Mortality Tables and Life Insurance

The concept of mortality is a critical one to life insurers. Their business model revolves around providing coverage against mortality risk. However, actuaries do not only use mortality tables for life and health insurance specifically, but also for annuities – particularly when setting annuitization rates. Thus, mortality tables are a central tool to life and health insurers, and annuity providers.

• The mortality table defined

The mortality table is also known as a life table or actuarial table. It is constructed from death rates from observation over a limited period of time, and gives a complete age-by- age breakdown of the likelihood that a person would die by his next birthday. For insurance purposes, the table also incorporates smoking status, occupation, and demographic information.

Mortality tables are based on statistics collected from a particular segment of a population. Therefore, such statistics vary from country to country and even among regions within a country. In addition, mortality risks change over time – depending on the period to which it is indexed. For proper risk assessment, insurance companies need to relate the tables to the experience of their market. For instance, a Caribbean insurer would be unwise to use statistics from North America for a mortality table.

• Primary features of mortality tables for insurers

While such tables can utilize a number of variables, but the three most important variables are age, sex and tobacco-use. On an insurance application, the insured must reveal medical history, occupational information, and family medical history – among other things. These are also used to place the insured in a particular rating class, for which different tables are produced.

• How the mortality table is used

The mortality table is a fluid, dynamic mathematical construct. In the context of insurance, it is merely a tool to determine premium rates and benefits based on life contingencies. For better precision, actuaries must first select mortality tables that are up-to-date and reliable. The mortality table helps insurance actuaries to determine the expected mortality experience. Owing to differing experiences according to sex, males and females have different mortality tables, which is why life insurance premiums also differ according to sex. This tool also assists actuaries in determining the rating class of the insured.

• Mortality risk as just one factor in life insurance

Mortality tables illustrate the mortality risk, which, in turn, influences the insurer’s mortality experience. However, this is not the only factor that goes into the premium. Expenses, interest (for cash value policies) and coverage amounts can also affect premium rates. This is why insurance companies operating in the same market would have marginally different premium rates.

Insurance companies base specific rating classes on mortality rates. These classes include Preferred Best, Preferred, Standard and Tobacco. However, the starting point for actuaries is the mortality table, which serves as a tool and a guide to classifying insurance and annuity prospects.