A new blueprint for building mortality models has been developed by the Pensions Institute at Cass Business School.

The new ‘general procedure’ blueprint can be applied to any dataset to build a mortality model that fits all ages across the population, and “could transform the way pensions and annuity providers forecast mortality rates”, the institute said.

The new blueprint was developed following the rise in new mortality models that often involved ad-hoc extensions to existing models thought to have “questionable demographic significance”. These models also resulted in difficulties in extracting realistic forecasts of specific mortality rates, the institute highlighted.

However tests of the new blueprint on UK data found that the general procedure outperformed simpler models such as the Lee-Carter model and produced more parsimonious models than those using a mechanical algorithm.

The tests also found that the new procedure gave well specified cohort effects which are essential for reliable forecasting of mortality rates.
Pensions Institute director and co-author of the research Professor David Blake said: “Rather than propose yet another new mortality model we outline and implement a general procedure for building a mortality model from scratch.

“The general procedure is a way of constructing mortality models which are tailored to specific datasets. This means it is able to identify the idiosyncratic features of different populations which conventional ‘off-the-peg’ models are unable to do.”

Andrew Hunt co-author of the study added: “The procedure works by sequentially extending a simple mortality model – first with freely varying age effects which take whatever shape fits the data best and then replacing these with a simpler, parametric age function which does the same job. It uses a combination of expert judgement and a toolkit of functional forms.
“This then achieves a good fit to the data with a relatively parsimonious model whose age effects can then be interpreted in light of the underlying socio-economic and demographic drivers of changing mortality rates.”

Share Story: