The insurance industry is confronting a potential shift in risk dynamics due to the widespread use of weight loss drugs such as Ozempic and Mounjaro. These medications, which have dominated healthcare discussions in recent months, are now raising concerns among actuaries who are questioning their long-term impact on life insurers and pension funds.
In a recent report, UBS outlined the possible dangers these drugs pose to the sector. The main concern is that, if these treatments prove effective in significantly improving health, individuals may live longer than insurers have currently anticipated. This could erode the profitability of long-term insurance products, particularly annuities.
A Historical Perspective
The impact of health trends on life expectancy is not new. UBS draws a parallel to the decline in smoking rates and its effect on life expectancy, which led to adjustments in longevity models. However, while smoking rates declined gradually over decades, the adoption of weight loss drugs has been much faster. Recent reports indicate that one in six obese Americans is already using these medications, and uptake in the UK is growing quickly, driven in part by lower costs compared to the US.
For insurers, this swift adoption presents a challenge. Although insurers can adjust pricing for new business, the real concern lies in the potential for significant losses on existing policies if mortality rates change unexpectedly. This risk is particularly relevant for policies that have not fully accounted for longevity risk through reinsurance.
Impact on Legacy Portfolios
For insurers like Aviva, the immediate impact of weight loss drugs is limited, though long-term ramifications could be significant. UBS notes that many UK life insurers, including Aviva, typically reinsure most of their longevity risk for new annuity business, particularly for “in-payment” annuities where future payouts are already set. As a result, any unexpected increase in life expectancy due to the uptake of weight loss drugs would likely have a minimal effect on newer contracts.
However, legacy annuity portfolios present a different challenge. UBS estimates that only 50% of UK life insurers’ existing annuity portfolios are reinsured. If these drugs lead to a faster-than-expected increase in life expectancy, insurers such as Aviva, Legal & General, Phoenix, and M&G could face longer payout periods than anticipated, potentially squeezing profit margins.
A Gradual Risk, But Not Immediate
Despite the concerns, UBS does not see this as an immediate crisis. Insurers already factor in gradual improvements to life expectancy, and there remains uncertainty about how widespread and durable the benefits of weight loss drugs will be, especially given potential side effects and costs.
One immediate challenge, however, could arise in the reinsurance market. If reinsurers adjust their pricing to reflect longer life expectancies, the cost of writing new annuity business could increase, placing pressure on insurers’ returns. In response, companies like Aviva may need to raise prices for new policies to offset the increased costs.
While the risk posed by weight loss drugs is not urgent, UBS stresses that insurers cannot afford to ignore this shift in population health, which could have a profound impact—potentially on par with the changes seen after the decline in smoking rates.
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