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New mortality assumptions not a blip, benefits will take time to materialise: RBC

21st April 2017 - Author: Luke Gallin

The continued trend of lower than expected mortality improvements, underlined by the 2016 version of the UK mortality tables (CMI_2016), suggests that the mortality rate trend highlighted by CMI_2015 is not a blip, and that it might take some time for changes to filter through the industry, says RBC Capital Markets.

In March 2017 the Mortality Projections Committee (MPC) published the 2016 version of the UK mortality tables (CMI_2016), which projected 3 months (1.3%) lower life expectancies for males, and 6 months (2%) for females aged 65, when compared with CMI_2015.

RBC Capital Markets explains that the trend of increased deaths were seen with the release of CMI_2015, and at the time certain dynamics led some to suggest that rather than a long-term trend it was more of a blip. However, the continuation of the trend as seen with the release of CMI_2016, “suggests to us that the reduction in life expectancy is not a blip,” says RBC, in a recent report examining the UK life insurance sector.

Further supporting the idea that this is more of a long-term trend than a blip, RBC explains that an increase in mortality in the UK is strongly linked to a rise in dementia-related deaths between 2001 and 2015.

“Looking at the main causes for death for people over 75 in England and Wales, we note that the deaths due to dementia and Alzheimer’s have increased in recent years which further support the view that the increase in deaths is not a blip,” says RBC.

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Interestingly, and despite the release of CMI_2016, no insurers within RBC’s coverage uses the latest mortality data tables, which means no firms have taken the full benefits from any change to forward-looking assumptions.

Aviva updated its mortality tables last year to CMI_2015, with the rest still using CMI_2014, says RBC.

RBC explains that life expectancy is 2.5% lower for men and 3.3% lower for women in CMI_2016 when compared with CMI_2014, suggesting that it will take time for UK life insurers and the marketplace to realise the full benefits of any changes as all companies are still using outdated mortality assumptions.

“There is less pressure for insurers to move to new tables when the tables are more favourable for them (i.e., the margin of prudence simply builds), in our view. In contrast, if new tables indicated that life expectancy was increasing faster than insurers expected (as they did in December 2002) then they would be under considerable pressure to move very quickly to new mortality tables, in our view,” explains RBC.

The message from RBC is that more benefits are to come as the majority of firms are reportedly taking important and prudent steps, and do intend on updating mortality assumptions once more evidence is available.

“Therefore, we expect there are further earnings benefits to come,” says RBC.

New mortality data continues to filter through into longevity insurance and reinsurance market pricing, and industry analysts and experts have said that it could result in a significant year for the longevity risk transfer market in 2017.

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