IAI Actuarial Core Principles · Risk Modelling and Survival Analysis · Mortality projection
A pension insurer notes that its projected mortality improvement rates by age and calendar year are based on the assumption that past improvements continue. Which is the main weakness of simple extrapolation of past trends?
Simple extrapolation ignores the causes of mortality change. If the drivers of past improvement, such as falling smoking prevalence or medical advances, weaken or change, the extrapolated trend may no longer be appropriate, so projections can be badly wrong.
- AIt cannot produce any estimate of future mortality rates
- BIt always overestimates improvements because past improvements were smaller than future ones
- CIt requires the population to be closed to migration
- DIt ignores the underlying causes of change, so it may fail if the drivers of past improvement (such as reductions in smoking) change or fadeCorrect
- It can only be applied to a single age rather than to a range of ages
Explanation
Extrapolative methods assume the past pattern of change continues and do not model causes. If drivers like smoking reduction or medical advances change in effect, projections can be misleading. The other options are not true generally.
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