Older age mortality and SGUL: It's hard to get the combo right

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By Keith Dall | 22 October 2007

It is nearly impossible to attend any industry conference that doesn't have at least one session on the subject of older age mortality (defined as issue ages 70 and above for purposes of this article).

Why all the attention? Without a doubt, it is difficult to estimate older age mortality, but the real story lies in the many factors that complicate understanding mortality rates at older ages.

An often-mentioned reason for not being comfortable with older age mortality is lack of industry experience. That may seem odd to casual observers, as life insurance has been sold in the United States for more than 200 years. However, several recent changes have placed emphasis on fully underwritten policies issued at older ages.

First, there are simply more people at older ages than ever before.

Second, secondary guarantee universal life (SGUL) insurance products have only become popular in the past 10 years. This product provides permanent coverage with low premiums (relative to whole life) and low cash values. It places an emphasis on death protection (and is popular in the older issue-age market for planning purposes). By comparison, a whole life (WL) policy and most accumulation universal life (UL) policies focus on higher-premium funding and have large cash values at older ages, resulting in a very small net amount at risk.

Another factor is the recent and rapid expansion of the life settlement market and premium financing as a sales strategy. Most insurers selling competitive SGULs at older issue ages have seen a dramatic increase in percentages of sales at these ages.

These factors help explain the spotlight on older age mortality, but they do not explain the difficulty of estimating older age mortality, other than acknowledging that the older age market has experienced recent rapid expansion.

Changes in underwriting throughout the years have made it difficult to understand the slope of the mortality table or how mortality rates change with increasing age. More recent mortality tables have shown a steeper slope in mortality over the first 20 years. However, some insurers flatten out the slope, believing some of the steepness was created by underwriting advances and increases in underwriting classes.

As underwriting continues to evolve, it will have an ever-larger effect on mortality; the challenge is compounded by the difficulty of gathering sufficient company experience within an underwriting era.

Recently, companies have considered several strategies that may further complicate the issue. These include tightening underwriting to have more competitive rates, simplifying underwriting to significantly reduce time to issue, and including cognitive underwriting at the older issue ages.

Companies also differ in how mortality expectations are affected by the wearing-out of preferred mortality. When preferred underwriting began, most insurers did not recognize that preferred status would gradually wear off. Subsequently, ratios of preferred non-tobacco mortality to standard nontobacco mortality remained the same for all durations. But now, some companies are starting to recognize that some of the discount for being preferred starts to wear off in the later durations or at the older attained ages.

As well, companies differ in their use of mortality improvement factors. Industry studies clearly show that mortality has been improving over the years. Studies have shown, however, that although mortality improvement differs by gender, underwriting classes and issue ages, not all companies using an improvement factor recognize the difference by category.

There is also a large difference in opinion among current researchers of mortality improvement. One camp is convinced that the obesity problem in the United States or human genetic limitations will minimize future improvement in mortality, while others point to continued medical and underwriting advancements that may actually cause mortality improvement to increase.

All of this means that insurance companies have well-founded reasons for any differences in opinion with regard to mortality expectations at the older ages.

Time will tell how these differences in opinion will play out. It is clear that the death benefit protection focus of SGUL products will leave them most vulnerable to actual mortality experience as it unfolds. That is a major reason why many insurers are reviewing their pricing for this product. A few have pulled their product at older ages; others have raised rates; and some have tightened underwriting and other factors affecting pricing assumptions to be more competitive at the older ages.

The only certainty, then, is continued uncertainty and a continuing evolution of SGUL premium rates as knowledge of older age mortality continues to evolve.