Mortality improvement trend
Structural evolution of the decline in mortality rates over time, a key and uncertain parameter of longevity pricing.
The mortality improvement trend designates the structural decline in mortality rates over time, which translates into a lengthening of life expectancy. This parameter is central to the pricing and reserving of annuities and pension obligations: anticipating future mortality improvement determines the duration over which annuities will be paid. The difficulty lies in the uncertainty of this trend: the improvement observed in the twentieth century saw phases of acceleration and slowdown, and its future pace is debated. An underestimate of the improvement exposes the insurer to a lasting longevity risk, beneficiaries living longer than expected. Medical progress, lifestyle changes, but also unfavorable factors such as certain health crises influence this trajectory. Actuaries model improvement through trend and volatility components, subject to regular revision. For pension risk transfer and bulk annuities, the calibration of this trend is one of the main determinants of the profitability of very long-term obligations.
Textbook case: a faster-than-expected mortality improvement lengthens the annuity payment period, exposing the insurer to an unpriced longevity risk.
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