Cutting the bias

With the exception of dressmaking, bias is generally undesirable.  This is particularly the case when projecting future mortality rates for reserving for pension liabilities.  More precisely, a bias towards over-stating mortality rates would be particularly bad because it would lead to under-reserving.

One method for forecasting future mortality is to project changes by cause of death.  I have written previously about the numerous technical challenges facing the cause-of-death approach.  However, there is also a fundamental academic objection to this approach: it is biased.  This is covered by a number of researchers, two of whom we quote below:

"Mortality projections disaggregated by cause of death have been found in practice to be more pessimistic than those without disaggregation [...]. The reason is straightforward: over time the overall trend becomes dominated by the trend for those causes with the slowest decline."

Wong-Fupuy and Haberman (2004) Projecting mortality trends, NAAJ.

 

When Wong-Fupuy and Haberman write "pessimistic", they mean the over-estimation of mortality rates. This is exactly the kind of bias you do not want when you are worried about the adequacy of pension-fund reserves.  If a company uses cause-of-death projections as a basis for reserving, auditors and regulators will want to know how the in-built tendency for bias has been overcome.

 

Comments

captcha

Find by key-word


RECENT POSTS

Last week I presented at Longevity 14 in Amsterdam.  A ... Read more
The United Kingdom has long had persistent regional disparities in ... Read more
Most of the survival models used by actuaries are smooth ... Read more
Stephen Richards
Stephen Richards is the Managing Director of Longevitas