How Biological Age Could Change How Life Insurance Is Priced
In my last blog I discussed how thinking in terms of biological age could alter how we conceive life expectancy. Risk assessment in life insurance means forecasting the survival likelihood of an applicant - determining when it is lower than, equal to, or higher than the average for similar individuals of the same age.
Life insurers use large volumes of statistical data to calculate average premium values. However, the subgroups of policyholders can vary considerably from the average due to the influence of the geographical area or market segment in which an insurer operates, in addition to its products and distribution channels.
Actuarial techniques allow insurers to distinguish correction factors with high accuracy and on an individual level. Applying discounts or loadings based on risk factors helps insurers calculate a fair premium for every applicant.
Assessments by underwriters include individual risk factors such as medical status, lifestyle, habits and socioeconomics.
Underwriters classify applicants as “preferred,” “standard” or “substandard” risks, depending on whether their life expectancy is lower than, equal to, or higher than the average. Many individuals who weren’t always able to obtain life insurance can now do so while certain groups with below average mortality risk can be offered a competitive price.
The risk factors I have mentioned could also be used to calculate an individual’s biological age. Sticking to a purely statistical view of “biological age,” we can say it is equivalent to the system of discounts or loadings commonly used in insurance, although it is expressed in a way that is simpler to understand.
For an insured, being told that his biological age varies from his chronological age is different from being told that his premium is cheaper, more expensive or in a preferred class. Individuals whose biological age is higher could be offered insurance products with incentives that help them to reduce it. (Read Ross Campbell’s blog, Insurers Turn to Behavioural Economics to Attract Fitter Customers.)
If biological age could be calculated using markers in DNA - for example, telomeres - risk assessment would change considerably. Current DNA techniques are complex and costly but this is likely to change with time. However, the regulatory framework may pose a more enduring obstacle to the use of DNA-based techniques. In Spain insurers are prohibited from requesting or using predictive genetic tests - or any genetic data - even if an applicant provides it voluntarily. This is similar across the EU but in some Asian countries, and in Australia, regulations are already less restrictive.
We’ll be watching developments in markets with fewer restrictions to see whether the next step might be to determine biological age using DNA only. If this becomes feasible in the future the following challenge will be how to deal with the findings.
Read my last blog where I discussed how thinking in terms of biological age could alter how we conceive life expectancy calculations in the future.