Trendspotter: Uncertainty About Mortality Will Rattle Life, Health and Pension Sectors

Some people will continue to benefit from advances in medical diagnostics and treatment, while others will suffer from adverse changes in their behaviors and backgrounds. Longevity will continue to benefit from past reductions in smoking prevalence, while suffering from the seemingly never-ending trend toward increased obesity levels that has resulted from unhealthy nutrition and inadequate physical activity.

Unfortunately, the COVID-19 pandemic has attenuated alcohol consumption, overall body weight, and smoking, and slowed our success in addressing drug overdoses. I hope we can reverse some of these. And we don't know what, if any, will be the health effects of the 10% of the American population who have survived COVID-19.

A key area of concern is the future of cardiovascular disease. Although over the last few decades we have greatly benefited from improvement in the identification and treatment of cardiovascular risk factors, such as blood pressure and cholesterol, there has been significantly less improvement in the 2010s.

It may be that we have seen the major benefits of our fight in this area and further advancement will be tougher to achieve. This may represent a major drag on future longevity improvement, as these diseases remain the most significant cause of death. Our success in these behavioral drivers of change in the cardiovascular area will determine whether our overall longevity continues to lengthen or we will remain stuck at our current level.

Yet we have plenty of potential to improve. We have wonderful health-related research capabilities, but we remain in the lower tier of longevity experience among developed countries. There is no reason why we can't catch up. There are plenty of medical achievements ahead of us and room to improve our behaviors, but it will be a tough slog.

Nancy Bennett, senior life fellow, American Academy of Actuaries

Life insurance mortality is evaluated over a very long-term period. Products are priced using mortality and other assumptions for a 30-plus-year time horizon. Pricing assumptions include margins to cover varying mortality experience — i.e., products are priced assuming mortality will move up and down over the pricing period. The concern is when that fluctuation persists for an extended period and its impact can't be absorbed in the margins.

Insurers' mortality experience is different/better than general population mortality, as insurers use underwriting and risk selection criteria to create risk pools with better mortality experience than the general population.

Life insurance products include mortality guarantees where an insurer cannot charge the policy more than the mortality guarantee; actual charges are typically far less than the mortality guarantee.

If actual mortality experience turns out to be materially different than expected, some insurance products allow the insurer to make adjustments (e.g., dividends, cost of insurance charges). Note that raising prices comes with ramifications, so insurers are hesitant to do so unless necessary.

Mary Pat Campbell, life actuary and editor of Stump, a blog for actuaries

With respect to annuities in the United States, except for a very few companies, longevity doesn't affect the financial performance of their annuity blocks of business — mainly because it's mostly deferred annuities, and it's the financial guarantees embedded in the products that drive those results and not much in the way of mortality.

But for life insurance, the mortality trends are concerning. The question is whether insurers are able to properly underwrite and price for the mortality risk, on both new policies as well as in-force coverage.

For products such as your standard annual renewable term group life insurance coverage through employment, that's relatively simple. You can re-price for the next year's business, so insurers should be able to be responsive and have only transitory issues with mortality trends.

For individual life insurance, even term life insurance, it's more problematic, especially with the super-low interest rates. When valuation rates are so low, getting it wrong on estimating mortality levels is amplified, especially for longer-term term life and permanent products.

We already saw many companies having bad mortality experience (that is, worse mortality on their business than they had expected) on old blocks of universal life for many years before 2020.

Many companies increased cost of insurance (COI) charges on in-force business, which of course led to complaints (and lawsuits). I believe some of that was not only driven by population-level trends but also by the fact that lapse and surrender rates were very low for a very long time.

Low lapses are usually an indication that the policyholders can't find better deals elsewhere, so that generally indicates the premiums are low relative to the benefits.

So there can be stress on these old blocks of business. While for some products insurers can increase charges to make up for deteriorating mortality experience, there are a lot of negative repercussions for that.

Other products, such as term life, have fewer levers to improve financial performance once they've been issued. Some insurers may seek to reduce their exposure by making deals to sell or reinsure in-force blocks of business.

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