Financial Reporting Round Up: Increased Life Expectancy Sparks Changes in Actuarial Mortality Tables
By Heidi DeVette, Manager, Johnson Lambert LLP
People are living longer than ever before. In 2014, the government’s National Center for Health Statistics announced that life expectancy in the United States hit an all-time high based on 2012 information. Globally, life expectancy has risen an average of 6 years over the last two decades. While that is good news for the average person, it is not necessarily good news for life insurers and businesses offering pensions.
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The increase in life expectancy and resulting decrease in mortality rates prompted the Society of Actuaries (SOA) to undergo a pension mortality study that was released in October 2014 with new mortality tables. Mortality tables are actuarial tables showing the probability of death for certain populations within a defined period of time.
According to the SOA RP-2014 Mortality Tables Report (the Report), issued October 2014 and revised November 2014, the Retirement Plans Experience Committee initiated the study because the mortality assumptions currently used to value most retirement programs in North America were developed from data more than 20 years old. The study produced mortality tables that reflect an increase in the assumed life expectancy of pension plan participants. The result of the Report has been discussed by many industry leaders, including pension plan sponsors, accountants and actuaries. Most plan sponsors expect an increase in sponsor obligations, with industry publications indicating possible increases ranging from 3%-10%.
While the Report is intended for pension actuaries, there may be consequences for life insurers as well. Mortality tables are a staple tool for the life insurance industry, which uses mortality tables to price products, estimate the amount of cash needed to pay death claims, and determine the amount of reserves required to cover insureds. The most recent mortality table in use by life insurance actuaries is the 2001 CSO Mortality Report and Tables developed by the American Academy of Actuaries and adopted by the National Association of Insurance Commissioners.
The impact of changes to mortality tables for life insurance is less direct than the impact for pension plans and depends on the type of policy written and the health and age of a policyholder. Generally, each mortality age shares the premiums necessary to cover the claims for that group. A decrease in the mortality rate would theoretically require fewer premiums for most groups.
Another impact to life insurance companies relates to reserves and resulting investment strategy. If people live longer, insurers carry reserves longer, making it critical to have accurate mortality tables to estimate the timing of claim payments. Matching an investment portfolio’s duration to the expected timing of claim payments is important to balance the goal of increasing investment return with the need to ensure that an appropriate amount of the portfolio is liquid to pay claims.
While the overall impact of the new mortality tables on pensions and life insurance is unknown, companies need to be aware of the change and evaluate its impact on their operations and financial reporting and should update their business strategies accordingly.
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