Morbidity and Mortality Rates are the fundamental financial concepts in insurance.
The 4 facts outlined below are the basic concepts everyone has regarding insurance premium. Have you ever wondered how to explain these scenarios, in a proper way?
- Ceteris paribus*, the insurance premium for smoker is higher than non-smoker
- Ceteris paribus*, the insurance premium for male is higher than female. Sometimes, it is vice versa (ever ask why?).
- Ceteris paribus*, the insurance premium for older people is higher than younger people.
- Ceteris paribus*, the insurance premium for a construction worker is higher than office worker.
It boils down to 2 core concepts in actuarial science – morbidity and mortality rates.
Mortality rate refers to the frequency of deaths, while morbidity rate refers to occurrence of diseases in a defined population, at a specific time interval. For simplicity, we disregard any investment or profit sharing element in insurance premium for now; we look at the insurance natural charges alone instead.
Higher morbidity and mortality rates translate to higher insurance premium.
Higher age group has higher morbidity and mortality rates than lower age group, everything else being the same. It’s just the way it is – the older you are, the more likely you are to acquire various ailments, which could potentially be life threatening.
Smokers are prone to fatal diseases than non-smokers. In other words, smokers have higher mortality and morbidity rate.
The above is applicable for both life and medical (hospitalization) insurance.
The only aspect that morbidity and mortality rates work the opposite way, is when it comes to gender.
Men are generally deemed to have shorter life span compared to women. It is generally true that men’s health is deteriorating at faster rate because they are exposed to more job stresses and other risk factors (probably a stereotype 🙂 ). Statistics shows that men also tend to have more fatal conditions, such as coronary heart disease.
Despite their advantage in mortality rate, women tend to be afflicted with more illness than men. This health comes in part from what is generally a greater willingness to see a physician when women feel something is not right with their health and body condition. Men also do not have to deal with gynaecological or pregnancy issues.
Note that “more illness” does not necessarily mean death.
This explains the following:
Male mortality rate is higher than female. Therefore, the premium is higher for male compared to female, with everything else being the same.
Female morbidity rate is higher than male. Therefore, the premium is higher for female compared to male, everything else being the same.
Any claim in life or medical insurance is an expense for insurance companies. Thus, precise computation of mortality and morbidity rates are crucial for keeping insurance companies profitable. This is done by actuaries. In the insurance industry, consider your insurance agent as the sales engineer, while the actuary is the design engineer.
It’s too bad that I do not have a table or illustration on the insurance premium with regard to mortality & morbidity factors to share with you. If you have, you can drop me a message at admin [at] howtofinancemoney [dot] com so that it could be shared with other readers.
*Ceteris paribus (Latin)= all other things being equal or held constant