New mortality table for collective pension insurance (K2013)

Transcription

1 All life insurance companies and pension funds OUR REFERENCE YOUR REFERENCE DATE 10/ [Translation as of 22 March The original Norwegian letter was sent 8 March 2013.] New mortality table for collective pension insurance (K2013) 1 Introduction The overarching aim of the Insurance Activity Act of 10 July 2005 is to ensure that technical provisions are at all times sufficient to cover insurance obligations and that inadequate technical provisions are addressed when identified. In order to properly cover current insurance obligations and to safeguard pension institutions' (life insurers and pension funds) financial position in the long term, technical provisions need to be significantly strengthened owing to the declining mortality rate. In light of recent years' declining mortality rate, and hence rising life expectancy, in the Norwegian population, Finanstilsynet (Norway's FSA) wrote on 28 September 2010 to Finance Norway calling for a further review of the mortality assumptions underlying collective pension insurance. Finance Norway's reply of 12 October 2010 cited the insurance industry's intention to follow up the matter. In December 2011 Finanstilsynet received the industry's preliminary report on a new mortality table. Finance Norway's final mortality table recommendation was received on 1 November On 7 January 2013 Finance Norway forwarded for review new marital status elements (including assumptions regarding the probability of being married and expected age difference between spouses). Finance Norway bases its recommendation for new mortality tariffs on a dynamic mortality table (superseding today's static mortality table). It selects 2013 as the starting data year and presents appropriate assumptions for the mortality trend further ahead which are based on Statistics Norway's mortality projections. The assumptions underlying the new mortality table will accordingly better reflect the expectation of declining mortality rates in future. A dynamic mortality table assumes improving mortality rates in all calendar years in the forecasting period. It involves estimating a future mortality trend purely on the basis of age and gender. For relevant age groups, mortality rates have shown a larger decline for the insurance portfolio than for the overall population, and a differential mortality decline must be expected in the years ahead. FINANSTILSYNET Revierstredet 3 P.O. Box 1187 Sentrum NO-0107 Oslo Tel Fax post@finanstilsynet.no Enquiries to Brun-Gulbrandsen / Gilde Dir. tel

2 FINANSTILSYNET PAGE 2 OF 5 Finance Norway's investigation method does not take into account the expectation that persons on higher pay and hence higher secured old age pension benefits are expected to live longer than persons on low pay (socioeconomic factors). These are specific characteristics for an insured portfolio which must to be taken into account when a new mortality table is determined. Finanstilsynet proposes to introduce a dynamic mortality table for collective pension insurances written by life insurers and pension funds (private sector, paid-up policies and the municipal sector, including institutions with similar pension plans) with effect from 2014 in which mortality is assumed to decline in all age groups. 2 Legal basis Pension institutions must have a price tariff that includes a mortality table. The price tariff must be used in the calculation of premiums and technical provisions; see the Insurance Activity Act sections 9-3, 9-5 and 9-16 third subsection. According to section 9-3 the premiums employed by an insurer shall be in reasonable proportion to the risk assumed and adequate to the company's financial position. The premiums shall be sufficient to ensure that obligations under contracts entered into are fulfilled. Finanstilsynet may prohibit use of premiums that it deems unsatisfactory or unreasonable. This provision applies to future premium payments. According to section 9-6 of the Act and section 2-10 of the Life Insurance Regulations of 30 June 2006, the price tariff including the mortality table must be notified to Finanstilsynet at the latest when taken into use. The adoption of minimum requirements for new mortality tables should be seen in light of Finanstilsynet's oversight to ensure that pension institutions are adequately provisioned under section 9-16 first subsection of the Act, and the requirement of the Life Insurance Regulations section 2-1 second subsection to the effect that the price tariff for personal risk shall as far as possible build on the latest updated risk statistics. Further, Finanstilsynet may require a pension institution to carry out analyses of certain elements of the price tariff etc. Technical provisions must be calculated with a basis in the price tariff's mortality table. Finanstilsynet does not consider the mortality assumptions contained in the current basis for calculating technical provisions (K2005) to be sufficient to enable pension institutions to meet the minimum requirement for mathematical provisions set out in section 9-16 of the Act for life insurance with a guaranteed minimum rate of return. Reference is made to the first subsection's first sentence which reads: Mathematical provisions for contractual liabilities shall at minimum constitute the difference between the capital value of the company s future liabilities and the capital value of future net premiums (prospective method of calculation). Pension institutions may employ surplus on the collective portfolio to strengthen mathematical provisions for insurance obligations as a result of the switch to a new mortality table. This requires Finanstilsynet's consent. If there is a need for the increase of technical provisions to take place over a number of years, Finanstilsynet may give the pension institution concerned a deadline for this to be done. A plan for such increase of technical provisions must be drawn up and communicated to Finanstilsynet.

3 FINANSTILSYNET PAGE 3 OF 5 3 Methodology and statistics The fact that longevity in the population is on average increasing can be described in two ways: either that average life expectancy is rising, or that the number of mortalities expected in an age group is reduced annually by a percentage rate. Expected residual lifetime is not used directly in the calculation of premiums and reserves in life insurance. Instead use is made of a calculation base incorporating mortality intensities in the respective age groups. A dynamic mortality table differs from a statistical mortality table in that, in the former, the mortality rate in each age group is assumed to change over time whereas in the latter the mortality rate is assumed to be constant throughout the period of insurance. Finance Norway's mortality assessments are based on life insurers' overall mortality experiences for the period for collective pension insurance and Statistics Norway's mortality projections for The mortality rate in collective pension insurance is assumed to develop at approximately the same pace as in Statistics Norway's mortality rate projections. A dynamic mortality function builds on an opening mortality rate and a mortality projection (a function designed to describe future mortality rate change per year). The starting point is the actual mortality rate for the period plus a projection for the period to Finance Norway's final recommendation for a new mortality table starts out from an opening mortality rate and the assumption of an age-independent, but gender-dependent annual reduction in mortality in the projection period. 4 Finanstilsynet's requirements on a new mortality table 4.1 New mortality table Uncertainty inevitably attends the calculation of a mortality table that requires assumptions to be made regarding future mortality rates and account to be taken of the effects of the fact that the insurance portfolio largely comprises persons with higher pay and higher life expectancy than is usual in the wider population (socioeconomic effects). Finanstilsynet's determination of opening mortality starts out from actual mortality in the insurance portfolio for the period plus a projection to 2013 based on Statistics Norway's intermediate scenario. Statistics Norway's forecasts naturally do not take specific characteristics of the insurance portfolio into account. When determining opening mortality, Finanstilsynet has added a 12 per cent margin, partly to accommodate the above characteristics of the insurance portfolio. Finanstilsynet requires the new mortality table to incorporate the assumption that the improvement in the mortality rate is age- and gender-dependent, i.e. that the decline in mortality is not constant. The relationship between mortality rate, age and gender is estimated with a basis in Statistics Norway's intermediate population projection scenario for the population as a whole. When determining the mortality rate decline, Finanstilsynet has added a 10 per cent margin to Statistics Norway's intermediate scenario, in part to accommodate the expectation of a higher mortality rate decline in the insurance portfolio than in the wider population.

4 FINANSTILSYNET PAGE 4 OF 5 The new mortality table applies to old-age pensions and dependants' pensions in collective pension insurance. It should also apply to disability pensions and active pension scheme members' exemption from premium and contribution payments. Mortality related to both longevity risk and mortality risk for members of an insured portfolio is expressed by the following formulas: μ Kol (x, t) = μ Kol (x, 2013) (1 + w(x) 100 )t 2013 where µ Kol (x,2013) is the mortality rate for a member aged x in 2013, while µ Kol (x,t) is the mortality rate for a member aged x in calendar year t (t at least equal to 2013). Further, the mortality rate decline is termed w(x), where w(x) = min ( x x 2, 0) for men w(x) = min( x x 2, 0) for women The mortality rate related to longevity risk is expressed by the following formulas: 1000 μ Kol (x, 2013) = ( x ) for men 1000 μ Kol (x, 2013) = ( x ) for women The mortality rate related to mortality risk is expressed by the following formulas: 1000 μ Kol (x, 2013) = ( x ) for men 1000 μ Kol (x, 2013) = ( x ) for women Finanstilsynet emphasises that this is a minimum tariff and that pension institutions must themselves assess the need for margins over and above the minimum tariff, based on updated risk statistics of the institution's own insurance portfolio. 4.2 Need for provisioning etc. The need for provisioning in the private sector (i.e. for premium-paying pension schemes and paidup policies) will largely depend on age and gender distribution and insurance covers. Schemes providing purely old-age cover will have a greater need for increased technical provisions. Public pension schemes' (local authorities, county authorities etc.) need to increase technical provisions will largely be set off against reserves freed up owing to the rules on life expectancy adjustment. This is because the adjustments to the pension reform entail that already accumulated rights are adjusted for life expectancy, combined with an individual guarantee which somewhat dampens the effect of life expectancy adjustment for those born in 1958 and earlier. Finanstilsynet assumes that the need for increased technical provisioning is far lower for civil servants than for private sector employees. The need for provisioning will be considerable, and Finanstilsynet assumes that most pension institutions will need a step-up plan pursuant to the Insurance Activity Act section Such stepping-up plans will apply from and including The plans should not have a longer duration than five years. Increase of reserves must at minimum be on a linear basis over the period and such all surpluses on the collective portfolio are set aside for as long as the contract is under-provisioned.

5 FINANSTILSYNET PAGE 5 OF 5 Depending on the pension institution's financial position and assessments of prospects for the years ahead, at least 20 per cent of the provisioning need should be met through equity. The size of the pension institution's contribution will be determined based on the overall provisioning required by the new mortality tariff, independent of the size of the policyholder surplus used to increase technical provisioning in the period prior to introduction of the new tariff. The pension institution's contribution will be added to the contract annually in equal shares each year in the step-up period. The Bank Law Commission proposed in NOU 2013: 3 certain adjustments to the framework for increased technical provisioning and use of step-up plans. However, Finanstilsynet bases its assessments on the currently applicable rules. The calculation of transfer values for contracts undergoing technical provisioning after the introduction of the new mortality table will receive close attention. Finanstilsynet will return to this matter in due course. On behalf of Finanstilsynet Morten Baltzersen (sign.) Director General Emil Steffensen (sign.) Deputy Director General Copy: Finance Norway The Norwegian Association of Pension Funds