Smoothing, Decomposing and Forecasting Mortality Rates

The Lee-Carter (LC) model represents a landmark paper in mortality forecasting. While having been widely accepted and adopted, the model has some limitations that hinder its performance. Some variants of the model have been proposed to deal with these drawbacks individually, none coped with them all at the same time. In this paper, we propose a Three-Component smooth Lee-Carter (3C-sLC) model which overcomes many of the issues simultaneously. It decomposes mortality development into childhood, early-adult and senescent mortality, which are described, individually, by a smooth variant of the LC model. Smoothness is enforced to avoid irregular patterns in projected life tables, and complexity in the forecasting methodology is unaltered with respect to the original LC model. Component-specific schedules are considered in projections, providing additional insights into mortality forecasts. We illustrate the proposed approach to mortality data for ten low-mortality populations. The 3C-sLC captures mortality developments better than a smooth improved version of the LC model, and it displays wider prediction intervals. The proposed approach provides actuaries, demographers, epidemiologists and social scientists in general with a unique and valuable tool to simultaneously smooth, decompose and forecast mortality.