Longevity risk – the risk of insured individuals living longer than expected – is a thematic one in the life risk industry, having far-flung ramifications for insurance companies and capital markets participation in life risk. This month, Chris Anderson, Senior Manager, EMEIA Insurance – Risk and Actuarial Services in EY’s Edinburgh office discusses the impact of longevity from an actuarial sciences perspective.
LRN: Chris, let’s start at the beginning. What is the main topic or theme in longevity risk from an actuarial perspective right now?
CA: One of the topics that keeps coming up is whether and how to adjust longevity risk in light of the data emerging from the pandemic. In normal circumstances, such risk would be calculated by using data from the last 5 years to set a baseline view of mortality from which to project the long-term view. Many firms in the last 24 months have effectively left everything static, with assumptions almost entirely unchanged from 2019 given the lack of certainty and the lack of precedent. As we gather more data about the health effects of the pandemic, insurers pricing risk will have to continue with the current model, and decide how and when to allow for changes to their reserving calculations and new policy estimates.
LRN: The pandemic’s effect on longevity risk won’t be fully known for years, maybe decades; we don’t know the extent to which ‘long Covid’ will impact the health of the general population, and we don’t know what variants might emerge in future. What’s the current thinking here?
CA: At the moment, the prevailing opinion is to assume no change to the view of long-term mortality. Some firms believe that the positive and negative factors will net out over time, while others claim there’s not enough evidence yet to decide which direction will be stronger. As the pandemic in the UK has subsided to some extent following high vaccination levels and a growth in natural immunity within the population, the number of deaths recorded has also begun to stabilise back towards pre-pandemic levels, which is encouraging. However, we still don’t yet have a strong understanding of how long the current immunity will last, what new variants might emerge, or what the impacts of long covid will be on mortality rates.
There are also socio-economics at play for insurers to consider. More affluent groups of people (who tend to be overrepresented within financial services policyholders) appear to have been less affected by Covid-19, possibly due to enjoying better general health and showing that as a group they are more likely to be vaccinated. At a minimum, the range of uncertainty around future mortality rates is wider than it was a couple of years ago, and so insurers must hold more capital to account for that wider range.
LRN: Outside of the pandemic, what are some of the other concerns that your clients are coming to you with regarding their exposure to longevity risk? Are any themes emerging?
CA: The key themes align with the dynamics of the market. In the UK annuity space, a significant amount of longevity risk held by insurers is reinsured outside of the UK given the high level of capital requirements that the current solvency regime demands against the risk. However, there is an ongoing review of the solvency regime being carried out by HM Treasury and the PRA, with one of the areas of focus being the level of capital required to be held against so-called “unhedgeable risks” (one of which is longevity risk). In a recent speech, John Glen, Economic Secretary to the Treasury, hinted at a 60%-70% reduction in the level of this capital, which may be enough to convince some firms to consider retaining more of this risk within the UK.
Within the US annuity market however, insurers have the opposite concern, with regulators considering introducing a capital charge for longevity where one currently does not exist. This may result in more reinsurance than we currently see in that market.
Within the ILS space, where investors are exposed to longevity risk on the policies they invest in, the concerns are around the quality of the life expectancies received to value policies. Some existing life expectancy providers have recently changed their methodologies, and a number of new providers have emerged. This is making it more difficult to have confidence in life expectancy methodologies that don’t yet have a long track record of successful forecasting.
LRN: What’s the most misunderstood part of an actuary’s job – from a client perspective – and what’s the impact of that misunderstanding?
CA: I think many people still think of actuaries as people who are only great at building complex models for insurance and pensions… and not much else! As a result it’s easy for us to get overlooked for other roles where our skillset can be really valuable, and it also does little for our street cred! The modern actuary is essentially a financial risk manager and a great communicator, and we can therefore add value wherever there is uncertainty over the future and a need for the situation to be understood and explained. We’re starting to see actuaries broaden out into a wider range of fields including climate risk, infrastructure projects and government planning, and I hope this trend continues.
LRN: Insuretech has been a buzzword in venture capital and insurance for a few years now. What’s been the impact of this so far on the actuarial sciences? Is that impact one that’s going to persist, and is it generally good for clients?
CA: Insuretech in the broadest sense is simply a commitment to innovation and developing new technologies that improve insurance. In that context, the whole market is committed to this, and we see firms investing in improving their customer experience and focusing on improving efficiencies through better use of technology. For actuaries, this has mainly involved moving towards ever more powerful analytic tools that improve the quality of the analysis, as well as the control environment. I think this trend will not only persist but accelerate, particularly as a newer generation of actuaries emerge with greater capabilities in new technology.
In the narrower sense of Insuretech being related to startups that are shaking up the industry, quite a lot of companies are doing some very interesting things, particularly around the customer experience via apps and portals. Some of this is filtering up to the more established players and encouraging them to take more steps also to improve customer experience.
LRN: Lastly, Chris, we’re seeing an increasing amount of longevity risk transfer deals being done in the UK. What are some of the best practices you’ve observed, and what’s the message to the market in terms of expectations and opportunities?
CA: The UK pension risk transfer market is an incredibly attractive market right now, as it’s one of the few places in insurance seeing significant growth, with volumes increasing from single digit billions only five or so years ago to around £30bn today. With over £2trn of pension scheme liabilities remaining that could potentially transfer, the opportunity over the next 10 years and more is huge. As a result, existing providers are investing heavily to meet demand and to maintain or grow market share, and a number of other firms are investigating market entry. In terms of best practices in this market, it is about who is getting the customer experience right and who is doing things sustainably.
Whilst some insurers are providing a good customer experience already, I think there is also a lot of opportunity. For a long time, providers had been used to servicing only current pensioners, which involves little more than making sure their money arrives in their bank account every month on time. However, there is a growing contingent of “deferred” members who are not yet retired and have many more options over what to do with their money. These individuals need more engagement and guidance through their options, and providers can do more to support with this. The upcoming UK Pensions Dashboard Programme may be a catalyst to some of this change.
On sustainability, all of the providers have now set out net zero commitments, but some are moving more at pace than others to put these into practice and to decarbonise both their operations and their asset portfolios. As more pressure is put on pension schemes by regulators and members to consider climate risk (and ESG more widely) more explicitly in their decisions, this will in turn put pressure on insurers to have a positive story to tell relative to their peers when trying to win schemes.
Chris Anderson is Senior Manager, EMEIA Insurance – Risk and Actuarial Services at EY