Estimating the Life Expectancy of Individuals is an Underwriting Exercise
It happened again, and it happens all the time. In a conversation with an analyst in the early stages of looking at the life settlement business industry as a whole, and from an outsider's perspective, a very common question arose as it often does: “So, after you underwrite a case, your actuaries calculate the life expectancy, right?”
It’s a fair question for those unfamiliar with the insurance business and asking it is understandable, but it belies a very common misunderstanding of the degree to which both actuaries and the work they do is understood generally, and specifically what they do in the life settlement business. Yes, there are actuaries involved in the life settlement business, and yes, they can be involved in the business of estimating life expectancies. However, underwriting is NOT an actuarial activity, and actuarial activities are not underwriting.
Actuaries vs Underwriters
Perhaps a simple analogy helps. Architects design buildings, rooms, developments, even cities (though the urban planning process generally involves more than architecture), and they may build some of the spaces they design, but they don’t have to. It’s much more common for an architect to design a building and a builder to build it, following the architect’s plan as best they can. However, even perfect plans can require modifications or adaptation on the fly. Talk to any experienced builders and they will tell you that sometimes, maybe often, they have to adapt or modify designs to “make them work.”
In the business of estimating life expectancy, particularly the micro-longevity risk associated with individual lives, the mortality tables designed and built by actuaries are used by underwriting firms as a part of calculators. However, properly designed calculators do not require actuaries to run them any more than a Texas Instrument’s calculator requires a mathematician to use it. Remember, expertly trained underwriters create the critical input for these calculators, the individual mortality rating applicable to that one single life.
Can an actuary also be an underwriter?
Of course. In fact, ISC Services was originally founded by an individual who was both a credentialed underwriter and a credentialed actuary. However, most underwriting firms work with both of these types of professionals and of the two, the day-to-day production of life expectancy estimates is done by individuals trained as underwriters — not physicians, not actuaries, not programmers, etc. There are significant and very important differences between actuaries and underwriters, but both are useful for certain functions in the life settlement business.
It’s understandable that the uninitiated might think that anything having to do with estimations about the probabilities associated with living too long (i.e., longevity risk) or dying too soon (i.e., mortality risk) ought to be the work of an actuary. However, the process of assessing individual lives, in other words, micro-longevity, is first and foremost an underwriting activity, not an actuarial one. So, when you consider the business of life expectancy underwriting, remember this: specialized as it is for the life settlement industry, it takes both underwriting expertise and the use of actuarial tools and techniques.
If you’re interested in learning more about the process of underwriting or creating life expectancy assessments, contact ISC Services. We have decades of experience producing accurate, individualized reports.