A report published by Swiss Re calls on for sweeping changes in mortality calculations, arguing new assumptions will help capital markets and pension schemes gain better understanding of the factors that affect them.
The report – A window into the future: Understanding and predicting longevity, observed the current models, stochastic or blended, failed to take into account the progresses made in medical sciences and made inefficient use of information available.
Daniel Ryan – the author of the report and head of life and health research & development at Swiss Re, said commercial databases such as General Practice Research Database should be used instead to calculate the combination of diseases affecting overall mortality.
The historical data then should be combined with forward looking events, taking into consideration different treatments in trial to arrive at possible scenarios that could then be used to explain variations from predicted mortality rates, he argued.
This meant that it can be easily explained if medical breakthroughs, when achieved, have already been factored in. Future projections can accordingly be updated if it’s found that medical developments were not considered.
“It’s putting a covering of a narrative over the numbers that are churned out by a particular model,” explained Mr. Ryan.
Sudden unforeseen adverse developments in treatment, such as failure of a promising drug or a sudden health scare may cause predictions to fail, conceded Mr. Ryan, but added this could be addressed by calculating a wide range of long-term assumptions on individual disease basis.
The fresh approach would have been able to project the dramatic rise in longevity since the 90s better, said Mr. Ryan.
“We still would have had to change our expectations, but it would have been over a more gradual period of time rather than the kind of step change we saw,” he explained.
The new approach will open the market for new players and address the problem of limited market capacity for longevity swaps.
“By providing greater information to the capital markets we can help them understand that, while longevity in the future is an unknown, it is inherently no more unknown than many of the other variables people have to consider when taking on future risk,” added Mr. Ryan.