STAT3037/6043 LIFE CONTINGENCIES

QUESTIONS WEEK SEVEN SOLUTIONS

Question 1
(a) Reserve = 1000a 70 = 1000(10.375 1) = 1000(9.375) = 9,375
(b) Per policy in force in three years time the reserve is:
= 100v 2 2 p 63 a&&65
= 100(1.04 2 )

8821.2612
(12.276)
9037.3973

= 1107.84
Now the expected number in force is 100

l 63
9037.3973
= 100
= 97.56
l[60 ]
9263.1422

Hence the expected reserves required to be held are $108,081.

(c) To determine the probability that the office will make a profit first determine the
break-even premium for the annuity.
l
l
l
Premium = 100 v [65]+1 + v 2 67 + v3 68
l[65]
l[65]
l[65]

1 8686.2016
1 8557.0118
1 8404.4916
= 100
+
+
= 270.56
2
3
1.04 8772.7359 (1.04) 8772.7359 (1.04) 8772.7359
Note, this is the same as:
100 l68
100 d[65]+1 100 100 d 67 100 100
+
+
+
+
+
= 270.56

2
2
3
1.04 l[65] 1.04 1.04 l[65] 1.04 1.04 1.04 l[65]
(ie. $100 paid if death occurs between ages 66 and 67, $200 paid if death occurs between
ages 67 and 68, and $300 paid if survival to at least age 68).
Now the office only makes a profit if the annuitant dies before age 68 since only then
the present value of the payments actually made will be less than the premium of $270.56
paid for the contract.
P ( profit )= 3 q[65] = 1

l 68
8404.4916
= 1
= 4.20%
l[ 65]
8772.7359

Page 1

(d) (i) Approximate probability implies (in this course!) using the normal approximation.
Since the normal approximation means we are assuming a symmetrical distribution of the
payout and hence profit when there is no loading for profit in the premium charged this
will lead to a 50 % approximate probability of profit.
(ii) Under the assumption of normality the profit, Pf, will be distributed normally:
To determine the standard deviation above use the fact that
Var(Payout) = E[(Payout)2] [E(Payout)]2
Now E[(Payout)2] is given by:
2
2
2
100 l68
100 d[65]+1 100 100 d 67 100 100
+
+
+
+
+

2
2
3
1.04 l[65] 1.04 1.04 l[65] 1.04 1.04 1.04 l[65]

74543
Therefore the variance of the payout is 1340.29 on a single policy. (ie 74543-270.562)
Hence on 50 policies the variance is 50*1340.29 = 67014. The standard deviation on 50
policies is 67014 = 258.9.
Pf ~ N(100,253.6) ie normal with mean 100 (50 policies x $2 profit per policy) and
standard deviation 258.9.
So the probability that the profit will exceed zero is given by:
Profit-E(Pf) 0 100
100
Pr(Profit > 0) = Pr
>
) = Pr( Z > 0.386) = 0.65 .
= Pr( Z >
258.9
258.9
sd ( Pf )
Alternatively, we could have solved this question by writing:
Pr(Profit > 0) = Pr(50(P+2) > 50C) where P is the risk premium and C is the claim per
policy.
50P + 100 50 C 50C 50 C
= Pr ( 50P + 100 > 50C ) = Pr
>

50

50 C
C

100

= Pr
>Z
258.9

= 0.65

Question 2
(a) Let the annual premium be P.

Page 2

D
48.61

EPV(Prems) = Pa&&[65]:25| = P a&&[65 ] 90 a&&90 = P12.337

4.109 = P (12.0456 )

D[65 ]
685.44

EPV(Bfts)

= 60000A1[65]:25| + 120000

D90
D
D
2D90
= 60000A[65]:25| + 60000 90 = 60000 A[65] 90 A90 +

D[65]
D[65]
D[65]
D[65]

48.61
2(48.61)

= 60000 0.52550
0.84196 +
685.44
685.44

= 36457.46
EPV(Exps)
= 0.01Pa&&[65 ]:25| + (200 0.01P )
= 0.120456 P + 200 0.01P
= 0.110456 P + 200
Hence,
12.0456P = 36457.46 + 0.110456P + 200
P = $3071.39

(b) At time 5, just before the premium paid, and just after the death benefit paid:

EPV(Bfts)
= 60000A 70:20| + 60000

D90
D
2D90
48.61
2 * 48.61

= 60000 A 70 90 A 90 +
0.84196 +
= 60000 0.60097

D 70
D70
D 70
517.23
517.23

= 42588.02

EPV(Prems)

D
48.61

= Pa&&70:20| = P a&&70 90 a&&90 = P10.375

4.109 = P(9.98883)
D70
517.23

= 3071.39(9.98883)
= 30,680
EPV(Exps) = (0.01)30680 = 306.80

Page 3

Therefore the policy value is

42588.02 30680 + 306.80
= $12,215.

Page 4