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Mortality Tends and The Impact

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Syed Abbas Jamal

on 18 April 2015

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Transcript of Mortality Tends and The Impact

Mortality Trends
The Impact on Life industry

Actuarial Models
Group 6

Section B: Continuous Mortality Investigation
What is Continuous Mortality Investigation?
What does it do?
Mortality trend
Section C:
Impact Study

ECJ Gender Ruling:

Gender can no longer be use as a risk factor in car insurance, life assurance and pension scheme.

Unisex premiums.

Redistribution effect.

Insurer's portfolio becomes increasingly risky and the cost of insurance has to rise to compensate.

Created transition costs for insurers.

Insurers are still offering different premiums to remain competitive.

Section A:
Mortality Trends

Trends in Mortality
By Age and Gender
Factors including: Cause of Deaths, Alcohol, Smoking and Profession
Continuous Mortality Investigation
What is Continuous Mortality Investigation?
What does it do?
The historic under-estimation of Mortality Improvements

Its Impacts on:
Pension Funds
Life Insurance

Solvency II's impact on core operations
Legal Reforms & Risk Management

ECJ & Pension drawdown
Basis Risk
Risk Management
Cause of Deaths
Major Cause of Deaths
Top 5 Cause of Deaths
2001 - 2013
Alcohol Consumption
Smoking in Graphs
Section D:
Legal reforms, basis risks & Risks Management.
Pension/Income drawdown:

Individuals age 55+ who have pension funds of over £15,000 will be allowed to withdraw up to 25% of their pension fund tax-free and there are several options for the remaining 75%.

According to Aviva, 400,000 people will be affected immediately plus 320,000 retiring each year in DC schemes.


Mortality models:
Management of Mortality Risks:

Companies can diversify their mortality risk across product ranges, regions and socio- economic groups where they can use natural hedging.

They can enter into partial or full reinsurance in order to hedge downside mortality risk.

Mortality risk can be managed through the use of derivatives and mortality-linked securities:

Mortality Catastrophe bonds

Longevity bonds

Mortality or Survival swaps

Mortality forwards

Inventions in medical equipments; CT, X-rays, MRI
People are informed about the recommended nutrients in their body.
People are convinced about the danger of smoking
More medical workforce in the health industry
What is Continuous Mortality Investigation?
What does the CMI do?
There are four major investigations undertaken by the CMI:
Annuitant mortality
Assurance (critical illness and mortality)
Income protection
Self-administered pension scheme mortality (SAPS)
Interim Cohort Projections
Mortality Projections Model
Do not take account of experience data published for calendar years after 1999, therefore they become increasingly out-of-date.
Reflected the latest experience on trends in mortality
Relatively straightforward to understand and describe
Allowed users the flexibility to modify projections to suit their own views and purpose
Could be regularly updated over time to reflect emerging experience
Comparisons between the prototype model and the revised versions
Death percentage in each group of age in the UK
Period expectation of life at age 65 according to mortality rates experienced in given years
Life expectancy of both males and females at age 65 in the United Kingdom
The life expectancies have improved
The CMI Projection Model gives a better estimate of the life expectancy compared to the previous models
No “perfect” model yet, as it is and would most probably still be a continuous process
There always been a small change throughout every publication but is relatively small compared to the sensitivity to the Long-Term Rate of Mortality Improvement
Longevity Risk
Source: Divorce of Expectation and Experience
Will the Life Expectancy gains continue?

Impact on Pension Schemes (FOCUS
DB to DC Transition
Pricing & Reserving for Pensions
Significance of Mortality Projection & its Future

We have been getting mortality wrong for a long time!
Future of Mortality improvements
Impact on Pensions
Pricing & Reserving
Mortality Projection Going Forward...
Sophisticated modelling techniques
Lee-Carter, CBD, P-spline
Better underwriting
Medical Underwriting for large individual liabilities
Use of Big Data (Club Vita)
UK Shortfall?
Mortality improvements mean pay-outs generally occur at a later date
Hence lower EPV... Competition drives down premium
Impact on Life insurance
Life Insurance Reserving
Later pay outs mean that insurers can have excess reserves set-aside

This could make investment planning inefficient.

Solvency II adds to this problem
Impact on profitability reporting
Assumptions required around key metrics
Discount rate
Trends in premium income
Observed, smoothed and projected mortality rates for England & Wales males ages 70.
Log(mortality) by age for CMI assured lives data, age 40- 100.
Using Office for National Statistics data from 1965-2005
Basis Risk

In the context of mortality and longevity, basis risk is the mismatches in demographics between the exposed population and the hedging population associated with the hedging instrument.

There are 3 mains sources of basis risk:
Demographic risk.
Sampling risk.
Structural risk.

It is important to understand that basis risk is present in most longevity hedges.

Owners of longevity risk should examine the potential impact of basis risk carefully.
Changing mortality has delivered a significant impact on the operations of Life Companies & Pension Funds

Hence we aim to
- Analyse the Mortality Trends
- Evaluate the impact of these trends on Life Business
- Consider Developments within CMI
- Discuss Risk Management Strategies and the Legal regime encompassing the life business

Biggest difference in life expectancy for age 60 is between during the year 1930-1939 and 2010-2011

Difference in life expectancy decreasing since 1980s.
Period vs Cohort: 11 years difference
Aged 65 in 2013: 8% males vs 14% females lives up to 100 years old
During 1970 1 in 2 male is possibly a smoker compared to 1 in 4 in 2010 onwards
Similar trends can be seen for females with roughly 1 in 5 females possibly is a smoker
Males persistently have higher percentage of quitters compared to females except in 2013
Impact on Life Insurance
Pricing & Reserving

Impact on Profitability Reporting

Impact of Solvency II (brief)
The risk that future mortality improvements
prove to be greater than those assumed and reflected in provisions.
Longevity risk
Mixed opinions

Research says
Industry believes it
PwC surveyed 140 life companies

Conclusion: Quite a few companies are weakening their life tables...

Suggesting an end to the apparently unprecedented improvements.
Strong evidence from medical research
ONS Projected Life Expectancy (2008 Base) also suggests a continuation of trends

Self-Administered Pension Scheme (SAPS) tables - Issued by CMI

Slightly older tables such as PCMA/PFMA 2000
CMI Dominated
Approx. 87% companies use CMI
UK occupational pension plans have traditionally been Defined Benefit (DB) in nature

Increasing life expectancy

DB Pension Schemes paying out more than expected
Hence terminal decline of DB schemes - Rise of DC
Wide adoption of CMI has prevented a shortfall

Research by OECD places UK in
"None to little shortfall"
DB to Dc Transition
This transition is a measure to transfer Longevity Risk to Individuals
Defined benefit will continue for a few more decades
Chairman of the pension regulator estimates that each extra year of life expectancy will 3-4% to pension liability which is currently £800 bn for UK
What is longevity risk
instead of

Solvency II
A bureau of the Institute and Faculty of Actuaries
Provides the mortality and sickness rate tables
The work is published under CMI Ltd.
Collects information from insurance companies and pension consultancies
Analyse the mortality and morbidity experience
• Base mortality rate
• Initial rates of mortality improvements
• Assumed ultimate / long term rate(s) of mortality improvement
• Assumed speed and pattern of convergence from ‘initial’ to ‘long-term
Structure of the new model
Defined Benefit
Pension provider promises to pay a certain amount each year when you retire
Defined Contribution
The pension pot based on how much is paid in.
Solvency II to play a key role in what information is to be disclosed
Life insurance
Underestimated Mortality Improvements will lead to lower profits
Underestimation will Strengthen the Profitability position
Deadline: 01 January 2016

A fundamental review of capital adequacy regime

Aim: To establish a revised set of capital requirements and risk management standards

But... essentially its about changing behaviors within insurance companies, which influences all core operations
To handle mortality risk effectively Pension providers and Life Assurance companies will need to use models to study the general trends and use it to predict the future risk.

There are three main models use by these institutes:

Lee Carter
Cairns- Blake- Dowd
Management of Longevity Risks:
The most common arrangement to migrate longevity risks of pension funds are:

Buy- in

Transferring risks to an insurer or reinsurer.
Only cover current pensioners.

Typical Examples
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