Lee-Carter state space modeling: Application to the Malaysia mortality data

Abstract

The population of many countries might undergo dramatic changes in the coming decades due to continuous increases in life expectancy. The sustained reduction in mortality rates and its systematic underestimation has been attracting the significant interest of researchers in recent years because of its potential impact on population size and structure, social security systems, and (from an actuarial perspective) the life insurance and pensions industry worldwide. Among all projection methods, the Lee-Carter method has been widely accepted by the actuarial community. This paper explores the use of the Lee-Carter method to forecast the mortality rates for Malaysian population. The index of the level of mortality for each gender, and the shape and sensitivity coefficients for 18 age groups were obtained through the Lee-Carter method. The Singular Values Decomposition (SVD) is used to forecast the general index for the time period that goes from 2011 to 2030. Since the model involves nonlinear equations that are explicitly difficult to solve, the Matrix Laboratory Version 7.0 (MATLAB 7.0) software will be used in the study. The empirical data sets of Malaysia population for the period of 1981-2010 and for both genders will be considered.