For the first time in a century, life expectancy has slowed. The question for financial planners is whether this is a blip or the sign of a new trend. However, one thing remains clear – the need for life insurance is as great as ever…
Life expectancy has steadily improved internationally for more than a century. In recent years, however, there are signs that the rate of mortality improvement has slowed in a number of advanced countries, according to figures from Swiss Re.
Statistically, the Swiss insurer says, it is difficult to determine if the recent slowdown is simply a short-term blip or a more permanent trend. The latest sigma report from the Swiss Re Institute, Mortality Improvement: Understanding the Past and Framing the Future, suggests that future gains in health and longevity will depend on the success of public health policy. For governments and private financial institutions that are exposed to longevity risks, shifts in the underlying mortality trend are crucial as this risk cannot easily be diversified or perfectly hedged.
The report reveals that, since 1990, mortality rates – the number of deaths in a standardised population in a particular period – have been declining relatively rapidly in developed countries at about 1%-2% per year. This reflects improved living conditions, advances in medicine and innovations in health technology.
However, since about 2011, age-standardised mortality rates in the US, UK and Germany, for example, while still declining, are doing so at a slower pace than in earlier decades. The recent US mortality experience has been impacted by additional deaths caused by opioid drug overdoses. Statistically, it is difficult to conclude whether the slowdown represents a structural change or simply reflects typical annual volatility in death rates.
The longer it persists, the more likely it is that the underlying trend has changed. For now, it is too early to tell, warns Swiss Re.
It suggests cause-of-death statistics indicate that some of the recent slowdown in mortality improvement might reflect the lack of additional progress in treating major illnesses such as cardiovascular diseases. Worsening trends in circulatory-related disease have been a key influence on the slowdown. To the extent that these can be linked to behavioural factors, lifestyle choices regarding diet and physical exercise rather than smoking or alcohol consumption are the most obvious explanations.
Daniel Ryan, head of insurance risk research at Swiss Re Institute, says: “Differences in mortality between healthy sub-groups and the general population provide a lens through which to quantify potential, but as yet untapped, mortality gains.”
The sigma study also emphasises that the future of healthcare has to be focused on identifying early signs and symptoms of disease and attempting to prevent disease progression and overall poor health. Digital health tools like telemedicine and wearables can play an important role in driving future mortality improvement. These technologies not only improve access to care, but also encourage healthcare markets to compete for lower, more affordable options. A key challenge is how to encourage consumers to sustainably adopt new technology and change their unhealthy behaviours.
For governments and private financial institutions that assume longevity risk on behalf of individuals, shifts in the underlying mortality trend are crucial as this risk cannot easily be diversified away.
Paul Murray, chief pricing officer, life and health products centre at Swiss Re, says: “We may be entering a new period where we see no improvements to life expectancy. Decision-makers in insurance will need to be alert to how the uncertainty plays out in the coming years in regards to pricing, reserving decisions and policy.”
Swiss Re suggests insurers and pension schemes need to form a view on the likely success and availability of public and private health interventions to influence behaviour and prevent disease and death. This is especially the case given that the reported slowdown in mortality improvement for the general population has yet to be echoed among people in higher socioeconomic classes, who typically make up the bulk of insureds.
Overly conservative pricing to cover the range of future mortality outcomes will make products such as annuities and life insurance unnecessarily expensive. At the same time, prematurely adjusting assumptions about underlying mortality trends will almost inevitably stretch insurers’ balance sheets once the liabilities are ultimately re-rated to reflect revised life expectancy realities.
There is some good news for insurers. The outlook for the global life insurance sector is stable, reflecting a favourable economic cycle and strong capital levels, according to Moody’s Investors Service.
In a new report, it suggests global life insurers have adapted to persistent low interest rates better than expected by exchanging sales of interest-sensitive products for fee-based retirement, savings and health products.
Manoj Jethani, a vice-president at Moody’s, says: “Rising interest rates in some regions, such as the US and Canada, have been positive credit-drivers.
“However, there is marginal re-risking of investment portfolios, with a gradual move towards lower quality and less liquid assets, such as private credit and alternatives.”
Overall, the balance sheets of global life insurance companies are healthy and capital levels are expected to remain robust in 2019, although some challenges lie ahead.
Specifically, risk-based capital ratios are expected to decline in the US due to the impact of tax reform, although this should not affect the credit profile or ratings in the region. UK and Japanese capitalisation is expected to remain solid, although any financial market volatility in the UK as a result of Brexit remains an area of focus.
In China, the capitalisation of life insurers remains solid, while the refinement of its China risk oriented solvency system will be beneficial for the insurance industry. More negatively, the German life market remains under particular pressure and some insurers face solvency risks if interest rates stay low.