United Kingdom

Aon says avoid over-reacting to COVID-19’s disruption to the CMI Mortality Projections Model

LONDON, 23 September 2020 – Aon plc (NYSE: AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions, has cautioned against over-reaction to the disruption COVID-19 will cause to the CMI Mortality Projections Model.

The Continuous Mortality Investigation (CMI) updates its official mortality projections model every year. These mortality projections are critical for valuing pension scheme and insurance company liabilities. The CMI has just released a consultation on how its model should be adjusted to handle the mortality data for 2020.

Tim Gordon, Head of Demographic Horizons in Aon's Risk Settlement Group, said:
“The CMI Model is the de facto official mortality projections model for the UK and, since it was introduced in 2009, we have all become accustomed to its annual update in March.

“The CMI Model blends an average of recent national mortality improvements into a long-term improvement rate, which has been a robust approach since its introduction. If, however, the 60,000 excess deaths we have experienced in the UK in 2020 so far, are input into the model without adjustment, then it is likely to produce unrealistic falls in life expectancy. The CMI’s newly released consultation focuses on whether or how to adjust its model to ensure its projections remain reasonable.”

Tim Gordon continued:
“We need to be mindful that COVID-19 doesn’t necessarily imply a fall in future mortality improvements. Although mortality in 2020 has been much heavier than expected, it is possible that future mortality may actually be lighter than anticipated. In the short-term this could be because some individuals who died in 2020 would have otherwise died in the next few years. And although the UK is currently in an economic recession, and recessions tend to be associated with lower future mortality improvement, the increased attention to healthcare and social care may lead to greater long-term public spending on these areas, which is also typically positive for future mortality improvement.”

Tim Gordon continued:
“The mortality experienced in 2020 is unlikely to be indicative of longer term trends. For this reason, we think the CMI’s proposal to place no weight on 2020 data is a sensible ‘least bad’ option. COVID-19 is going to cause real problems for all mortality models that project trends, but it’s important that insurers, reinsurers and pension schemes do not over-react to this short-term disruption to their model updates.

“Longevity risk has not gone away. Pension schemes and insurance companies trying to reduce their exposure to longevity risk have the same access to the necessary tools, such as longevity swaps and bulk annuities, as they had before the pandemic. And the risk settlement market pricing remains competitive.”

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Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

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