Evaluating Life Expectancy Evaluations. Issue 2 (3rd April 2018)

• Record Type: Journal Article
• Authors: Bauer, Daniel; Fasano, Michael V.; Russ, Jochen; Zhu, Nan
• Is Part Of: North American actuarial journal. Volume 22:Issue 2(2018)
• Page Start: 198
• Page End: 209
• Publication Date: 2018-04-03
• Subjects: Life insurance -- Research -- North America -- Periodicals; Actuarial science -- North America -- Periodicals; Web sites; Electronic journals; 368.010973
• DOI: 10.1080/10920277.2017.1381031
• Languages: English
• ISSNs: 2325-0453

Abstract

Abstract : The quality of life expectancy estimates is one key consideration for an investor in life settlements. The predominant metric for assessing this quality is the so-called A-to-E ratio, which relies on a comparison of the actual to the predicted number of deaths. In this article, we explain key issues with this metric: In the short run, it is subject to estimation uncertainty for small and moderately sized portfolios; and, more critically, in the long run, it converges to 100% even if the underwriting is systematically biased. As an alternative, we propose and discuss a set of new metrics based on the difference in (temporary) life expectancies . We examine the underwriting quality of a leading U.S. life expectancy provider based on this new methodology.