UK life insurers are expected to report years of gains as 2017 life expectancy rates slow compared to reserve assumptions.
RBC Europe said “over the next 2 weeks, the large UK annuity writers will report their 2017 preliminary results – we expect the group to handsomely beat consensus estimates as they adopt updated tables.”
Life expectancy has been reduced by two months for both sexes – life expectancy at age 65 is now 22.1 years for men and 24 years for women.
According to the CMI “the average mortality improvements over the six years since 2011 have been 0.5% per year for males and 0.1% per year for females – lower than in any other six-year period in the dataset underlying CMI_2017.”
RBC had predicted life expectancies in the 2017 tables would be lower than the 2016 tables and this has proven true with the number of deaths in 2017 being the highest since 2003.
Lower life expectancies are a positive for UK annuity writers as they have to pay the customer’s income for a shorter period.
However, this trend of lower mortality rates and the consequent boost to UK life insurers’ earnings will be a short-term boost as underlying mortality continues to improve slowly.
RBC analysts explained that the reason 2017 tables showed lower life expectancy is a “model catch up”, the model previously used by the Institute of Actuaries has not been responsive enough to changes in the mortality trend which led to CMI 2016 underestimating the deaths in 2016 by 4%.
Therefore “it remains a strong possibility that future CMI mortality tables are made more responsive, which would result in greater reductions in life expectancy leading to greater reserve releases for insurers,” said RBC.
UK life insurers have yet to realise the benefits of the lower life expectancy rates, as these are only starting to feed into firms consensus.
RBC expects “UK insurers will move to the 2015 mortality tables in their 2017 results (which will be published over the next two weeks). Then we assume insurers to adopt the 2016 tables in 2018E and 2017 tables in 2019E. For Just Group (Outperform) we are above consensus by 42%, 34% and 36% in 2017E, 2018E and 2019E respectively. For L&G (Outperform) we are 8%, 24% and 20% ahead. For Aviva (Outperform) we are 9%, 6% and 7% ahead. The significant majority is due to our differentiated view on life expectancy.”
The reduction in the expected mortality rate improvement will be a positive for UK life insurers, which have been facing material longevity risks as the sector undergoes significant change leading to increased diversification of products and spurring demand for longevity reinsurance.
