Long-term investment and the silver economy – Credit Suisse
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Supertrend silver economy: Investing for an aging population

The demographic shift is in full swing. Insurance and funding solutions will be in increasingly high demand, offering long-term investment possibilities for investors.

The world's senior population is in the process of doubling from just short of a billion senior citizens at present to over two billion by 2050. Population aging will continue and despite efforts to lower healthcare costs and increase efficiency, the need for individual funding solutions for higher longevity and rising healthcare costs will continue to increase globally, representing an important driver for the insurance sector in addition to the healthcare sector. This affects not only developed markets, but increasingly emerging markets as well. Health insurance in particular continues to profit from high structural demand in emerging markets as incomes rise.

In emerging economies, out-of-pocket (OOP) expenses typically form a large part of overall health expenditures, with government and compulsory health insurance the second main category. Voluntary health insurance makes up a minor share, but offers growth potential as individual wealth increases (OOP expenses could otherwise threaten to increase poverty, according to the World Health Organization) along with health expenses, which underpins both the affordability and need for health insurance coverage.

Increasing demand for life insurance products

Population aging and rising longevity are likely to increase the demand for life insurance products as well. We believe that real gross premiums in life and savings should increase more in underpenetrated regions like Asia and, at a later stage, Africa. Growth is likely to be driven by life annuities, which are the only permitted retirement payout option in some regions.

In countries where social security benefits are not sufficiently generous, longer life spans could increase demand for precautionary private savings and liquid assets to cover future expenses, not least for health services. Hence, we expect life insurers to increasingly expand toward so-called unit-linked products on the savings side and simultaneously focus more on protection products for the elderly.

Higher retirement age will increase savings

In most developed countries, eligible individuals receive public pension benefits after reaching retirement age. These schemes are administered by governments, which bear the associated costs and risks. Most schemes work contributions are used to fund current pensions. The aging population is likely to increase public pension expenditure and, combined with falling support ratios, exert pressure on government budgets.

Healthcare expenditures

To sustain public pension systems, the retirement age could be raised, which would translate into more savings and increased demand for (capital protected) financial products. Aging and low interest rates are putting further pressure on retirement benefit levels and corporate pension funds. Hence, the transition from defined benefit (collective risk sharing) to defined contribution (individual risk bearing) plans will continue. This transition is already making rapid progress in the USA and UK.

As people can rely less and less on public and corporate pension plans, we expect households to increasingly save privately for retirement, so that a part of future pension income will stem from accumulated private assets and savings. While some life insurance products offer a tax advantage, increasing private savings will also require more sophisticated investment products to channel and convert those assets over an individual’s lifetime. With the shift toward defined contribution plans, there will be opportunities for supplementary advisory services in structuring retirement plans/products and asset-liability management.