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Evaluating Life Expectancy Evaluations

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  • Daniel Bauer
  • Michael V. Fasano
  • Jochen Russ
  • Nan Zhu

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.

Suggested Citation

  • Daniel Bauer & Michael V. Fasano & Jochen Russ & Nan Zhu, 2018. "Evaluating Life Expectancy Evaluations," North American Actuarial Journal, Taylor & Francis Journals, vol. 22(2), pages 198-209, April.
    • Handle: RePEc:taf:uaajxx:v:22:y:2018:i:2:p:198-209
    DOI: 10.1080/10920277.2017.1381031
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    Cited by:

    1. Blake, David & Cairns, Andrew J.G., 2021. "Longevity risk and capital markets: The 2019-20 update," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 395-439.
    2. Daniel Bauer & Jochen Russ & Nan Zhu, 2020. "Asymmetric information in secondary insurance markets: Evidence from the life settlements market," Quantitative Economics, Econometric Society, vol. 11(3), pages 1143-1175, July.
    3. Oytun Haçarız & Torsten Kleinow & Angus S. Macdonald & Pradip Tapadar & R. Guy Thomas, 2020. "Will genetic test results be monetized in life insurance?," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(4), pages 379-399, December.

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