The latest mortality data for the UK from the recently published new Continuous Mortality Investigation (CMI) model showing that lower levels of mortality improvement continue in England and Wales suggests that downward pressure on longevity reinsurance pricing will continue, reducing longevity swap premiums, according to Aon.
Insurance or reinsurance broker and professional services firm Aon has estimated that the new model can lower a pension scheme’s liabilities by between 0.5% and 1%, compared with the previous version of it.
The new version of the mortality data model, called ‘CMI_2017’ is based on data to the end of 2017, and shows that there have been lower than expected improvements in national mortality in England and Wales over the last six years.
Lower modelled life expectancies result in lower liability values, compared with previous versions, as a result affecting reinsurance appetite to assume that risk and influencing pricing, which in turn can make longevity swaps and other solutions more attractive for pensions to enter into.
Matthew Fletcher, senior longevity consultant at Aon, explained, “The post-2011 trend of lower improvements continued through 2017. It is no longer credible to claim that this is a blip – longevity specialists who have found reasons to treat each new year of heavy mortality data as somehow a ‘one-off’ may now have some difficult explaining to do.
“The longevity markets have also now recognised that the post-2011 experience was not a ‘blip’ and are reflecting more recent trends. But we expect that the 2017 data – in combination with the surprisingly heavy mortality data for 2018 so far – will continue to place further downwards pressure on longevity reinsurance prices and have a positive impact on bulk annuity and longevity swap premiums.”
He continued, “While mortality improvements for pension scheme members have also fallen broadly in line, our analysis at Aon suggests that they have not fallen to the same level as for the general population. All else being equal, simply being a member of a defined benefit pension scheme has positive life expectancy implications!
“Trustees and sponsors need to consider carefully how to adjust the CMI model to obtain mortality improvements assumptions that are appropriate for their pension scheme. It is important that this adjustment is based on data and sound principles. At Aon, we have developed a robust methodology that takes explicit account of each scheme’s socio-economic profile, while automatically remaining consistent with the pattern of improvements observed nationally.”
Read about many historical longevity swap and reinsurance transactions, in our Longevity Risk Transfer Deal Directory.
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