Evaluating Life Expectancy Evaluations

Area of Science:

• Finance
• Actuarial Science
• Insurance

Background:

• Life expectancy estimates are crucial for life settlement investors.
• The A-to-E ratio (Actual to Expected deaths) is the standard metric for assessing estimate quality.
• Existing metrics have limitations in accurately reflecting underwriting performance.

Purpose of the Study:

• To identify critical limitations of the A-to-E ratio in life expectancy estimation.
• To propose novel metrics for evaluating underwriting quality in life settlements.
• To assess the underwriting quality of a major U.S. life expectancy provider using new methods.

Main Methods:

• Analysis of the A-to-E ratio's statistical properties, including short-term uncertainty and long-term convergence.
• Development of new metrics based on the difference in temporary life expectancies.
• Application of the new methodology to a dataset from a leading U.S. life expectancy provider.

Main Results:

• The A-to-E ratio is susceptible to estimation uncertainty in smaller portfolios.
• The A-to-E ratio converges to 100% over time, masking systematic underwriting bias.
• The newly proposed metrics provide a more robust evaluation of underwriting accuracy.

Conclusions:

• The A-to-E ratio is an inadequate measure for assessing long-term underwriting quality in life settlements.
• New metrics based on life expectancy differences offer a superior alternative for evaluating life expectancy providers.
• The study provides a framework for more accurate assessment of investment risk in life settlements.