Service-integrated Innovative Pension Annuity Insurance

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With the growth of China’s aging population, the demand for high-quality life after retirement has increased. Therefore, more and more financial companies are involved in the construction of continuing care retirement communities (CCRCs).

In the past 10 years, insurance products and CCRCs have not been effectively integrated, resulting in the slow return of funds to the CCRC projects and longer debt duration than expected. To explore an innovative model that closely integrates insurance products with CCRCs, we designed and developed “service-integrated innovative pension annuity” by optimizing actuarial skills and product rules. Based on the immediate pension annuity, our products—which provide high standard services and financial guarantee—empower the policyholders to make decisions in the settlement of CCRC. The innovative model of “CCRC + pension annuity” paves a new way for the exploration of pension annuity.

Background

Population aging, which initially occurred in developed countries, is the inevitable result of the development of economics and the improvement of the medical security system. According to United Nations criteria, when the elderly population 60 and older accounts for 10 percent of the total population, or the percentage of the population older than 65 reaches 7 percent, the country enters an aging society.¹

According to the seventh national census in 2020, the proportion of the Chinese population aged 60 and older is 18.7 percent, in which the population aged 65 and older accounts for 13.5 percent. As the economy of China booms, it has entered the era of an aging society.

With the continuous population aging, the demand from the elderly for exclusive pension insurance products and high-quality professional pension services has increased. According to the “Retirement Planning and Healthcare of Chinese HNWIs 2017,” 68 percent of the high-net-worth population is willing to pay extra for premium value-added services, such as qualification of living in senior care communities.²

However, in contrast to the young and middle-aged customers who have access to abundant “CCRC + annuity insurance” products, the aged customers can only access few products with more restrictions. As of July 2021, based on the industry database of Personal Life Insurance Product Information from the Insurance Association of China, there are 7,200 personal insurance products available in the market, among which 241 are of pension annuity insurance, causing the imbalance of supply and demand.

Product Design

Pattern Design

We created a closed-loop service of “insurance, medical care and industry” by combining “pension insurance” and “senior community,” providing better pension products and services for the senior. On the basis of the traditional immediate pension annuity only providing future pension, the option of living in the pension community is added.

Additionally, we provide customers with two alternatives: Customers can directly get cash back, or they can change beneficiaries to live in designated senior care communities to fulfill the one-stop senior care planning.

Here are the key aspects of the service-integrated innovative pension annuity insurance model we developed:

• It is a whole-life pension annuity.
• Annuity is paid monthly after the cooling-off period.
• We give policyholders two types of guaranteed payment periods: If they insure before 81 years old, the guaranteed payment period is 25 years; if they insure at 81 or older, the guaranteed payment period is 20 years.
• Based on the annuity, we give the policyholder the added option of living in the community.

Product Pricing

Consideration of Incidence Rate

The pension annuity product is mainly faced with longevity risk and continuous pressure of future cash flow. Due to the limitation of the industry life table, we used the HP (Heligman and Pollard) eight parameter model³ and Whittaker cubic spline smoothing⁴ to extrapolate and smooth the death rate of advanced age. Moreover, combined with the trend of future mortality improvement, the premium rate and value of new business (VoNB) under different mortality improvement factors are tested. Based on the experience of the industry, the company’s own experience and testing results, the incidence rate assumption of the product is carefully formulated.

Extend the Issue Age

The pension annuity products can be purchased after reaching the mandatory retirement age. Retirees could join the high-end retirement community by purchasing the product for a lifetime income stream. The maximum issue age can be up to 85 years old, and the guarantee period is moderately reduced for the elderly to reduce the premium amount and purchase pressure.

Longevity Risk

For product pricing, the maximum age of the current life table that is capped at 105 years old will not be compatible to the prolonged life expectancy cases since someone could live longer than that. Although comprehensive consideration and analysis are applied, the insufficient demographic data of those older than 90, which results in increased volatility of mortality rates, may result in the product model having certain longevity risks in the future.

Product Services Integration Model

Available for “Customer Direct Payment”

Customers can directly receive monthly pension payments to settle the statement of housing fees and service charges. If they prefer to stay in the designated senior care community before the appointed date, not only will the right to settle be guaranteed, but the lifelong locked discount will be offered for housing usage, plus the multiple discounts for services.

Realize the “Joint-life Annuity Insurance” Feature

For spouses choosing to live together, if the insured dies, the spouse can still settle the housing and services charges directly via the “direct payment” option until the end of the guaranteed payment period. This feature helps customers transfer longevity risks and provides solid wealth protection for a quality retirement life.

Conclusion

Developing insurance products that are bundled with senior care services is a future industry trend. Most insurance companies prudently provide this model product due to the problems of large investment and long-term capital flow in the construction of the senior care community. The demand for premium senior care services pursued by the senior is hardly satisfied.

Our article introduced service-integrated innovative pension annuity insurance that sufficiently accomplished the synergistic effect consisting of the senior care community and pension annuity products through a combination of “medical and health care living industrial landscape.”

On the one hand, this model provides premium senior care services by opening up business integration nodes. On the other hand, this model helps to attract more long-time customers to live in the community, thereby fundamentally increasing the sales rate and faster cash withdrawal to form a closed loop of funds. But to fundamentally solve the problem of capital flow in the assets-heavy model for the senior community, it is still necessary to improve the service quality by improving the offerings to the senior community.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Copyright © 2021 by the Society of Actuaries, Chicago, Illinois.