Pricing Longevity Risk: Establishing the Base Mortality Level

Steven Baxter

Governments, insurance companies, reinsurance companies, company pension schemes and a range of other financial institutions provide products that help to provide the consumer with an income later in life. These institutions need to manage the risk that the assets available to them are sufficient to meet the income that they will need to pay out. A first step in this process is to identify the anticipated future cash outgoings, which are reliant on an estimate of how long people will live for, on average.

While it is possible to model historical and future mortality rates concurrently, the required data volumes mean this is usually the preserve of stochastic simulations of national population mortality. Once specific individuals or groups of lives are being considered by a financial institution it is usual to separate out the estimation of how long people are currently living for (the base mortality level) from an allowance for how this will change in the future. These projections of future changes are often referred to as future improvements (the name reflects the general anticipation of future medical advances and health interventions improving the status quo).

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