- Longevity continues its long-term decline
- Life insurers could see large capital releases
The Institute and Faculty of Actuaries is not a place for levity and its continuous mortality investigation (CMI) is one of the key pieces of data that life insurers use to calculate their potential future liabilities. The most recent CMI report showed that mortality in the third quarter was 0.5 per cent higher than in the 2013-2022 period, and an astonishing 5 per cent higher than over the same period in 2019.
The past three years have seen a 16-month reduction in life expectancy for a 65-year-old male, the same as 2014-2020.
That raises all sorts of questions for life insurance companies and retirees, particularly as the government will review in two years’ time whether the pension age will have to be raised to 68. That assumed that mean life expectancy would continue its extraordinary rise – when the first baby boomers were born the average life expectancy was 63, whereas it is now 79. This poses another dilemma for insurers and policymakers as the youngest baby boomer cohorts will retire by 2031: If life expectancy continues to fall, then will future generations have the least time to enjoy retirement since the start of the welfare state?
The outlook for life insurers is also complex in this scenario. Research by RBC suggests that life insurers will benefit over the coming years from reserve releases that were earmarked to cover excess client longevity. RBC calculates that this could amount to 15 per cent of the sector’s total market capitalisation over the next few years which isn’t currently included in consensus figures for Aviva (AV.); Phoenix (PHNX); M&G (MNG); Just (JUST) and Legal & General (LGEN). "Longevity reserve releases should drive enhanced capital generation and [contractual service margin] growth over at least 2023-25," said RBC analysts. Contractual service margin is the future unearned profit on insurance contracts, in the words of Aviva.
Life insurers in this scenario benefit from having to make lower payouts, but also from not having to transfer longevity risk to reinsurers to free up capital. RBC reckons that unlike reserves, which are valued annually, the bulk purchase annuity market is probably including the latest longevity data in its calculations. The bulk market is currently in a boom phase as defined benefit pension schemes return to surplus.
All of this makes the current unpopularity of the life insurance sector in the UK market, unlike in the US market, for instance, difficult to understand. Average dividend yields are well over 9 per cent, and with the sector apparently flush with excess capital over the next few years, that level of payout looks well covered.
