Impact of income level on life insurance pricing and reserving: evidence from Spain

Accurately estimating premiums and technical provisions is essential for the sustainability ofinsurance businesses. However, despite growing evidence that socioeconomic factors - particu-larly income - significantly influence mortality, life insurance models continue to rely almostexclusively on age and sex. This conventional approach, while operationally simple, overlooksimportant heterogeneity in mortality risk. This study examines the consequences of excludingincome from both pricing and reserving processes in the life insurance sector by analysing itsimpact on a widely used life insurance product: funeral services. We analyse four Spanish funeralinsurance portfolios - covering over 2.1 million georeferenced policies - using a newly developedincome-based mortality database. Our empirical analysis of premiums and Best Estimate Liabilities(BEL) reveals patterns of underestimation and overestimation depending on the income level ofthe insured, highlighting the importance of incorporating income into mortality assessments in theinsurance industry.