Author: Shiro Armstrong

The incidence of suicide in Japan appears high. Are there insurance incentives to suicide? Indeed, Chen, Choi and Sawada in a recent paper titled Suicide and Life Insurance find a positive relationship between the suicide rate and the availability of life insurance with a death benefit associated with suicide. They claim that suicide is a rational decision after taking into account the exemption period (the period that the death benefit is not available after the insurance is purchased – to minimise adverse selection).

It is apparently not uncommon to have life insurers provide a payout for suicide. Most OECD countries have the option of a death benefit in life insurance payable in the event of suicide with exemption periods ranging from 1 to 3 years.

What is the social rationale for having such insurance options? Should a regulatory authority or supervisory body in the insurance industry allow insurance that, in some circumstances, provides incentive for suicide? You can imagine the adverse selection problems that arise.

John Armstrong, actuary and health economist (and also my cousin) tells me

It is rational for insurers to remove the benefit for suicide because of adverse selection. Thus, the key question is why do insurers cover such cause of death or pay benefits in such circumstances?

The logic as discussed is a social responsibility. The logic is that it is unfair to the families who may be financially dependent to completely remove the benefit. So what happens in practice (certainly in Ireland, the United Kingdom and I think the United States) is that insurers pay a benefit in some restricted circumstances following death by suicide.

The set of circumstances that can be considered includes:

a. Where the period since the inception of the policy is sufficient to suggest that the presence of adverse selection has been limited to an acceptable level. Thus, where claim events happen after four or more years after the inception of the policy benefits are paid.

b. Where the death by suicide arises often insurance companies pay a lesser payment because of this ‘social responsibility’ objective. It is often also because they do not want the adverse publicity of explaining why they didn’t pay the benefit to a family who have no other source of income.

From an actuarial perspective I would say that the cost of suicide as a cause of death is also relatively very small so the ‘extra’ cost of paying this benefit is probably quite small. For example, suicides in Ireland and most other OECD countries are predominantly in age profiles where the take-up of insurance is very small so the additional cost is even smaller.

Another issue is the cost in investigating claims. It is said that without the option of death benefit from suicide, there will be a lot more elaborate ‘accidents’. Therefore, it is cost effective to provide the benefit and incorporate the additional suicide payout risk in the premium than to disallow any such benefit and have to investigate claims. There is an additional cost to investigating and distinguishing accidents from suicides, even though it may be very small. In the end, it comes down to balancing the social costs and adverse selection problems.

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