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What If Annuity Holders' Life Expectancy Spikes?

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For an annuity issuer, the equivalent of a catastrophic death-rate improvement hurricane might be a 6% drop in the death rate for its annuitants in a single year.

A long-term longevity risk nightmare could be seeing the annuitants’ death rate improve by an annualized level of about 1.6% per year over a 20-year period.

The typical rate of death-rate improvement could be about 1% per year.

(Related: 10 Worst States for Death-Rate Improvement)

The Longevity Risk Task Force, an arm of the American Academy of Actuaries (AAA), has included those glimpses of how Americans’ death rates typically change over time in an analysis of Social Security beneficiary mortality data for the period from 1940 through 2013.

The AAA Longevity Risk Task Force is developing and testing a model regulators can use to improve the way insurers build annuity longevity risk into their risk-based capital (RBC) ratios.

An RBC ratio is a rough indicator that insurers, regulators, investors, customers and life insurance agents can use to estimate how well an insurer has prepared itself to deliver the insurance benefits and other benefits it has promised to provide.

The Longevity Risk Task Force put the Social Security death-rate improvement chart in a slidedeck for the Life Risk-Based Capital Working Group, an arm of the National Association of Insurance Commissioners.

The Longevity Risk Task Force plans to brief the NAIC working group on the death-rate analysis project on Saturday, in Indianapolis, at an in-person session the working group has scheduled for the NAIC’s spring national meeting.

Links to copies of working group session documents and other resources are available here.

The Longevity Risk Task Force Field Study

To most people, the idea of living longer than expected sounds great.

For life insurers that promise to provide lifetime benefits streams, through products such as annuities, surprising jumps in life expectancy can be as dangerous as a terrible flu pandemic might be to a health insurer.

The Longevity Risk Task Force has come up with a model actuaries can use to measure an annuity issuer’s longevity risk protection level, to build that level into the RBC ratio.

The task force is thinking about basing the RBC adjustment on the difference between how much the issuer has set aside for ordinary death-rate improvement conditions, or 85% of the scenarios tested, and how much cash the issuer might need to cope with 95% of the scenarios tested.

The task force is getting ready to ask insurers to send it real-world annuity data. The task force then will see how well its model works on the real-world annuity data.

One challenge for annuity issuers is that the life expectancy of people who buy individual annuities, or who get income from pension-related group annuities, may be much different from the life expectancy of the general population, or from the people collecting Social Security benefits.

Traditionally, annuity market watchers have assumed that people who buy individual annuities with lifetime income streams expect to live much longer than typical Americans.

The life expectancy of group annuity annuitants may depend partly on the kinds of jobs, and lifestyles, they had in their working years.

The Longevity Risk Test Force notes in the slidedeck that an annuity issuer also faces other types of death-rate analysis problems.

One is knowing whether its data reflects its own annuitants’ experience or represents a statistical fluke,

Another is knowing whether the underlying death rate has really changed.

A third is knowing what the trend, or underlying rate of change over time, is, and how the trend has changed.

— Read Life Expectancy for a 65-Year-Old Increases 1.6 years on ThinkAdvisor.

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