21. Mortality and morbidity

Question 1

What is meant by risk classification and what is its main aim

Answer 1

Risk classification is a process by which individuals (or ‘risks’) are separated into groups according to the risk they present

The main aim is:
* to split the data into homogeneous groups so that (as a result of a reduction in heterogeneity)
* the experience of each group is more stable and data can be more accuratley used.
* e.g to set premiums/contributions and provisions

Question 2

Describe the use of risk classification by life insurance companies when underwriting life insurance policies?

Answer 2

• Risk classification=> Potential insured lives separated into different homogeneous groups for premium rating purposes
• According to the risk that they present
• Expectation is that lives in a similar group have the same mortality/morbidity risk.
• Risk groups are defined by the use of rating factors (age, gender, smoking habits, lifestyle, medical history,…)

Question 3

What are the limitations of risk classification in life insurance?

Answer 3

• Ideally rating factors should be added until all mortality/morbidity differences are accounted for.
• However this may not be possible since:
• May not always be possible to obtain full and accurate answers to Q on proposal form
• Collecting and processing info= Time + money
• Prospective policy holders prefer apply for life insurance to be quick+ easy=> marketing prefer fewer rating factors
• Where data is scarce, homegeneous groups may have very small data

Question 4

How do life insurance companies deal with the limitations of risk classification?

Answer 4

• Using a restricted number of rating factors which achieves
• Compromise between risk requirements for classification
• AND marketing
• Rating factors only included if they avoid any sort of selection against the company
• AND satisfy the time and cost constraints of marketing
• Driven by competitive pressure
• when data is scarce, combine into groups that are less homogeneous but achieve credibility. Sensitivity test to check if results would be the same if groupings were different

Question 5

Why is it necessary to have different mortality tables for different classes of lives?

Answer 5

• When a life table is constructed=> it is assumed to reflect the mortality experience of a homogeneous group of lives
• i.e. All lives for whom the table applies follow the same stochastic model of mortality.
• The table is used to model mortality experience of a homogeneous group of lives that is expected to have a similar experience.
• IF the table is constructed using a heterogeneous group of lives
• Mortality experience will depend on the exact mixture of lives in that group
• This table can only be used to model mortality in a group with the same heterogenous structure as the group used to produce the table
• Hence the table would have very restricted uses

Question 6

What factors affect mortality and morbidity rates?

Answer 6

• Age
• Gender
• Occupation
• Nutrition
• Housing
• Climate and geographical location
• Education
• Genetics

Question 7

How does occupation affect people’s mortality and morbidity?

Answer 7

• Determines a person’s environment for >= 40 hours per week
• rural or urban
• exposure to harmful substances
• or potentially dangerous situations
• Some occupations are healthier by nature- fitness instructor, and
• Whereas some are given exposure to less healthy life style=> publicans
• Some occupations attract more healthy workers (armed forces)
• Occupation determines income => people to adopt specific lifestyle diet, housing, access to healthcare

Question 8

How does nutrition affect people’s mortality and morbidity?

Answer 8

• Poor quality nutrition increases risk of contracting a disease+ hinders recovery from sickness
• prolonged sickness can influence mortality
• Excessive eating + poor diet leads to obesity=> increases the risk of diabetes, cancer and heart problems
• Low income+ poor health and personal education=> poor nutritional choices
• Social+ cultural factors=> consumption of certain foods

Question 9

How does housing affect people’s mortality and morbidity?

Answer 9

• Physical quality of housing=> sanitation+ type of construction+ heating
• Way in which accommodation is used=> overcrowding shared cooking
• Impacts morbidity=> infectious diseases
• Impacts mortality over the long term
• Effect of poor-quality housing is often mixed in with general effects of poverty

Question 10

How does climate and geographical location affect peoples mortality and morbidity?

Answer 10

• Levels+ patterns of rainfall and tempurature lead to environment associated with certain kinds of diseases
• Natural disasters are more common in certain areas
• Traffic accidents are more common in urban areas= Emergency services arrive quicker
• Availability+ accessibility of modern medical facilities+ good transport and communication networks reduce delay in receiving medical treatment
• Availability of preventative screening and immunisation programmes is also relevant
• Mortality rates in countries at war and where there are high levels of violence and social unrest will also be higher

Question 11

How does education affect people’s mortality and morbidity?

Answer 11

• Education influences the awareness of the components of a healthy lifestyle => Which reduces mortality and morbidity
• Better education is associated with:
• Increased income
• Better diet
• The taking of regular exercise
• Better personal health care
• Moderation in alcohol consumption and smoking
• Awareness of the dangers of substance abuse
• Awareness of the importance of safe sex

Question 12

How do genetics affect people’s mortality and morbidity?

Answer 12

• Risk of contracting certain diseases is
• Increased for those lives with a family history of that disease
• And/or with certain genetic markers or characteristics
• Genetics=> rapidly developing area of study
• Increasing number of specific diseases being linked with specific genetic info

Question 13

What does selection mean?

Answer 13

• Process by which lives are divided into separate groups
• Such that the mortality or morbidity within each group is homogenous
• Mortality or morbidity within each group can be modelled using the same stochastic model
• In practice, selection refers to => source of heterogeneity itself
• Anti-selection=>An individual taking advantage of inefficiencies in a providers pricing basis to secure better that would otherwise be justified

Question 14

What are the types of selection?

Answer 14

STATiC

• Spurious selection=> Ascribing mortality differences to groups formed by factors that are not the true causes of the observed mortality differences.
• e.g. Mortality improvements due to increasing strictness of underwriting
• Geographical mortality differences actually due to a different balance of high and low risk occupations
• Time selection => Within a population, mortality and morbidity rates usually vary over a calendar year, essentially due to medical advances. This effect is observed at all ages and the usual effect is for mortality rates to become lighter.
• e.g. Individuals living 30 years ao exprience heavier motality than lives of the same age today
• Adverse selection=> Any selection that leads to an adverse effect on another party (e.g. on an insurance company). Involves an element of self-selection which acts against a controlled selection process which is being imposed on the lives.
• e.g. Poeple who decide to purchase an immediate annuity with pension funds usually experience lighter mortality than those who decide not to do so
• Temporary initial selection=> Usual that the mortality rates depend on the duration since some event, up to some duration s. After duration s they are independent of duration. This phenomenon is known as initial selection. S= select period.
• e.g. Lives that have recently been underwriten have lower mortality rates than those of same age that took policies several years ago
• Life insurance policies=> mortality rates of policies recently underwritten is lower than those of the same age who have been underwritten a while back
• Class selection => Each group categorised by the nature of a particular characteristic of the population
• Gender
• Occupation
• Age

Question 15

What is mortality convergence?

Answer 15

• Variations in mortality between different subgroups are most notable at working ages
• For older population, Mortality less variable between different groups
• Convergence of mortality between subgroups at older ages is mortality convergance

Question 16

How can decrements have a selective effect?

Answer 16

• Grouping population by decrement other than death
• Different mortality experience for those who do have the decrement and those who do not
• Examples include:
• Those who get married experience lighter mortality and morbidity than those of the same age who do not
• Ill-health retirement results in lighter mortality among the remaining active member of a pension scheme. AKA healthy worker effect
• Voluntary resignation/withdrawal from pension scheme=> select those with lighter mortality
• TA who lapse likely to have lighter mortality than those who keep their policies in force