Fifteen years ago, the life expectancy of Canadians was shy of 75. But medical advances and an improved quality of life have meant that many of us can hope to live past 80. Preferred rate insurance is profiting from this trend.
Highly attuned to any change in the average longevity of their insured, insurance company actuaries quickly adjust their prices downward when conditions improve. Today, the longer life expectancy is a bonus for preferred rate life insurance products.
"The past few years saw a dramatic plunge in T10 insurance prices," said Robert Mallette, Senior Vice-President, Development, at life reinsurer RGA.
In fact, the rise in life expectancy has made a deep imprint on preferred rate product structure. "The additional five to ten years of life expectancy is benefiting the insured, who can now enjoy super preferred rates, as opposed to customers who inherited regular rates," said Mr. Mallette. The gap was much narrower in the days when insurers differentiated simply between smokers and non-smokers.
To back his observations of the increased longevity of insured with preferred rates, Mr. Mallette analysed the evolution of T10 pricing over a period of nearly 30 years.
In 1975, the average premium was nearly $4 for each $1000 of insurance amount, he noted. "Then toward the late 1970s and early 1980s, insurers began to divide clients into smoker and non-smoker categories."
This sorting lowered the premium to $2.32 for non-smokers, a 42% drop. "In reality, non-smokers stopped subsidizing smokers," he commented.
In 1990, the situation evolved further, Mr. Mallette continued, with non-smokers paying $1.52 per $1000 of insurance.
In 2000, three years after the division between preferred rates and non-preferred rates was introduced, the non-smoker's premium cost 72 cents, again per $1000 of insurance. A decrease of almost 53% compared to 1990.
Mr. Mallette pointed out that the life insurance industry differentiates between the life expectancy of the general population and that of the insured population. "The insured population often has a better life expectancy because of better living habits, which amounts to lower premiums."
Longer lives still
Evidently, actuaries assume that life expectancy is constantly improving. "We take into account that life expectancy will lengthen over time. With medical advances, I anticipate that next year life expectancy will be longer than it is today," added Mr. Mallette.
He explained that actuaries' assumptions are not based on current life expectancy. "For someone at age 40, for example, we will price according to more optimistic assumptions than those of today's basic mortality table.
We know that the life expectancy of this person will improve over time and we take this into account."
Mr. Mallette estimates that a 40 year-old client who qualifies for preferred rates in 2002, has a life expectancy of 85.5 years. But in 2003, he predicts he will attribute the same person a life expectancy of 86.
He added that life expectancy has also changed the more "subtle" aspects of term insurance, such as the renewal age limit. "Fifteen years ago, the age limit for renewal of T10 policies was between 70 and 75. Today, the renewal period has reached 80 or even 85."
Brenda Buckingham, Vice-President, Sales, Life and Health at Swiss Re, explained that preferred rate products drove the rise in age at term insurance renewal.
Prices in freefall
François Lemieux, Actuary at the French reinsurer Scor Vie, feels that the extension of life expectancy is creating good business opportunities for the insured. "A prolonged life expectancy exerts downward pressure on life insurance products in general. The T10 price structure is directly linked to what we call the mortality cost, which is constantly declining, month after month," Mr. Lemieux observed.
While this downward pricing trend in term should continue, life expectancy has a less apparent effect on longer-term products such as T100. The fact that very few people will live until age 100 explains the more mitigated effect of life expectancy on these policies and similar products such as level universal life insurance.
Rates to decline
Richard Houde, Actuary with Optimum Re, says that life insurance premiums will decline as life expectancy rises, but the opposite is true of life annuity products. "If life expectancy improves, insurers will have to pay life annuities for a longer period."
This will mean less advantageous life annuity conditions for customers. The more insurers anticipate a longer life expectancy, the less generous they will be when it comes to annuity payments.
Will the price cuts fuelled by actuaries' optimistic assumptions affect product profitability? If actuarial forecasts are off the mark, then insurance products may prove to be more profitable, Mr. Mallette believes. "If the life expectancy is higher than that originally predicted by the insurer, the profitability of the product would be boosted."
But you can't count on this, he added. "The profit margin of life insurance products is slimmer than it was 20 years ago. This is because insurers are structuring their products with more precision and with updated data." In Mr. Mallette's view, insurers are trying to beef up their profit margin by creating value added products.