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The heat wave model for constructing two-dimensional mortality improvement scales with measures of uncertainty

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  • Li, Johnny Siu-Hang
  • Liu, Yanxin

Abstract

Recently, the actuarial professions in various countries have adopted an innovative two-dimensional approach to projecting future mortality. In contrast to the conventional approach, the two-dimensional approach permits mortality improvement rates to vary with not only age but also time. Despite being an important breakthrough, the currently used two-dimensional mortality improvement scales are subject to several limitations, most notably a heavy reliance on subjective judgments and a lack of measures of uncertainty. In view of these limitations, in this paper we introduce a new model known as the heat wave model, in which short- and long-term mortality improvements are treated respectively as ‘heat waves’ that taper off over time and ‘background improvements’ that always exist. Using the heat wave model, one can derive two-dimensional mortality improvement scales that entail minimal subjective judgment and include measures of the uncertainty.

Suggested Citation

  • Li, Johnny Siu-Hang & Liu, Yanxin, 2020. "The heat wave model for constructing two-dimensional mortality improvement scales with measures of uncertainty," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 1-26.
  • Handle: RePEc:eee:insuma:v:93:y:2020:i:c:p:1-26
    DOI: 10.1016/j.insmatheco.2020.04.001
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    References listed on IDEAS

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    2. Yanxin Liu & Johnny Siu-Hang Li, 2023. "Disentangling Trend Risk and Basis Risk with Functional Time Series," Risks, MDPI, vol. 11(12), pages 1-18, November.
    3. Yang Qiao & Chou-Wen Wang & Wenjun Zhu, 2024. "Machine learning in long-term mortality forecasting," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 49(2), pages 340-362, April.

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