“Pan-European” Life Insurance at Equal Terms - Good or Bad Idea?
The European Commission’s recent Green Paper on retail financial services reveals wide differences in term life insurance prices across the EU.1 The findings have prompted the commission to suggest standardised “Pan-European” insurance be sold to citizens in all EU countries at equal terms. This blog takes a look at whether such a move would make sense.
Currently, premium levels differ between countries. While some of the differences are due to local regulation and taxation regimes, the underestimation of the variation in levels of mortality in some EU member states may also account for the disparities.
The comparison in the chart above is based on the most recent available life tables (from 2013) from Eurostat.2 Any volatility was dampened by focusing on countries with at least five million inhabitants and looking at average mortality levels in five-year age bands. The levels were then compared to the five-year age band mortality rates for the EU as a whole, i.e. a mortality level of 100% represents the average mortality in the EU.
An analysis of the age range 20 to 65, which covers the overwhelming majority of term life business, shows varying mortality levels (see Chart 2 showing the age band 40 to 44 as an example). For single five-year age bands in this age range, Denmark, the Netherlands, Spain and Sweden have the lowest male mortality - ranging from 55% to 65% of the overall EU mortality level. The highest male mortality levels in the age range 20 to 65 - seen in Bulgaria, Hungary and Poland - were between 155% and 210% of the EU average. This comparison shows that the maximum male mortality level is 2.7 to 3.6 times the minimum male mortality level.
Variation in mortality levels lessens at ages 65 and over when the cause of death tends to be related to ageing. In the age range 65 to 84, minimum male mortality levels in a single EU country amount to 70% to 80% (France, Sweden) of the average whereas maximum male mortality levels are as high as 140% to 190% (Bulgaria, Hungary) of the average. In this age range, which has a dominant influence on life expectancy, variation in mortality levels is less pronounced (with the maximum running at factor 1.8 to 2.5 of the minimum).
It’s worth noting that while French male mortality rates are the lowest in the EU at ages 75 to 84, they run above the EU average for any five-year age band from 20 to 49. For example, male mortality in Germany in the 20 to 24 age band is only 66% of the French level but it is 126% in the 80 to 84 age band. Up to age 59, male mortality is lower in Germany than in France, even if French life expectancy is a half year longer. This example illustrates the great variation in mortality and in the shape of the mortality curves.
While the trends are similar for female mortality levels, the variations are less pronounced. Minimum female mortality across the whole age spectrum runs at about 65% to 75% (France, Italy, Spain) of the EU average whereas the maximum female mortality levels amount to about 160% to 180% (Bulgaria, Hungary, Romania). This means the spread between the maximum mortality level in a single EU country is 2.2 to 2.7 times the minimum mortality level in a single EU country - still a huge spread but considerably smaller than the male one.
Once again, French mortality rates stand out. With 85.6 years, French women have the second longest life expectancy in the EU. They have low mortality rates at ages 65 and over, and the lowest in the EU at ages 75 and over, but the mortality is slightly higher than average until age 50.
Clearly, the mortality rate spread across the EU is massive, even when the analysis is limited to countries whose population exceeds five million. It shows that life expectancy is not a good indicator of mortality levels in the ages typically covered by term life. Further research is needed to explain the differences in mortality rates and curves across the EU, but the assumption is well-founded that factors including health care, lifestyle, nutrition, and accident prevention play a major role.
Offering term life at standardised rates across countries with such great variation in mortality would bear a great risk of miscalculation for insurers. Therefore, it seems the Green Paper’s suggestion of “Pan-European” term life insurance at equal terms in all EU countries should be dismissed.
- Green Paper on retail financial services – better products, more choice, and greater opportunities for consumers and business, European Commission, COM(2015) 630 final, Brussels, December 2015, available at: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2015:630:FIN.