Actuarial Sciences Expert Discusses Excessive Insurance Charges


Actuarial Expert WitnessThis case involves an alleged breach of contract by a major life insurance provider. The plaintiff was an owner of a universal life insurance product that featured a “cost of insurance” charge that is deducted from an account that the policy holder can deposit money into at will. It was alleged that the plaintiffs have been forced to pay unlawful and excessive COI charges by the defendant. Contracts for these life insurance policies specify that these costs are based on future mortality experience that were allegedly outdated. Since the time that these statistics were established, mortality projections have improved and people are living longer. Because of this, cost of insurance should be decreasing due to the fact that the defendants are paying off death benefits far less frequently.

Question(s) For Expert Witness

  • 1. Please briefly describe your actuarial experience in the life insurance space.
  • 2. Can you speak to how companies calculate COI rates, specifically as it relates to mortality experience?

Expert Witness Response E-134518

With sufficient documentation of the defendant’s contracts, historical mortality experience, assumption development methods, the COI rates and mortality assumptions themselves, along with mortality assumptions used by the defendant’s actuaries for other purposes, I would feel comfortable assessing COI rates and the methods used to develop them. In my experience, it is fairly unusual for a contract to specify that the COI charges are based only on future expectations of mortality, so it would be necessary to have a complete understanding of the contract to provide a proper basis for this assessment. It is critical in a case like this to understand the defendant’s own mortality experience, not just population-wide experience or insurance industry experience. That said, many companies’ life insurance blocks are not large enough for their own experience to be fully credible (i.e. fully predictive of future expectations), so it is important to assess the credibility of the defendant’s mortality experience and supplement it with relevant industry experience if necessary. Finally, the defendant’s actuaries will project mortality experience for various purposes – financial reporting, financial planning, various actuarial certifications – and understanding the assumptions used for these purposes can be very valuable to gain an understanding of their true expectations of future mortality experience.

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