This year I have spent a lot of time talking about the Mortality Ratio Bucket. What is a mortality ratio? What is this bucket? Why is it important?
Let’s answer these questions. A mortality ratio (MR) is the ratio of an individual’s mortality to that of correct “standard” mortality.
Example: The individual may have serious medical impairments. However, the standard mortality is taken from a table representing current mortality for people without serious impairments.
Standard mortality is measured by the actuarial symbol “q” meaning the probability of death within one year. So, a person with MR of 2 would be subject to double that standard mortality. (See chart for examples of MRs.)
We will discuss later the tremendous variation in mortality ratios. But first, let’s discuss the extreme importance of getting the MRs right. They are key to underwriting and pricing. They are key to determination of life expectancy. They are key to the sales process; that’s because client confidence is gained by providing customized insight into a person’s future.
What about all those MR variations? To start with, MRs vary according to medical impairment and the interaction of multiple impairments. They also vary by sex, smoking habit, attained age and socio-economic status.
Many mortality ratios are “less than 1,” meaning that the mortality is better than standard. “Never smoked” in the chart, is an example.
The new science of socio-economic underwriting produces many examples of MRs which are less than 1. Secular trends in MRs are also important, especially for ailments such as heart trouble that have seen dramatic improvements in treatment. It’s no wonder the MR variation has become so tremendous.
When I first entered the business in 1946, the available MRs would not fill a teacup. Now they fill a bucket and a tanker truck may soon be needed.
In the last few years, two developments have been filling the bucket: (1) great emphasis on blood and body fluid testing; and (2) great emphasis on old age underwriting.
On the first point, it has been discovered that people who satisfy all of the modern blood test procedures have much better mortality than average; this can lead to MRs lower than 1. Other blood conditions, such as high cholesterol, can lead to high MRs.
On the second point: Amazing amounts of business are being written at high ages, well up into the 80s. This has led to the need for high-age MRs on virtually all medical and underwriting conditions.
So, the bucket keeps filling. And let’s not forget–it’s a very old bucket.
The bucket is old because the mortality ratio system has been a vital part of the insurance business for nearly 100 years. Home office underwriters determine MR for every case.
Historically, 89% of cases have low MRs and are issued standard or preferred; 4% are uninsurable. The remaining 7% are issued with substandard table ratings. Table A means MR = 1.50; Table B means MR = 2.00; and Table H (5.00) is a typical maximum that would be issued. (See the chart for some table rating examples.)
As a historical curiosity, there used to be a Table AA, meaning MR = 1.25. That table was abolished; these cases are now just lumped into “standard.” Lumping into large groups is of course common; for example, Table B at MR = 2.00 really includes cases in the 1.75 to 2.25 range.
“Table shaving” is also common; for example, a case which looks like Table C might be issued at Table B. This could happen for competitive reasons or because there is internal disagreement about the MR on the case.
The insurance industry continues to improve its ability to serve all segments of the market. That’s why the mortality ratio bucket keeps getting fuller.