### Division of labour

#### (Jan 10, 2017)

At this time of year insurers have commenced their annual valuation of liabilities, part of which involves setting a mortality basis.  When doing so it is common for actuaries to separate the basis into two components: (i) the current, or period, mortality rates and (ii) the projection of the future path of mortality rates (usually mortality improvements).  This sub-division is carried over into the regular Solvency II assessment of capital requirements, where there is always a minimum of two sub-risks for longevity:

1. Mis-estimation risk, i.e. the uncertainty over the current level of mortality.
2. Trend risk, i.e. the uncertainty over the future direction of improvements.

In practice a Solvency II assessment…