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06 A Mortality Profit

This document discusses mortality profit, which is the part of an insurance company's profit that is earned due to mortality experience. It defines key terms related to mortality profit such as death strain at risk, expected death strain, actual death strain, and mortality profit. It explains that if actual mortality experience differs from the assumptions used to set reserves, it can result in profits or losses for the insurance company. Specifically, if mortality is lighter than assumed, it generates a profit for policies with death benefits but a loss for annuities or other policies where benefits are paid out upon survival. The document focuses on calculating mortality profit assuming all other experience follows assumptions.

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Kimondo King
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263 views6 pages

06 A Mortality Profit

This document discusses mortality profit, which is the part of an insurance company's profit that is earned due to mortality experience. It defines key terms related to mortality profit such as death strain at risk, expected death strain, actual death strain, and mortality profit. It explains that if actual mortality experience differs from the assumptions used to set reserves, it can result in profits or losses for the insurance company. Specifically, if mortality is lighter than assumed, it generates a profit for policies with death benefits but a loss for annuities or other policies where benefits are paid out upon survival. The document focuses on calculating mortality profit assuming all other experience follows assumptions.

Uploaded by

Kimondo King
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MORTALITY PROFIT

Learning Outcomes;
After studying this lecture, you should be able to:
Define and calculate, for a single policy or a portfolio of policies (as appropriate):
a) death strain at risk
b) expected death strain
c) actual death strain
d) mortality profit
for policies with death benefits payable immediately on death or at the end of the year of death; for
policies paying annuity benefits at the start of the year or on survival to the end of the year; and for
policies where single or non-single premiums are payable.

Case Application
In previous Lecture we described the recursive relation between reserves and how an expression for the
profit earned over a particular year could be derived from this. In this topic we look at that part of the profit
earned during the year that is due to mortality, referred to as mortality profit.

Previously it was shown that, if the experience exactly follows the reserve basis, then, on average, the income
and outgo in each policy year are equal. In this case ‘outgo’ includes the increase in reserves. When talking
about outgo from the insurance company’s point of view, we consider reserves as money for policyholders.
Hence increase in reserves is a form of outgo.

If the experience does not follow the assumptions, then there will either be an excess of income over outgo
(a profit, or surplus) or an excess of outgo over income (a loss or negative profit). Profits and losses may arise
from any element of the reserve basis. For example:
a) If the interest earned is greater than that assumed in the reserve, then the income will accumulate to
more than the sum required to cover the cost of the benefits and the year-end reserve, giving an
interest surplus.
b) If the policyholder decides to surrender his or her policy (that is, to cease paying premiums, and take
some lump sum in respect of the future benefits already paid for) then the year-end outgo is not as

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assumed. If the lump sum is less than the reserve there will be a surrender profit. If no surrender
benefit is paid, the profit will be equal to the reserve.
c) If the experienced mortality is heavier than that assumed in the basis, then there will be a profit or
loss from mortality, depending on the nature of the contract. Where benefits are paid out on death,
such as under a term assurance, lighter mortality than assumed will give rise to a profit. Where
benefits are paid out on survival, such as under an annuity, then lighter mortality will give rise to a
loss.
So, if experience is not as assumed, profits or losses will arise. Exactly the same principle applies in pension
schemes; surpluses and deficits arise because experience is not in line with the actuary’s view of future
experience.
Here we consider mortality profit only. We assume, therefore, that in all elements other than mortality,
experienced rates follow the assumed rates exactly.
In practice, they do not; and each of the above will give rise to profits or losses. The impact of each element
may be quantified. This procedure is known as analysis of surplus.

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Lecture 9

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