Mortality projection modelling to benefit from CMI evolution: Aon

Aon Hewitt, the talent, retirement and health solutions division of insurance and reinsurance brokerage Aon plc. has expressed support for the continued evolution of the mortality projection model used by the Continuous Mortality Investigation (CMI), citing recent proposed amendments as a positive step.

The longevity swap, or risk transfer market has grown in recent years, with projections of continued rapid growth through to 2020 predicted, as pension funds and annuity providers increasingly look to offload some of their longevity exposure, and insurance and reinsurance firms show a willingness to assume the risk.

In order for insurers to accurately set annuity prices and pension funds and alike to accurately predict their longevity exposures, mortality rate predictions are essential. Since 2009, the CMI has produced an annual mortality projection model, which reflects newly released mortality information and data from the Office for National Statistics (ONS).

However, unexpected fluctuations in mortality rate improvements from 2011 to 2015 across England and Wales, has led the CMI to propose certain changes to the newest version of the model, which is set for release in early 2017.

Aon Hewitt explains that the average mortality rate improvement over 2011-2015 in England and Wales was the lowest since 1975, underlined by roughly 36,000 more deaths recorded than expected in 2015.

“This means that the life expectancy projected by the latest version of the model is lower (by around a year) than models produced in earlier years. This means that, effectively, there have been no significant improvements in mortality rates since 2011,” said Aon Hewitt.

Aon Hewitt had expressed concerns prior to the release of the latest version of the model in 2015, stating that perhaps the CMI model focuses too heavily, and is too responsive to short-term impacts on mortality rates. Previous models have been very focused on utilising single-year datasets, which may not be accurate as they can easily be impacted by one-off events.

“Longevity projections are key for future planning for both pension schemes and insurance companies. We were previously concerned whether the CMI 2015 Model was over-reacting to recent years with relatively high numbers of deaths, as these may be caused by one-off factors rather than being part of a long-term trend.

“Insurers and pension scheme trustees were certainly concerned about the volatility of longevity projections. For example, moving from CMI 2014 to CMI 2015 reduced liabilities by around 1%. Was that really justified by one more year’s data?” said Martin Lowes, Partner at Aon Hewitt.

In response to industry concerns, the CMI has proposed some changes for the 2017 model release, including making the model less responsive to single years of data that might be caused by one-off factors, but continuing to respond to long-term changes in mortality improvement predictions.

According to Aon Hewitt, the proposal also seeks to provide practitioners with the option to ‘dial up’ or ‘dial down’ the responsiveness of the model to new data, and will look to support greater transparency and ease of use and calibration.

“We therefore welcome the CMI’s focus on the responsiveness of the model, as well as its aim of making the model much easier for practitioners to use. The proposals reflect an evolution of the modelling process rather than a revolutionary change. Based on the consultation paper, we believe this model is likely to be a good step forward for mortality modelling,” concluded Lowes.