Chapter 21: Mortality and morbidity Flashcards
Discuss risk classification in life insurance.
Risk classification in life insurance
- 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 - 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 - 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
What are the principal factors contributing to variation in mortality and morbidity?
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
What are the principal factors contributing to variation in mortality and morbidity? - Occupation
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
What are the principal factors contributing to variation in mortality and morbidity? - Occupation
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
What are the principal factors contributing to variation in mortality and morbidity? - Housing
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
What are the principal factors contributing to variation in mortality and morbidity? - Climate and geographical location
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
What are the principal factors contributing to variation in mortality and morbidity? - Political unrest
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
What are the principal factors contributing to variation in mortality and morbidity? - Education
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
What are the principal factors contributing to variation in mortality and morbidity?
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
What are the principal factors contributing to variation in mortality and morbidity?
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
What are the principal factors contributing to variation in mortality and morbidity? - Genetics
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
What are the principal factors contributing to variation in mortality and morbidity? - HIV
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
What are the main types of selection?
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
Discuss temporary initial selection.
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
Discuss class selection.
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