yobria wrote:For example, take the life insurance segment (which includes LTCI and fixed annuities) of the 2011 Genworth income statment... we see in 2011 Genworth had about a 60/40 benefits/expense ratio.

It's not that hard to do amateur-actuary stuff and get a ballpark estimate. On SPIAs, I figure it has

*got* to be more like a 90% benefits/premium ratio, probably a little higher because of adverse selection. It just can't be 60%.

BRK Direct EZ-Quote says, for a man born 4/1/1947 (age 65) "Your investment of $187,537 will yield 2.30% based upon our mortality assumptions and the U.S. Treasury yield curve as of April 23, 2012. This investment will provide you with $1,000 every month for as long as you live, beginning on June 1, 2012."

I get the CDC 2003 Life Table for Males. Notice that this is the general population, not the supposedly-healther adversely-selected part of the population that buys annuities.

It shows me that of an initial population of 100,000, 78,694 survive to age 65, 77,235 to age 66, etc. Let's say someone wants to pay all 78,694 of them $1,000 a month for the rest of their lives. I take those numbers and multiply each of them by 12,000. Then in the next column, I calculate the discount, based on BRK's 2.30%, for each year, as (1.0230)^(-n) where n = age-65. There are endless questions about "start-of-year-or-end-of-year" etc. but I'm just trying to get a ballpark estimate.

It will cost $13,067,294,408 to make $1,000/month payments for life to 78,694 people, or $166,052/person.

So, with no profit and no expenses, assuming a 2.3% interest rate, it would cost $166,052 to fund those payouts, i.e. $166,052 is the actuarially fair premium. BRK, which is

*not* a particularly low-cost insurer, wants $187,537. So, that implies their payouts cost them 88.5% of the premium.

And I used the real CDC life table for the general male population. Somewhere I once found a COSM table that has what I'll call "phonied-up" life tables that supposedly represent the mortality curve of the annuity-buying population--it goes up to age 120! If I used that table I'd get a higher payout number.

The point is, I have no idea whether the benefits/premium ratio is 88.5% or 95%, but it can't as low as 60% or even 75% or 80%. It's got to be in the general ballpark of 90% unless I screwed up the calculation. I'd give more details of the calculations but I'd rather have someone do a completely independent check.

I got the life table

here, table 2, page 10.

I'd hypothesize that actuarial math is so cut-and-dried that the risk is small--they can calculate very precisely how many of their annuitants will still need to be paid in 2032, and they can buy in advance the exact bonds they need to make those payments. And the information on mortality rates is not secret--they might even be required to all use the same tables--and neither is the Treasury yield curve. So it's a low-risk business and they probably don't need much profit to justify the risk, and probably can't get much because all their competitors know what they know.

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.