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Life Health > Life Insurance

The High Cost of Living

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Last month, the New York Times reported that government agencies were undertaking the emotionally sticky and subjective job of placing a statistical value on life. The issue has been a canvas for debate between regulatory agencies that calculate such figures and businesses that have to abide by them. So where does that leave the life insurance industry, which is intimately involved in the valuation of life?

Life insurers are tasked with the unfortunate duty of placing values on life while supplying the insured with a policy tailored to their individual needs. The very fact that the life insurance industry is dealing with the issue on a person-by-person basis makes it a little harder for them to disassociate themselves from the individual and look at the value of life from the standpoint of government agencies or, say, trial lawyers.

The model that the Environmental Protection Agency (EPA) used last year in proposing tighter restrictions on air pollution differs widely from the 2001 CSO Table that life insurers implement. According to the EPA, the value of statistical life is determined by a formula that calculates willingness to pay for minor reductions in mortality risks. An example provided by the EPA is as follows: suppose each person in a sample of 100,000 people were asked how much he or she would be willing to pay for a reduction in their individual risk of dying of 1 in 100,000, or 0.001%, over the next year. This reduction of risk implies that one fewer death would occur among the 100,000 people over the next year on average, which would then be labeled “one statistical life saved.” Supposing the average response to the question posed was $100, the total dollar amount that the group would be willing to pay to save one statistical life a year would be $100 per person x 100,000 people or $10 million. This is how “value of statistical life” is calculated.

Trial attorneys on other hand, use no such standard mathematical calculation. The valuation of life is very much subjective and done on situational basis. The value of life in a wrongful death suit usually is derived by taking into account the amount of conscious pain and suffering that the deceased individual experienced before death. If death is immediate, the monetary value is zero. If there is a significant amount of conscious suffering a rough amount may be $250,000 for every ten or fifteen minutes suffered, according to Jersey City, NJ based trial attorney Raoul Bustillo. When factoring in the economic loss to the family, the attorney will usually hire a locational economist as well as employing the use of tax returns to extrapolate a value. It is worth noting that if no one economically depends on the deceased person in question, such as children, and if there is no spouse, then the value is placed at zero.

The value of statistical life would not be of much use to trial lawyers. It would not be of much use to insurers either, even if they were not required by the NAIC to use the 2001 CSO Table. Even though the value of statistical life may be of some interest to them because it gauges how individuals calculate risk, it would not be profitable, prudent or legal for insurers to use the model. According to Cathy Ho, Product Actuary with LIMRA, Windsor Conn., underwriting would not change even if life insurers took into account the “value of a statistical life.”She said that underwriting would most likely change with the direction of a company’s goals. Pricing would not change until actual data shows a change in mortality.

This leaves insurers with the arduous task of taking into consideration a variety of factors when placing a value on life. They do not have the luxury that the government does to step back, detach itself, and attach a value to life.

Classically, an obstacle to the sale of life insurance has been the natural aversion that people have to discussing their own mortality. The value of statistical life softens the grim nature of this discussion because it deals with how much one would spend to avoid a given risk. The situation is hypothetical and clouded in a crowd of other people. The “what are the chances of this happening to me?” mantra plays a strong role in the philosophy behind the calculation that the individual may make. This philosophy is not meant for the practical calculation of the value of life on an individual basis, nor was it meant to be.

A parent of three with a mortgage, in fairly in good health, who needs to supplement the basic life insurance offered at the workplace, is not going to use the value of statistical life theory to secure the future of his or her family in the event of an untimely death. Just as the life insurance agent selling the policy is not going to employ the theory either.

When PBS rebroadcast its American Experience series on Ronald Reagan in early February, it mentioned how Reagan was able to detach himself from the impact that his policies would have on the individual because he viewed those policies as affecting a mass number that did not necessarily correlate to people and families. But when he was confronted at a town hall meeting with an individual who was adversely impacted by such a policy, it would weigh heavy on his psyche. Government bureaucracies do not, nor should they, have the leisure to devote themselves to individuals and the unique situations that every person and family are in, which is why they can employ the value of statistic life model.

When selling life insurance, that becomes difficult. Though no one is under the illusion that life insurance is not a business that has to be solvent, profitable and savvy, agents have to toe a fine line because they are selling to individuals who don’t see themselves or their families as potential risk or potential profit centers.


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