Page 257 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes This fact has important bearings upon life insurance. From data showing the length of life and
ages at death in the past it is possible to predict probabilities of death and of survival in the
future. This prediction is based on the assumption that, like the law of chance, there is a law of
mortality by which human beings die; that certain causes are in operation which determine that
out of a large group of persons at birth a definite number of lives will fail each year until all have
died; and that the force of mortality could be measured if only the causes at work were known.
But it is not necessary to analyze this law of mortality completely and to know all the operating
causes in order to predict the possible rate of mortality in a group of persons. By studying the
rate of death among any group and noting all the circumstances that might, according to our
best knowledge, affect that rate, it is possible to surround any future group of persons with
approximately the same set of circumstances and expect approximately the same rate of death.
Thus without complete knowledge of the law of mortality a working basis is found for predicting
future rates of death. It is necessary then to have mortality statistics in order to develop a
scientific plan of life insurance.

The Measurement of Mortality - Mortality Tables

The establishment of any plan of insuring against premature death requires some means of
giving mathematical values to the chances of death, and the considerations advanced in the first
division of this chapter show that the laws of probability can be used for this purpose as soon as
trustworthy data are secured showing the course of past mortality. Mortality tables, as such data
are called, are records of past mortality put into such form as can be used in estimating the
course of future deaths.

Sources of Mortality Tables

There are two sources from which the best-known mortality tables in existence today have been
obtained: (1) population statistics obtained from census enumerations, and the returns of deaths
from registration offices, and (2) the mortality statistics of insured lives. Well-known examples
of the former are the English life tables of Drs. Farr, Ogle, and Tatham, successively in charge of
the General Registry Office of England and Wales. Dr. Farr's life table, for instance, was based on
the registered deaths in England and Wales during the years 1838-54, and on the two census
enumerations of population for 1841 and 1851.

Description of a Mortality Table

A mortality table has been described as the picture of "a generation of individuals passing
through time". It shows a group of individuals entering upon a certain age and traces the history
of the entire group year by year until all have died. Since any description will best be understood
by reference to an actual table, the American Experience table, used almost exclusively for the
computation of premium rates by old line companies in the United States, is presented below.
The essential features of the table are the two columns of the number living and the number
dying at designated ages. It is assumed that a group of 100,000 persons comes under observation
at exactly the same moment as they enter upon the tenth year of life. Of this group 749 die during
the year, leaving 99,251 to begin the eleventh year. The table proceeds in this manner to record
the number of the original 100,000 dying during each year of life and the number living at the
beginning of each succeeding year until but three persons of the original group are found to
enter upon the ninety-fifth year of life, these three dying during that year.

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