A Three-Factor Model for Mortality Modeling

North American Actuarial Journal, Volume 19, Issue 2, pp129-141, 2015

In this article, the authors propose a three-factor model for mortality modeling in which the dynamic of the entire term structure of mortality rates can be expressed in closed form as a function of three variables x, t, and y. Due to this feature, they are able to project mortality rates across age (x), across time (t), and for y years (y ⩾ 1) after t. Their proposal differs from most existing models where only the one-year mortality rate is considered (y = 1). The model is characterized by three parameters that are calibrated yearly. The authors describe the stochastic dynamic of the three factors with correlated autoregressive processes. They generate stochastic scenarios accounting for the historical mortality trend in a consistent manner with the Gompertz law. Using population mortality data for Italy, the U.S., and the U.K., the model’s forecasting capability is assessed, and a comparative analysis with other models is provided.