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Information OverloadSteven RimmerTowers Watson

Information overload:Setting mortality assumptions in the modern eraSteven Rimmer, Towers Watson

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What we promised to talk about

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What we are going to conclude

New data can help

Markets change risk

Context matters

5

A brief history of base assumptions

Single assumption

• Own experience

• Industry standard tables

• Adjusted for industry / amount

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A brief history of base assumptions

Postcode rating

• Everyone is ‘different’?

• Postcode vs individual

• Data quality

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Quick aside – Knightian uncertainty

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“The essential fact is that 'risk' means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating”

Risk, Uncertainty, and Profit (1921)

Frank Knight (1885 – 1972)

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Quick aside – Ellsberg paradox

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Set-up

• 90 sweets in a jar• 30 are red• 60 are either yellow or black

Wager 1

• £100 if you draw a red; or• £100 if you draw a black

Wager 2

• £100 if you draw a red or yellow; or• £100 if you draw a black or yellow

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A brief history of base assumptions

Postcode rating

• Everyone is ‘different’?

• Postcode vs individual

• Data quality

10

A brief history of base assumptions

£10,000 pensionSmoker

Heart attackNo financial dependants

Individual underwriting

• Current hot topic

• Role for Trustees?

• Insurability?

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Quick aside – The market for lemons

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“This paper relates quality and uncertainty. The existence of goods of many grades poses interesting and important problems for the theory of markets…… good cars may be driven out of the market by the lemons.”

The Market for “Lemons”: Quality Uncertainty and the Market Mechanism (1970)

George Akerlof (1940 – )

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Quick aside – The market for lemons

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Sellers Buyers

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Quick aside – The market for lemons

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Sellers Buyers

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Quick aside – The market for lemons

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Sellers Buyers

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Quick aside – The (annuity) market for lemons

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Pension schemes

Insurers

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Quick aside – The (annuity) market for lemons

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Pension schemes

Non-underwritten

Medical underwriting

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Quick aside – The (annuity) market for lemons

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Pension schemes

Non-underwritten

Medical underwriting

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A brief history of base assumptions

£10,000 pensionSmoker

Heart attackNo financial dependants

Individual underwriting

• Current hot topic

• Role for Trustees?

• Insurability?

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What next?

£10,000 pensionSmoker

Heart attackNo financial dependants

Genetic profiling

• Next step?

• Explains a lot of variation at oldest ages

• Would we want to gather the information?

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especially about the future.”ZZZ

“It's hard to make predictions,

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Actual and projected period life expectancy at birth, males, 1961-2031

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67

69

71

73

75

77

79

81

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1961 1971 1981 1991 2001 2011 2021 2031

Year

Exp

ecta

tio

n o

f lif

e at

bir

th (

year

s)

Actual 1987-based 1992-based 1996-based

2000-based 2004-based 2006-based 2008-based

Sources: ONS, Human Mortality Database

“Trend risk”

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Deaths by quarter

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CMI Working Paper 69

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Male life expectancies

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Female life expectancies

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Deaths in England & Wales 2001 to 2012

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Total Change from previous year

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Ten most prevalent causes of death in E&W 2001

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Ten most prevalent causes of death in E&W 2001

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Nine of Top 30 are diseases of the circulatory system

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Twelve of Top 30 are malignant neoplasms

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Other nine of Top 30

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Ten most prevalent causes of death in E&W 2001

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Ten most prevalent causes of death in E&W 2001

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Ten biggest increases over last 12 years

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Ten biggest fallers over last 12 years

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Biggest risers and fallers 2011 to 2012

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Differentiating rates of improvement

Source: Article in The Actuary by Piero Cocevar and Luigi De Falco

Low pension High pension

Evidence from Italy

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