Morbidity Tables

Morbidity Tables are statistical charts that predict the probability of people getting sick, injured, or becoming disabled. Think of them as a “sick-day” forecast for an entire population. Primarily used by insurance companies, these tables are the less famous but equally important sibling of Mortality Tables (which predict the likelihood of death). While mortality tables help price life insurance, morbidity tables are the bedrock for calculating the risks and costs associated with health, disability, and long-term care insurance. They analyze vast pools of historical data to estimate, for example, how many 45-year-old non-smoking office workers in Germany are likely to file a disability claim in the next year. This allows an insurer to calculate the correct premiums to charge to cover future claims and still turn a profit. An error in these calculations can be catastrophic, either by making policies too expensive to sell or too cheap to be profitable.

At its core, a morbidity table is a sophisticated data-driven tool. Insurers and actuaries compile them by analyzing anonymous health data from millions of people over many years. They don't just look at age; they slice the data by numerous factors to get as precise a picture of risk as possible. Key variables include:

• Age and Gender: The probability of most illnesses increases with age, and some conditions are more prevalent in men or women.
• Occupation: A construction worker faces different health risks than a software developer.
• Lifestyle: Habits like smoking or a sedentary lifestyle dramatically increase the likelihood of certain health issues.
• Medical History: Pre-existing conditions are a major factor.
• Geography: Health trends can vary between countries or even regions.

By combining these factors, the table provides a morbidity rate—the statistical likelihood of a specific health event (like a heart attack or a major surgery) occurring within a defined group. This rate is the fundamental number an insurer uses to price a policy.

For the average investor, morbidity tables might seem like an obscure tool for insurance nerds. However, for a value investor, they are a secret window into the engine room of any health or disability insurer. Understanding their role is crucial for analyzing these businesses.

Insurance can be a fantastic, long-term compounder of wealth—just ask Warren Buffett. The profitability of an insurance company depends almost entirely on its skill in underwriting, which is the art and science of pricing risk correctly. Morbidity tables are the “science” part of that equation.

• The Goldilocks Problem: If an insurer's morbidity tables are too optimistic (they underestimate how often people will get sick), they will set premiums too low. They might attract lots of customers, but they will be slammed with unexpectedly high claims, destroying their profitability. Conversely, if their tables are too pessimistic, their premiums will be too high, and they'll lose business to more competitive rivals.
• Your Analytical Edge: As an investor, you won't get to see a company's proprietary morbidity tables. However, you can see the results of their underwriting skill in the financial statements. By analyzing a company's loss ratios (claims paid out as a percentage of premiums earned) and combined ratios over many years, you can judge how well they price risk. A company with consistently stable and profitable ratios likely has a superior grasp of its morbidity data and a disciplined underwriting culture—hallmarks of a well-run insurer worth investing in.

Morbidity data can also offer insights into macroeconomic and societal trends. Rising morbidity rates for obesity-related illnesses, for example, could signal long-term challenges for public healthcare systems but also create opportunities for pharmaceutical companies, fitness businesses, and medical device manufacturers. Keeping an eye on these broad trends can help a value investor spot both risks and opportunities across different sectors.

• The Foundation of Risk Pricing: Morbidity tables are the statistical engine that powers the health and disability insurance industries.
• A Proxy for Management Quality: While you can't read the tables themselves, you can judge their effectiveness by analyzing an insurer's long-term loss and combined ratios. Consistency and profitability are signs of excellent risk management.
• Essential for Insurance Analysis: If you are considering investing in an insurance company, understanding the role of morbidity tables is non-negotiable. It separates a guess from an educated investment decision.
• Beyond Insurance: The data can provide valuable clues about broader health trends, informing investments in the wider healthcare ecosystem.