Evaluating Medical Underwriters in Life Settlements: Problem of Unreported Deaths

The valuation of policies in the life settlement market hinges upon life expectancy assessments provided by medical underwriters. Because accurate assessments are essential to the market functioning well, determining so is of interest to various stakeholders, including regulatory bodies. As a third party to settlement transactions, these underwriters, and hence their auditors, have to rely on public sources in compiling mortality data on underwritten insureds. Such acquired data are known to contain a significant proportion of unreported deaths. Accurate accounting for their presence is crucial to a fair evaluation of an underwriter’s methodology. However, existing methods for doing so either rely solely on actuarial opinion or are based on assumptions untenable in the life settlement context. Toward developing a practical data-driven methodology for consistently estimating mortality in the presence of unreported deaths, we propose the IBNR (incurred but not reported) rate model. This adaptation of the cure rate model accommodates the heterogeneity in the rates of both mortality and unreported deaths seen in practice. Our methodology thus facilitates an accurate and objective evaluation of an underwriter.