Underlying Mortality Assumption

What is ‘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.

Explaining ‘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.

Underlying Mortality Assumption FAQ

What is an actuarial factor?

A Participant’s Actuarial Factor is the factor the Plan Administrator establishes based on the interest rate and mortality table the Employer elects in its Adoption Agreement.

What is an actuarial calculation?

Actuaries use the actuarial cost method to calculate the amount a company must pay periodically to cover its pension expenses. The cost approach calculates total final benefits based on several assumptions, including the rate of wage increases and time of retirement of employees.

What is an actuarial gain or loss?

Actuarial gain or loss is an increase or a decrease in the projections for valuing a corporation’s defined benefit pension plan obligations. The Financial Accounting Standards Board (FASB) SFAS No. 158 requires the reporting of the funding status of pension funds on the plan sponsor’s balance sheet.

How do you account for actuarial gains and losses?

Actuarial gains and losses is the difference between the pension payments actually made by an employer and the expected amount. It’s a gain if the amount paid is less than expected and a loss otherwise.

What are mortality tables used for?

A mortality table shows the probability of a person’s death before their next birthday, using their current age. These tables are to inform the construction of insurance policies and other forms of liability management.

Further Reading