Insurance and reinsurance broker Aon expects to see a slight increase in liabilities from the use of the latest model from the Continuous Mortality Investigation (CMI) when compared with the 2018 version of the model.
CMI_2019, the newly released March 2020 update of the CMI’s projection model, incorporates deaths in the England and Wales population up to the end of December 2019.
Aon notes that 2019 saw the strongest full year mortality improvement since 2011, reporting that the standardised measure of mortality was 3.8% lower in 2019 than in the prior year.
According to the new model, projected male life expectancies from age 65 increased by roughly three weeks, or 0.2%, while female life expectancies increased by around five weeks, or 0.4%. As highlighted by Aon, this is the first increase in life expectancy since the introduction of CMI_2014.
“Adding 2019 data to the CMI’s mortality projections model will increase projected life expectancies slightly – as a result we expect the overall impact on UK pension scheme liabilities compared to the previous model to be a small increase of less than 0.5%.
“Because the model is based on mortality in England & Wales as a whole, CMI make it clear that users should consider whether mortality improvements in the population they are valuing (e.g. a pension scheme) have been different to the wider population. There are two standard ways that actuaries use to allow for this, the ‘initial addition’ (A) parameter and the ‘period smoothing’ (Sκ) parameter. Changing A in CMI_2019 will have roughly the same impact as before but changing Sκ will have a very different impact,” explained Matthew Fletcher, Senior Longevity Consultant at Aon.
The longevity risk transfer, or de-risking markets have reached new heights in recent years, breaking records in 2019 with 2020 predicted to be another busy year for transactions as pension funds and annuity providers increasingly look to offload some of their longevity exposure.
In order for insurers to accurately set annuity prices and pension funds and alike to accurately predict their longevity exposures, mortality rate predictions are vital. The CMI produces an annual mortality projection model, which reflects newly released mortality information and data from the Office for National Statistics (ONS).
“Pension scheme actuaries adjusting Sκ to set a valuation basis may need to reconsider whether retaining the same level of adjustment is still appropriate, because the liability impact of a given change in Sκ will be very different than with previous versions of the model – so retaining the same adjustment when updating the model may lead to a significant change in the level of prudence,” concluded Fletcher.
