What Is an Underlying Mortality Assumption?
Let me explain what an underlying mortality assumption is. It's essentially a projection of expected death rates that actuaries like me use to figure out insurance premiums and pension obligations. We base this on mortality tables, which are straightforward statistical charts showing expected annual mortality rates.
Given how crucial this assumption is, we actuaries must stick to guidelines from pension and insurance regulators when choosing the right mortality assumption.
Key Takeaways
- Underlying mortality assumptions are the modeled projections of expected death rates used by actuaries.
- They are used to estimate insurance premiums and pension obligations.
- These assumptions are based on mortality tables, which are statistical tables of expected annual mortality rates.
Understanding the Underlying Mortality Assumption
You need to grasp that the underlying mortality assumption is a core factor in estimating life expectancies, which directly affects how much insurance costs for a company and what a pension fund owes long-term. If we set this assumption too low, a life insurer might underestimate the real cost of insurance and end up paying more in death benefits than planned.
On the flip side, if it's too high, we could underestimate life expectancies for pension plan members, leading to underestimating the fund's long-term obligations.
Most people avoid thinking about death, but for life insurers and pension administrators, it's our primary focus. I'll tell you straight: people often get mortality statistics wrong. They mix up mortality at birth with what happens in old age—they're not the same.
Special Considerations
Let's look at some data from the Centers for Disease Control for 2020. The death rate was 835.4 per 100,000 population. Life expectancy at birth stood at 77 years, with an infant mortality rate of 541.9 deaths per 100,000 live births.
The leading causes of death included heart disease at 168.2 deaths per 100,000, cancer at 144.1, COVID-19 at 85.0, unintentional injuries at 57.6, and stroke at 38.8.
For males, life expectancy dropped from 76.3 in 2019 to 74.2 in 2020; for females, it went from 81.4 to 79.9. Females consistently have higher life expectancy than males.
Once you reach advanced age, different stats apply. In 2020, life expectancy at age 65 was 18.5 years for the total population, down from 19.6 in 2019. For males, it was 17.0 (from 18.2), and for females, 19.8 (from 20.8).
