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2003 Life Convention 11 November 2003
Copyright (c) 2003 Prudential. All rights reserved. Copying prohibited 1
Presentation to Actuarial Life Convention11 November 2003
ANNUITANT MORTALITY AND LONGEVITY RISK
Stephen RichardsHead of Mortality RiskPrudential
11/11/03 Copyright (c) 2003 Prudential. All rights reserved. Copying prohibited. 2
INTRODUCTION
Key player in individual and bulk annuity markets in U.K.
Longevity risk management critical
Dedicated three-man “Mortality Risk Unit”
Major contributor to CMIB data
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CONTENTS
Mortality transition
Mortality improvements
Rating factors
- Socio-economic group
- Gender
Open discussion
2003 Life Convention 11 November 2003
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MORTALITY TRANSITION
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MORTALITY TRANSITION
Distribution of age at death (males)
0 10 20 30 40 50 60 70 80 90 100
ELT 151990-92ELT 3
1838-54
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MORTALITY TRANSITION: Compression
Mortality compression occurs when the ages at death become increasingly concentrated in a narrower range.
A lack of mortality compression is an indicator of premature deaths.
Mortality compression differs substantially between even developed countries, with large differences even between genders within a country.
2003 Life Convention 11 November 2003
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MORTALITY TRANSITION: Compression
C50 is the shortest age range in which 50% of deaths occur.
Mortality compression appears to have stopped in England and Wales, although the modal age at death is still increasing.
Mortality compression is both more pronounced and still ongoing in Continental European countries.
72.9 73.6
80.1
86.2
30
40
50
60
70
80
90
1841 1896 1951 1991
Mod
al a
ge a
t dea
th
Modal ageat death
Source: Kannisto
- C50
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MORTALITY TRANSITION: Compression
10 11 12 13 14 15 16 17 18
France
Japan
England
Scotland
Korea, S.
USA
C50 for selected industrialised nations(small bar equals high mortality compression)
FemalesMales
Source: Kannisto
MORTALITY IMPROVEMENTS
2003 Life Convention 11 November 2003
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MORTALITY IMPROVEMENTS
Male mortality improvements in U.K.
0%
1%
2%
3%
4%
1969 1974 1979 1984 1989 1994 1999
Ann
ual m
orta
lity
impr
ovem
ent
Age 60
Age 70
Age 80
RATING FACTORS
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RATING FACTORS: Quiz
A. Adult height
B. Parents’ at age below 70
C. Leg length at age 15
D. Month or season of birth
Three of the following are predictors of future mortality experience. Only one says nothing - good or bad - about your life expectancy. Which is the odd one out?
2003 Life Convention 11 November 2003
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RATING FACTORS
It is crucial to know how long an annuitant may live.
A rating factor explains variation in life expectancy.
Traditional rating factors are age and gender.
Less common rating factors include purchase price and fund source.
There is a very wide choice of additional rating factors…
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RATING FACTORS: The obvious…and others
Other obvious rating factors include:
- Social class- Occupation- Geography- Smoking status- Diet
While some slightly less obvious rating factors include:
- Lifespan of mother- Annuity options- Marital status- Height
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RATING FACTORS: The illegal…to the bizarre
Some potential rating factors are illegal:
- Genetic markers- Race or ethnicity- Religion- Sexual orientation- Gender?
While some significant rating factors are little short of bizarre:
- Month or season of birth- Birth order- Age of father at conception- Leg length
2003 Life Convention 11 November 2003
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RATING FACTORS: Economics
Perfect risk classification is, however, not wanted.
Rating factors must be economic (cost-benefit trade-off).
Actuarial risk classification aims to cheaply and accurately classify individuals into reasonablyhomogeneous groups.
Many of these rating factors are statistically significant…
…but they are not all economically useful.
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RATING FACTORS: Explanatory power
Rating factor Variation explained
Age 80%
Gender 7%
Lifestyle/class 2%
Size 0.7%
Policy type 0.4%
Total 90%Source: Prudential figures
Some rating factors for life expectancy:
SOCIO-ECONOMIC GROUP
2003 Life Convention 11 November 2003
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SOCIO-ECONOMIC GROUP
Membership of a particular socio-economic group does not cause mortality differentials…
…but it is correlated with behaviours which do:
- smoking- diet and drinking habits- other lifestyle factors- income and wealth
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SOCIO-ECONOMIC GROUP
Many ways to classify people into socio-economic group:
- income- education level- occupation- housing tenure- car ownership
ONS1 Longitudinal Survey uses occupation.
Class I (professional) to class V (unskilled), with III (skilled) split into IIIN (non-manual) and IIIM (manual).
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SOCIO-ECONOMIG GROUP: Life expectancy
11
12
13
14
15
16
17
1972-76 1977-81 1982-86 1987-91 1992-96 1997-99
Mal
e lif
e ex
pect
ancy
at 6
5 in
yea
rsSource: ONS Longitudinal Study I
II
IIIN
IIIM
IV
V
2003 Life Convention 11 November 2003
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SOCIO-ECONOMIC GROUP: Differentials
-3
-2
-1
0
1
2
1972-76 1977-81 1982-86 1987-91 1992-96 1997-99
"Exc
ess"
life
exp
ecta
ncy
at 6
5 co
mpa
red
to II
IN
Source: Adapted from ONS Longitudinal Study
I
II
IIIM
IV
V
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SOCIO-ECONOMIC GROUP: Improvements
95%
100%
105%
110%
115%
120%
125%
130%
1972-76 1977-81 1982-86 1987-91 1992-96 1997-99
Life
exp
ecta
ncy
at 6
5 re
lativ
e to
197
2-76
figu
re
IIIIIINIIIMIVV
Source: Adapted from ONS Longitudinal Study
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QUIZ
A. Mortality improvements (CMIR17 v. long cohort)
B. Gender
C. Socio-economic group
We know of the importance of mortality improvements, gender and socio-economic group in longevity and annuity pricing. But which is most important?
2003 Life Convention 11 November 2003
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GENDER
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GENDER: EU Draft Directive
On 5th November 2003 the European Commission issued a draft directive under Article 13.
Covers gender equality of access to goods and services
Gender-rated insurance declared contrary to Article 13.
Justification centred on annuities and life expectancy.
The “justification” is a string of falsehoods and unsubstantiated claims…
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GENDER: EU Draft Directive
“There are a number of studies that show that sex is not the main determining factor for life expectancy.”
Age is the main factor. Gender is the second-most important factor in every EU member state.
2003 Life Convention 11 November 2003
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GENDER: EU Draft Directive
“Other factors are shown to be much more relevant, such as marital status, socio-economic factors, […] and nutritional habits.”
These are undeniably important. However, they actually apply more to men than women:
Mortality of the recently-widowed women does not rise nearly as much as that of recently-widowered men
Gender differences actually widen for “lower” socio-economic groups.
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GENDER: EU Draft Directive
“This leads one to the conclusion that gender differences in life expectancy are not purely biological.”
Oestrogens protect circulatory system…
…while androgens (testosterone) damages it
Males more susceptible to diet-related cancers
Males have weaker immune systems
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GENDER: EU Draft Directive
“The overwhelming majority of men and women (about 86%) die around the same age.”
US statistic, not from any EU member state!
Applies to overlap in age at death
Statistic is misleading, but linked to compression
Varies by EU member state (c.f. France and U.K.)
Many EU states have a lower statistic
2003 Life Convention 11 November 2003
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OPEN DISCUSSION