(Mis-)Estimation of mortality risk

(Mar 2, 2016)

One of the risks faced by annuity providers is mis-estimation, i.e. the risk that they have incorrectly assessed the current rates of mortality.  This is often handled as a simple reduction factor applied to a published mortality table. There are two implicit assumptions behind this:

  1. Mis-estimation risk is a constant proportion of mortality rates, and
  2. Mis-estimation is a simple down-shift in rates without any offsetting aspects.

In fact the true situation is a lot more subtle than these two assumptions imply, as mortality risk can seldom be fully expressed with a single parameter.  Richards et al (2013) demonstrated this with a multi-parameter model covering seven risk factors.

Multiple parameters inů

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Tags: parameter correlations, orthogonality, mis-estimation risk

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