Select Mortality Table: Analysis of Initial Years of Policyholders

August 31, 2024 3 min read Insurance Actuarial Science Select Mortality Table Insurance Actuarial Analysis Mortality Rates Policyholders

An in-depth look at Select Mortality Tables which consider policyholder mortality during the initial years post-issuance.

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A Select Mortality Table is an actuarial tool used in the insurance industry to reflect the mortality rates of policyholders during the initial years following the issuance of an insurance policy. These tables are crucial for determining premiums and reserves in the early policy years when mortality experience tends to be better due to underwriting selection.

Key Features of Select Mortality Tables

Initial Years Focus

Select Mortality Tables typically account for the first few years post-issuance, often up to 10 years. During these years, the policyholders, having recently undergone underwriting, generally exhibit lower mortality rates compared to a general population of similar age.

Underwriting Selection Factor

A key idea behind Select Mortality Tables is the “selection effect” from underwriting, where individuals recently evaluated for insurability are generally healthier than those in the general population or those not recently underwritten.

P_{t} = P_{0} \cdot S_{t}

Where:

\( P_{t} \) is the probability of survival at year \( t \)
\( P_{0} \) is the initial probability of survival
\( S_{t} \) is the selection factor at year \( t \)

Historical Context and Development

Historically, mortality tables were simpler and did not account for selection. However, with advancements in actuarial science and better data, the concept of varying mortality rates over the early years of a policy was introduced.

Types and Applications

Types of Mortality Tables

Select and Ultimate Mortality Tables:
- Initial years (select period), followed by ultimate (non-select) period.
- Useful in differentiating initial healthy period from later years.
Aggregate Mortality Tables:
- Averages mortality rates across a broad population without distinguishing initial years.

Applications in Insurance

Premium Calculation:
- More accurate premium setting during the early policy years.
Reserve Setting:
- Prudent reserve levels tailored to the better-than-average mortality experience in initial years.

Select vs Ultimate Mortality Tables

Select Tables:
- Focus on initial years post-issuance.
- Lower mortality rates due to underwriting.
Ultimate Tables:
- Consider mortality rates after the selection period.
- Higher and more stable rates reflecting normal population mortality.

Underwriting: The process of evaluating risk to determine insurability.
Mortality Rate: The rate at which death occurs in a particular population.
Reserves: Funds set aside to pay future claims.

FAQs

Why are Select Mortality Tables Important?

Select Mortality Tables provide a more accurate reflection of a policyholder’s mortality in the initial years post-issuance, leading to better pricing and reserve practices in the insurance industry.

How Do Select Mortality Tables Impact Premiums?

By recognizing the lower mortality rates immediately following policy issuance, insurance companies can set lower premiums initially, reflecting the reduced risk.

How Does Underwriting Affect Select Mortality?

Underwriting selects healthier individuals for policy issuance, thus impacting the initial years’ mortality experience, reflected in Select Mortality Tables.

References

Summary

The Select Mortality Table is an essential actuarial instrument that captures the improved mortality experience of newly underwritten policyholders in the initial years post-issuance. Its application ensures accurate premium calculation and reserve setting, accounting for the selection effect, ultimately benefiting both insurers and policyholders by reflecting true risk.

This entry explores the intricate aspects of Select Mortality Tables, providing valuable insights into their development, applications, and distinctions from other mortality tables.