The insurance industry is facing a potential game-changer in the form of weight loss drugs like Ozempic and Mounjaro. These medications, which have already sparked widespread discussions in healthcare, are now raising alarms among actuaries, who are concerned about the long-term effects on life insurers and pension funds.
UBS, in a recent report, highlighted the significant risks these treatments pose, particularly for life insurers. The core concern is that, if these drugs lead to sustained improvements in health, individuals may live longer than insurers currently predict. This shift could drastically impact the profitability of long-term insurance products, such as annuities.
A Historical Parallel The situation brings to mind a past change in health trends: the decline in smoking rates and its subsequent impact on life expectancy. While smoking rates dropped gradually over time, the adoption of weight loss drugs has been swift, with reports suggesting that one in six obese Americans are already using these medications. The UK is also experiencing rapid uptake, spurred by the relatively lower cost of these treatments compared to the US.
For insurers, this rapid adoption presents a challenge. While they can adjust pricing for new business, they face the risk of significant losses on existing policies if mortality rates begin to shift unexpectedly—especially if longevity risk is not fully reinsured.
The Nuanced Impact For companies like Aviva, the effects of widespread weight loss drug usage are currently limited, but the long-term consequences could be more significant. UBS notes that many UK life insurers, including Aviva, typically reinsure most of their longevity risk on new annuity business. This is particularly true for “in-payment” annuities, where future payouts are already predetermined. As a result, any unexpected increase in life expectancy due to weight loss drugs would likely have little impact on newer contracts.
However, the situation is different for legacy annuity portfolios. UBS estimates that only 50% of UK life insurers’ existing annuity portfolios are reinsured. If weight loss drugs significantly extend lifespans faster than currently projected, companies like Aviva, Legal & General, Phoenix, and M&G could be forced to cover longer-than-expected payout periods, potentially squeezing future profit margins.
A Slow-Burning Risk Despite these concerns, UBS does not view this as an immediate threat. Insurers already account for some improvement in life expectancy over time, and the long-term effects of weight loss drugs remain uncertain, especially considering factors like cost and side effects.
A more immediate challenge may arise within the reinsurance market. If reinsurers adjust their pricing to reflect longer life expectancies, the cost of writing new annuity business could increase, putting further pressure on insurers’ returns. To mitigate this, insurers like Aviva may have to pass on higher costs through price hikes for new policies.
While the risks posed by weight loss drugs are not yet urgent, UBS emphasizes that insurers must not overlook this potential shift in population health—a change that could rival the impact of the decline in smoking rates.
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