Actuarial science and the assessment of mortality risk has evolved slowly over the past few centuries.
This is all set to change. Exponential growth of data coupled with massive increases in computer processing power are accelerating the ability of insurers to understand and quantify mortality risk.
This paper presents a brief history of life insurance risk assessment, highlighting the major chronological milestones (see Figure 1). The last 50 years have seen important innovations and a rapid and relentless acceleration in the rate of change. Gazing into the future, wearable devices, genetic testing, and digital health data will have a transformational impact on life insurance risk selection processes.
Creation of modern insurance and age-based premiums
In the early days of formal life insurance there were virtually no underwriting barriers to obtaining life insurance cover. In the 1600s and 1700s, in England, friendly societies provided financial and social services. In exchange for money collected from members, they paid out emergency funds to help survivors with burial costs. The contributions did not vary by age and group sizes were fixed, limiting the ability to bring in new members. This meant most friendly societies struggled to keep up with rising claim costs as mortality rates increased as their members aged. To reduce the risk inherent in an aging portfolio, membership (both new and existing) was restricted to a maximum age of 45 or 50.
Royal astronomer and mathematician Edmund Halley made the first important attempt to quantify human mortality when he created the first survival table in 1693.[i] But it wasn’t until another 70 years had passed that age-based life insurance premiums were introduced.
In 1755, English mathematician James Dodson, a Fellow of the Royal Society, was declined due to being over age 45. Undeterred and building on Halley’s earlier work, Dodson demonstrated how insurance applicants could be accepted regardless of age as long as the annual premium reflected the applicant’s mortality risk. Sadly, Dodson died soon after he was unable to buy life cover. Five years after Dodson’s death, Equitable Life was founded in 1762 as the world’s first mutual insurer. Using Dodson’s mortality tables, age-based premiums allowed Equitable Life to offer cheaper cover, older ages at issue and for longer terms than ever available previously.[ii]
Due to the prevailing gap in gender mortality rates, evidence suggests gender-differentiated premiums were introduced in the U.K. before the mid-19th century and many years later in the U.S. The gender mortality gap grew steadily in both countries until the 1970s, primarily due to higher male smoking rates and major improvements in maternal mortality. Since the 1970s, the gender gap has tapered due to better male working conditions and lower tobacco consumption by men. [iii], [iv]
In pursuit of fair and equal treatment of the sexes, gender-neutral life insurance pricing was introduced throughout the European Union in 2012, resulting in unisex rates based on the gender mix within each insurer’s portfolio.
For most of the 18th and 19th centuries, infectious diseases were the top causes of death. Epidemics of tuberculosis, malaria, cholera, typhoid fever, diphtheria, and scarlet fever occurred frequently. No one knew what caused these diseases, and unfortunately effective treatments and prevention (vaccines) were not yet available.
During this period an insurer’s primary concern was to avoid the risk of insuring someone already suffering from an infectious disease. An insurance company physician, who was also typically a major shareholder of the company, acted as gatekeeper by medically examining all applicants to assess their acceptability. Additionally, this time period also saw the first crude attempts to screen out higher mortality risks. Applicants provided personal statements about their own and their family’s health history, along with written references from friends about their health, lifestyle and habits.
Although most applicants were either accepted or rejected, the concept of “rating up” riskier-than-average lives was introduced. This was typically achieved by “years to age” ratings; i.e., charging applicants as if they were older than their actual age.[v]
Birth of underwriting
The insurance industry changed very little until the beginning of the 20th century. Mortality data remained scarce, and without meaningful experience data insurers had to rely heavily on the clinical experience of their company medical doctors.
These doctors used medical knowledge and intuitive observations about family history and individual habits to form an opinion of a proposed risk. Actuaries worked alongside the doctors to set premiums for those accepted.
In the Roaring Twenties (1920s), increasing business volumes and rising medical fees made it impractical for every applicant to be assessed by a doctor and an actuary. To deal with the demand, insurers created clerical roles to take over the assessment process, leading to the formation of the underwriting profession in that decade.
At about the same time, an increasing number of insurers introduced detailed application forms. This allowed insurers to accept applicants who could not be easily assessed in person (e.g., those living in rural areas). Indeed, more than 150 years after the formation of Equitable Life, insurance applicants could now be accepted without a medical examination and without involving a doctor or an actuary.
The rise of non-communicable diseases
In the early 20th century a major shift occurred in the most common causes of death, which changed the focus of insurance underwriting. Along with the benefits of economic development came better disease control through cleaner water, better sanitation and improved personal hygiene. The emergence of antibiotics (1928) and the launch of large-scale vaccine production (1940s) supported the fight against the deadly infections that had plagued humans for millennia. For the first time in history, non-communicable diseases such as heart disease, stroke and cancer surpassed infectious diseases as the primary causes of death.
Survival curves from four points in time are illustrated in Figure 2 and show a significant improvement in the 1930 survival curve.Read More +