Insurance and investment themes: life expectancy

In recent decades the public have become accustomed to hearing that UK life expectancy has been rising to record levels. That trend has however been slowing in the last few years, according to 2019 data from the Office for National Statistics. Now the tragic death toll from COVID-19 adds another factor for actuaries working in the insurance and pensions industries to take into account.

Summarising its latest annual data in September 2019, ONS revealed: “Life expectancy at birth in the UK in 2016 to 2018 was 79.3 years for males and 82.9 years for females. Relatively low increases in life expectancy at birth in 2016 to 2018 suggest a continuation of a trend observed since 2011, where annual life expectancy improvements have slowed down compared with the previous decade.

Improved healthcare provision, medical advances and control of many deadly diseases helped lift life expectancy figures during the twentieth century and into the new millennium. With the combined ongoing impact of these factors already starting to diminish, the question is whether COVID-19 or any other new viruses that may follow it will nudge life expectancy improvements into reverse gear.

Educated guesses

Assessing the life expectancy of someone born in 2020 is a complex and long-term business that stretches the minds of expert actuaries and statisticians. Many educated guesses are involved along with historical data and trends. If COVID-19 turns out to be a short one-off occurrence, its effect upon life expectancy at birth may be minimal. A run of deadly pandemics could alter projections.

Life expectancy projections matter to insurers and pension providers when they calculate premiums on life policies, annuity rates and pension fund adequacy. They need tables of life expectancy across a wide range of ages. Whilst average female life expectancy at birth may now be 82.9 years, at age 65 it is 21 years, making 86 years in all. This effect is largely due to deaths that occur before age 65.

The ONS adds: “Life expectancy at age 65 years was 18.6 years for males and 21.0 years for females, with an improvement of 4.7 weeks for both sexes in comparison with 2015 to 2017. The probability of reaching age 90 years has remained the same in 2016 to 2018, where one in five males and one in three females born in 2016 to 2018 are likely to celebrate their 90th birthday.”

Social and financial decisions

Government policymakers also use average life expectancy data when making social and financial decisions. For example, rising life expectancy was cited as a key reason for the lifting of State Pension Age currently under way. Linked to that process has been the controversial equalisation of the male and female pension ages (previously 65 and 60, respectively).

Insurers have for several years also been required to eliminate the gender disparity that gave female life policyholders cheaper premiums than males, due to lower male life expectancy. On the other hand, females buying annuities have been freed from the disadvantage of lower annuity income for a given sum as their greater life expectancy can no longer be taken into account.

It was a ruling in 2012 by the European Court of Justice that brought about the gender equalisation in UK pension and insurance matters. As well as addressing the disparity in life expectancy affecting life insurance and pensions, the ECJ ruling applied to other types of insurance where gender had affected claim rates; this led to many young women paying more for their motor insurance.

Health and lifestyle

Whilst age and life expectancy (minus variations based on gender) remain key influences on insurance and pension matters, there are many other considerations that underwriters may apply in setting an individual’s life insurance premiums or annuity rate. Health and lifestyle issues may be fed into the mix, though there has been much debate about the role of genetic testing.

Whatever the future may hold, life expectancy projections will continue to be adjusted to help ensure that they represent the most accurate possible picture for the decision-makers that rely on them. Today’s statisticians and actuaries must surely wish they could still be around to see if their current ‘at birth’ life expectancy figures come close to the actual outcome.