As long as there has been a life settlement market, there has been disagreement over the ‘best’ or appropriate mortality tables for determining life expectancy. The subject has been the source of countless white papers, articles, and verbal sparring during industry panel discussions between actuaries, underwriters, and researchers representing Life Expectancy Provider (LEP) firms. As an underwriting professional, I always come back to what I have always felt to be a relevant stance, which is: “You can have the best mortality table in the business, but if the risk assessment applied by the underwriter is incorrect, the output from the table is going to be worthless.”
Historically, the relationship between actuarial and underwriting professionals has been symbiotic on the life insurance side. We develop our work in the same ecosystem, and both professions’ decisions will affect each other’s assumptions. However, it is critical to distinguish that actuarial philosophy is based on mathematical theory, based on large homogenous data populations. In contrast, the underwriting philosophy is based on health impairments with unique factors reflected at an individual applicant or insured level. So, when actuarial assumptions do not come to fruition, there is a deep dive into how the individualised risks, with shared components, were underwritten. These typically cause changes reflected in the mortality tables. Essentially, the underwriting process drives mortality table changes and outcomes.
Consider the following: actuaries live in a world of large numbers. They typically relate it to ‘if we start with 1,000 lives’ when they break down examples. However, underwriters, while understanding that debit and credit methodology takes the law of large numbers into account, we live in a world of assessing the individual in front of us and all of the aspects of the risk that may be relative to the impairment but also unique to that individual.
For example, when you take the broad category of coronary artery disease, actuarial science (for developing appropriate outcomes relative to the risk) will start with the Framingham heart study out of MA (circa 1948). Framingham has been a serial decade study of individuals and their family members tracking specific cardiac risk factors over generations, starting with over 5,200 original participants. This study works well, from the diversity, population size, and duration (years of study time) for actuarial science, to determine, with reasonable certainty, the mortality impact of specific risk factors for developing disease and stability (or progression) of disease over time. This insight into crucial risk components is incorporated into underwriting manuals that guide the underwriter in capturing all relative risk factors the same way for every cardiac risk. However, the studies, the actuarial science, and the manual do not provide insight into the nuance of each risk. Meaning the data will indicate in broad terms a potential outcome. Still, the information underwriters develop on applicants or insureds is not purely broad-based impairment data; it is very specific to that individual.
What does this intersection of actuarial science versus underwriting do? Suppose you are an underwriter that ‘underwrites by the book’ and applies what an underwriting manual suggests without considering the unique factors of the individual. In that case, there is a high probability that you will over or under-assess the risk (by applying too many or too few debits or credits). Then, when using that outcome in the actuarial table, which could be the most relevant table for the population of risk being assessed, the estimated life expectancy may be useless in pinpointing the risk.
Based on life settlement-specific information noted in various articles, white papers, and presentations I ingest weekly, I have yet to see anything that focuses on the underwriting of the risk and how it impacts the mortality outcomes. Instead, most of the information is a continued argument over which table is best; Social security population being more relevant than insured lives tables, not sharing mortality tables because it is the ‘secret sauce’ of the process, layers of different tables to fit the risk, etc.
While actuarial science is critical and has a place in developing appropriate tables based on the unique factors of the population being underwritten, underwriting is where the discussion should focus, even if you are working with a LEP that establishes all outcomes on the table. If you do not understand the underwriting methodology or philosophy, and you are not being provided that insight by the LEPs you are working with (assuming you are speaking with someone that is a professional and certified Actuary or a Certified Underwriting Professional), it is to be expected that the outcomes seen in the block of business you are managing will be not what you thought you’d see.
Traci E. Davis, Certified FALU, FLMI, ACS is Chief Customer Whisperer, Chief Underwriter at Valkyrie Limited