A method for calculating the implied no-recovery three-state transition matrix using observable population mortality incidence and disability prevalence rates for the elderly

Lim, W., Khemka, G., Browne, B. and Pitt, D.
Journal of Population Research, forthcoming.

The most accurate estimation of transition probabilities for a multiple state model of health status requires longitudinal data. However, for many countries such data are usually not available. Instead population level mortality incidence and disability prevalence rates are often all that can be accessed. In this paper, for a three-state no-recovery model (with states healthy, disabled, dead), using simple mathematical derivations, we propose a framework to estimate the age-and gender-specific boundaries within which each of the transition probabilities should fall. We then provide two methods for estimating unique transition probabilities-a least squares procedure and a method based on the 'extra mortality' factor proposed by Rickayzen and Walsh (2002). We also show the acceptable range for the 'extra-mortality' factor given the mortality and disability data. Furthermore, we provide a critique of the method proposed by Van der Gaag et al. (2015), as their estimates can fall outside the acceptable boundaries. Finally, we illustrate how our results can be used to determine premium rates for a life care annuity and a disability annuity.

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