Ch 3 Life tables, underwriting, an intro to mortality analysis

Question 1

assessment method of funding

Answer 1

protection offered for specified period of time and necessary money to fund plan was raised by assessing each member an equal amount in advance.

Question 2

annual mortality rates

Answer 2

tabulated by age, sex and other factors

Question 3

dx

Answer 3

interval deaths, number of deaths occurring during interval

Question 4

qx

Answer 4

interval probability of death
probability of death during interval

Question 5

px

Answer 5

interval probability of survival
probability of survival during interval

Question 6

x

Answer 6

specified period of time, interval

Question 7

Ex

Answer 7

exposure during an interval (person X years)
persons exposed to risk dying X duration of interval exposure

Question 8

lx

Answer 8

number individuals alive at beginning of interval exposed to risk of dying

Question 9

qx

Answer 9

deaths / exposure

interval mortality rate, calculated by dividing # deaths occurring during interval by corresponding exposure
qx = dx/Ex

Question 10

edrx

Answer 10

interval excess death rate

Question 11

future values of fixed death benefit affected by?

Answer 11

inflation
-erodes future value
-claim occurring in future has less financial impact than shortly after policy issue. projected death claims are discounted for interest anticipated to be earned on investment

Question 12

growth of secondary markets (viatical/elder life settlement) threaten?

Answer 12

to reduce policy lapse rates
-adversely affecting profitability
-pricing assumptions discount future death claims for anticipated lapse rates, premiums paid to that time & accumulated interest, no longer exposed to risk of claim w/lapse
-keeping policies in force, potential to overestimate lapse rates when setting pricing assumptions leading to underestimation of actual mortality experience

Question 13

Population life table

Answer 13

tabulating death rates for large segments of population w/o regard to individual health, socioeconomic status or employment status
-segmented by sex, race, residence
-avg mortality rates across large segments of gen. pop

Question 14

period life table (current)

Answer 14

tabulating death rates for particular period of time for individuals of different ages at time mortality data was collected
-1-3 yrs
-depicts death rates for large # of birth cohorts (groups)

Question 15

cohort life table

Answer 15

tabulating year-to-year death rates for group (cohort) of individuals born around same time
-limits: only historical, does not predict future rates
types:
select & ultimate (basic)
annuity
group life
pension life
standard & ordinary
disabled life

Question 16

basic table (select and ultimate, standard or better rates)

Answer 16

used to price life insurance products
-tabulating death rates for individuals who purchased insurance at standard or better rates
-subdivided by tobacco use and by select and ultimate periods
-higher proportions from higher socioeconomic groups and lower proportions of disabled/ill health
-non-tobacco select mortality rates substantially lower

Question 17

select factors

Answer 17

scalar factors applied to life tables to reduce mortality rates to levels thought to be attractive to potential life insurance buyers while maintaining achievable mortality goals through the combination of target market selection, underwriting, and anticipated secular (gen. pop) mortality improvements

Question 18

select period

Answer 18

period from policy issue to time at which the effect of underwriting has been assumed to no longer be effective in selecting standard or better risks from amount pool of insured persons
-20-25 yrs
-select portion of basic table is cohort life table

Question 19

ultimate period

Answer 19

period after select during which effect of underwriting is assumed to no longer be effective in selecting standard or better risks from entire pool of insured persons
-beyond 20-25 yrs
-ultimate portion represents period life table

Question 20

individual annuity tables

Answer 20

tabulating mortality rates of individuals who have purchased annuities
-lowest mortality rates

Question 21

group life tables

Answer 21

aggregate life tables, little to no underwriting
-rates on par w/ slightly higher than individual select and ultimate tables
-requirement to be actively employed

Question 22

social security/pension life tables

Answer 22

higher mortality rates close to but less than population
-rates of those actively employed at some time
-requirement be eligible for social security or pensions

Question 23

standard & ordinary tables

Answer 23

collective aggregate insured lives table in which select and ultimate rates are combined to arrive at collective rates for each age, thus ignoring effect of selection resulting from underwriting
-rates higher than basic select and ultimate
-CSO table
-mortality on par w/ pension tables

Question 24

disabled lives table

Answer 24

mortality rates of persons no longer able to work due to disability
-rates higher than general population

Question 25

Table rankings

Answer 25

Annuity
select & ultimate: NT/ST
group, life and annuities
social security/pension
CSO - standard
population
disabled lives

Question 26

comparing rates

Answer 26

no direct comparison
mortality rates observed in clinical population having impairment in question should be first compared to mortality rates in another population matched as closely as possible in other respects to population w/ impairment

Question 27

excess death rate

Answer 27

calculated using relationship of observed to expected mortality
-difference in death rates observed in population having the impairment compared to death rates expected in otherwise matched population w/o the impairment
-can be compared to select lives mortality rates to calculate select relative mortality ratio from which a table rating can be derived.

Question 28

edr

Answer 28

used to calculate amount of extra premium (flat extra) to be charged on annual basis to cover excess mortality risk
extra premium = edr + addl load for overhead/profit

Question 29

base pricing assumptions

Answer 29

reflect mortality expected for individuals in good health and free from impairments

Question 30

relative mortality ratio (rmr)

Answer 30

ratios between observed mortality rates and expected mortality rates
rmr=q/q1
-basis of classification system for rating substandard mortality risks in which a table of excess mortality risk represents 25% increase in risk over expected for standard mortality risks.

Question 31

substandard ratings

Answer 31

25% of extra risk = 1 table

Question 32

table rating

Answer 32

used to account for extra mortality risk by charging extra premium based on multiple of the base premium
-best way to charge extra premium to cover excess mortality cost if the excess mortality risk increases w/ each duration the policy remains in force

Question 33

flat extra rating

Answer 33

used to account for extra mortality risk by charging constant extra premium in addition to base premium
-only if excess risk is to remain constant
-risks: occupational/ avocation/ foreign travel
ex $5 per $1,000 per year
-can convert excess premium from flat into equivalent permanent table rating

Question 34

temporary flat extra

Answer 34

where excess mortality risk decreases w/ time
-avg cost of extra premium per $1,000 of coverage and duration in yrs over which exta risk is expected to be present
ex. $12.50 per $1,000 for 5 years
cancer
-avoids anti-selection for risks that decrease over time, minimizes selective lapsation if extra premium charged beyond time when risk returns to baseline levels.

Question 35

anti-selection

Answer 35

individuals who know or suspect they are at an increased risk of dying apply for and retain larger amounts of insurance compared to healthy individuals w/ less risk of dying

Question 36

3 objectives of temporary flat extra ratings

Answer 36

1. postponement period avoids speculative risks during early duration when mortality is very high
2. period over when temp flat extra is charged allows individuals to purchase affordable insurance when risk diminishes to more predictable levels, minimizing anti-selection.
3. returning to standard pricing at later duration minimizes anti-selection that would result from selective lapsation

Question 37

most common life tables to encounter

Answer 37

general population life: avg. annual mortality rates across large segments of gen. pop. w/o regard to socioeconomic status, health or tobacco use, race, sex, residence
basic select and utlimate life: annual mortality rates for persons insured at standard or better by age, sex, policy duration, tobacco use

Question 38

early durations after issue

Answer 38

mortality rates are lower than general population mortality rates