How much data do you need?

(Aug 30, 2017)

There are two common scenarios when an actuary has to come up with a mortality basis for pensioners or annuitants:

  1. For a portfolio of liabilities already owned, e.g. an insurer's existing annuities in payment or a pension scheme's pensions in payment.
  2. For a portfolio of liabilities where the risk is to be transferred, e.g. an insurer or reinsurer looking to price a buy-out or longevity swap.

Leaving aside questions of data quality, in each case the actuary is faced with the same question: is the portfolio's experience data large enough to rely on? And if there isn't enough experience data, what does the actuary do instead?

At one extreme consider a pension scheme with a hundred pensioners. With an average of around

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Tags: credibility, basis risk, concentration risk

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