Insurance and reinsurance broker and risk advisory Aon has warned today that re/insurers and pension funds need to avoid over-reacting to how inclusion of COVID-19 deaths changes recognised mortality models, saying that “longevity risk has not gone away.”
Once excess deaths are added into the mortality models for the United Kingdom it may produce an unrealistic fall in life expectancy, Aon warns.
Insurance and reinsurance companies, as well as pension schemes and funds, factor life expectancy into their calculations for managing their liabilities.
If life expectancy falls, longevity risk could be perceived as reduced, but Aon’s Risk Settlement Group believes it’s important not to over-react to this when it causes “disruption” to the CMI Mortality Projections Model.
Tim Gordon, Head of Demographic Horizons in Aon’s Risk Settlement Group, explained, “The CMI Model is the de facto official mortality projections model for the UK and, since it was introduced in 2009, we have all become accustomed to its annual update in March.
“The CMI Model blends an average of recent national mortality improvements into a long-term improvement rate, which has been a robust approach since its introduction. If, however, the 60,000 excess deaths we have experienced in the UK in 2020 so far, are input into the model without adjustment, then it is likely to produce unrealistic falls in life expectancy. The CMI’s newly released consultation focuses on whether or how to adjust its model to ensure its projections remain reasonable.
“We need to be mindful that COVID-19 doesn’t necessarily imply a fall in future mortality improvements. Although mortality in 2020 has been much heavier than expected, it is possible that future mortality may actually be lighter than anticipated. In the short-term this could be because some individuals who died in 2020 would have otherwise died in the next few years. And although the UK is currently in an economic recession, and recessions tend to be associated with lower future mortality improvement, the increased attention to healthcare and social care may lead to greater long-term public spending on these areas, which is also typically positive for future mortality improvement.
“The mortality experienced in 2020 is unlikely to be indicative of longer term trends. For this reason, we think the CMI’s proposal to place no weight on 2020 data is a sensible ‘least bad’ option. COVID-19 is going to cause real problems for all mortality models that project trends, but it’s important that insurers, reinsurers and pension schemes do not over-react to this short-term disruption to their model updates.
“Longevity risk has not gone away. Pension schemes and insurance companies trying to reduce their exposure to longevity risk have the same access to the necessary tools, such as longevity swaps and bulk annuities, as they had before the pandemic. And the risk settlement market pricing remains competitive.”
Mortality projections are seen as “critical for valuing pension scheme and insurance company liabilities,” Aon explained.
The CMI has just begun a consultation process as to how its model should be adjusted to handle the mortality data for 2020, so including deaths from the COVID-19 pandemic.
While these could cause a sharp drop in life expectancy, as mortality rates claim for the year, it is not changing the longer-term picture on people living longer, at least there is no evidence to suggest that it will at this stage.
As a result, reinsurance capital for managing longevity risks is likely to remain key, as to is adopting a realistic approach to managing both longevity and mortality liabilities and related assets.