Life Insurance Actuaries
As discussed in the article “How Life Insurance Companies Make Money,” insurance companies collect revenue from their premiums that the policy owner pays. How do they decide how much to charge? The answer is a function of the actuarial data.
Insurance companies employ actuaries to collect critical information about various types of people. The following is an example of actuarial data from 2003 supplied by the United States Social Security Administration at http://www.ssa.gov/OACT/STATS/table4c6.html.
| Life Expectancy in 2003 | ||||
| Age | Male | Female | ||
| Death Probability | Life Expectancy | Death Probability | Life Expectancy | |
| 0 | 0.76% | 74.40 | 0.61% | 79.60 |
| 5 | 0.02% | 70.07 | 0.02% | 75.18 |
| 10 | 0.01% | 65.13 | 0.01% | 70.22 |
| 15 | 0.06% | 60.20 | 0.03% | 65.27 |
| 20 | 0.13% | 55.46 | 0.05% | 60.40 |
| 25 | 0.14% | 50.84 | 0.05% | 55.54 |
| 30 | 0.14% | 46.16 | 0.06% | 50.69 |
| 35 | 0.17% | 41.48 | 0.09% | 45.86 |
| 40 | 0.25% | 36.88 | 0.15% | 41.11 |
| 45 | 0.39% | 32.40 | 0.23% | 36.46 |
| 50 | 0.57% | 28.09 | 0.32% | 31.91 |
| 55 | 0.81% | 23.95 | 0.49% | 27.47 |
| 60 | 1.23% | 20.00 | 0.77% | 23.21 |
| 65 | 1.88% | 16.33 | 1.20% | 19.20 |
| 70 | 2.89% | 12.98 | 1.89% | 15.45 |
| 75 | 4.54% | 9.99 | 3.02% | 12.04 |
| 80 | 7.17% | 7.43 | 4.95% | 9.00 |
| 85 | 11.70% | 5.29 | 8.54% | 6.43 |
| 90 | 18.86% | 3.68 | 14.67% | 4.45 |
| 95 | 28.74% | 2.59 | 23.64% | 3.09 |
| 100 | 38.23% | 1.95 | 33.00% | 2.25 |
| 105 | 48.79% | 1.46 | 44.16% | 1.63 |
| 110 | 62.27% | 1.06 | 59.09% | 1.13 |
| 115 | 79.47% | 0.74 | 79.08% | 0.75 |
Actuarial tables are basically probabilities of when groups of people will die. Notice that a person born in 2003 (age 0) is expected to live 74 more years, and an 80-year-old person is expected to live 7.43 more years. That’s why a life insurance company would charge a policy holder much more to insure a person of greater age.
Clearly, life insurance companies worth billions of dollars have more up to date information. Also, they track historical data to compare them with the actuaries’ estimates.
In addition to age and gender, insurance companies are concerned with habits of smoking, drinking, travel, and recrecreation as well as medical history.
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