Valuation Mortality Table

Definition

A Valuation Mortality Table is a statistical chart used by insurance companies and actuaries to determine the estimated life expectancy and mortality rates of a given population. These tables assist in the process of calculating premiums, policy reserves, and overall risk exposure for life insurance products. By taking into account factors such as age, gender, and lifestyle, the Valuation Mortality Table aids in the prediction of future claim liabilities, thus providing a foundation for financial stability within the insurance industry.

Phonetic

Valuation Mortality Table in phonetics: /vælˌjuˈeɪʃən mɔrˈtæləti teɪbəl/

Key Takeaways

1. Accurate predictions of expected mortality rates: Valuation Mortality Tables provide insurers and actuaries with accurate predictions of expected mortality rates for different age groups, and other demographic factors (such as gender), allowing them to calculate the premiums and charges for life insurance products.
2. Regulatory compliance and financial planning: These tables are often required for regulatory compliance, as they help insurance companies establish proper reserves, ensure solvency, and maintain adequate financial planning to meet their obligations to policyholders.
3. Regular updates and improvements: Valuation Mortality Tables are periodically updated in order to reflect the most recent data on mortality trends and improvements in life expectancy, thus maintaining the accuracy and effectiveness of life insurance products and financial planning in the industry.

Importance

The Valuation Mortality Table is crucial in the business and finance realm, particularly for the insurance and pension industries, because it serves as a statistical tool to accurately assess and quantify the financial risks associated with an individual’s life expectancy. These tables compile age-specific mortality rates, which are essential for determining the likelihood of a policyholder’s death and consequently, the expected time of receiving claims. This information enables insurance companies and pension funds to calculate premiums, forecast claim liabilities, and make necessary provisions for future payouts. Furthermore, the proper use of valuation mortality tables is vital in maintaining financial stability and solvency within the industry, thus serving the interests of both clients and providers.

Explanation

Valuation Mortality Tables serve a crucial purpose in the insurance and finance industries, as they aid in estimating the future occurrences of death within a particular population. This information is of vital importance to life insurance companies, who are involved in pricing policies and calculating reserves for outstanding policies. These tables help insurers in estimating the likelihood of policyholders dying within a specific period or at certain ages, allowing them to better assess the potential risks and costs associated with providing coverage. The use of Valuation Mortality Tables allows companies to establish financially sound premiums for life insurance products, ensuring that they maintain profitability and solvency over time. Moreover, Valuation Mortality Tables are employed in certain financial calculations involving annuities or pension plans.

These calculations are necessary to enable organizations to effectively evaluate the present value of their future obligation to make annuity or pension payouts. By factoring in the likelihood of policyholders living to certain ages in their population, organizations can better establish suitable funding levels for their annuity or pension plan which safeguards them against insolvency and ensures that policyholders’ benefits are adequately secured. Ultimately, the primary purpose of Valuation Mortality Tables is to support risk management and financial planning efforts in both the insurance and finance sectors.

Examples

A Valuation Mortality Table is a tool used by insurance companies, actuaries, and financial professionals to estimate the probability of death at various ages and calculate the present value of future cash flows (like death benefits) for insurance products or pension plans. Here are three real-world examples where the valuation mortality table is used:

1. Pricing Life Insurance Policies: An insurance company uses a valuation mortality table to assess the likelihood of death at varying ages to estimate the costs of providing insurance coverage. This data helps them set appropriate premiums that address the risk associated with issuing a life insurance policy. For example, a 25-year-old non-smoker may be charged a lower premium than a 50-year-old smoker, as the latter has a higher probability of death according to the mortality table.

2. Evaluating Pension Plans: Companies offering pension plans use valuation mortality tables to evaluate their long-term liabilities. The actuarial assessment based on the mortality table helps them determine the appropriate amount of money to set aside each year to fulfill their pension obligations to retired employees. This ensures the pension fund remains solvent and can pay out the promised benefits to retirees.

3. Solvency Analysis for Insurance Companies: Regulators and rating agencies use valuation mortality tables to analyze the solvency of insurance companies. By comparing the company’s reserves and assets against the projected death claims based on the mortality table, agencies can assess the insurer’s ability to payoff its claims and maintain financial stability. This analysis can result in recommendations to ensure the insurer has the financial strength to meet its obligations and can impact the credit rating of the company.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Actuarial Analysis
• Life Expectancy Estimate
• Insurance Underwriting
• Probability of Death
• Present Value of Future Cash Flows

Sources for More Information

• • Investopedia
  • Fincash
  • WallStreetMojo
  • Corporate Finance Institute