Mortality rate observations place longevity market in a state of flux: Aon Hewitt

In response to the new Continuous Mortality Investigation (CMI) model, recent reductions seen in national mortality improvements can no longer be regarded as a “blip” and have put the pension longevity swap and reinsurance market into a state of flux, according to Aon Hewitt.

The new CMI mortality projections model, CMI_2016, is based on data to the end of 2016 and incorporates lower than previously expected mortality improvements during the last five years into its forecast.

According to Aon Hewitt, the global talent, retirement and health solutions business of insurance and reinsurance brokerage Aon, the new 2016 model suggests a complex picture for pension schemes, as it supports the notion that recent “reductions in mortality improvements can no longer be considered a ‘blip.’”

Tim Gordon, Partner and Head of Longevity, Aon Hewitt, commented; “It is increasingly difficult to argue that the fall off in national mortality improvements since 2011 is simply a blip.

“However, the underlying picture for pension schemes is complex and, accordingly, a more-tempered view is appropriate. In particular – and perhaps surprisingly – less-well-off defined benefit scheme pensioners appear to have had higher recent mortality improvement than both the national population and better-off defined benefit scheme pensioners.”

Uncertainty and changes to national expected mortality rate improvements presents a challenge to pensions schemes and insurers and reinsurers that operate in the longevity risk transfer market.

Aon Hewitt commented recently that 2016 was a challenging time for the longevity swap market, with new data driving pension and reinsurance markets to react to changes in mortality expectations.

Changing, potentially incomplete and less-than-accurate data could result in poor pricing in the longevity market, as pensions schemes and re/insurers look to transact based on old data that fails to consider recent reductions to mortality improvements, which could well be the long-term trend.

“The emerging mortality data means that the pension scheme longevity market itself is in a state of flux. With changing or incomplete data, there remains a risk that schemes considering hedging their longevity risk may end up with poor pricing, or make a decision based on out-of-date information.

“We are continuing to work with schemes, insurers and reinsurers to build a wider consensus on future mortality improvements and to ensure fair and efficient pricing in the longevity market,” said Gordon.

Aon Hewitt also reveals that data from the first two months of this year, which isn’t included in the new CMI model, further supports the idea that recent reductions in mortality rate improvements show no sign of returning to past levels, suggesting the current trend is no longer a “blip.”

Furthermore, analysis of the Aon Hewitt Longevity Model (AHLM) dataset supports further analysis undertaken by the CMI, which reveals that mortality rate improvements for pension scheme members have varied from the national population.

Activity in the longevity swap market has been fairly slow in 2017, although we have seen a couple of transactions come to market. According to market participants there remains high interest in hedging among UK and other national pension schemes, although mortality improvement rate uncertainty and changes, and resulting pricing instability could be hindering market growth.

Changes in mortality rates and improvements in them affect both longevity reinsurance and mortality reinsurance markets, as the new expectations need to be priced into transactions. With the longevity market on a slow-down as a result of this data it could take some time for new assumptions to filter through and for activity to increase to levels previously seen.

Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.