Chapter 21: Mortality and morbidity

Question 1

Discuss risk classification in life insurance.

Answer 1

Risk classification in life insurance

1. Heterogeneity
   - Providers of financial products offer cover against risk events
   - Individuals or companies buying these products have different features
   - Product provider could assess each individual or company and determine premium to charge and cover to provide for each risk it considers
   - This works when risks are rare and large and it is difficult to group them
   - E.g. marine hull and cargo covers: ships are different and cargos they carry and routes travelled accentuate the difference
   - Individual assessment would be expensive for smaller risks
   - For these the provider usually has access to large amount of data concerning how population behaves
   - If population can be divided into homogenous groups then price can be determined that applies to all risks in that group
   - If provider can pool independent homogenous risks then by CLT – profit per policy will be random variable that follows normal distribution with known mean and std dev
   - This result can be used to set premium rates which ensure that probability of loss on portfolio of policies is at acceptable level
   - Risk classification – process by which potential insured lives are separated into different homogeneous groups for premium rate purposes
   - Involves trying to identify risk factors specific to individual that might influence the likely risk of that individual
2. Selection
   - There will be range of risks in the pool – irrespective of how provider constructs its homogenous risk pools
   - Mortality and morbidity risk increase rapidly in later ages
   - If provider set rate for males lives aged 82 based on expected experience of life aged 82.5 then person aged 82.9 getting better terms than appropriate given risk
   - If everyone aged 82.9 realised and took out policies the pricing assumption of average age 82.5 would be wrong and company would incur a loss
   - Selection is taking advantage of inefficiencies in provider’s pricing basis to secure better terms than might otherwise be justified – normally at expense of provider
   - Not fraudulent, immoral or illegal
3. Risk grouping
   - Careful underwriting – mechanism by which provider ensures that its risk groups are homogeneous
   - Risk groups are defined using rating factors – age, gender, medical history, height, weight, lifestyle
   - Should continue to add rating factors to underwriting system until difference in risks between categories are indistinguishable
   - Ability of prospective policyholder to provide accurate responses and cost of collecting info limit the extent to which rating factors can be used
   - Proposal form should not ask for info which requires specialist knowledge
   - Prospective policyholders want process of underwriting to be straightforward and quick – marketing
   - In practice, rating factors will be included if avoid any possibility of selection against company and satisfy time and cost constraints of marketing
   - This is often driven by competitive pressures
   - If companies introduce new rating factor which is good descriptor of underlying risk – then other companies will need to follow or risk adverse selection against them

Question 2

What are the principal factors contributing to variation in mortality and morbidity?

Answer 2

Principal factors contributing to variation in mortality and morbidity

• In addition to variation by age and sex, mortality and morbidity rates are observed to vary:

 between geographical areas e.g. countries, regions of country, urban and rural areas

 by social class e.g. manual and non-manual workers

 over time e.g. mortality rates usually decrease over time

• None of these categories provide direct causal explanation of observed differences
• Rather they are proxies for real factors which cause observed difference:

	Occupation
	Nutrition
	Housing
	Climate/geography
	Education
	Genetics
	HIV status

• Rare that observed differences in mortality can all be ascribed to single factor
• Difficult to disentangle the effects of different factors because of relationship between them
• E.g. mortality rates of those living in sub-standard housing usually higher than people living in good quality housing
• But those living in substandard housing usually have less well-paid occupations and lower education
• Thus, part or all of observed difference may be due to these differences and not housing differences
• NB for governments to be able to identify risk factors so as to bring improvements in public health
• Very NB in insurance since identifying specific risk factors enables insurer to classify individual’s mortality or morbidity risk more precisely – allowing more accurate calculation of premiums and reserves

Question 3

What are the principal factors contributing to variation in mortality and morbidity? - Occupation

Answer 3

Occupation

• Can direct and indirect effects on mortality and morbidity
• Determines person’s environment for many hours each week
• May be rural or urban
• May involve exposure to harmful substances or potentially dangerous situations
• Some occupational effects may be moderated by health and safety regulations at work
• Some occupations are naturally healthier and some work environments give exposure to less healthy lifestyle
• Some occupations attract more healthy or unhealthy workers
• May be accentuated by health checks on appointment or need to pass regular health checks e.g. airplane pilots
• External factors can distort presumed state of health
• E.g. former miners (left due to ill-health) and now sell newspapers will inflate morbidity rates of newspaper sellers
• Selection of employees with respect to health (entry and exit) may lead to lighter morbidity and mortality among workers
• Person’s occupation largely determines their income and this permits them to access a particular lifestyle, diet, quality of housing and access to healthcare
• The effect on mortality and morbidity can be positive or negative
• Unemployment has negative effect since leads to increased levels of stress and lower income
• Not always easy to obtain reliable estimate of mortality rates for particular occupation
• Rates estimated will be unreliable if deaths are not recorded under same category of occupation as are lives in exposed to risk
• This can occur for following reasons:

 Entries on census returns (used to determine expose to risk) may not be specific enough – may result in wrong occupation being recorder

 Families of individuals who die may unintentionally elevate occupation

 Estimates may be unreliable as result of factors below

Previous occupation

• Info from censuses and death certificates relates usually to most recent occupation
• Selective effect can occur when workers who become ill and cannot continue usual job switch to light duties
• Can lead to artificially high rates of mortality being associated with certain jobs
• Recording complete employment histories is not a practical solution

Classification

• In past wives categorised under same occupational group as husbands
• No longer appropriate as most women follow their own occupations
• Still a correlation between occupation of husband and wife

Lack of statistics

• For occupations which have only smaller number of participants – may not be sufficient data to provide meaningful statistics
• Bu select occupations more likely to maintain detailed records of members – can be used to provide accurate statistics

Question 4

What are the principal factors contributing to variation in mortality and morbidity? - Occupation

Answer 4

Occupation

• Can direct and indirect effects on mortality and morbidity
• Determines person’s environment for many hours each week
• May be rural or urban
• May involve exposure to harmful substances or potentially dangerous situations
• Some occupational effects may be moderated by health and safety regulations at work
• Some occupations are naturally healthier and some work environments give exposure to less healthy lifestyle
• Some occupations attract more healthy or unhealthy workers
• May be accentuated by health checks on appointment or need to pass regular health checks e.g. airplane pilots
• External factors can distort presumed state of health
• E.g. former miners (left due to ill-health) and now sell newspapers will inflate morbidity rates of newspaper sellers
• Selection of employees with respect to health (entry and exit) may lead to lighter morbidity and mortality among workers
• Person’s occupation largely determines their income and this permits them to access a particular lifestyle, diet, quality of housing and access to healthcare
• The effect on mortality and morbidity can be positive or negative
• Unemployment has negative effect since leads to increased levels of stress and lower income
• Not always easy to obtain reliable estimate of mortality rates for particular occupation
• Rates estimated will be unreliable if deaths are not recorded under same category of occupation as are lives in exposed to risk
• This can occur for following reasons:

 Entries on census returns (used to determine expose to risk) may not be specific enough – may result in wrong occupation being recorder

 Families of individuals who die may unintentionally elevate occupation

 Estimates may be unreliable as result of factors below

Previous occupation

• Info from censuses and death certificates relates usually to most recent occupation
• Selective effect can occur when workers who become ill and cannot continue usual job switch to light duties
• Can lead to artificially high rates of mortality being associated with certain jobs
• Recording complete employment histories is not a practical solution

Classification

• In past wives categorised under same occupational group as husbands
• No longer appropriate as most women follow their own occupations
• Still a correlation between occupation of husband and wife

Lack of statistics

• For occupations which have only smaller number of participants – may not be sufficient data to provide meaningful statistics
• Bu select occupations more likely to maintain detailed records of members – can be used to provide accurate statistics

Question 5

What are the principal factors contributing to variation in mortality and morbidity? - Housing

Answer 5

Housing

• Standard of housing encompasses all aspects of physical quality of housing (state of repair, type of construction, heating, sanitation) and also way in which housing is used such as overcrowding and shared cooking
• These factors have NB influence on morbidity particularly that related to infectious diseases and thus mortality in longer term

Question 6

What are the principal factors contributing to variation in mortality and morbidity? - Climate and geographical location

Answer 6

Climate and geographical location

• Closely linked
• Levels and patterns of rainfall and temp lead to environment which is amicable to certain kinds of diseases
• Differences between rural and urban areas in geographical regions
• Some effects can be accentuated or mitigated depending upon development of an area – industrial development leading to better roads and communications
• Natural disaster will affect mortality and morbidity rates – may be correlated to climates and geographical locations
• Other factors that vary according to geographical location

Access to medical care and transport

• Availability of readily available accessible, modern medical facilities nearby can reduce delay in receiving effective medical treatment
• Preventative screening can identify problem in early stages
• Immunisation programmes can control epidemics

Road accidents

• Individuals living in cities may be more likely to be involved in motor accidents – but traffic speed may be lower so less likely to be fatally injured

Natural disasters

• Certain countries are known to be susceptible to natural disasters – tidal waves, earthquakes, hurricanes, flood, drought and famine

Question 7

What are the principal factors contributing to variation in mortality and morbidity? - Political unrest

Answer 7

Political unrest

• Mortality rates in countries at war or where there is high level of violence and social unrest will be higher because:

 Individual may be required to take part in direct combat

 Increased risk of injury to civilians

 Food, clean water and medical facilities may be restricted in war zone

Question 8

What are the principal factors contributing to variation in mortality and morbidity? - Education

Answer 8

Education

• Influences the awareness of components of a healthy lifestyle which reduces morbidity and lowers mortality rates
• Encompasses formal education and more general awareness resulting from public health and associated campaigns
• Healthy lifestyle with improved fitness can lead to enhanced ability to resist diseases
• Smoking and excessive alcohol consumption are direct causes of increased morbidity – leads to diseases such as lung or other forms of cancer and strokes
• Although education is believed to affect mortality, it is highly correlated with other risk factors

Question 9

What are the principal factors contributing to variation in mortality and morbidity?

Answer 9

Dangerous activities

• Dangerous sports – more likely to be involved in serious and possibly fatal accidents
  Travel
• Travel frequently – more likely to be involved in accident and exposed to wider range of infectious diseases

Question 10

What are the principal factors contributing to variation in mortality and morbidity?

Answer 10

Dangerous activities

• Dangerous sports – more likely to be involved in serious and possibly fatal accidents

Travel

• Travel frequently – more likely to be involved in accident and exposed to wider range of infectious diseases

Question 11

What are the principal factors contributing to variation in mortality and morbidity? - Genetics

Answer 11

Genetics

• Give information about likelihood of person contracting certain diseases and thus provide improved info about chances of sickness or death
• Rapidly developing new area of study for medical profession
• Increasing number of specific diseases being identified where genetic info provides firm predictive evidence of chances of sickness or death relative to person of average health

Question 12

What are the principal factors contributing to variation in mortality and morbidity? - HIV

Answer 12

HIV

• Significant factor when it comes to underwriting an individual for a life policy
• Sensitivity, due to stigma associated with HIV, has led to it being seen as discriminatory or controversial to risk-rate based on HIV status
• Education and ARTs have helped reduce prevalence of HIV and increased life expectancy of those living with HIV
• Changes such as these will need to be allowed for in any pricing reviews performed over time

Question 13

What are the main types of selection?

Answer 13

Selection

• Has become customary to refer to source of heterogeneity itself as selection
• Or, it can refer to subdivision of heterogeneous data into homogeneous classes

Types of selection:

Temporary initial selection

Class selection

Time selection

Adverse selection

Spurious selection

Question 14

Discuss temporary initial selection.

Answer 14

Temporary initial selection

• Each group defined by specified event happening to all members of group at particular age e.g. buying a life insurance policy
• Mortality or morbidity is estimated for each group and for population that is not exposed to specified event
• Mortality/morbidity patterns in each group are observed to differ only got first s years after the select event
• Length of select period is s years
• Difference are temporary – producing temporary initial selection
• Occurs when heterogeneity is present in group that was selected on the basis of criterion whose effects wear off over time
• Can arise as result of underwriting process – since lives recently underwritten will tend to have better experience, this effect wears off over time

Question 15

Discuss class selection.

Answer 15

Class selection

• Population can be divided into classes e.g. gender with classes of males and female or occupation with classes of manual and non-manual employment
• Stochastic models (life tables) different for each class
• No common features to the models – different for all ages
• This is class selection
• Class selection refers to factor which is permanent in its effect with respect to mortality
• i.e. source of the heterogeneity is due to a permanent attribute of individuals concerned
• E.g. age, as it is permanent because lives subdivided by age will always be expected to show different mortality

Question 16

Discuss time selection.

Answer 16

Time selection

• Within a population, mortality and morbidity normally varies with calendar time, essentially due to medical advances
• This effect is usually observed at all ages
• Usual pattern is for mortality rates to become lighter over time
• Can be exceptions e.g. due to increasing effect of AIDS in some countries
• Separate model or table will be produced for different calendar periods
• Difference between tables is termed time selection and shows mortality improvements in the e.g. 10-year period

Question 17

Discuss adverse selection.

Answer 17

Adverse selection

• Characterised by the way in which the select groups are formed rather than by the characteristics of those groups
• Any of the previous forms of selection may also exhibit adverse selection
• Usually involves element of self-selection – acts to disrupt a controlled selection process which is imposed on the lives
• Tends to reduce effectiveness of controlled selection
• E.g. in deciding whether or not purchase an immediate annuity with pension funds, those who decide to purchase an annuity usually experience lighter mortality than those whose who decide not to do so
• This is because individuals who purchase annuity at retirement are more likely to be in good health
• If they thought they were likely to die in near future they would not convert capital lump sum into lifetime annuity as this would represent a poor investment
• Underwriting process by which life insurance companies divide lives into homogeneous risk groups by using the values of certain factors recorded for each life
• If prospective policyholders know that company does not use a particular rating factor e.g. smoking status, then lives who smoke will opt to buy a policy from this company rather than a company who uses smoking status as a rating factor
• Outcome = lessen effect of the controlled selection being used by company as part of underwriting process
• Effect of self-selection by smokers is adverse to company’s selection process

Question 18

Discuss spurious selection.

Answer 18

Spurious selection

• When homogeneous groups are formed, we usually assume that factors used to define each group are the cause of differences in mortality observed between the groups
• But there may be other differences and these differences are the true case of the observed mortality differences
• I.e. the groups are unlikely to be homogeneous
• Ascribing mortality differences to groups formed by factors which are not true causes of these differences is called spurious selection
• E.g. when population of England and wales is divided by region of residence, some striking mortality difference are observed
• Large part of these differences can be explained by different mix of occupations and standards of housing and nutrition in each region
• Applying class selection to regions is spurious as the observed effect are due to different underlying causes
• Spurious selection can be removed by identifying all possible sources of heterogeneity within the parent population i.e. by risk classification
• Even though a class selection is spurious doesn’t prevent it being used as good proxy rating factor for underlying mortality/morbidity differences
• E.g. postal codes or ZIP codes can be used as effective and easily assessed measure of likely standard of occupation, housing and nutrition
• Withdrawal often acts as a selective decrement in respect of mortality
• Those withdrawing tend to have lighter mortality
• This selective effect results in mortality rates that increase markedly with policy duration
• Two reasons for heavy mortality of those who have had a policy for a while compared with new entrant
• Firstly, temporary initial selection at the underwriting stage should ensure that new entrant will be relatively healthy
• Secondly, healthier lives are more likely to lapse policies and so will be an increasing concentration of impaired lives as time goes on

Question 19

What is mortality convergence?

Answer 19

Mortality convergence

• Variations in mortality noted most strongly at working ages
• These variations can be large and have material financial impact on insurance companies
• Variations have been seen to continue after retirement but reduce at very highest ages
• Convergence of mortality between subgroups at higher ages is referred to as mortality convergence
• I.e. factors such as occupation/social class/geographical areas have less of an effect on mortality for retired people than they do for working people
• Detailed analysis of mortality convergence is complicated by low volumes of data at highest ages

Question 20

How can decrements have a selective effect?

Answer 20

How decrements can have a selective effect

• One way in which lives in a population can be grouped is by operation of decrement other than death
• 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 primary decrement of interest, often mortality and morbidity
• Those getting married usually experience lighter mortality and morbidity that those of same age not getting married
• Marriage is said to have a selective effect in respect of mortality and morbidity