challenge for the health care system as treatment transitions from acute disease to chronic condition. It also places a strain on the availability of labour to provide goods and services and the sustainability of social safety nets (RGA, 2013).

How will industry and government adapt to these changes in demographics?

The insurance industry has 3 main areas that it can address in relation to the changing demographics of the Australian population: preparing retirees financially for the future; offering an innovative and flexible range of products and extending the duration of healthy, independent living in later life.

These products and areas will need to address both the pre and post retirement phases. As life expectancy increases, the retirement systems will need to cater for longer periods of retirement (Dragan Savic, 2013).

Preparing retirees financially for the future

Retirees who are financially prepared place fewer burdens on social safety nets and require less support from younger generations (RGA, 2013). This requires individual planning, as well as education and innovative products (RGA, 2013).

Consumer education

Retirement financial planning requires time and effort in making the required complex decisions. The risks related to making decisions about retirement security are complex and can often be unclear. Therefore, individuals require clear and comprehensible education and guidance.

There are already initiatives that have been developed in Australia to assist individuals to make informed financial planning decisions such as the Australian Financial Services Council’s LifeWise campaign (lifewise.org.au). The problem with many of these initiatives isn’t the content but rather the effectiveness. The Actuarial Foundation provides consumer financial education on insurance and retirement planning. Canada created the Financial Consumer Agency of Canada (FCAC) in 2001 to provide financial literacy initiatives with various tools, programs and publications (Generali Assicuranzioni, 2013).

As there are already existing resources, industry and government should promote these already existing resources creating awareness and simple ways to access these. The Insurance industry has the ability to provide clear and comprehensible consumer education that is written in everyday language to provide

Winner – 2014 ALUCA TurksLegal Scholarship 2 Lara Neate, BT Financial Group practical considerations and advice. From a government perspective there is the possibility that financial planning could be taught in schools to create a culture of lifelong savings.

Offering an innovative and flexible range of product solutions

The insurance industry would need to act as the innovator in the development of new products and services to protect the financial security of its customers. Governments already invest in research and development incentives but as the population ages they will be required to do more to support the wealth protection needs of the population. There are a number of areas that both government and industry can offer products.

In Germany, which appears to have been successful so far in addressing the issue of an aging population, the government has aimed at changing the pension landscape by shifting the financing of pensions towards private pensions and capital funding (Generali Assicuranzioni, 2013). Products offered in Germany are many and most have generous tax incentives, for example the Government provides tax deferrals and exemption from social security contribution in order to encourage individuals to convert part of their wage into pension plan schemes. Private voluntary pension products can only be offered by insurance companies. Insurance companies offer insurance products to cover occupational pension schemes of various types and Insurers and brokers provide effective and extensive advisory to consumers when selling their products (Generali Assicuranzioni, 2013).

Macquarie currently offers the Macquarie Life Active policy which is an alternative to traditional insurance products. It’s a comprehensive all-in-one insurance with severity based benefits, broader coverage and the ability to make multiple claims (Macquarie, 2014).

In Belgium, insurance companies offer cover where Term Life, Income Protection, and Trauma are offered all together and the insured person risk and therefore premiums and benefits changes during their lifetime. A possibility of this could be definitions with objective severity criteria when higher ages are covered. Compared to a pay-out on any diagnosis, the risk of deteriorating claims experience is strongly reduced due to medical progress or changing screening behaviour (GenRe, 2014). Another possibility would be the reduction of the sum insured over time.

There is large scope to make changes and improvements in the way individuals are able to use their superannuation. As the law currently stands, there is nothing to prevent anyone from accessing all of their superannuation as a lump sum once they reach their preservation age.

To prevent lump sum withdrawals and to better plan for an income during retirement, there are requests by life insurance companies for this option to be removed and replaced with mandated income streams. Financial products such as annuities can serve this purpose. Annuities provide a guaranteed regular income stream for an upfront lump sum payment or a series of smaller payments. Retirees receive income over a specified time horizon (fixed-term annuities) or for the remainder of their life (lifetime annuities) (TAL, 2014). ‘Indexed annuities’ protect this income from the effects of inflation, while ‘deferred lifetime annuities’ provide an income stream once the person reaches a certain age (TAL, 2014). Deferred lifetime annuities would help to maintain a retiree’s lifestyle, but they have not taken off as a retirement investment solution in Australia. This is due to the difficulty financial advisers and their customers have understanding the regulatory complexities governing these products, and how the regulations do not provide the tax benefits afforded to other superannuation products.

Winner – 2014 ALUCA TurksLegal Scholarship 3 Lara Neate, BT Financial Group The Chinese Government is working to offer deferred tax annuities products, with a pilot scheme started in Shanghai. There are potential future tax incentives and there are a large variety of products being offered by insurance companies (Generali Assicuranzioni, 2013).

In the post retirement phase and as the prevalence of diseases such as Alzheimer’s and dementia increases the burden on Australia’s long term care there is scope for insurers to offer products to help offset the cost of long term care.

Long term care insurance products are offered in the UK, USA and Canada. These products are designed to cover long term services and supports, including personal and custodial care in a variety of settings such as the home, community organisation or other facilities. These policies reimburse policy holders a daily amount for services to assists them with ADL’s.

In Singapore, the Supplementary Retirement Scheme (SRS) was developed in 2001 and is administered by three Singaporean banks. It’s a voluntary savings system that complements the Central Provident Fund (CPF), which provides basic retirement income for housing, medical and basic living needs after retirement (Samsung Life Insurance, 2013).

Extending the duration of healthy, independent living in later life

A longer period of healthy, productive capacity combined with a shorter and less-costly stage of financial dependency will help retirees improve their quality of life and reduce the economic burden on society. Medical research focused on healthy longevity combined with incentives directed at reducing behavioural risk factors will help influence this outcome (RGA, 2013).

Behavioural incentives

As the private insurance industry increases its role in helping individuals to secure their retirement, there is a reduced dependency on social safety nets. As the Australian population ages, individuals should have secure and fully funded retirement plans as well as individual protection insurance.

Government and the insurance industry can both use their marketing power to encourage individual savings and private insurance ownership to fill the gaps of social safety nets (RGA, 2013). Governments can achieve this by building incentives into government tax policies. Insurance companies can develop initiatives by offering products that encourage healthy lifestyle choices.

For example AIA Singapore launched AIA Vitality in July 2013, providing participants with the knowledge, tools and motivation to help them achieve their personal health goals. Clients complete in-depth health assessments to understand their current state of health and then receive clearly defined personal health goals and earn “Vitality Points”. The customers earn more Vitality points and ultimately bigger rewards as they improve their Vitality Health Status.

Scanners that can determine BMI and waist measurements or screening of the client’s genome could result in being offered a lower premium if you are in better health.

Winner – 2014 ALUCA TurksLegal Scholarship 4 Lara Neate, BT Financial Group Medical research and technology

Both government and industry have a role in supporting research into slowing the progression and reducing the large costs associated with older age disease. Spending on healthcare is estimated to increase to 7% of GDP by 2050 and become the highest area of government spending (Dragan Savic, 2013).

Investment into medical research already occurs both in government and insurance companies, including projects that are focused on the elderly population. There has been a recent announcement of a partnership between public and private industry for the BRAIN initiative that may lead to treatments or cures for Parkinson’s disease, Alzheimer’s disease and other cognitive disorders (NIH, 2014).

Consideration must be given to improvements in medicine to include major organ transplantation or other surgical procedures into trauma cover sold to older Australians.

Improvements in clinical practices and improved life expectancy, may increase the age people are undergoing certain treatments and this in turn could impact on future incidence rates (GenRe, 2014).

Common medical events in the older population such as a fractured hip could lead to additions to trauma products offered to that group. Depending on the total insured amount, a partial payment can be appropriate for such events or assistance services could be added as well. To balance this, conditions seen as disorders of the young could be removed from the cover (GenRe, 2014).

Claims occurring in the older population is likely to result in multi-morbidity. This can complicate claims management as it’s not always clear which disease caused which physical limitation. A possible response is to price for a lump sum disability benefit or a long-term care cover based on an ADL’s definition.

Long term care is one area of concern and the rising incidence and prevalence of people suffering Alzheimer’s and dementia-related disease. The cost of extended care is set to increase, as is the burden on family members to care for those suffering from Alzheimer’s disease. As stated above long term care insurance products could be offered or even gene testing to determine risk.

Legislative problems and changes required to assist the industry to provide effective products

The insurance industry and Government will need to work collaboratively to influence financial preparedness and increase the duration of healthy longevity.

Government policy and regulation that is holding back the development of insurance products include the current retirement age, the cost of pension benefits, the current rate of pension contributions and taxes, regulation of annuities and the current mandated employer contribution.

Deferred lifetime annuities are almost non-existent in Australia. Regulations force life insurance companies to price these products more expensively than consumers are willing to pay (TAL, 2014).

A variety and number of changes could be made to legislation including offering tax incentives for voluntary pension savings; making pensions mandatory; requiring a minimum annuitisation of pensions; improving people’s awareness of their financial status at retirement; matching the retirement age for private pensions funded through superannuation (Generali Assicuranzioni, 2013).

Specifically ASFA has recommended the SIS regulations be amended to facilitate product innovation in pensions and annuities (Dragan Savic, 2013). These include: provide equivalent treatment to post-retirement

Winner – 2014 ALUCA TurksLegal Scholarship 5 Lara Neate, BT Financial Group products offered by life insurance companies and by superannuation funds; set out general requirements for longevity products rather than mirror specific characteristics of existing products; and allow products which provide deferred benefits past normal retirement age to be offered (Dragan Savic, 2013).

There are various legislative barriers to the development and use of annuity products. Policy settings need to be adjusted to increase the variety and use of these products, as they are an effective tool for managing longevity risk.

Conclusion

The rapid aging of Australia’s population over the next 40 years and decrease in growth of the workforce is going to create problems. There will be an increased strain on the health care system, decreased proportion of workers relative to retirees and uncertain financial futures for the oldest generations. The increase in life expectancy and change in prevalence and incidence of diseases or even the possibility of new illnesses becoming apparent can mean that the future is still uncertain in relation to how the industry adapts to these demographic changes. But it does present opportunities for the insurance industry and Governments alike: innovative financial products; long term care products specific to the older population; medical and technological advancements to reduce the cost of dependency and lengthen the period of healthy and productive life, as well as reduced dependency on social safety nets.

There are many ways that Australia can prepare individuals for retirement as the demographics change over the next 40 years based on the examples globally. There is no single product or offering that will meet the challenge.

Winner – 2014 ALUCA TurksLegal Scholarship 6 Lara Neate, BT Financial Group Works Cited

Australian Bureau of Statistics (ABS), 2008. Population by age and sex, regions of Australia. Cat. No. 3235.0., [Online] Available at: http://www.abs.gov.au/Ausstats/[email protected]/mf/3235.0 Accessed September 16, 2014

Australian Institute of Health and Welfare (AIHW), 2013. Australian trends in life expectancy. [Online] Available at: http://www.aihw.gov.au/deaths/life-expectancy/ Accessed September 16, 2014

Oeppen J, Vaupel JW, 2002. Broken limits to life expectancy. Science 2002;296:1029-1031.

Department of Health and Ageing, 2006. National Framework for Action on Dementia. [Online] Available at: http://www.health.gov.au/internet/main/publishing.nsf/content/dementia-nfad2013-2017 Accessed September 16, 2014

Commonwealth of Australia, 2004. Australia's Demographic Challenges; Appendix – the economic implications of an ageing population. [Online] Available at: http://demographics.treasury.gov.au/content/_download/australias_demographic_challenges/html/adc-04.asp Accessed September 16, 2014

RGA Reinsurance Company, 2013. Aging Populations: How Governments and the Insurance Industry Can Work Together. Available at: http://www.iisonline.org/files/uploads/2013/06/Final_Combined_IIS_Papers_2013_at_14-6.pdf

Dragan Savic, 2013. Australia’s aging population: what existing policy settings could be changed, or new policies implemented, to better insulate Australia from the future economic impacts of an ageing population. Available at: http://www.fsc.org.au/downloads/file/aboutus/dragansavic-futureleadersawardpaper.pdf

TAL, 2014. Retirement Income Solutions needed [Online] Available at: http://www.tal.com.au/voice-for-life/longevity/retirement- income-solutions-needed#will-i-have-enough-to-retire

Generali Assicuranzioni, 2013. Ageing: Insurance and Government—Italy, Germany and China. Available at: http://www.iisonline.org/files/uploads/2013/06/Final_Combined_IIS_Papers_2013_at_14-6.pdf

Samsung Life Insurance , 2013. How the Insurance Industry and Governments Could Work More Closely Together to Begin to Tackle Jointly the Emerging Problems Caused By an Aging Population. Available at: http://www.iisonline.org/files/uploads/2013/06/Final_Combined_IIS_Papers_2013_at_14-6.pdf

Alzheimer’s Australia, 2014.Dementia and Memory Loss Statistics [Online] Available at: https://fightdementia.org.au/about-dementia- and-memory-loss/statistics

National Institutes of Health (NIH), 2014. Brain Research through Advancing Innovative Neurotechnologies (BRAIN) Initiative. [Online] Available at: http://www.nih.gov/science/brain/

Macquarie, 2014. Macquarie Life Active [Online] Available at: http://www.macquarie.com.au/mgl/au/advisers/campaigns/insurance/macquarie-life-active

EY, 2014. Global Insurance Outlook Available at: http://www.ey.com/Publication/vwLUAssets/EY-2014-global-insurance- outlook/$FILE/EY-2014-Global-insurance-outlook.pdf

Tim Eppert, GenRe, 2014. Critical Illness: Fit for the Elderly? Risk Insights Vol 18 No. 3 Available at: http://www.genre.com/knowledge/publications/ri14-3-eppert-en.html

National Care Planning Council, 2014. Guide to Long Term Care Planning: About Long Term Care. Available at: http://www.longtermcarelink.net/eldercare/long_term_care.htm

Winner – 2014 ALUCA TurksLegal Scholarship 7 Lara Neate, BT Financial Group