Mortality Tables and Premium Calculation
We will cover following topics
Use of Mortality Tables
Introduction to Mortality Tables
Mortality tables, also known as life tables, are statistical tools used by insurance companies and actuaries to analyze mortality and survival patterns of a population over a specific period. These tables provide valuable insights into the life expectancy and mortality rates of individuals at different ages. They are essential for determining the risk associated with insuring individuals of various age groups and genders.
Construction of Mortality Tables
Mortality tables are typically constructed based on the data collected from large populations. The data includes the number of individuals at each age and the number of deaths that occur during a specific period. These data points are used to calculate probabilities of survival and death at different ages, enabling the estimation of life expectancies and mortality rates.
Types of Mortality Tables
Period Life Tables: Based on mortality data observed over a specific period, usually one year. Cohort Life Tables: Follow a specific group of individuals (cohort) throughout their lives, providing more accurate long-term mortality data.
Premium Calculation for a Policy Holder
Determining the Premium
The premium is the amount an insurance company charges policyholders in exchange for coverage. Premiums are calculated based on various factors, including the policyholder’s age, health status, gender, occupation, and the type and amount of coverage sought.
Role of Mortality Tables in Premium Calculation
Mortality tables play a crucial role in premium calculation by providing insights into the probability of a policyholder’s survival or death over time. Insurers use mortality tables to assess the risk of providing coverage to individuals of different ages and demographics.
Example: Premium Calculation
Let’s consider a life insurance policy for a 35-year-old non-smoker. Using mortality tables, the insurer can estimate the probability of the policyholder surviving for one year. Based on this probability and other relevant factors, such as the desired death benefit and the insurer’s expenses, the premium for the policy can be calculated.
Mortality Risk and Longevity Risk
Distinguishing Mortality Risk and Longevity Risk
Mortality risk refers to the risk of death faced by individuals, which impacts life insurance policies. Longevity risk, on the other hand, refers to the risk that individuals may live longer than expected, leading to higher payouts for annuities and pension plans.
Managing Mortality Risk and Longevity Risk
Insurance companies manage mortality risk by using mortality tables to assess the probability of death for policyholders. To mitigate longevity risk, insurers use factors like life expectancy estimates and cohort analysis to project future longevity trends.
Hedging Strategies for Mortality and Longevity Risks
Insurance companies can hedge against mortality risk by diversifying their policyholder base and employing reinsurance to spread the risk. To hedge longevity risk, insurers may use financial instruments, such as longevity swaps, to transfer the risk to third parties.
Conclusion
In this chapter, we explored the use of mortality tables in insurance companies, their role in premium calculation, and the management of mortality and longevity risks. Understanding mortality patterns and risk is fundamental for insurance companies to effectively price their products and manage their financial liabilities. By using mortality tables and adopting appropriate risk management strategies, insurance companies can offer competitive products while ensuring their long-term financial stability.