Evaluating Life Expectancy Evaluations

Daniel Bauer, Michael V. Fasano, Jochen Russ and Nan Zhu

North American Actuarial Journal, 2018, vol. 22, issue 2, 198-209

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.

Date: 2018
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DOI: 10.1080/10920277.2017.1381031

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