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.”
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