AS 3431B: Life Contingencies III

January 6, 2013
Lecture Slides
Plan for Todays Class
Introduction and review of course outline
Owl site for the course
Actuarial applications of multiple state models
Assumptions and notation
1
Actuarial applications of multiple state models
The alive-dead model:
(x) alive
0
(x) dead
1

2
Actuarial applications of multiple state models
The multiple decrement model:
cause 1
1
cause 2
2


(x) insured
0
cause m
m

/
/
/
/
/
/
/
/
/
/
/
/
/ /-
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
3
Actuarial applications of multiple state models
The joint life and last survivor model:
(x) dead
(y) alive
2
(x) dead
(y) dead
3
(x) alive
(y) alive
0
(x) alive
(y) dead
1

4
Actuarial applications of multiple state models
The disability income insurance model:
(x) healthy
0
(x) sick
1
(x) dead
2

`
`
`
`
`
`
`
`
`
`
`
`
``

-
5
The multi-state process
Let Y = {Y (t)}
t0
be a continuous-time multi-state process with n + 1
states labelled 0, 1, . . . , n.
Then Y (t) is a random variable for each t 0.
Relevant probabilities in our actuarial applications can be expressed as
probabilities associated with Y .
6
Important notation
Let
t
p
ij
x
= Pr[Y (x + t) = j|Y (x) = i],
t
p
ii
x
= Pr[Y (x + s) = i for all s [0, t]|Y (x) = i],
and

ij
x
= lim
h0
+
h
p
ij
x
h
, i = j.
The function
ij
x
is called the force of transition from state i to state j or
the transition intensity function.
7
Assumptions
Assumption 1. For all i, j and all t, s 0,
Pr[Y (t + s) = j|Y (t) = i, Y (u) = y(u) for u [0, t)]
= Pr[Y (t + s) = j|Y (t) = i]
=
s
p
ij
t
.
Assumption 1 is known as the Markov property. It means that the future
of the process (after time t) depends only on the current state and not on
the path of the process up to time t.
8
Assumptions
Assumption 2. For any positive interval of time h,
Pr[2 or more transitions within a time period of length h] = o(h).
A function g(h) is said to be o(h) if
lim
h0
g(h)
h
= 0.
That is, the function approaches 0 faster than h does.
9
Assumptions
Assumption 3. For all states i and j and all x 0, we assume that
t
p
ij
x
is
a differentiable function of t.
This assumption guarantees that the forces of transition exist and allows
us to write differential equations for the probabilities
t
p
ij
x
.
10
For Wednesday
Read AMLCR 8.1 to 8.4.1.
Review these slides.
Start Assignment 1.
11