Writing Life Insurance At Extreme Older Ages
The market for older-age fully underwritten life insurance has expanded in recent years to the point that insurance companies often are writing fully underwritten life insurance to age 90.
Do the issuing companies have a good understanding of the mortality risk they are accepting when selling large policies to insureds at these extreme older ages? This article explores that question.
Over 20 years ago, few life policies were issued to insureds above age 65. With the growth that has occurred in the “final expense” market in recent years, however, many policies now are being issued to insureds above 65. These final expense life policies generally are written with face amounts of $5,000 to $30,000, and they use a simplified issue application with few underwriting questions.
Also, about 20 years ago, growth in “pre-need” insurance began. These policies generally have low face amounts, averaging about $5,000, and are issued on either a simplified issue basis or a guaranteed issue basis. Many pre-need insurance policies have been written in the last 20 years, generally on insureds between the ages of 65 and 90.
Because the final expense and pre-need policies have been around for some time, insurers have a pretty good basis for setting rates for the policies. They can predict within a fairly narrow range what profitability to expect from this business.
This is not true with fully underwritten business, however, especially for very large policies (over $1 million face amount). Only recently has the market for fully written life at ages over 65 taken off. This has not provided enough time for actuaries to gather mortality experience at these higher ages in order to price the products accurately.
A few studies have been published in recent years concerning this, but the data has been sparse, especially at issue ages over 80. Therefore, without good mortality data, the actuary is left to estimate expected deaths to determine premium rates at these older ages. (This explains why sessions are crowded at actuarial meetings that discuss underwritten, older-age mortality.)
Table 1 shows the significance of the mortality assumption for older-age policies. The representative mortality rates are compared for a blended male and female, issue age 80, for policy durations 1, 5 and 10. Rates are shown assuming guaranteed issue, simplified issue and fully underwritten policy. The rate differences are significant.
Years ago, actuaries would tend to price very conservatively when data was not available to determine pricing assumptions. In todays competitive marketplace, however, the actuary often is pressured to take greater risks and price more aggressively, which can lead to mispricing in favor of the consumer.
Because of scarcity of older-age mortality data and information on other pricing assumptions, premium rates at extreme older ages are quite diverse. As experience is gathered at the older ages and mortality studies are published, the rates across the industry will tend to come together.
An added complexity with insuring the extreme ages is defining underwriting categories for older-age insureds. What does it mean that an age 85 insured is “standard”? Because of different definitions across companies, it is difficult to create a mortality study that is meaningful. Over time, though, these definitions will be resolved and premium rates for older ages will converge.
Table 2 shows the diversity in premiums for a whole life policy for a male, issue age 85, best underwriting class, $500,000 policy. All 4 companies shown are rated A+ or better by A.M. Best, and they were the first 4 companies selected for our sample.
Long term care insurance products have gone through a similar evolution in recent years. Perhaps the life insurance industry can learn from that and apply it to the older-age life insurance products. The initial LTC products had diverse premium rates across the industry. Over time, many of the products were found to be underpriced, often due to underestimating claims cost and/or underestimating persistency.
Most LTC policies were guaranteed renewable, allowing the insurer to adjust premium rates. That is not the case with older-age life policies. If the life product is underpriced, the insurer is left with an unprofitable product unless product features can be adjusted to improve profitability.
Do life insurers have a good understanding of the mortality risk they accept when selling large policies to insureds at the extreme older ages? Possibly not now, but the industry is learning, knows much more now concerning older-age mortality than a few years ago, and will learn much more in an additional few years. Until then, expect the industry to have a wide range of older insured premium rates.
Kent C. Scheiwe, FSA, MAAA, is a principal in the Indianapolis office of the Milliman actuarial consulting firm. He can be reached via e-mail at email@example.com.
Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.