In the world of insurance, a little jab could have outsized consequences. Weight loss drugs such as Ozempic and Mounjaro have transformed the healthcare conversation...and now, they’re starting to worry actuaries.
UBS this week flagged the potential long-term impact of these treatments on the insurance sector, especially life insurers and pension funds.
The concern is simple: if these drugs deliver sustained improvements in health outcomes, people could end up living longer than insurers currently expect, a development that would erode the profitability of long-dated products like annuities.
Smoking parallel
It wouldn’t be the first time a health shift upended longevity models. The UBS note compares it to the post-smoking-era jump in life expectancy.
But while smoking rates fell over decades, take-up of new weight loss drugs has been brisk; the FT recently reported that one in six obese Americans is already using them.
If the US is leading the field, the UK is quickly following and catching up; particularly given the medication is significantly cheaper on this side of the Pond.
That pace presents insurers with a dilemma. They can reprice new business, but sudden changes in mortality trends could cause losses on existing policies, particularly where longevity risk hasn’t been fully reinsured.
Impact nuanced
For insurers like Aviva, the impact of widespread weight loss drug use is nuanced; and, for now, relatively limited. But it’s the long-term actuarial implications that could start to bite.
UBS points out that many UK life insurers reinsure the bulk of longevity risk on new annuity business. That’s especially true for so-called “in-payment” annuities, where future payouts are already locked in.
This means any unexpected boost to life expectancy, say, because of the successful uptake of so-called 'fat jabs', is less likely to affect recent deals.
However, the legacy back-books are a different story. According to UBS, only about 50% of UK life insurers’ existing annuity portfolios are reinsured.
Long-tail problem?
So if these drugs materially extend lifespans faster than currently modelled, Aviva and peers like Legal & General, Phoenix and M&G could be left on the hook for longer-than-expected payout periods, putting pressure on future margins.
That said, UBS doesn’t see this as an immediate threat. Insurers already build in some improvement to life expectancy over time, and there’s still a degree of uncertainty around how durable and widespread the benefits of weight loss drugs will be, especially given the cost and side effects.
The bigger challenge might come through the reinsurance market itself. If reinsurers start to adjust their pricing to reflect better longevity, the cost of writing new annuity business could rise, squeezing returns unless insurers like Aviva can pass that on through pricing.
So while the current risk is a slow burn, the message from UBS is clear: insurers can’t afford to ignore what could be the biggest shift in population health since smoking rates fell.