The release of the 2008 VBT tables
New mortality tables and the Life Settlements Industry
Last March, the Society of Actuaries released a new mortality table –the Valuation Basic Table (VBT) 2008- which replaces the VBT 2001. The introduction of a new table has a great impact to anyone involved in the longevity industry, as it is one of the key inputs for building the pricing models.
A mortality table tries to ascertain the probable number of years any person of a given age and of ordinary health will live. Such tables are used by insurance companies to underwrite risk, develop pricing models and determine the premium to be charged for those in the respective age group. Because of the permanent socioeconomic and technological changes, the tables need to be updated regularly.
The 2008 VBT is based on data from 2004 and has more senior lives than the 2001 VBT. The new table introduces an extension of life expectancies when compared to the previous version. “The 2008 VBT has longer life expectancies for males, non smokers (10% to 16% longer) and also for females, non smokers (2% to 4% longer), with no significant variations in the life expectancies of smokers”, points a report from the actuarial firm Melinsky, Pellegrinelli and Associates, an Abelica Global Correspondent Firm.
Life insurance companies vs life settlement industry
Life insurance companies and life settlement investors look at the mortality risk from two different angles. Insurance companies focus on the early stage of the mortality curve - individuals aged 25 to 65 -, while life settlement investors look at the later stage - people aged 65 and over - (see the graph above). This has a significant impact in how each industry measures and prices the mortality risk:
Life insurance companies use the VBT tables as the basis for setting reserves and the tables are developed to be conservative for that purpose, which means they represent a higher underlying mortality. For the life settlement industry, this implies a non-conservative approach, since higher mortality means shorter LEs.
A second challenge for the life settlement market is that the VBT tables are less reliable at the more advanced ages due to the lack of large scale experience in this area. Even the VBT team that developed the tables pointed that "the industry data loses almost all credibility beyond age 85". Thus, for older ages, the tables tend to equal population mortality with life assured mortality. This is a conservative stance in the life insurance industry, but it is certainly not for the life settlement market.
Furthermore, the VBT tables do not consider claims greater than $ 2.5 million, though in the life settlement industry, face values are often much higher than that. Again, this introduces a distortion when trying to assess life expectancies for policies over the US$ 2.5 million mark.
|
 |
Source: Melinsky, Pellegrinelli and Associates
Source: Fasano Associates
Because of all these reasons, life expectancy providers that generate the reports for the life settlement industry have started to review and adjust their underwriting methodologies to increase the accuracy of the life expectancy estimations for the 65-and-over age group.
Last February, life expectancy provider Fasano Associates said it has developed new mortality tables for the over-65 age group. Mike Fasano, president of Fasano Associates, said in a statement that he plans to use multiple mortality tables in the rating of each individual. "We have undertaken extensive research on mortality in the over-65 market, which shows distinct mortality patterns that vary by the severity, or mortality rating, of the individual's health condition," he said.
Also, starting from September 16th, 21st Services – another major life expectancy provider - will start using a new estimation model, based on the new VBT 2008 and recent research. “Since life insurance companies can exclude older aged clients through the underwriting process but the life settlement market desires LE determinations on them, 21st Services must look for new sources of data with which to enhance its underwriting methods”, stated Vincent Granieri, chief actuary with 21st Services.
In Centurion Fund Managers, we are closely following the recent developments and our group of actuaries is evaluating the potential impact of these changes in our business. We have also contracted and independent actuarial company - Melinsky, Pellegrinelli and Associates - to study the impact of the VBT 2008 on our valuation methodologies. Life settlement investments, unlike bonds, do not mature on a guaranteed date. Thus, the life expectancy estimation of the insured is the cornerstone of a life insurance policy’s valuation and a key point in reaching the desired returns..
For furhter information, please contact us at info@centurionfundmanagers.com or at +44 (0) 207 079 5882.
 Download the PDF version
|