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.




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Stephen Richards
Stephen Richards is the Managing Director of Longevitas