C20 Mortality and Morbidity

Question 1

How to price for heterogeneity of risk?

Answer 1

• Assess each risk individually
• Determine premium and level of cover
• Suitable when risks are rare and large, e.g. marine hull and cargo covers

Question 2

How to price for homogenous risk?

Answer 2

• For smaller risk, individual assessment will be prohibitively expensive,
• Provider usually has a large amount of data
• Divide population into relatively homogenous groups
• Determine Premium that applies to all risks in that group
• Ensure that probability of loss is at an acceptable level

Question 3

What is anti-selection?

How can companies reduce it?

Answer 3

Anti-selection:
Taking advantage of the inefficiencies in the provider’s pricing basis to secure better terms than might otherwise be justified, normally at the expense of the product provider

Underwriting can be used to reduce anti-selection or ensure that the risk groups are homogenous

Question 4

How are risk groups defined (separated)?

What are the commonly used risk groups?

Answer 4

Risk groups are defined by using rating factors
Commonly used rating factors:
Age, sex, medical history, height/weight, lifestyle, smoker, geographical area, social class,

Question 5

List the practical limitations in deciding the number of rating factors to use

Answer 5

List the practical limitations in deciding the number of rating factors to use
1. Ability of the prospective PH to provide accurate answers to questions
2. Cost of collecting information
3. Marketing: Underwriting process should be simple and quick
4. Competition

Question 6

List direct rating factors that affect mortality and morbidity

Answer 6

Direct rating factors: HE ONCG
1. Housing
2. Education
3. Occupation
4. Nutrition
5. Climate/geography
6. Genetics

Question 7

Describe how occupation affects mortality and morbidity

Answer 7

Occupation can have several direct and indirect affect on mortality and morbidity (WE HI LEH)
1. Environment : Urban or rural
2. Exposure to harmful substances
3. Work hazard : working at heights,
4. Health and safety regulations/standard
5. Lifestyle : Healthy/Unhealthy
6. Health checks : Pilot
7. Income

Results can be distorted if a person changes occupation

Question 8

Describe how nutrition affects mortality and morbidity

Answer 8

Nutrition has an important influence on morbidity and in the longer term on mortality
Poor nutrition can:
1. Increase the risk of contracting many diseases
2. Hinder recovery from sickness
3. Obesity and risk of associated diseases

Income, education, social and cultural factors influence consumption choices

Question 9

Describe how housing affects mortality and morbidity

Answer 9

1. Physical quality of housing (state or repair, type of construction, heating, sanitation)
2. Use : overcrowding and shared cooking
3. Risk of infectious diseases

Effect of poor housing if often mixed up with the general effects of poverty

Question 10

Describe how climate and geographical conditions affects mortality and morbidity

Answer 10

1. Diseases: Levels and pattern of rainfall and temperature
2. Rural and urban areas
3. Development of an area
4. Natural disasters

Question 11

Describe how education affects mortality and morbidity

Answer 11

Education increases the awareness of the components of a healthy lifestyle

This effect can be apparent in aspects such as: CAPITA M
1. Choice of a better diet
2. Awareness of the dangers of drug abuse
3. Personal health care
4. Increases income
5. Taking up Exercise
6. Awareness of a safe sexual lifestyle
7. Moderation in alcohol consumption and smoking

Question 12

Describe how genetics affects mortality and morbidity

Answer 12

• Genetics may give information about the likelihood of a person contracting certain diseases
• Genetic information may provide firm predictive evidence of the chances of sickness or death relative to a person of average

Question 13

List four types of selection

Answer 13

Four types of selection (TACT)
1. Temporary initial selection
2. Adverse selection
3. Class selection
4. Time selection

Question 14

Explain what is meant by ‘Temporary initial selection’

Answer 14

• Each group is defined by a specified event (the select event) happening to all the members of the group at a particular age, e.g. buying a LI policy, retiring on IH grounds
• The mortality and morbidity is estimated for each group and for the population that is not exposed to the select event.
• The mortality/morbidity patterns in each group are observed to differ only for the first s years after the select event.
• The differences are temporary, producing the phenomenon called temporary initial selection

Question 15

Explain what is meant by ‘Class selection’

Answer 15

Class Selection
- Different stochastic models (life tables) for each class
- There are no common features to the models, they are different for all ages.
- E.g. Gender (m/f), Occupation ( manual, non-manual)

Question 16

Explain what is meant by ‘Time selection’

Answer 16

• Within a population, M&M varies with calendar time, essentially due to medical advances
• This effect is usually observed at all ages.
• The usual pattern is for mortality rates to become lighter
• A separate model or table will be produced for different calendar periods
• The differences between the tables is termed ‘time selection’

Question 17

Explain what is meant by ‘adverse selection’ or ‘ anti-selection’

Answer 17

‘adverse selection’ or ‘ anti-selection’

• Characterised by the way in which the select groups are formed, and not by the characteristics of those groups
• Other forms of selection may also exhibit adverse selection
• Usually involves an element of self-selection, which acts against a controlled selection process which is being imposed on the lives
• Tends to reduce the effectiveness of the controlled selection

Question 18

What is ‘underwriting’

Answer 18

Underwriting is the process by which life insurance companies divide lives into homogeneous risk groups by using the values of certain factors ( rating factors) recorded for each life

Question 19

What is meant by ‘spurious selection’

Answer 19

• There may be other differences in the compositions between groups that are the true cause of the observed mortality differences
• Ascribing mortality differences to groups formed by factors which are not the true cause of these differences is term spurious selection.

E.g. Class selection is spurious, but a good proxy rating factor for the underlying mortality/morbidity differences

Question 20

At what ages are variations in mortality rates most pronounced

What is ‘mortality convergence’

Answer 20

• The variations in mortality are noted most strongly at working ages.
• These variations can be large and have a material financial impact on insurance companies
• These variations have been seen to continue after retirement but reduce at the very highest ages,
• This convergence of mortality between subgroups at higher ages is referred to as the mortality convergence
• Detailed analysis of the mortality convergence is complicated by the low volumes of data at the highest ages

Question 21

Explain what is meant by selective decrement in respect of mortality and morbidity

Answer 21

• One way in which lives in a population can be by the operation of a decrement( other than death)
• e.g. IH retirements, getting married, migrating to a new country.
• Those who do or do not experience this selective decrement will experience different levels of the primary decrement of interest

e.g.
1. Withdrawal from life assurance protection: those withdrawing have lighter mortality. This results in mortality rates that increase markedly with policy duration.

2. Those getting married usually experience lighter mortality and morbidity.