The BCG Pension Insider
December 2022 – Volume 134, Edition 1
COVID-19 Pandemic and Future Pension Risk Transfer Mortality – What’s Next?
It goes without saying that the COVID-19 pandemic has significantly affected the world in all aspects of daily living. The impact on the insurance industry, and in particular pension risk transfer (“PRT”), goes beyond just the number of deaths that have occurred. This article focuses on the mortality impacts, both historically as well as what the future may bring, with a focus on potential impacts on insurers’ PRT business. It also addresses the additional information that PRT insurers are using and requesting in evaluating PRT transaction opportunities.
Historical Mortality Trends
The last five years of population mortality information shown below fairly depict the impact of the pandemic. We have focused on ages 50 and above since that is where most of the PRT business is issued. We have used population mortality as current pension or annuitant mortality is not readily available in the public domain.
Source: National Center for Health Statistics, National Vital Statistics System, Mortality.
As can be seen in these charts, there was slow improvement in life expectancy prior to the pandemic (2017-2019). As an example, age 65 female life expectancy in 2017 was 20.6 years. This had improved slightly to 20.8 years as of 2019, which translates into a 0.55% annual improvement for the two-year time period. In 2020, the life expectancy dropped to 19.8 years, a marked 5% decline. The estimate for 2021 continues that decline, albeit at a much slower pace (19.6 years or a 1.0% decline). The percentage declines are pretty consistent for males, and increase as age increases for females.
Future Mortality Trends – Qualitative Considerations
The real question now becomes what happens next for future mortality improvement. From a qualitative standpoint, there are several items that could influence future mortality improvement, both positively and negatively:
|COVID’s Impact on Future Mortality|
|Positive Improvement||Negative Improvement or Disimprovement|
|COVID affected people that were already weakened which means the surviving population is healthier||Those infected by COVID could be weaker, causing other unrelated illnesses to manifest|
|COVID was a pandemic but in the future will be much like the flu||Long COVID is not fully understood as to its potential impacts on mortality|
|We are more immunized against disease through vaccine development||Long term impacts of vaccines are not known – will they weaken immune systems?|
|Revolutionary vaccine development can be used to defeat other diseases||Will there be a variant of COVID or another virus that becomes more impactful than COVID was?|
As noted, there are arguments that can be made for or against future mortality improvement but even after three years, there are still a lot of unknowns regarding the potential impact of COVID.
BCG U.S. Pension Risk Transfer Mortality Assumptions Survey
In order to gain greater insight, we developed a short survey to share with the insurers that participate in the U.S. PRT market. This survey covered the relevance of in-house mortality experience in pricing, adjustments to future mortality due to COVID, and other underwriting criteria that PRT insurers are using or would like to use. We asked 19 insurers to complete the survey and received 17 responses. We are thankful for such great participation!
1. COVID Survey Questions
When asked whether the mortality experience during the pandemic is included in setting PRT mortality assumptions, 14 insurers stated that they are not reflecting this experience, two are reflecting it, and one is still considering whether to reflect it. This is not unexpected, since as the historical data shows, the 2020 experience in particular was reflective of more of a mortality shock than a trend. More data will be needed to understand if it is a trend.
We also asked whether historical mortality experience in general influences PRT mortality assumption setting. This question is relevant if a PRT transaction opportunity does not provide the plan’s own mortality experience. We were surprised to learn that 11 out of the 17 insurers do not really reflect their own experience in assumption setting for pricing. Note that seven of those 11 are insurers that are new to the PRT marketplace. Of the other six, four of them rely materially on historical experience in setting assumptions.
We then asked whether the pandemic influenced future mortality improvement assumptions. Consistent with the first question asked, only two insurers have reflected a change, both reducing future mortality improvement due to the pandemic. The change in life expectancy has not been significant for those that have reflected this reduction (change of -.5 to 0 years for age 65 or up to 3%).
The results of the survey confirm that there is still a lot of uncertainty regarding the impact of COVID on future mortality. The experience that emerges over the next 3-5 years will most likely be the telling sign as to how COVID has fundamentally changed mortality, if at all.
2. PRT Mortality Underwriting Survey Questions
In recent years, PRT insurers have requested more demographic information on the participants included in PRT quotes. This is consistent with the question above regarding historical mortality experience and its use in pricing. In particular, newer entrants into the market do not have historical experience to use, so the more demographic information provided, the better they are able to underwrite the PRT business. The survey covered what information has been particularly useful in pricing new business PRT transaction opportunities.
An important PRT transaction readiness consideration is assessing the availability of participant 9-digit zip code data.
Zip codes have definitely become more prevalent in assumption setting, as 16 of the 17 insurers used 5-digit zip codes, and 10 of 17 take the next step and use 9-digit zip codes. The insurers not using this data (either 5- or 9-digit zip codes) are considering incorporating this in their assumptions in the near future as well. So, we would suspect that 9-digit zip codes will become the accepted norm for census data.
13 of the 17 PRT insurers consider prior lump sum availability as an assumption determinant. Most insurers are concerned with one-time lump sum offer programs to retirees and/or terminated vested participants; those that consider these programs in assumptions typically view the five-year point as to when the effects of anti-selection of these programs wears off. The criteria for the lump sum programs is also important to some of the insurers, such as the population offered the program, the take-rate of those included in the program, etc.
Other information that was mentioned as helpful to PRT insurers in assessing the mortality of a PRT population are job titles and job descriptions, years of service, more detail on industry, hourly/salaried, and blue/white collar. There is also a desire to link any of this information to case specific mortality experience, when included in a quotation.
The pandemic has certainly added to the uncertainty of future mortality assumptions for PRT insurers. The next few years will be indicative of whether fundamental changes have occurred in life expectancy or if the pandemic was a temporary blip. As insurers await this experience, their approach to mortality assumptions for PRT business is getting more sophisticated, taking into account as much demographic information as possible that could differentiate mortality. We would expect this to continue to evolve.
For more information
Steve Keating, Managing Director
BCG Pension Risk Consultants | BCG Penbridge
T: 203-955-1566 E: firstname.lastname@example.org
American National Insurance Company Commences Participation in BCG’s Monthly Annuity Buyout Pricing Survey
American National Insurance Company (American National) is now participating in BCG’s monthly annuity buyout pricing survey, effective this month. American National entered the US Pension Risk Transfer (PRT) market in December of this year.
American National writes a broad array of insurance products and services and operates in all 50 states. Founded in 1905 and headquartered in Galveston, Texas, the company has been rated A or higher by A.M. Best for more than 75 years.
Earlier this year, American National was acquired by Brookfield Reinsurance. The company intends to leverage Brookfield Reinsurance’s PRT experience through its leading PRT business in Canada, Brookfield Annuity Company, to support its growth in the US PRT market. American National looks to build on over 117 years of providing reliable coverage to clients when they need it the most and building on a dedication to strong financial stability and growth with a long-term focus.
In total, there are 19 PRT insurers currently active in the market, with eleven new entrants since 2014 that remain in the market. Of the 19 insurers, 15 are now participating in BCG’s monthly pricing survey. Other participating insurers include Athene, Corebridge Financial, Fidelity & Guaranty, Legal & General, MassMutual, MetLife, Midland National, Mutual of Omaha, OneAmerica, Pacific Life, Principal, Prudential, Securian Financial and Western & Southern.
BCG uses the rates gathered in its survey to measure and monitor annuity pricing for its clients via its PRT Analysis and Customized Buyout Price Monitoring (CBPM) services and also to compile the BCG PRT Index, which is the longest standing pension buyout index in the United States. The Index provides an easy comparison of annuity pricing to various important pension liability measures.
To learn more about BCG’s PRT Analysis and CBPM services or the BCG PRT Index, please visit www.bcgpension.com
ANNUITY PURCHASE RATES
Sample Interest Rates for a Pension Annuity Buyout
(Assumes no lump sums, disability, or unusual provisions)
Retirees (duration of 7) – 4.72%
Term Vesteds (duration of 10) – 4.68%
Actives (duration of 15) – 4.62%
Annuity Purchase Rates as of December 1, 2022