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Rating the raters: evaluating the predictions from a life expectancy rating service
Robert Shavelle1, David Strauss
1Life Expectancy Project, 1439 - 17th Avenue, San Francisco, CA 94122, USA. Shavelle@LifeExpectancy.org
Abstract:
There is a growing market for the resale of life insurance policies to third party investors. A key factor in the valuation of a policy is how long the insured is likely to live. Various commercial rating services offer to provide estimates of individuals' likely longevity, but the reliability of their estimates has rarely been correctly evaluated. The question is how to compare the estimates provided for a large group of policy-holders with the observed "truth data"--the actual mortality experience observed during follow-up. Various approaches to this have been used in practice, some of them quite wrong. The correct method does not seem to be practiced or widely known in the life settlement industry. It is based on a comparison of observed and expected deaths computed on the basis of person-years of exposure rather than of individual persons. The method is explained in detail here and illustrated with the results from a large portfolio of policies.
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