Annual Changes in Mortality Rates and Related Effects on Life Insurance Company Financials

Author: Michael Santos, Ph.D.; Vincent Richman, Ph.D.; and John Urbanski, Ph.D.

Publication: Journal of Applied Financial Research

Publication Date: 2017

Abstract:
Individual life expectancy has steadily increased for decades, however yearly changes in mortality rates are not uniform across all age groups. As Social Security Administration (SSA) Life Tables for 2010, 2011, and 2013 demonstrate, mortality rates for individuals in their 30s increase, while rates decrease for those in their 40s. These annual mortality rate changes may create a significant adverse financial impact for most life insurance firms. To insulate a life insurance firm's financials against the annual mortality changes, a life insurance firm must adjust by either annually increasing or decreasing premiums, or by establishing a portfolio of life insurance products to be sold to different age groups. Either approach would allow the variation in the annual death rates for one age group to offset changes in annual death rates for another age group; leaving the life insurance firm financials unaffected by these changes.