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IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area

An actuary reviewing a company's gratuity scheme finds that members are living longer than the mortality table used in the last valuation assumed. Which action best addresses this challenge?

The actuary should update the mortality assumption in line with experience, measure the effect on liabilities and communicate the funding impact to the sponsor. Longer lifespans raise expected benefit payments, and ignoring or masking the trend through other assumptions or data changes would misstate the liability.

  1. AIgnore it until actual claims exceed expectations
  2. BUpdate the mortality assumption, assess the effect on liabilities and communicate the funding impactCorrect
  3. CReduce the discount rate only, leaving mortality unchanged
  4. DRemove older members from the valuation data
  5. Shorten the valuation period to avoid the issue

Explanation

Improving longevity raises the expected duration of benefit payments, so the assumption should be reviewed against experience and the cost effect communicated. Waiting, altering unrelated assumptions or removing data would give a misleading valuation.

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