The mortality risk for individuals historically declined for fully underwritten life insurance remains unclear due to a lack of direct mortality data. With the rise of accelerated underwriting programs, which bypass traditional requirements like physical exams, blood tests, and urinalysis, these previously uninsurable individuals are now obtaining policies and entering the insured mortality pool.
Ehren Nagel, Head of Actuarial Innovation, US Life, delves into the critical aspects of the shape and severity of these risks, as detailed in a recently published whitepaper using data collected by Milliman.
Despite its importance, decline mortality has been underexplored in the life insurance industry. Historically, the industry has not tracked customers who do not have active insurance policies and now faces limitations in data availability, particularly concerning declined applications and their subsequent outcomes. This lack of data has made it difficult to study decline mortality comprehensively.
Another barrier has been the complexity of evaluating decline mortality risk using traditional underwriting manuals which were designed only to segment insurable risk and say very little if anything about how to quantify risk beyond the insurable range.
Market inertia also plays a role. The life insurance industry for the last thirty years has generally focused on creating more refined segmentation of the healthiest 80% of applicants into ever more granular classifications. As a result, the potential insights offered by analyzing thresholds for declinable mortality have not been fully realized.
The mortality curve for declinable risks is highly front-loaded compared with traditional select period expectations, meaning that a simple point-estimate scalar fails to accurately capture the true risk profile and timing of claims for declined applicants entering the insurance pool. The industry assumption of 500% relative severity for declinable risks may be suitable for long-duration life insurance products where the early differences in the shape of mortality eventually even out, but the impact on shorter-term product structures can vary significantly.
Additionally, the tables of expected select mortality for females is significantly lower than males, and therefore the relative impact of declinable risks is more significant compared to those expectations.
The research indicates that the impact of declinable risks should be modeled as more than a single point estimate scalar, and the present value of the mortality impact can range from at least 400%-850%, so the pricing impact of declinable risks slipping into AUW programs should be carefully considered based on male/female and product design.
While this analysis of declinable risks should serve as a starting point for a more in-depth study of the mortality shape and severity of historically declined individuals entering the insured AUW risk pools, it is still limited by the lack of direct decline risk data, and the whitepaper’s conclusions are based only on proxy approximations of traditional underwriting decisions.
To better understand and manage the risk of decline mortality, life insurers need to adopt a more data-driven approach. The first step is to improve data collection and analysis, focusing on the outcomes of declined applications.
Integrating this data into underwriting models is crucial. Insurers should adjust their models to account for the mortality risk of declined applicants, ensuring more accurate risk assessments. This will help prevent adverse selection and enhance the overall performance of the portfolio.
Additionally, insurers should regularly audit their AUW programs and quantify the impact of decline mortality on their portfolios. This ongoing evaluation allows for timely adjustments to underwriting criteria and risk models, ensuring they remain effective as market conditions change.
Continuous learning and adaptation are key. As more data on decline mortality becomes available, insurers must stay proactive in refining their strategies, ensuring they can effectively manage this risk and maintain portfolio health.
Given the potential long-term impact on life mortality experience and AUW product profitability, we believe there is a strong argument for an industry sponsored study of the actual declinable risk pool. Research into declinable risks is necessary for the long-term sustainability of such programs and the continued improvement of life insurance distribution and the customer journey.
As a top-tier global life reinsurer, we continue to expand and develop our suite of mortality quantification and monitoring tools to empower life insurance carriers to create data driven, actionable insights around claim expectations and mortality slippage.
Contributor: Ehren Nagel, Head of Actuarial Innovation, US Life