The Lee-Carter Model under the Conditions of Variable Age-Specific Parameters

Marie Claire Koissi, Western Illinois University
Arnold Shapiro, Pennsylvania State University

In recent years, unexpected level of mortality improvement has become an increasing challenge for life annuities business. As a result, the need for robust and reliable models for mortality projection has become a growing issue among actuaries and policies makers. The model proposed by Lee and Carter in 1992 seems to be generally accepted, though it needs improvement. To improve the performance of the Lee-Carter model several extensions to the original version have been proposed. In this paper, we propose a modification of the Lee-Carter model that accommodates variations in age-specific parameters. The Lee-Carter assumption of constant age-specific pattern of mortality over the year is known to be unrealistic (Gutterman and Vanderhoof, 1999; Tuljarpurkar and Boe, 1998). The paper also proposes an extended weighted least square approach to find the model parameters.