From an “emerging risks” perspective it can be seen that the inadequacies of the “lump sum” method of compensation have been highlighted by a number of systemic factors:
- Advances in medical technology/medical inflation
- Increasing life expectancy
- Government down-sizing/privatization of long-term care
- Compensation culture which requires “risk free” solutions
These systemic factors are being seen globally. They may manifest themselves to varying degrees in different regions but it is likely that they will only become more pressing.
For varying social and cultural reasons, annuities have been commonplace in a number of countries in Continental Europe for some time, most notably in Germany and France. However, their impact has been somewhat mitigated by the relatively low level of medical care costs (due to the provision of substantial state-funded care) and the fact that inflation was either discounted or covered by the government, as in the case of France.
These developments make France a good example of an “emerging risk” because the government has recently withdrawn the full extent of its inflation protection. This exposure has now been “privatized” and is the subject of negotiation between French insurers and their reinsurers.
Recent cases in Spain have highlighted the inadequacies of the Baremo system in relation to long-term care compensation and there is an ongoing review into the establishment of some form of annuity compensation structure.
Similar issues are arising in Central Europe, most notably in the Czech Republic where there is already a comprehensive framework for annuity structures. At the moment the monetary amounts at stake are relatively insignificant so recognition of their financial impact has not been fully articulated by insurers or by their reinsurers.