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Stochastic Mortality and the Dispersion of Subjective Estimates of Survival Probabilities – Evidence from 11 European Countries

GoTriple's project summary

Recently, the analysis of stochastic processes for mortality change have gained considerable interest in insurance and finance research. This project aims at assessing how stochastic mortality is really perceived by individuals. Stochastic mortality, or aggregate mortality risk, refers to the fact that future mortality rates are uncertain. Uncertainty arises from the fact that the drivers behind changes in mortality over time, e.g. medical progress or general living and nutrition conditions, are themselves outcomes of stochastic processes. For individuals, theoretical models indicate that the uncertainty around future mortality rates is an important determinant for saving and asset allocation, especially annuitization decisions. This project therefore wants to assess how stochastic mortality is perceived in reality. Lacking data on direct subjective estimates of the volatility of mortality rates we aim to use methods developed in research analyzing the information content of the dispersion of financial analysts’ estimates. We can utilize a rich micro-level data set, the Survey of Health, Ageing and Retirement in Europe (SHARE), a project financed by the European Commission. SHARE covers major EU countries and includes subjective estimates of individuals’ survival probabilities. Our aim is to investigate if, like in the analysts’ forecasts, the dispersion of respondents’ answers is informative in the sense that the dispersion is linked to the actual gender, age, and country-specific volatility of mortality. Estimates for actual volatility of mortality rates will be obtained by calibrating a standard model for stochastic mortality with data from the Human Mortality Database. Our results will be highly relevant in the context of pension reform. For pension reforms which emphasize individually managed retirement savings and asset allocation, it crucial that individuals make informed decisions. Our results deliver relevant input for the design of pension systems.

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