Aon warns on longevity reinsurance pricing

Longevity reinsurance capacity may have been overpriced last year, despite a reduction in liabilities flowing through from new mortality data which showed that mortality improvements were slowing, according to Aon Hewitt.

Reinsurance pricing levels, for the UK pension risk transfer market, in the fourth quarter of 2016 showed that pensions which chose to delay longevity risk transfer or swap deals were seeing price reductions of up to 2%.

Aon Hewitt is urging pension schemes to be aware of and analyse the latest mortality rate data to ensure they are forewarned of where reasonable pricing of longevity insurance or swap transactions should be.

Tim Gordon, partner and head of Longevity at Aon Hewitt, said; “Over the past six years, male mortality rates improved by less than 1% per year compared with over 3% per year during the previous decade. This reduces projected future improvement, and potentially reduces liabilities by 3-4% compared with the view of only a couple of years ago.

“We believe it is important to continue taking a measured approach when incorporating the latest mortality data, not least to avoid unnecessary volatility in funding and accounting valuations. However, this change is significant as it indicates that the expected future reduction in mortality improvements has taken place earlier than expected. This has material implications for longevity swap and bulk annuity pricing – especially in today’s hyper low-discount rate environment.”

Martin Bird, senior partner and head of Risk Settlement at Aon Hewitt, added; “In the second half of 2016 we were concerned that some reinsurers were operating with out-of-date pricing. We worked hard to address the potential price dislocation in the longevity market and we are optimistic that – with mortality data now available right up to the end of 2016 – insurers and reinsurers will be able to update their pricing to be consistent with current improvement trends.

“We will continue to do everything we can to ensure a functioning and competitive longevity market because we firmly believe this is in the interests of pension schemes, insurers and reinsurers alike.”

The problem is that it can take time for new mortality assumption data to be included in pricing models, and not every market participant will incorporate new data at the same times, leaving a possibility of a price differential and the potential for dislocation.

Reinsurance pricing drives the price for longevity insurance through longevity swaps and the like, so it is no surprise that with a price dislocation issue that 2016 saw lower longevity swap & risk transfer activity as a result.

Standardised mortality rates E&W male - From Aon Hewitt

Notes

The graph shows standardised mortality rate for men in England & Wales by calendar year from 2000 to 2016 inclusive. In this context, ‘standardised’ means the rates are

(a) representative averages, i.e. they represent mortality at ages important for longevity-related liabilities such as pensions, and

(b) directly comparable between years (because it removes the effects of the population growing and ageing).

The graph is plotted on a logarithmic scale because improvement trends show up as straight lines on a log scale and are therefore easier to spot.