Actuarial Standard of Practice No. 48
Life Settlements Mortality
STANDARD OF PRACTICE
TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Reporting and Validation of Mortality used in Life Settlements Investments
FROM: Actuarial Standards Board (ASB)
SUBJ: Actuarial Standard of Practice No. 48
This document contains the final version of ASOP No. 48, Life Settlements Mortality.
The life settlements market arose from the viatical settlements market, which grew quickly in the 1980s. Actuaries are involved in various aspects of the market, including working with Life Expectancy (LE) providers to establish appropriate survival curves for risk appraisal, determining a value for a buyer who wishes to purchase a specific life insurance policy or portfolio, and valuing the policies in a portfolio for financial reporting purposes. An understanding of mortality assumptions and of how individual risk assessment affects the mortality assumptions for individual lives is critical to a proper actuarial valuation and risk analysis. To date, actuarial practices have varied widely in this market, and there are no specific regulatory standards defining life settlements mortality tables or assumptions.
The life settlements market has demanded actual-to-expected (A/E) results from the LE providers, but in the absence of specific guidelines and disclosures, practices for calculating A/E results have varied widely. A limited number of states require LE providers to file A/E ratios, but again, lack of specific guidelines has led to concerns with mortality tables and methodologies used. At issue are survival curves defined for exposure measurement and methodologies for adjusting such curves to reflect individual risk assessments. Also, measurement of exposures based on multiple underwritings has posed significant difficulties.
In May 2013, the ASB approved the exposure draft with a comment deadline of July 31, 2013.
Ten comment letters were received and considered in making changes that are reflected in this final ASOP. For a summary of issues contained in these comment letters, please see Appendix 2. The majority of commentators supported the effort to issue this ASOP, although a few comments indicated a concern with the scope of the ASOP, and one commentator believed this ASOP should not be issued.
Changes made to the final standard in response to the comment letters include the following:
1. Sections 2.16, Mean Life Expectancy, and 2.17, Median Life Expectancy, were revised to remove examples of formulas that could be used to calculate mean and median life expectancy.
2. Section 2.20, Mortality Assumption, was revised to include mortality rates and survival curves period by period. Survival curves are commonly used in the life settlements market to illustrate the mortality assumption.
3. Section 4.1, Disclosures, was revised after considering the feedback on a question raised in the exposure draft transmittal letter to require the actuary to disclose: a description of how the mortality assumption was developed and how the mortality assumption differs from that of the life expectancy provider, a description of how multiple life expectancy evaluations are handled (previously in section 4.2(f)), and the reason for choosing an IBNR assumption (if any).
4. Section 4.2, Disclosures when Performing A/E Analysis, was revised to allow the actuary to determine whether presentation of historical A/E results is appropriate with appropriate disclosure if they are not presented.Please see Appendix 2 for a detailed discussion of the comments received and the reviewers’ responses.
The ASB thanks everyone who took the time to contribute comments and suggestions on the exposure draft.
The ASB voted in December 2013 to adopt this standard.
Life Settlements Mortality Task Force
Timothy A. DeMars, Chairperson
Mary j. Bahna-Nolan Linda M. Lankowski
Peter J. Bondy Scott E. Morrow
Jeremy J. Brown Arshad H. Qureshi
Vincent J. Granieri Larry H. Rubin
Life Committee of the ASB
Jeremy J. Brown, Chairperson
David A. Brentlinger David Y. Rogers
Dale S. Hagstrom Barbara L. Snyder
James B. Milholland Candace J. Wood
Actuarial Standards Board
Robert G. Meilander, Chairperson
Beth E. Fitzgerald Thomas D. Levy
Alan D. Ford Patricia E. Matson
Patrick J. Grannan James J. Murphy
Stephen G. Kellison James F. Verlautz
The ASB establishes and improves standards of actuarial practice. These ASOPs identify what the actuary should consider, document, and disclose when performing an actuarial assignment. The ASB’s goal is to set standards for appropriate practice for the U.S.
Section 1. Purpose, Scope, Cross References, and Effective Date
This actuarial standard of practice provides guidance to actuaries developing and evaluating mortality assumptions and evaluating mortality experience associated with life settlements.
This standard applies to actuaries performing professional services, when reporting on or evaluating mortality experience with respect to life settlements or when developing, analyzing, or using mortality assumptions with respect to life settlements.
If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority), or for any other reason the actuary deems appropriate, the actuary should refer to section 4.
1.3 Cross References
When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.
1.4 Effective Date
This standard is effective for work performed on or after April 30, 2014.
Section 2. Definitions
The terms below are defined for use in this actuarial standard of practice.
2.1 Actual-to-Expected (A/E) Analysis
The process of calculating and analyzing A/E ratios over a selected time period; for example, across different ages, genders, and durations. This is also known as an A/E study.
2.2 Actual-to-Expected Ratio
Actual deaths (either face amount or number of lives) in a group of lives being evaluated, over a specified period divided by the expected deaths over the same period.
2.3 Debits and Credits
The components of a system used by underwriters to determine a set of mortality multiples to apply to a base mortality table. Debits increase the mortality multiple due to various impairments that an insured may have; credits reduce the mortality multiple due to good health characteristics.
The length of time since a life expectancy estimate was issued.
2.5 Expected Deaths
The number of deaths statistically expected in a given time interval.
The process of making adjustments to experience results in order to have a smooth progression in the mortality rates over the whole age range.
2.7 Historical A/E Mortality Basis
Mortality assumptions developed from a base mortality table using information such as underwriting multipliers, improvement factors, medical records, and other pertinent information relevant to the individual life expectancies as of their associated underwriting dates.
2.8 Impaired Mortality
A mortality assumption that has been adjusted for impairments.
A health factor or condition that tends to increase an insured’s probability of death.
2.10 Incurred but not Reported (IBNR) Deaths
Adjustment to observed deaths in a given time period to account for deaths that have occurred but have not been reported due to the time lag in reporting systems or errors and incomplete information available from reporting sources regarding deaths.
2.11 Incurred Death
A death occurring during a period of exposure being analyzed, whether reported during that period or not.
An individual whose life is covered by a life insurance policy.
2.13 Life Expectancy (LE)
The expected future lifetime of an insured. Two primary types of life expectancies, mean and median, are reported by LE providers in the life settlements market.
2.14 Life Expectancy Provider (LE Provider)
An entity that applies medical underwriting analysis to determine a mortality assumption or life expectancy.
2.15 Life Settlement
The life insurance policy or policies sold to an investor. The term “life settlement” includes viatical and other life settlements. Generally, a viatical life settlement is any life settlement where the insured has a life expectancy of less than two to three years, depending on state regulation.
2.16 Mean Life Expectancy
The average life expectancy based on the assumed survival curve.
2.17 Median Life Expectancy
The point in time at which, based on the assumed survival curve, there is a 50% probability that the person will still be alive.
2.18 Modification Factor
A factor that is used to adjust standard mortality to reflect rating classification. This may include items such as flat extras, mortality multiples, and age ratings.
2.19 Modified A/E Mortality Basis
Mortality assumptions other than the historical A/E mortality basis. Use of this basis may result in life expectancy estimates that differ from those originally provided.
2.20 Mortality Assumption
A set of values representing mortality rates or the survival curve period by period. This may reflect an assumption of future mortality improvement or deterioration or modification factors. This term may apply to either a single insured or group of insureds.
2.21 Mortality Multiple
A modification factor typically determined from a debit/credit underwriting methodology.
2.22 Survival Curve
The probability data set representing the assumed probability of survival to the end of every period in the future for an insured.
The process of evaluating medical and other information received on a given insured to determine modification factors reflecting risk classification for that insured.
Section 3. Analysis of Issues and Recommended Practices
3.1 Purpose of the Assignment
The actuary should understand the purpose of the assignment and be familiar with any regulatory or accounting standards that may have a bearing on the actuary’s work product. Assignments that may result in different sets of mortality assumptions include fair value valuation (for example, under Accounting Standards Codification 820, Fair Value Measurements and Disclosures) and performing or using an A/E study.
3.2 Required Knowledge
The actuary should be reasonably knowledgeable about relevant aspects of mortality table construction, exposure methods, mortality improvement, older age and impaired mortality, graduation, and related issues.
3.3 Developing Mortality Assumptions
When an actuary is developing mortality assumptions, the following apply.
3.3.1 Base Mortality Table Selection
The actuary should select a base mortality table that is appropriate for the purpose of the assignment. The actuary should choose a table (which may be a combination of tables) that in the actuary’s professional judgment reflects the characteristics of the underlying population. The actuary may use credible data to create new mortality tables if existing tables do not adequately fit the underlying population. If the actuary uses a mortality table prescribed by another party or applicable law, the actuary should refer to ASOP No. 41, Actuarial Communications, section 3.4.4, and the disclosures in sections 4.3(a) and (b) of this ASOP.
3.3.2 Mortality Table Modifications
The actuary should consider whether modifications to the base mortality table(s) are needed to fit the population being examined. In making these modifications, the actuary should consider items that may lead to a differentiation in mortality, such as socioeconomic effect (i.e., a tendency for mortality rates to differ based on sociologic and economic factors), antiselection, selection period, impairment(s), impairment level, marketing methods, policies settled versus policies evaluated but not sold as life settlements, and variations in LE estimates provided by different LE providers.
3.3.3 Mortality Improvement or Deterioration
The actuary should consider whether incorporating historical and projected mortality improvement or deterioration is appropriate. These adjustments could be due to mortality improvement caused by medical advancements or new approved drugs, which could cause a shift in expected mortality for a group of insureds within the population.
3.3.4 Application of Individual Underwriting to Mortality Assumptions
If the actuary has access to underwriting information on individual insureds in the population, the actuary should consider adjusting the mortality assumptions to reflect this information. The actuary should consider using available data regarding factors such as the impairment(s), impairment level, debits or credits assigned, mortality multiples, and life expectancies and their associated survival curves, as appropriate for the purpose of the assignment.
If LEs are used, the actuary should make a reasonable effort to learn and understand the basis for the LEs including whether the LE information provided is a mean or median LE. If the actuary has unresolved concerns about the LEs used that have a material impact, the actuary should make the disclosure in section 4.1(f).
3.3.5 Mortality Assumption Adjustments Using A/E Analysis
The actuary should consider adjusting mortality assumptions when A/E results are available.
3.4 A/E Analysis
When performing an A/E analysis, the actuary should produce results by duration. As data and credibility allow, the actuary should analyze results by gender, smoking class, age bands, level of mortality multiples, impairment type, and other pertinent categories.
3.4.1 Incurred Deaths
The actuary should be aware of the methodology and sources used in determining incurred deaths and the completeness of such approach for determining deaths. The actuary should consider whether to adjust actual results to reflect IBNR deaths. The actuary should consider using a supplemental external source of recorded deaths, such as the Social Security Death Master File, if available, to improve the timeliness of reported deaths.
3.4.2 Multiple Life Expectancies for a Single Life
The actuary should assess whether the method for handling data regarding an insured underwritten multiple times (and creating multiple exposures) is appropriate for the intended use of the A/E study, given the reasons a specific insured was underwritten more than once. If the actuary uses a method prescribed by another party, the actuary should refer to ASOP No. 41, section 3.4.4, and the disclosures in section 4.3(a) and (b) of this ASOP.
3.4.3 Use of a Modified A/E Mortality Basis
The actuary may analyze results based on a historical A/E mortality basis or a modified A/E mortality basis. If a modified A/E mortality basis is used, the actuary should prepare results using a historical A/E mortality basis for comparative purposes, if the actuary believes doing so is appropriate. The actuary should refer to Section 4.2 (e).
3.5 Reliance on Data or Other Information Supplied by Others
When relying on data or other information supplied by others, the actuary should refer to ASOP No. 23, Data Quality, for guidance.
3.6 Credibility of Data Used in Evaluation of Mortality
When considering the credibility of the data used in setting assumptions, the actuary should refer to ASOP No. 25, Credibility Procedures, for guidance.
The actuary should prepare and retain documentation in compliance with the requirements of ASOP No. 41. The actuary should also prepare and retain documentation to demonstrate compliance with the disclosure requirements of section 4.
Section 4. Communications and Disclosures
When issuing actuarial communications relating to mortality in life settlements, the actuary should refer to ASOP Nos. 23, 25, and 41. In addition, the actuary should disclose the following items:
a. a description of how the mortality assumption was developed including any modifications to the mortalityassumption to reflect risk characteristics;
b. a description of the methods used to adjust results for the impact of multiple life expectancy evaluations on the same insured or on the same policy;
c. whether the actuary has information about the LE provider’s mortality assumption and, if so, how the actuary’s mortality assumption differs from that of the LE provider;
d. the extent of historical or projected mortality improvement or deterioration assumed for the assignment;
e. the method used for determining incurred deaths, including any IBNR assumption, and discussion of the significance and reason for choosing such IBNR assumption;
f. any unresolved concerns the actuary may have about the data, assumptions used, or methodology used that could have a material impact on the actuarial work product;
g. the mortality assumption for estimating the price that would be received to sell the asset in an orderly transaction between market participants, and the basis for that assumption, when performing work related to fair-value projections;
4.2 Disclosures when Performing an A/E Analysis
In addition to the disclosures in section 4.1, the actuary should disclose the following items if an A/E analysis is performed:
a. the source of the expected mortality assumptions and why the actuary believes they were appropriate for the assignment;
b. results of the A/E analysis by duration;
c. as data and credibility allow, a presentation of results by gender, smoking class, age bands, level of mortality multiples, impairment type, and other pertinent categories;
d. whether a historical A/E mortality basis or a modified A/E mortality basis was used for the A/E analysis. Such disclosure should indicate the implications of the method, the reasons for the choice of method, and whether the method could distort the results of the analysis;
e. if results on a modified A/E mortality basis are disclosed, the actuary should disclose results based on a historical A/E mortality basis for comparative purposes if the actuary believes doing so is appropriate. If results on a modified A/E mortality basis are disclosed and the actuary does not disclose historical A/E mortality basis results, the actuary should disclose why they are not being disclosed;
f. a description of the methods used to adjust results for the impact of multiple policies on the same insured;
g. when IBNR is included in the analysis, a presentation of results with and without IBNR; and
h. a statement that A/E results may not be indicative of future results.
4.3 Other Disclosures
The actuary should include the following, as applicable, in an actuarial communication:
a. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law;
b. the disclosure in ASOP No. 41, section 4.3, if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and
c. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional judgment, the actuary has otherwise deviated materially from the guidance of this ASOP.
Appendix 1 – Background and Current Practices
Note: This appendix is provided for informational purposes and is not part of the standard of practice.
Life Settlements are financial transactions in which a third party buys an existing life insurance policy for more than its cash surrender value but less than its net death benefit. The life settlements market grew out of the viatical settlements market, where chronically ill AIDS patients sold their policies, often to individual investors. The viatical settlements market essentially ended with the advent of anti-retroviral drugs, which extended the lives of AIDS patients, lowering the economic value of their life insurance policies. From there, the market focus shifted to other health-impaired policyholders, primarily at older attained ages.
In the life settlements market, a mortality assumption is determined, which allows the buyer to project expected premiums, death benefits, and other relevant cash flows period by period. These expected cash flows are then discounted to determine the policy value. To determine the mortality assumption for an insured, it is common to use life expectancy (LE) estimates, often measured in months, produced by LE providers. The accuracy of the LE estimates is of great interest to the life settlements market since the value of a policy is highly dependent on the mortality assumption derived based on the LE estimate.
The life settlements market is highly dependent on actuarial expertise. In particular, analysis of actual mortality experience as compared to expectations (actual/expected or A/E analysis) has generated controversy in the life settlements market.
An A/E study is a backward-looking evaluation of underwriting results based on assumed mortality. The mortality assumption may be based on the mortality tables and modification factors used to produce the original LE estimate. At times, the mortality assumptions may be modified to reflect factors relevant to current LE estimates so that past results may be measured against current underwriting methodologies and tables.
Actuaries working in the life settlements market have been asked to assess mortality for many different purposes, including the following:
- an A/E study of an LE provider;
- the determination of survival curves for an LE provider;
- the pricing/modeling of life settlements policies and portfolios on behalf of investors;
- the valuation for financial reporting; and
- risk models to examine extension risk and its consequences for investor performance.
The discussion below focuses on A/E studies, which have been central to the life settlements market and an area of interest in life settlement discussions. However, as noted above, there are several other mortality-related tasks that actuaries may be asked to perform.
An actuary performing an A/E study on a block of lives or policies has several options for creating mortality assumptions for individual lives. The analyses differ regarding whether the original LE provider’s mortality assumption is adjusted. A historical A/E mortality basis utilizes the LE provider’s methodology in use at the time each LE was issued. Two modified A/E mortality bases used today are as follows:
1. Adjusted to Current Methodology A/E Mortality basis—A/E analysis that typically defines expected deaths using mortality tables, underwriting multipliers, improvement factors, and any other aspects of the underwriter’s current methodology applied to the medical records and any other pertinent information for each insured that existed at the time the insured was underwritten. This attempts to measure how accurate the LE provider’s current methodology is by back-testing it to obtain the A/E analysis that would have developed if the LE provider’s current methodology had been in place from the time it began issuing LEs.
2. Back-solving the actual LE into a mortality table—A/E analysis that defines expected deaths by using the back-solving method with the actual LE that was issued and mortality assumptions that may or may not have actually been used when the LE was issued by the LE provider. This has commonly been used when the LE provider’s table is proprietary, non-existent, deemed not relevant, or in the actuary’s judgment is not appropriate for the life settlement population being studied.
In performing an A/E study, there are several methods that are used to handle multiple underwriting opinions on individual lives. The results of the A/E study can vary substantially depending on the method chosen. Some of the methods in use today are as follows:
1. Earliest submission: Counts only the earliest LE estimate produced for each insured. As a result, no single insured counts more than any other.This method does not reflect all instances of underwriting.
2. Latest submission: Counts only the latest LE estimate produced for each insured. Considerations are the same as in method 1. This method excludes time periods where it is known that no deaths occurred.
3. One-year look-back: Includes only the latest LE estimate within each calendar year.
4. Fractional method: The earliest LE estimate contributes one exposure up until the time that the insured is underwritten a second time, at which point each contributes half an exposure. Repeat as necessary. Only one total exposure per year per insured is used, and a subject contributes only one death in the calculation.
5. Non-fractional method: Several LE estimates may be used for one insured. Possible reasons for inclusion depend on time elapsed since prior LE opinion used or material change in health status. One insured that has been underwritten many times may have a much larger impact on the A/E results than another insured who was underwritten once.
For A/E studies, there have been a wide range of adjustments made to account for IBNR. The level of IBNR chosen is crucial since the results of the A/E analysis could vary substantially. Given the age of the life settlements market, data availability, and the reliability of the methods used to determine deaths that have occurred, determining the appropriate IBNR level is difficult.
To the extent experience is available, a lag study is sometimes performed on the historical level of IBNR experienced. The results of the lag study, to the extent credible, are then used to determine the level of IBNR. Often a lag study is not feasible. In utilizing other resources to determine the level of IBNR, such as social security information, some practitioners account for differences between the population of life settlement participants and the population being considered. A further problem is that the methodologies for determining maturities may change over time, as has happened when access to the Social Security Death Master File became more restricted.
Appendix 2 – Comments on Exposure Draft and Responses
The exposure draft of this ASOP, Life Settlements Mortality, was issued in May 2013 with a comment deadline of July 31, 2013. Ten comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The Life Settlements Task Force carefully considered all comments received, reviewed the exposure draft, and proposed changes. The Life Committee and the ASB reviewed the proposed changes and made modifications where appropriate.
Click here to view appendix 2 in its entirety.