Press Release

High mortality rates challenge the way life insurers project longevity

November 21, 2016
| United Kingdom

LONDON, 21 November 2016 - A new survey by Willis Towers Watson raises questions as to the appropriateness of annuity pricing and reserving, given that high mortality rates in 2016 are continuing the direction set last year, which saw the highest number of deaths in England and Wales since 2003 (nearly 530,000). The worsening of death rates in the last two years means that improvements have largely stalled since 2011.

Willis Towers Watson’s 2016 survey includes responses from 15 of the UK’s largest annuity firms regarding their intended year-end longevity assumptions for financial reporting. Although the survey showed that most firms were planning to keep their assumptions generally unchanged from previous years, there is an increasing risk that the level of future mortality improvements, which is a key assumption to make for pricing and reserving for retail and bulk annuity business, is too high and therefore leading to overpriced products.

Matthew Edwards, Head of Mortality and Longevity in Willis Towers Watson’s life insurance practice, commented: “Market speculation that the high mortality in 2015 was largely due to an ineffective flu vaccine is now accepted as wrong. With deaths to date in 2016 being nearly 7% above levels seen from 2011 to 2014, last year seems less of a blip and more like a turning point.

However, setting long-term assumptions based solely on data from the last few years would be extremely risky,” said Matthew Edwards. “For this reason, we have developed a more forward-looking approach that allows for factors such as the rapid rise in obesity and diabetes, expected future decreases in NHS funding on a real-terms per capita basis, the lack of material smoking reductions in the elderly, and the minimal medical progress shown for many common conditions.

PulseModel, recently launched by Willis Towers Watson, is the first widely-available mortality model to use medical science and the views of medical experts to determine future longevity trends, based on what is being seen across the main disease groups from a medical, lifestyle and healthcare perspective. Outputs from the model indicate that longevity improvements will be lower in future, averaging less than 1% in the 55-65 age range, in contrast to typical current assumptions of over 1.5% improvements annually.

Matthew Edwards noted: “The gap between insurers’ assumptions and these lower levels is partly due to regulatory pressure, making annuity business unnecessarily expensive from the consumers’ perspective.”

The Willis Towers Watson survey also shows additional pressure being applied to longevity capital modelling. Insurers have stated that the size of ‘longevity stresses’ (measured by the increase in life expectancies assumed by firms for capital calculations) has increased by more than 50% over the last four years, in spite of UK mortality data now pointing in the opposite direction. This increase is largely due to regulatory pressure on insurers to strengthen their assumptions.

About the Survey

A total of 15 firms took part in the survey of best estimate longevity improvement assumptions for 31 December 2016. These comprised a mix of reinsurers, monoline insurers, impaired life firms and ‘mixed’ firms, all of which hold material amounts of longevity liabilities.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employees in more than 120 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential.