Every structured settlement professional is familiar with the term “substandard age rating” as well as the important role more generally of “mortality risk” as one rationale for selecting a structured settlement. Not all structured settlement professionals, however, are aware that the Society of Actuaries (SOA) has sponsored and published six intercompany studies of mortality experience related to Structured Settlement annuities.
Actuarial science is the discipline that applies mathematical and statistical methods to access risk in insurance, finance and other industries and professions. The SOA is a global professional organization for actuaries. It was founded in 1949 and has more than 30,000 members. The SOA represents actuaries from all major areas of practice, including life and health insurance, retirement and pensions, investment and finance, enterprise risk management, and general insurance (property and casualty) insurance.
SOA Structured Settlement Mortality Studies
The SOA has sponsored and published six intercompany studies of mortality experience related to structured settlement annuities, most recently in January 2020. Data for that report (2019 Study) were collected in 2019 for the study years 2005-2017. The 2019 Study, which consists of 56 pages and includes numerous tables and graphs, is available for download on the SOA website. Although the 2019 study overlaps some of the previous studies, the study states: “it is based on a new collection of data in order to attract a larger amount of experience and, thus, greater credibility.”
The first SOA structured settlement mortality study included experience through calendar year 1989. The second study included experience through calendar year 1993. The third study looked at experience through calendar year 1997. The fourth study, combined the experience of years 2000-2004 collected in 2005, and the experience of years 2005-2008 collected in 2009. The fifth study looked at the experience of years 2009-2013 collected in 2016.
Overview of the 2019 Study
The most recent 2019 Study was performed on a calendar year basis. Nineteen (19) life companies contributed data to the 2019 Study and each company received an analysis of their own experience. Otherwise, individual company experience is not made public. Rather, all experience is combined and made available by contract (count) and amount.
The stated primary purposes of the 2019 study are to:
- Compare emerging structured settlement experience to that assumed in current statutory valuation bases, both standard and substandard.
- For substandard business, analyze the experience using the rated-age basis and the “true age plus constant extra death” (CED) basis.
- Help provide a basis for actuaries to assess mortality in this unique line of business where mortality tables based on traditional payout annuities may not be representative of this distinct population.
- Potentially use as a basis for an experience table and possibly a valuation table.
Selected Information and Observations from the 2019 Study
- Study data only includes contracts providing life contingent payments. Reason: certain-only business would likely result in an underreporting of deaths plus there is no real reason to study mortality on contracts for which mortality has no financial relevance.
- The study includes 17,814 deaths among standard lives and 13,475 deaths for substandard lives representing total death amounts of $1,314,053,349 and $2,734,618,709 respectively.
- The Study observes: “[a]lthough the current study has more comprehensive data than the previous ones, the number of deaths remains relatively low. Accordingly, considerable care must be taken in the interpretation of the results.”
- Study data are available with multiple breakdowns including: standard/substandard; male/female; experience years 2005-2017; plus extensive: 1) issue age groups; 2) durations; 3) attained age groups; 4) rated issue age groups; 5) size of rate ups in years; and 6) various benefit classes.
- The Social Security Mortality Tables used in the study are the SSA Tables obtained from the 2019 Trustees Report. However, the Study also notes: “[n]one of these tables fit the experience very well; the SSA table comes closest, but it may not be a usable table for projecting forward. An implication of this is that, in theory, structured settlement business should have its own mortality table.” P. 13
- For rated age cases, experience was studied based upon true age, rated age, and “true age plus constant extra deaths” (CED) bases. A more detailed explanation appears in Section 5.4 at page 28.
- The study observes: “[s]ubstandard structured settlement annuity mortality is particularly challenging to quantify because age categories are not homogeneous. True age groupings consist of slightly impaired lives with small age rate-ups and heavily impaired lives with substantially higher rated ages.” 29
- In comparing actual to expected mortality experience by gender for substandard cases, the study suggests the results: “might indicate that substandard annuities have been underwritten too aggressively.” P. 33
Additional Perspectives and Conclusions
Assuming you review the SOA 2019 Report, readers should also consider the following perspectives before forming any conclusions. Life companies use valuation mortality tables to set reserves and therefore they are designed to be conservative. The valuation table applicable to structured settlements is the 1983a table. It is conservative overall for standard lives and was originally created for pension data. For that reason alone, it is not a perfect fit for structured settlements. There is no reason to expect mortality from structured settlements to follow the pattern of pensioners, even if the resulting reserves are sufficiently conservative.
Compared with other studies, the number of deaths measured by the 2019 study is relatively small for mortality analysis and therefore only general patterns can be seen. Readers should avoid being too specific especially with breakdowns by age or sex. In addition, substandard mortality is difficult to measure because different life companies use different standards to evaluate risks.
Most industry veterans will tell you that medical underwriting in 2021 is much more conservative today than 10, 20 or 30 years ago. The resulting data might indicate substandard mortality was over-estimated (not conservative) in the past. Alternatively, today’s underwriting may well be conservative versus the ultimate results. That analysis won’t show up in studies for a long time. Also keep in mind, whether an annuity provider gains or loses from mortality depends on how the company incorporates mortality into its pricing which, in fact, may be to a greater or lesser extent than reflected in the valuation table.