Chapter 21: Mortality And Morbidity

Question 1

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

Answer 1

Risk classification is the process by which potential insured lives are separated into different homogeneous groups for premium rating purposes, according to the risk that they present.

The expectation is that the lives in any particular group have the same mortality / morbidity risk.

The risk groups are defined by the use of rating factors.

Question 2

State the limitations of risk classification in life insurance

Answer 2

Ideally, a life insurance company should add rating factors to its underwriting system until all mortality / morbidity differences are accounted for. However, this is not possible because:
1. it may not be possible to obtain full and accurate answers to questions on the proposal form from prospective policyholders

2. Collecting and processing all of this information costs too must time and money

Also, prospective policyholders prefer applying for life insurance to be a quick and easy process. So from a marketing point of view, it is better for the company to limit its use of rating factors.

Question 3

Explain how life insurance companies deal with the limitations of risk classification

Answer 3

Life insurance companies deal with the limitations of risk classification by using a RESTRICTED NUMBER OF RATING FACTORS.

This provides a compromise between the conflicting requirements of risk classification and marketing.

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.

Question 4

Explain why it is necessary to have different mortality tables for different classes of lives

Answer 4

When a life table is constructed it is assumed to reflect the mortality experience of a HOMOGENEOUS group of lives. In other words, 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 that is expected to have a similar experience.

If the table is constructed for a heterogeneous group, then the mortality experience will be depend on the exact mixture of the lives in that group. Such a table could only be used to model mortality in a group of lives with the same population structure as the group used to produce the table. Hence the table will have very restricted uses.

Question 5

List 6 factors other than age and gender that directly affect mortality and morbidity rates

Answer 5

CHONGE

1. Climate and geographical location
2. Housing
3. Occupation
4. Nutrition
5. Genetics
6. Education

Question 6

Spurious selection

Answer 6

Ascribing mortality differences to groups formed by factors that are not the true causes of these differences..

Examples include:

• mortality improvements that are actually due to increasing the strictness of underwriting
• geographical mortality differences that are actually due to a different balance of high and low risk occupations

Question 7

Describe the concept of mortality convergence

Answer 7

Variations in mortality between different subgroups are most noticeable at working ages.

For older populations, mortality in retirement is less variable between different groups.

This convergence of mortality between subgroups at higher ages is referred to as mortality convergence.

Question 8

Explain how decrements can have a selective effect

Answer 8

One way in which lives in a population can be grouped is by the operation of a decrement other than death.

Those who do and those who do not experience this selective decrement will experience different levels of mortality or morbidity.

Examples of selective decrements include:
1. Those getting married usually experience lighter mortality and morbidity than those of the same age who do not get married.

2. Ill-health retirement results in lighter mortality among the remaining active members of a pension scheme. This is sometimes called the HEALTHY WORKER effect.

Question 9

Temporary initial selection

Answer 9

It is usually the case that mortality / morbidity rates depend on the duration since some event, up to some duration s. After duration s they are independent of duration.

This phenomenon is called temporary initial selection, and s is called the length of the select period.

TI selection occurs in life insurance policies that have been underwritten, as the mortality rates of lives who have recently taken out policies are lower than those of the same age who took out their policies several years ago.

Question 10

Class selection

Answer 10

Class selection occurs where each group is categorized by the nature of a particular characteristic of the population.

Examples include:

• gender
• occupation
• age

Question 11

Selection/anti-selection or adverse selection

Answer 11

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 12

Time selection

Answer 12

Where a select group is taken from a population of individuals from different calendar years

Question 13

Extend of pooling risks depends on

Answer 13

• Accurate assessment
  o In theory the insurer should keep adding rating factors until there is no difference in the risks of the new groups by adding an additional rating factor

- Practicality
  o Costs of obtaining more info
  o Clients ability to provide more info
  o Competitive pressures
  o Exposed to more business mix risk

Fairness
o More underwriting is more fair but reduces the ability to cross-subsidise risk