Effect of the 2008 Valuation Basic Table on Life Expectancies

On March 19, 2008, the Society of Actuaries released the 2008 Valuation Basic Table (2008 VBT). After comparing the 2008 VBT to the ISC Services mortality table, we saw no reason to make any changes. Why not? The short answer is that we had already incorporated the same data into our table that the committee used to build their table. We introduced ISC Services 2 on March 1, 2008, three weeks before the 2008 VBT was released, and the effects on life expectancies, compared to ISC Services 1, were minor (less than 6 months in all cases.)

What are my thoughts on the 2008 VBT? I believe it is a good starting point, certainly much better than the 2001 VBT. The shape of the mortality curve, in general, is certainly closer to my expectations of future life settlement experience. However, just as few, if any, life insurance companies will use this table without adjustment for pricing purposes, we believe that our table is a better fit than the 2008 VBT for life settlement experience. In addition to life insurance industry experience, we factored in our own limited experience as well as the extensive body of knowledge provided by our professional consultants and other long term market participants.

For valuing a portfolio, the 2008 VBT may be a reasonable table, and many will use it for pricing. As a life expectancy provider, we made several adjustments to arrive at our table.

Another major issue in using the 2008 VBT is that it just addresses standard lives, not substandard or preferred lives. Non-standard lives represent at least 30% of the lives we encounter. Most of our research dollars are invested in refining single and multiple impairment-specific mortality data. In fact, a recent impaired life study* on insured lives contains the statement “No single impairment code comprised sufficient experience to draw any conclusions about impairment-specific underwriting performance.” This study represented data on policies issued by 16 large life insurance companies from 1990 through 1998, and observed these policies from the date of issue through the year 2002.

Preferred lives represent another issue. Life settlement underwriting typically does not anticipate preferred lives. We have recently begun to see more and more lives that we consider to be healthier than standard. We feel that there are enough of these cases that we will address this issue early in 2009.

Will the ISC Services table change? Yes. We plan to make minor adjustments to our basic table no more than once per year. By how much? In 2009, the change will be minor, primarily affecting lives age 65 and younger. Work is not complete, but changes are not expected to be dramatic. Smoker mortality rates may go up slightly, resulting in minor shortening of life expectancies. Other changes, all minor in nature, may occur at various points in the table to smooth a few discontinuities. In addition, since we factor in future mortality improvement, mortality rates will automatically go down by .25% to 1%. Impaired life mortality is under constant review, and changes to our underwriting manual occur continuously.

* MORTALITY EXPERIENCE IN THE ELDERLY IN THE IMPAIRMENT STUDY CAPTURE SYSTEM; ON THE RISK, vol. 24, n.3 (2008); Thomas Ashley, MD, FACP; Clifton P. Titcomb Jr., MD; Anna Hart, MS; Richard Bergstrom, FSA, MAAA