Chapter 20-Mortality and morbidity

Question 1

1. Describe how a provider of financial products could, in theory, allow for the heterogeneity of risks.

Answer 1

The providers of financial products offer cover against risk events. Individuals or companies buying these products all have different features - no two people in the world are alike in every respect, not even identical twins. A product provider could assess each individual or company and determine the premium to charge and the cover to provide for each risk it considers.

Question 2

2. Describe, with examples, the types of risk for which this would be appropriate and practical.

Answer 2

This approach works when the risks are rare and large and it is very difficult to group them. Marine hull and cargo covers are a good example: not only are ships generally different from each other but the cargos they carry and the routes they travel accentuate the differences. It is appropriate and practical to assess each risk individually.

Question 3

3. Explain how a provider deals with other risks, where the above approach would be prohibitively expensive.

Answer 3

Other risks are smaller and individual assessment would be prohibitively expensive. For these risks the provider usually has access to a large amount of data concerning how the population behaves. If the population can be divided into relatively homogeneous groups, a price can be determined that applies to all risks in that group.

Question 4

4. Justify this approach, using the Central limit Theorem.

Answer 4

If a product provider can pool independent homogeneous risks, then as a result of the Central Limit Theorem the profit per policy will be a random variable that follows the normal distribution with a known mean and standard deviation. The company can use this result to set premium rates which ensure that the probability of a loss on a portfolio of policies is at an acceptable level.

Question 5

5. Explain how mortality increasing with age could lead to a provider making a loss due to selection by males aged 82 last birthday.

Answer 5

Irrespective of how a provider constructs its homogeneous risk pools, there will be a range of risks in the pool. In life assurance, mortality and morbidity risk increases rapidly at later ages. If the provider sets a rate for male lives aged 82 (presumably based on the expected experience of a l ife aged 82.5), then a person aged 82.9 will be getting better terms than appropriate given the risk that person poses. If everyone aged 82.9 realised this and took out policies, the pricing assumption of an average age of 82.5 would be wrong, and the company would incur a loss.

Question 6

6. Define selection.

Answer 6

Selection is taking advantage of inefficiencies in a provider’s pricing basis to secure better terms than might otherwise be justified, normally at the expense of the product provider.

Question 7

7. State whether selection is fraudulent, immoral or illegal.

Answer 7

Selection is not a fraudulent, immoral, or illegal activity.

Question 8

8. What mechanism does a life insurance company use to ensure that its risk groups are homogeneous?

Answer 8

Careful underwriting is the mechanism by which the company ensures that its risk groups are homogeneous.

Question 9

9. What name is given to the criteria used to define the risk groups? Which ones are usually used in life insurance?

Answer 9

The risk groups are defined using rating factors, eg age, gender, medical history, height/ weight, lifestyle.

Question 10

10. What criterion should be applied when deciding how many rating factors a company should use?

Answer 10

In theory, a 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 remains after using the current list of rating factors.

Question 11

11. Describe the practical limitations that a company faces when deciding how many rating factors to use.

Answer 11

Both the ability of prospective policyholders to provide accurate responses to questions and the cost of collecting information limit the extent to which rating factors can be used. In general, a proposal form should not ask for information which requires specialist knowledge. For example, the cost of undertaking extensive blood tests has to be weighed against the expected cost of mortality or morbidity claims that will be ‘saved’ as a result of having this information.
From a marketing point of view, prospective policyholders will want the process of underwriting to be straightforward and quick.
In practice, rating factors will be included if they avoid any possibility of selection against the company, and satisfy the time and cost constraints of marketing. This decision is often driven by competitive pressures. If several companies introduce a new rating factor, which is a good descriptor of the underlying risk, then other companies will need to follow this lead or risk adverse selection against them.

Question 12

12. Explain the underlying assumption that is made when a life table is constructed.

Answer 12

When a life table is constructed it is assumed to reflect the mortality experience of a homogeneous group of lives, ie all the lives to whom the table applies follow the same stochastic model of mortality represented by the rates in the table. This means that the table can be used to model the mortality experience of a homogeneous group of lives which is suspected to have a similar experience.

Question 13

13. Describe the limitations of a life table that has been constructed for a group of heterogeneous lives.

Answer 13

If a life table is constructed for a heterogeneous group then the mortality experience will depend on the exact mixture of lives with different experiences that has been used to construct the table. Such a table could only be used to model mortality in a group with the same mixture. It would have very restricted uses.

Question 14

14. Explain how life tables are constructed when only parts of the mortality experience are heterogeneous.

Answer 14

In such cases the tables are separate (different) during the select period, but combined after the end of the select period.

Question 15

15. In addition to variation by age and sex, mortality and morbidity rates are observed to vary by what three factors?

Answer 15

In addition to variation by age and sex, mortality and morbidity rates are observed to vary:
* between geographical areas, eg countries, regions of a country, urban and rural areas
* by social class, eg manual and non-manual workers
* over time, eg mortality rates usually decrease over time.

Question 16

16. None of the factors in the previous question provides a direct explanation of the observed differences in mortality and morbidity. They are proxies for the real factors that cause the differences. List these factors.

Answer 16

Such factors are:
* occupation
* nutrition
* housing
* climate / geography
* education
* genetics

Question 17

17. Explain why it can be difficult to disentangle the effects of different factors that influence mortality, using mortality rates of people living in sub-standard housing as an example.

Answer 17

It is rare that observed differences in mortality can all be ascribed to a single factor. It is difficult to disentangle the effects of different factors because of the relationships between them.
For example, mortality rates of those living in sub-standard housing are (usually) higher than those of people living in good quality housing. However, those living in sub-standard housing usually have less well-paid occupations and lower educational attainment than those living in good quality housing. Part or all of the observed difference may be due to these differences and not to housing differences.

Question 18

18. Describe how occupation affects mortality and morbidity.

Answer 18

Occupation can have several direct and indirect effects on mortality and morbidity.
Occupation determines a person’s environment for often 40 or more hours each week. The environment may be rural or urban, the occupation may involve exposure to harmful substances such as chemicals, or to potentially dangerous situations such as working at heights. Some occupational effects may be moderated by health and safety at work regulations.
Some occupations are naturally healthier, whereas some work environments give exposure to a less healthy lifestyle.
Some occupations by their very nature attract more healthy or unhealthy workers. This may be accentuated by health checks made on appointment or by the need to pass regular health checks, eg airline pilots. However, external factors can distort a presumed state of health; for example former miners who have left the mining industry as a result of ill health and then chosen to sell newspapers will inflate the morbidity rates of newspaper sellers.
A person’s occupation largely determines their income, and this permits them to access a particular lifestyle, content and pattern of diet, quality of housing and access to healthcare. The effect on mortality and morbidity can be positive or negative.

Question 19

19. Describe how nutrition affects mortality and morbidity.

Answer 19

Nutrition has an important influence on morbidity and in the longer term on mortality.
Poor nutrition can increase the risk of contracting many diseases and hinder recovery from sickness. In the longer term, the burden of increased sickness can influence mortality.
Excessive or inappropriate eating can lead to obesity and an increased risk of associated diseases (heart disease, hypertension) leading to increased morbidity and mortality.
Inappropriate nutrition may be the result of economic factors - lack of income to buy appropriate foods or the result of a lack of health and personal education resulting in poor nutritional choices. There are also social and cultural factors which encourage or discourage the consumption of certain foods and drinks, such as alcohol.

Question 20

20. Describe how housing affects mortality and morbidity.

Answer 20

The standard of housing encompasses not only all aspects of the physical quality of housing (state of repair, type of construction, heating, sanitation) but also the way in which the housing is used, such as overcrowding and shared cooking.
These factors have an important influence on morbidity, particularly that related to infectious diseases (from tuberculosis and cholera to colds and coughs) and thus on mortality in the longer term.
The effect of poor housing is often mixed up with the general effects of poverty.

Question 21

21. Describe how climate and geographical location affect mortality and morbidity.

Answer 21

Climate and geographical location are closely linked. Levels and patterns of rainfall and temperature lead to an environment which is amicable to certain kinds of diseases, such as those associated with tropical regions.
Effects can also be observed within these broad categories - differences between rural and urban areas in a geographical region. Some effects may be accentuated or mitigated depending upon the development of an area, with industrial development leading to better roads and communications.
Natural disasters (such as tidal waves and famines) will also affect mortality and morbidity rates, and may be correlated with particular climates and geographical locations.

Question 22

22. Describe how education affects mortality and morbidity.

Answer 22

Education influences the awareness of the components of a healthy lifestyle, which reduces morbidity and lowers mortality rates. It encompasses both formal education and more general awareness resulting from public health and associated campaigns.
This effect can be apparent in aspects such as:
* increased income
* choice of a better diet
* the taking of exercise
* personal health care
* moderation in alcohol consumption and smoking,
* awareness of the dangers of drug abuse
* awareness of a safe sexual lifestyle
Some of these are direct causes of increased morbidity such as smoking and excessive alcohol consumption, which lead to diseases such as lung and other forms of cancer, and strokes. A healthy lifestyle with improved fitness can lead to an enhanced ability to resist diseases.

Question 23

23. Describe how genetics affects mortality and morbidity.

Answer 23

Genetics may give information about the likelihood of a person contracting certain diseases, and therefore may provide improved information about the chances of sickness or death. Such information may be used in isolation for the individual in question or, more usefully, by combining it with the life histories of the current and past generations of the family.
Genetics is a rapidly developing new area of study for the medical profession. There are increasing numbers of specific diseases being identified where genetic information provides firm predictive evidence of the chances of sickness or death relative to a person of average health.

Question 24

24. Explain what is meant by ‘temporary initial selection’.

Answer 24

Each group is defined by a specified event (the select event) happening to all the members of the group at a particular age, eg buying a life assurance policy or retiring on ill-health grounds.
The mortality or morbidity is estimated for each group and for the population that is not exposed to the specific event. The mortality / morbidity patterns in each group are observed to differ only for the first s years after the select event. The length of select period is s years.
The differences are temporary, producing the phenomenon called temporary initial selection.

Question 25

25. Explain what is meant by ‘class selection’.

Answer 25

The population can be divided into classes, for example by gender classification or occupation. The stochastic models (life tables) are different for each class. There are no common features to the models, they are different for all ages. This is termed class selection.

Question 26

26. Explain what is meant by ‘time selection’.

Answer 26

Within a population mortality and morbidity 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 (improve) over time, although there can be exceptions, for example due to the increasing effect of AIDS in some countries.
A separate model or table will be produced for different calendar periods, eg English Life Table No 15 1990-92 and English Life Table No 16 2000-02. The difference between the tables is termed time selection and shows mortality improvements in the ten-year period.

Question 27

27. Explain what is meant by ‘adverse selection’.

Answer 27

Adverse selection {or anti-selection) is characterised by the way in which the select groups are formed rather than by the characteristics of those groups. So, any of the previous forms of selection may also exhibit adverse selection. Adverse selection usually involves an element of self-selection, which acts to disrupt (act against) a controlled selection process which is being imposed on the lives. This adverse selection tends to reduce the effectiveness of the controlled
selection.
For example, in deciding whether or not to purchase an immediate annuity with pension funds, those who decide to purchase an annuity usually experience lighter mortality than those who decide not to do so.

Question 28

28. What is underwriting?

Answer 28

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 29

29. Explain how adverse selection can arise if a company does not use a particular rating factor, such as smoking status.

Answer 29

If prospective policyholders know that a company does not use a particular rating factor, eg smoking status, then lives who smoke will opt to buy a policy from this company rather than a company that uses smoking status as a rating factor. The outcome will be to lessen the effect of the controlled selection being used by the company as part of the underwriting process. The effect of self-selection by smokers is adverse to the company’s selection process. It is an example of adverse selection.

Question 30

30. Explain what is meant by ‘spurious selection’.

Answer 30

When homogeneous groups are formed we usually assume that the factors used to define each group are the cause of the differences in mortality observed between the groups. However, there may be other differences in composition between the groups, and it is these differences that are the true cause of the observed mortality differences.
Ascribing mortality differences to groups formed by factors which are not the true causes of these differences is termed spurious selection. For example, when the population of England and Wales is divided by region of residence, some striking mortality differences are observed.
However, a large part of these differences can be explained by the different mix of occupations and standards of housing and nutrition in each region. Applying class selection to regions is spurious as the observed effects are due to different underlying causes.

Question 31

31. Explain, using an example, why a factor that generates spurious class selection can still be useful.

Answer 31

Even though a class selection is spurious, that doesn’t prevent it being used as a good proxy rating factor for the underlying mortality / morbidity differences. For example, where a country has postal codes or ZIP codes, these can be used as an effective and easily assessed measure of the likely (but not certain) standards of occupation, housing and nutrition of people living in that area.

Question 32

32. Explain the concept of mortality convergence?

Answer 32

The variations in mortality with risk factors 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, although the evidence is disputed.
This convergence of mortality between subgroups at higher ages is referred to as mortality convergence.

Question 33

33. What complicates detailed analysis of this observation?

Answer 33

Detailed analysis of mortality convergence is complicated by the low volumes of data at the highest ages.

Question 34

34. Explain what is meant by selective decrements in respect of mortality or morbidity.

Answer 34

One way in which lives in a population can be grouped is by the operation of a decrement (other than death). This could be retiring on ill-health grounds, getting married or migrating to a new country.
Those who do and do not experience this selective decrement will experience different levels of the primary decrement of interest, often mortality or morbidity.

Question 35

35. How can withdrawal from a life assurance protection product act as a selective decrement?

Answer 35

For example, withdrawal (in respect of life assurance protection products) often acts as a selective decrement in respect of mortality. Those withdrawing tend to have lighter mortality than those who keep their policies in force. This selective effect results in mortality rates that increase markedly with policy duration.

Question 36

37. How does the mortality and morbidity of married lives usually compare with those who do not get married?

Answer 36

Those getting married usually experience lighter mortality and morbidity than those of the same age who do not get married.