The Office for National Statistics (ONS) published the latest, 2018-based projected life expectancy data for the UK, on 2 December.
Baseline life expectancy continues to increase but the Ogden tables, which we use in valuing large loss claims, are based on projected life expectancy which assumes there will be further gains made in life expectancy over that individual’s lifetime.
A slowdown in improvements in life expectancy has been observed in recent years and this is once again evident from the latest data, suggesting that previous estimates as to the likelihood of future improvements in mortality were overly optimistic. Indeed, the latest figures on projected expectation of life from birth are generally lower than those ONS figures from the 2008-based projections which underpin the multipliers in the current seventh edition of the Ogden tables (published in 2010) as shown by the graphs below.
The Government Actuary’s Department has yet to translate the new data into an updated eighth edition of the Ogden tables but given this recent development, together with the change in the discount rate in the summer, that should be expected to follow in early 2020.
A first look at the new ONS data, and the multipliers that this could produce based on the application of past methodology by BLM, enables us to form a view on the likely impact of these changes. If the eighth edition of the tables reflects the same approach, the reductions in the projected improvements are such that, on a whole life multiplier, the percentage difference, when compared with previous assumptions, is a reduction of about 2% for a male aged 20 but almost 6% in the case of a male aged 60. Whilst there is a range of outcomes, dependent on the age of the claimant, the broad monetary impact of these changes would be around a £140,000 reduction in the case of a £100k per annum claim and it could be in excess of more than £450,000 in the case of a £300k per annum claim.
In the short term, this new data raises certain issues for defendants to consider when it comes to determining strategy around life expectancy, particularly in the highest value cases, including:
- The need to factor in the likely effect of these multipliers when considering current settlement parameters and reserving.
- Whether to plead multipliers based on 2018 ONS data pending the release of updated tables, on the basis that current multipliers will over-compensate, much as cases were previously pleaded by defendants at an alternative discount rate.
- The benefit to delaying settlement pending the updated Ogden tables, how this compares with the benefit of achieving earlier settlement and how it might be used as a further lever in negotiations.
In the long term, defendants will need to be alive to the possibility that any reduction in projected life expectancy may revive arguments amongst claimant representatives that individual claimants have features which are atypical, such that they can argue a higher projected improvement should apply.
The Ogden Working Party is currently convening to discuss the eighth edition, which will have to consider various issues beyond merely life expectancy. It is not clear whether updated Ogden tables will be released to reflect the 2018 ONS data prior to the general release of the eighth edition. Twice so far during the life of the seventh edition, the Government Actuary’s Department have turned around updated tables at short notice in response to the discount rate changes. Arguably there is no reason why this should not be repeated to reflect changes in life expectancy now, failing which there is a further risk of over-compensation.
The issue of life expectancy is more important than ever in a world of negative discount rates (in both England & Wales at -0.25% and in Scotland at -0.75%). BLM’s Actuarial Group will be monitoring the situation closely.
Andrew Williamson, Partner, BLM