Pension schemes should review lower rates of UK mortality improvement to ensure fair pricing of longevity insurance transactions, Aon Hewitt has reiterated.
The company found, in its analysis of reinsurance pricing levels, that in the fourth quarter of 2016, schemes which decided to delay deals have typically seen price reduction of up to 2 per cent. This is the equivalent to a £20m saving on a £1bn deal, it said.
Aon Hewitt has encouraged that with data dating up to the end of 2016 available, insurers and reinsurers should also update their current pricing.
Aon Hewitt Risk Settlement Group partner and head of Longevity Tim Gordon, said: “Over the past six years, male mortality rates improved by less than 1% per year compared with over 3% per year during the previous decade. This reduces projected future improvement, and potentially reduces liabilities by 3-4% compared with the view of only a couple of years ago.
“We believe it is important to continue taking a measured approach when incorporating the latest mortality data, not least to avoid unnecessary volatility in funding and accounting valuations. However, this change is significant as it indicates that the expected future reduction in mortality improvements has taken place earlier than expected. This has material implications for longevity swap and bulk annuity pricing - especially in today’s hyper low-discount rate environment.”
Aon Hewitt senior partner and head of Risk Settlement Martin Bird, added: “In the second half of 2016 we were concerned that some reinsurers were operating with out-of-date pricing…we are optimistic that - with mortality data now available right up to the end of 2016 - insurers and reinsurers will be able to update their pricing to be consistent with current improvement trends.”
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