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Micromort (Underwriting)
Introduction
A “Micromort” (from micro– and mortality) is a unit of risk defined as a one-in-a-million chance of death. Micromort measurements are used extensively in actuarial sciences and are essential to the work of life insurance actuaries.
Usage And Applications
The Micromort concept was first introduced by Ronald A. Howard. It can be used to calculate the riskiness of day-to-day activities in isolation, or can be used to consider the total risk of a day comprised of various events. As each micromort is a 1 in a million chance of death (or 1/10,000th of a %), the larger the micromort value, the higher the risk a “life assured” presents for an insurance company.
Even without doing anything, we can estimate that there is a baseline 1 micromort risk for a 20 year old existing 24 hours in a commonwealth country. Probabilistically there is approximately a 1 in a million chance that they will not live to see the next day. Naturally dangerous sports, high-risk lifestyles and substance abuse all have high micromort values. Alongside this are geographical considerations- some places are more dangerous than others.
Examples Of Use
Mr. Client wishes to embark upon a new challenge in his life and likes to think big. He tells his wealth manager that he has started the preparations for a trip to India where he is to cross the Himalayas. The wealth manager asks Mr. Client, “Why would you want to do that?”, to which he responds “Because of how it will make me feel”. Conceding that this is a reasonable expectation, the wealth manager follows with another question, “Ok, but why wouldn’t you just take Ecstasy instead?”. Mr. Client thinks that his wealth manager has lost his mind at this point but feels compelled to answer as his wealth manager, curiously, does not appear to be joking. “Why? Because of the risks”. He notices the corner of his wealth manager’s mouth turn upward before he opens his mouth to speak once more…
“Mr. Client, taking Ecstasy involves a 13 in a million (13 micromort) chance of death each time. Mountaineering in the Himalayas presents a 12,000 in a million (12,000 micromort) chance of death.”
Sources & Further Reading
- US Department of Transportation, “Treatment of the Economic Value of a Statistical Life in Departmental Analyses—2011 Interim Adjustment”, 2011
- “Microrisks for Medical Decision Analysis” – International Journal of Technology Assessment in Health Care. 5 (3): 357–370 – Howard
- On making life and death decisions. Societal Risk Assessment: How Safe Is Safe Enough? General Motors Research Laboratories. New York: Plenum Press – Howard, R. A. (1980). J. Richard; C. Schwing; Walter A. Albers (eds.).