What Is an Underlying Mortality Assumption?

Underlying mortality assumptions are projections of expected death rates used by actuaries to estimate insurance premiums and pension obligations.

Key Takeaways

  • Underlying mortality assumptions are the modeled projections of expected death rates used by actuaries.
  • Underlying mortality assumptions are used to estimate insurance premiums and pension obligations.

This is 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.

Understanding the 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 in 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.

Mortality in the United States

For most people, death is the last thing they want to think about. For life insurers and pension administrators, it's the first thing they think about. Any good actuary can tell you that people often misjudge the statistics about mortality. They don't understand that mortality at birth and mortality in advanced age are two different things. 

According to the Centers for Disease Control 2019 data, there were 2,854,838 deaths in the U.S. and a death rate of 869.7 deaths per 100,000 population. Life expectancy at birth was 78.8 years, and the infant mortality rate was 5.58 deaths per 1,000 live births.

The leading causes of death: heart disease, 659,041; cancer, 599,601; accidents (unintentional injuries), 173,040; chronic lower respiratory diseases, 156,979; stroke (cerebrovascular diseases), 150,005; Alzheimer’s disease, 121,499; diabetes, 87,647; nephritis, nephrotic syndrome and nephrosis, 51,565; influenza and pneumonia, 49,783; and intentional self-harm (suicide), 47,511.

For males, life expectancy changed from 76.2 in 2018 to 76.3 in 2019; for females, life expectancy increased from 81.2 to 81.4. The life expectancy for females was consistently higher than it was for males. In 2019, the difference in life expectancy between females and males increased by 0.1 years from 5.0 years in 2018 to 5.1 years in 2019.

Once you make it to advanced age, a new set of statistics comes into play, the CDC noted: "In 2019, life expectancy at age 65 for the total population was 19.6 years, an increase of 0.1 year from 2018. For males, life expectancy at age 65 increased 0.1 year from 18.1 in 2018 to 18.2 in 2019. For females, life expectancy at age 65 increased 0.1 year from 20.7 years in 2018 to 20.8 in 2019."