2010 Insurance Studies InstuteEvoluon of Life Expectancies in the Life Insurance Secondary Market… Current Trends and New Developmentspage 2
Early Genus and Use of Mortality Tables
A “mortality table” is a stascal table showing the probabilityof death at each age. It is usually subdivided by gender andsmoking status. A mortality table represents a large group of people covering a long period of me. Mortality tables areused in a wide variety of circumstances where it is importantto know how long a person is approximately expected to live,given their unique circumstances.The need to esmate a person’s life expectancy began with theRomans. They are presumed to have created mortality tablesfrom extensive census and death data, and used those tablesto determine the value of life estates. However, not muchknowledge of mortality tables was recorded unl 1693, whenDr. Halley, a Brish astronomer, published the rst tables of any importance.
Dr. Halley created the table from the registryof deaths in the city of Breslau in Silesia, from data taken overa period of ve years. Before the middle of the eighteenthcentury, most mortality tables were formed from observaonsmade in the city of London. The mortality was generally low. In1746, M. De Parcieux published the “Essai sur les probabiliesde las Duree de la Vie Humanie” which had several mortalitytables constructed from lists of nominees in the Frenchtonnes and from death registers of dierent religious houses.The mortality rates were higher than Halley’s.The rst tables generally used for life insurance pricing inmodern mes were the North Hampton Tables, created by Dr.Richard Price in 1771. He formed the tables by counng onlydeaths, and without using census data. The tables were basedon faulty construcon and represented excessively high deathrates. Thereaer, the actuarial science of creang mortalitytables expanded to include data represenng gender, smoking/non-smoking, race, infancy, industries, educaon, geographyand other characteriscs.The rst mortality tables of any scienc value were created bythe American Society of Actuaries (“SOA”) in 1916. The tableswere constructed using the 1910 U.S. Government census dataand deaths recorded in 1909-1911 in certain northeasternstates, and were representave of the populaon in thatregion.Through the ensuing years, numerous mortality tables havebeen created by the SOA, U.S. Government and others. Thesetables have been used to price life insurance, annuies, businesscontracts, and many special applicaons, and have evolvedthrough much iteraon. The most common use of a mortalitytable is to esmate the life expectancy of a person. The pracce,science or art of determining the esmated remaining life of aperson is known as “life expectancy underwring.”
Esmang How Long Someone Will Live Is Based OnEstablished Sciences
At an early age, most everyone intuively knows that it is notpossible to exactly determine when a person will die, exceptfor forced situaons. However, numerous business deals andcontracts rely on such esmates. When a life insurer receivesan applicaon for a new life insurance policy, the insurergathers data based on the applicant’s age and health condionsto esmate how long the insured may live. The same thinghappens, more or less, with an annuity contract and when a lifeinsurance policy is sold in the life insurance secondary market.When someone esmates a life expectancy, they typically usecondenal medical informaon to create a series of debits forunhealthy condions and credits for healthy condions, whichare totaled to a score that indicates if the person may live longeror shorter than average. If the score is greater than 100, theperson is expected to live shorter than average (a higher scoremeans more health issues exist). If the score is less than 100,the person is expected to live longer than average. This scoringprocess is known as the “debit/credit methodology,” and thescore is the person’s mortality rang, or relave mortality.For example, a mortality rang of 200% would mean that aninsured (or, more accurately, a group of similar people with thesame mortality rang) would be expected to die at twice therate of death of a normal, healthy populaon. The score, ormortality rang, is applied to an actuarial mortality table thatis selected to be most representave of the populaon beingevaluated.
The product of the mortality rang applied to themortality table gives the probabilies of dying (and living)every year, and this forms the basis for compung an insured’slife expectancy. Here are some of the condions that are oenconsidered in the scoring:1.Uncontrolled high blood pressure, elevated cholesterol,obesity and other cardiovascular risk factors2.Decreased kidney funcon3.Depression and mood disorders4.Asthma, emphysema, sleep apnea and other respiratoryimpairments5.Diabetes and uncontrolled blood sugar levels6.Cancers other than skin cancer7.Coronary artery disease, heart valve impairments,cardiac arrythmias, heart failure, and othercardiovascular impairments8.Stroke or TIA history9.Memory loss or other possible symptoms of demena10.Morbid obesity