DEFINITION of 'Underlying Mortality Assumption'
Projections of expected death rates used by actuaries to estimate insurance premiums and pension obligations. Underlying mortality assumptions are based on mortality tables, which are statistical tables of expected annual mortality rates. Because of the critical importance of the underlying mortality assumption, actuaries have to follow guidelines set by pension and insurance regulators in deciding on an appropriate assumption.
Also called the mortality assumption.
BREAKING DOWN 'Underlying Mortality Assumption'
The underlying mortality assumption is a key variable in estimating life expectancies, which in turn determines the cost of insurance for an insurer and the long-term obligations of a pension fund. If the underlying mortality assumption is too low, a life insurer may underestimate the actual cost of insurance and may have to pay out more death benefit claims than it had forecast. Conversely, if the underlying mortality assumption is too high, the actuary may underestimate life expectancies of the pension-plan members and hence the long-term obligations of the pension fund.