Mortality and Longevity Valuation

Where we present a brief discussion on methods for valuing longevity risk. Chaos is the origin of the universe. Mathematics is its language. It is clear that the asset class comprised of life insurance related products that carry longevity risk cannot be valued based on typical financial measures. Specifically, the returns and yields so commonly bantered about amongst the 'players' have absolutely no meaning, because they are based on a flawed assumption that permeates the entire process: the FALSE premise that one knows when an individual is going to die. Nothing could be farther from the truth, nothing could be more difficult (nigh impossible) to predict, and this extremely dangerous assumption creates the illusion that the numbers spun by these 'players' can be used to make decisions. Recent events in the Mortgage Market (for those of shorter memory) as well as countless past collapses attest to just how dangerous these assumptions are. It is clear, then, that the only number that really matters in this asset class is volatility-of-life-expectancy (V.O.L.E). Because the experience that is publicly available is restricted to Official Census Data, special studies such as TOAMS, and the mortality tables prepared by the SOA, there are some caveats that must be observed. 1) These data are based on large groups of lives and are not statistically suited for predicting when one individual is going to die. 2) These data are not necessarily demographically or geographically compatible with the probabilities that should be associated with an individual life. Yet another fallacy is the LE provider number. Any commercial venture that claims to use medical information to estimate life expectancy, yet, whose estimates generally lie suspiciously close to those that one would get from the VBT 2008 gives cause for concern. Essentially, what one glimpses from these reports is that they know little more than we do about the health and life expectancy of the individuals they purport to have examined. So, to rely heavily on LE reports is to assume the same dangerous behavior mentioned above. These are, at best, merely another data point. So, the notion of variability in time of death is essential to any understanding of this asset. To this end we have devised a method to estimate this variance which is very straightforward and is founded on solid mathematical ground. Using the VBT 2008 we input age, gender and risk class as well as implied …