Ch21: Mortality And Morbidity

Question 1

Risk classification in life insurance definition

Answer 1

The process by which potential insured lives are separated into different homogeneous groups for premium rating purposes, according to the risk they represent.

Question 2

Selection (anti-/adverse selection) definition

Answer 2

Taking advantage of inefficiencies in a provider’s pricing basis to secure better terms than might otherwise be justified, normally at expense of the product provider. Not fraudulent, immoral, or illegal activity

Question 3

Risk grouping process

Answer 3

• Careful underwriting is the mechanism by which a provider ensures that its risk groups are homogenous.
• Risk groups are defined by using rating factors e.g. age, gender, medical history…
• In theory, provider should continue to add rating factors to its underwriting system until the differences in risk between the different categories of the next rating factor are indistinguishable from the random variation between risks that remain after using the current list of rating factors.

Question 4

Mortality and morbidity rating factors in addition to age and sex

Answer 4

• geographical areas e.g. countries, regions, urban and rural
• social class e.g. manual and non-manual workers
• time e.g. mortality rates generally decrease over time

Question 5

Occupation as a risk factor

Answer 5

• Determines work environment for most of week.
• Some occupations are naturally healthier
• Some require the need to pass regular health checks (airline pilot)
• Largely determines income, permits access to particular lifestyle

Question 6

5 types of selection

Answer 6

• Temporary initial selection (Lives recently underwritten will tend to have better experience,
  effect wears off over time; mortality and morbidity patterns are only observed to differ from
  the general population for first s years)
• Class selection (Factor which is permanent in its effect with respect to mortality; population is
  divided into classes e.g. gender with classes male and female)
• Time selection (Within a population, mortality and morbidity normally varies with calendar
  time, effect usually observed over all ages)
• Adverse selection (Usually involves a form of self-selection, which acts to disrupt a controlled
  selection process, reduces the effectiveness of controlled selection)
• Spurious selection (May be that the differences in mortality between groups are due to other
  differences in composition and not necessarily due to the factors used to define the groups)