Basis (or baseline) risk
\ˈbeɪsəs\ \rɪsk\
When model(l)ing a given population's longevity, the degree to which that population's true underlying longevity differs from the population used to derive the baseline longevity assumption.
This risk is reduced by using a rating factor model to model baseline longevity as participants of the pension plan are compared to participants of the reference population with similar characteristics to them as defined by the available ratings factors. Basis risk will tend to reduce with more rating factors (up to a point) and with a larger reference population. Pension plans exhibiting strong industry and/or plan specific effects have elevated basis risk.
Experience studies are an effective method used to further assess or mitigate basis risk. An experience study can help quantify the level of residual (unexplained by the baseline model) mortality present in a given population. The results of a study can provide valuable insights for the population being assessed in addition to being used to refine the baseline assumption.
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