dependence between mortality and morbidity: is underwriting scoring really different for life and...
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![Page 1: Dependence between mortality and morbidity: is underwriting scoring really different for Life and Health products? Andrey Kudryavtsev, St.Petersburg State](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649dab5503460f94a9a7e1/html5/thumbnails/1.jpg)
Dependence between mortality and morbidity: is underwriting scoring really different for Life
and Health products?
Andrey Kudryavtsev, St.Petersburg State University,
Russia
1.A. Stochastic Dependence9.A. Various Topics
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Aim
• to show that underwriting scores are quite close to each other for different kinds of insurance products, say for life and health insurance
• If so, there are problems in portfolio construction because of– risks may be more dependent,– possible higher degree of risk accumulation
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Idea
• to compare underwriting scores for life and health risks of a sample population
• Results– help to understand question how to use and
interpret the underwriting scores– do NOT help to solve any questions of
statistical estimation
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Methodology
• The sample population used is investigated from medical point of view
• The medical records and reviews were used to produce the averaging underwriting scores for life and health risks
• The scores are comparing to estimate the existence and degree of correlations
• The idea of modelling with copula is analysed
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The investigation
• paper is based on the special study with data collection for real group of people
• The number of people studied was 769• The study took place in 2000• The basic aim of the study was mostly medical• It included two parts:
– deep medical investigation– survey about people’s preferences in
healthcare
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The place of investigation
• Lyssye Gory – a small town in Central Russia in Saratov Region (downstream river Volga, south-east from Moscow)
• WHY:– typical agricultural province in Russia with
some industrial development– an appropriate professional mix of
population
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The target group
• people living in one medical district
• additional restrictions:– age interval chosen (from 20 to 49
including the latter age) – full set of the covariates (risk factors)
investigated
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Reasons for age restrictions
• Young people (younger than 20 year old) are presumably completely healthy: probably no extra life and health risks
• Old people (50+) are probably quite ill: the dependence observed between life and health risks is basically explained with poor health
• Only chosen age range (20 to 49) demonstrates balanced mixture of risk sub-groups
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The basic risk factor chosen
• job/profession (with additional information about working conditions)
• height/weight index• existing conditions (current diseases)• addictions (tobacco smoking and alcohol
drinking)• heredity factors (indirectly estimated)
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The Underwriting Manuals used
• Insurers:– Skandia International Insurance Corporation– Munich Re– Cologne Re
• There are some differences in those company-specific scoring procedures
• Resulting score was equal to arithmetic average between company-specific scores (all three manuals for life score and Skandia and Cologne Re manuals for health score)
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Underwriting scoring
• Risks estimated– Life (extra mortality score under whole life
insurance contract )– Health (permanent health (income
protection) insurance with 4 weeks of waiting periods)
• The choice of health scoring– it shows quite serious problem with health– too serious (very long) diseases are rare
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Rounding the individual scores
Score interval Final scoreup to 100 100
from 101 to 135 125from 136 to 175 150from 176 to 225 200from 226 to 275 250from 276 to 325 300more then 326 >300
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The distribution of people investigated
Life score
Health score Total
100 125 150 200 250 300 >300
100 97 43 1 2 143
125 20 78 41 2 2 13 156
150 1 6 16 33 6 56 118
200 5 12 28 45
250 1 26 27
300 5 5
>300 2 24 26
Total 118 127 58 42 20 1 154 520
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The distribution of people investigated
• there is some form of dependence• the coefficient of correlation is 0,6312• quite large – the actual t-test value is 24,6
that is much higher than the critical value• nevertheless, it is far from comonotonic (one-
to-one functional) dependence• the dependence could not be explained only
with mortality risks in permanent health (income protection) products as it is too high
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Standard/sub-standard proportions
Life risks Health risks Total
standard sub-standard
standard 97 46 143
sub-standard
21 356 377
Total 118 402 520
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Standard/sub-standard dependence: conclusions
• there is large enough dependence between life and health scores
• even for age intervals where it is not highly expected from the point of view of health dynamics with age
• actuaries and underwriters should be more careful with assumptions about the existence of independence between different Life and Health products in context of ALM and similar concepts
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Standard/sub-standard dependence: analysis
• The important result is that the proportion of standard risks is 27,5 per cent for life score and 22,69 per cent for health score
• It is too small• The odd of standard and sub-standard risks
(1:3) is different from usual odd for life insurance portfolios (9:1)
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Standard/sub-standard dependence: explanations
• The differencies could be explained witha) more conservative estimation under the
investigation than one in insurance practiceb) self-selection of potential clients with poor
healthc) full informational support in the investigation
vs. informational deficit in practice of insurance
• The latter explanation is important for insurance practice
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Dependence amongsub-standard risks
• Correlation coefficient is 0,84• It is even more than for all risks• The idea is to develop more formal model
than simple statistical coefficient, say, copulas
• It helps to understand the character of dependence in more details
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Marginal distributions
• They are conditional as the risks analysed are sub-standard
• The last two “boxes” (300 and ‘>300’) for health risk scores should be combined
• Both distributions were fitted using Maximum Likelihood method
• In both cases, the best goodness-of-fit (measured with χ2-test) was achieved on
Log-Normal distribution
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Marginal distributions
Values for
life risks health risks
Distribution parameter μ 3,761 4,545
Distribution parameter σ 1,043 2,088
Degrees of freedom 4 3
χ2-test 8,81 1,39
p-value 0,066 0,709
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Copula
• As a first choice, the normal copula could be used
where is the bivariate Normal distribution function with zero vector of expected values and covariation matrix
)(),(),( 112 vuvuC
),(2
1
1
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Copula: conclusions
• As marginal distributions in our case are Log-Normal, the copula simply gives the bivariate Log-Normal distribution
• Unfortunately, the model is not well calibrated• Other copulas tend to bring much more
complex formulas• Such models may be quite simple tools for
portfolio modelling in the context of ALM or similar concepts
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Thank You!