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2003 Life Convention 11 November 2003 Copyright (c) 2003 Prudential. All rights reserved. Copying prohibited 1 Presentation to Actuarial Life Convention 11 November 2003 ANNUITANT MORTALITY AND LONGEVITY RISK Stephen Richards Head of Mortality Risk Prudential 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 11/11/03 Copyright (c) 2003 Prudential. All rights reserved. Copying prohibited. 3 CONTENTS Mortality transition Mortality improvements Rating factors - Socio-economic group - Gender Open discussion

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Page 1: Presentation to Actuarial Life Convention 11 November 2003 ... · 2003 Life Convention 11 November 2003 Copyright (c) 2003 Prudential. All rights reserved. Copying prohibited 10 11/11/03

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

11/11/03 Copyright (c) 2003 Prudential. All rights reserved. Copying prohibited. 3

CONTENTS

Mortality transition

Mortality improvements

Rating factors

- Socio-economic group

- Gender

Open discussion

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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.

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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

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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?

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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

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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

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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

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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?

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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.

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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

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OPEN DISCUSSION