Protective Value Life Study - Assumptions

Baseline mortality was chosen as 75% of the 1975-80 Basic Select and Ultimate tables. This was not to suggest that other tables would not be appropriate (in fact, each company should use its own experience if available and credible). These sex-distinct tables were chosen to represent a blend of overall "standard" mortality today. No attempt was made to use tobacco-distinct mortality. Of the 877 sample cases eventually included in the study, 145 could be classified as single lives with an MIB impairment code. Each case was then "underwritten" to assess the probable degree of impaired mortality using a table rating scheme. Further, the examining underwriter was asked to estimate the exclusivity factor for each case.

Future impaired mortality was calculated over a 20-year period by multiplying the present value of the standard mortality stream by the substandard mortality rating (e.g., table C= 75% extra mortality). The future excess mortality (PVB) was discounted at 8%. The following lapse rates were also assumed:

PVBs were calculated for quinquenniel ages beginning at 0. Savings per $1000 was calculated by multiplying the PVB for each case by the designated exclusivity factor.

Of the 145 cases reviewed because of the MIB code(s) attached to them, 68 were issued as applied for even though the examining underwriter would have rated the case with only the knowledge at hand. These we concluded were "false positives", an indication of the specificity of an MIB inquiry for this case study. Because these policies were ultimately issued without a rating, we concluded that we could assign no value to the finding of the MIB code. There was, however, cost to be considered as the company underwriter would have had to review the case. In fact, we assumed there was a $10 underwriting cost applicable to all 145 such policies. This is in addition to the company-specific average per inquiry cost, which is applicable to all 877 cases in the study. This presented us with a total Cost of $2099, or a cost per application of $2.39 ($2099/877).

Total Savings was ultimately defined as the sum of the individual savings on the 69 policies that were rated or declined. No value was assigned in this study to the eight policies classified as incomplete, missing or postponed.