FSA Advises Life Offices To Examine Impact Of Increased Policyholder Longevity

by Robin Pilgrim, LawAndTax-News

03 May 2007

In a 'Dear CEO' letter sent late last month to firms in the life assurance sector, the UK's Financial Services Authority warned that companies should assess and make proper provision for the fact that their clients may now be living longer than ever before.

Sarah Wilson, Insurance Sector Leader, explained in the letter that:

"We are aware that reasonable assumptions for future annuitant longevity improvements are subject to significant industry and professional debate. Some argue that the Continuous Mortality Improvement Bureau medium cohort projection is already out of date and substantially understates annuity liabilities, while other experts disagree."

"We think most firms currently use the medium cohort projection as their valuation basis, often with a minimum level of annual mortality improvement."

"In this context we are writing to life offices to advise them of our expectations. We are concerned that in applying our existing rules, firms may not be giving sufficient weight to the possibility that their policyholders may live longer than expected."

"Typically, when firms set their Pillar 1 basis they make their best estimate assumption for annuitant longevity first and then add a margin for prudence. In setting their best estimate assumption, firms may be able to demonstrate the reasonableness of their longevity assumption by referring to their own experience...However, if this is not possible we would expect firms to consider the different industry views in this area and to err on the side of caution."

She concluded:

"Clearly, there is a large degree of uncertainty surrounding future longevity experience. So we expect firms to reflect carefully on this uncertainty and include an appropriate margin of prudence as they move from their best estimate assumption in Pillar 1. When setting Pillar 2 longevity assumptions similar considerations should be taken into account."

"We will carefully examine the longevity assumptions firms make as part of our review of the 2006 year-end regulatory returns."

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