It could be said that mortality tables are the lifeblood of the life and annuity business. First and foremost, without them, insurers — and the state regulators that oversee them — would be unable to get an estimate of how much they should have in reserves.
But where do those tables actually come from? What do they mean for the average consumer and advisor? To get a get a primer on mortality tables, LifeHealthPro.com spoke to Jack Luff, below right, experience studies actuary at the Society of Actuaries (SOA).
Part of the work of the SOA, Luff explains, is to gather data from insurance companies, aggregate that data and then produce reports on mortality. The first step is to collect the actual mortality statistics, based on in-force life insurance and annuity policies, over a period of time, which then forms the basis of the experience table. To determine how much mortality has changed, experience tables are compared to earlier ones to determine if a new standard table is needed.
That experience table is then used as the root for a projection of mortality into the future, which is known as the valuation basic table (VBT). For example, mortality data between the years 1990-95 led to the creation of the 2001 VBT for life insurance, which projected mortality to the year 2001.
Perhaps the most important function of those reports is that they ultimately establish the commissioner’s standard ordinary table, or CSO, which estimates how much insurance companies need to have in reserves for payment of claims. With principles-based reserving coming into play, Luff says the CSO tables are “tightening up,” meaning they need to be compiled in a more timely fashion.
“The intention is that companies and regulators will have a process to produce updated standards quicker than has been the case,” Luff says.
Currently, the 2012 annuity valuation basic table is in the adoption phase. It has been passed by the NAIC and is now being reviewed by the individual states.
Two sets of tables
The society produces separate reports on life insurance and annuities, Luff points out. Annuity profiles are further broken into individual and group annuities.
That isn’t surprising, considering those products are on opposite ends of the mortality spectrum. “Improving mortality is good news from a life insurance product point of view,” Luff says. “For annuities, improving mortality is bad news because you are looking for companies to make sure they have the funds on hand to meet their obligations.”
The longevity factor in financial planning
Improvement in mortality, while welcome news for life insurers, doesn’t necessarily equate to a major leap in longevity. According to Luff, over the past 10 years, life expectancy has averaged an increase of about 0.1 percent per year, or one year over that period. “It’s increasing, but it’s not increasing by the [same] type of number mortality decreased by,” Luff says.
Yet probable longevity can have a significant impact on financial planning. While life expectancy at age zero is typically highlighted — that is, the life expectancy for a person born in a particular year — Luff says it’s just as important to calculate a person’s likely lifespan at a particular age.
“The fact that a person age 65 does have a significant chance of living well into their 80s is something that people don’t necessarily take into account,” Luff says. “They do tend to have a short, even if it’s 10 years, planning horizon, and there certainly is a very real risk from a financial standpoint of outliving your assets.”
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Factor in financial planning for a couple and longevity becomes even more of an issue. Life expectancy, Luff explains, is an average; therefore, some will live beyond that number.
“What is the point at which you have a 25 percent chance of living [beyond the life expectancy number] versus a 50 percent chance? That is usually a four to five year difference,” Luff says. “If you are talking about a husband and wife, they probably want to have funds on hand for at least one of them. Certainly, at age 65, that pushes the numbers well into the 90s. If you are in a position to do good financial planning, it’s definitely the sort of thing that should be taken into account. The traditional annuity product is good because it does mean the person can’t outlive their income but there are other considerations that come into play.”
Other dynamics, both individual and societal, can influence mortality in both positive and negative ways. Having the means to gain access to good health care improves a person’s mortality profile, which is “not unexpected,” Luff says.
In the early part of the 20th century, improvement in life expectancy was at the juvenile ages, Luff notes. Increased attention on heart disease has helped mortality come down, but obesity may impede that progress.
“One concern today is that the population is getting heavier and that could have a negative impact on future mortality,” Luff says. “No sign that is happening. Mortality is continuing to improve, but some feel we will reach a point that mortality might start to not improve or get a little worse because of obesity and diabetes and associated factors. We’re not there yet, and it may never happen because of ongoing research into health care that may offset some concerns.”