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Chapter 3: Survival Distributions and Life Tables

Distribution function of X:
Fx(:r)

= Pr(X

S;

Force of mortality flea:):

:1;)

/1(:1:)

Survival function B(.1:):

8' (x)

sex)
Relations between survival functions and
force of mortality:

Probability of death between age :r and


age y:

Pr(.r < X S; z)

F.J( (z)

- Fx (:1:)

exp (

- B(Z)

Probability of death between age


age y given survival to age :r::

-I

"(Y)d ll )

and

x+n

exp

nPx

Pr(:1; < X S; zlX >

p.(y)ely

Derivatives:
d

dt t(jx

Notations:
tlJx

dt

-T
dt'"

prob. (3:) dies within t years

-L
dt x

distribution function of T(a:)


tPx

+ t)

tl

PriT(.r)

tPx . It (:r:

tPx

Pr[T(:c) > t]
attains age

;1;

-1

+t

Mean and variance of T and ](:

Pr[t < Tel')


t+ul]x t])a'

E[T(:r)]

+ 'Ill

complete expectation of life

=./

t(jx

tP:B elt

t+u])x

curtate expectation of life

tPx' u(]x-t-t

ex)

Relations with survival functions:


00

Vo.7:T(:r:) ]

2./

,J
,2
t . tPx u,t
- ex

00

Curtate future lifetime (K(:r)


integer in T(x)):

Pr[K(.l')

k]

Vo:r[K(.r}]

greatest

Pr[k

T(:r) < k

k]Jx

k+lPx

k=l

+ 1]

Total lifetime after age .r: Ta


ex;

kP", . qx+k

T-r:

klJx

Exam rv[

Life C;onting;;;ncicH - LGD@

2)2k -1) kP:r

./ lx+t dt
o

e".

~,

Varying benefit insul'ances:

(IA)x

./It + IJlIt,
./It +

Interest theory reminder

am
tPx !/'x(t)dt
n'fll

l,n

1
/5 '

IJI/ ' t1Jxlt x(t)dt

0fll

00Cl

1
d

- nvn

(Ia)fll

(X)

(IA)",

vn

11

(L4)~:m

./ t ' l,t , tP:r p'o,(t)dt


0
11

(IA);"fll

(IO)OCl

./ t ' 7,t , tPx It x (t)dt

(n

52
(Ia)fll + (Da)m

+ l)Ofll

11

CD"4.);':fll

./(n ItJ

' tPx fJ,x(t)dt

i'IJ

1 +i

id

12

0
T1

(DA);':fll

./(n - t)vt , tPdl'x(t)dt


0

(IA)x
(DA)~:fll

Ax + VP:L,(1A)x+l
lIqx + 1)1'rr'
nvqx

Doubling the constant force of interest 5


1 +i

-4

+ (15A);:fll
(IA)~:fll + (D)l)~:fll = (n + l)A;:fll
(IA )~:fll + (DA)~:fll (n + l)A~;m
(IA);:fll

d
i

+ i)2

--+

-+

2i

+ i2

2d d 2
2i + i 2

25

Limit of interest rate i = 0:

Accumulated cost of insurance:

A o,

Share of the survivor:

Exam l'vl - Life Cont.ingenciel$ - LC;D'V

(1
1)2

+ vpx(DA)x~l:n_ll

accumulation factor

-4

A~:fll

nqx

n!Ax

11}1X

Ax:fll
mlnqx

(JA)x

1 +e:r:

(IA)x

eo,

Chapter 5: Life Annuities

ax

Whole life annuity:

Recursion relations

J
00

Elan]

at!

t]Jx

+
+ nl

+ t)dt

1 +vpx

,x,)

00

Jvt'tPxdt

1 + v Px

tEx dt

o
1l or [an]

n-year temporary annuity:


n

(Iii)x

. tllx

dt

Whole life annuity due: 0,,;

1l oriY]

00

E[ii K+lll

'..=0

n-year deferred annuity:

Yor[oK+lll

JtE~,dt
OC.

rAJ

1,t .

tPx dt

n-yr temporary annuity due:


'11-1

Vor[Y]

aX!n)

E[Y] =

Lv

. k]lx

k=O

n-yr certain and life annuity:


n-yr deferred annuity due:

na,x

+
ex)

E[Y] =
Most important identity
1

ba'T

+ )Ix

)Ix

k=n

1 ba'x:111
1 - (2b)

n-yr certain and life due: ii'x:111

d
1

Ax:111

0111

Exam

f,/l -

+L
k=n

(lii J ;:111 +

Life COlltingencieh

L . kP"

+n,O'T

. kllx

11k.

kPx

Accumulation function:

Whole life immediate: ax

=L

. ~'P2:

11

=/-1

k=1

m-thly annuities

Limit of interest rate i


ax

Vo.r[Y]
1
(ra)

.. (m)

ax:-:m

1 + c 2:

II x

ex
cx:rrl
;=0
---+

-(I

ex

ii,x

o.x:11I

rn.
o'x:nl

;=0
---+

1+

'm

ex:rrl

0:

Chapter 6: Benefit Premiums


h-payment insurance premiums:

Loss function:

Loss
PV of Benefit,s - PV of Premiums

Fully continuous equivalence premiums

(whole life and endowment only):

P(Ax)

ii",

A,,;

(L4 x

P(A",)

x:h\

1
1

=- -6

P(A:r)

(l,;r

(1 + ~r

\/ar[L]

. 2]

Pure endowment annual premium PJ::~:


it is the reciprocal of the actuarial accumulated
value
because the share of the survivor who
has deposited P:r:4 at the beginning of each year
for n years is the contractual $1 pure endow
ment, i.e.

(A,,:)

Var[L]
Var[L]

(1)

Fully discrete equivalence premiums


(whole life and endowment only):

P(A,,:)

Px
dAa:
1- Ax

P(Ax)

P(Ax)

( pr

ax

1+ d

VadL]
\/ar[L]
\/ar[L]

P minus P over P problems:

The difference in magnitude of level benefit pre

miums is solely attributable t.o the investment

feature of the contract. Hence, comparisons of

the policy values of survivors at age :/: + n lllay

he done by ana.lyzing future benefits:

( n Px
[

l'"
P x:nl)8
x :m

(A,,:) 2]

2Ax (Ax?
(dii.".)2

<Ax - (Ax)2

(1-

A."Y

lVIiscellaneous identities:

P(A x :nl )

Semicontinuous equivalence premiums:

P(Ax:m) +6

m-thly equivalence premiums:


p(m)
#

Exa.m tv!

LIfe Contin)1;en-C'ies - LGD(':;:

+d

/~.

Chapter 7: Benefit Reserves

Benefit reserve tV:

The expected value of the prospect.ive loss at

time t.

Variance of the loss function

Continuous reserve formulas:


Prospective: t V(Ax)

Vad tL]

assuming EP

Ax+t - P(Ax)a.x+t

Retrospective: tti(Ax) = P(AT).'lT;t]-Premium diff.:

Var[t L ]

ass1lming EP

Paid-np Ins.:

Cost of insurance: funding of the accumu


lated costs of the death claims incurred between
age ;1: and x + t by the living at t, e.g.

Annuity res.: tV(A;t.) = 1

4E x

Discrete reserve formulas:


lkx

qT
P.T

lX+1

ACCUilmlated differences of premiums:


~Vx

Ax-;-n

n~::nl)

0 = A~'+n

.~Vx- nVT

~Vr

AXTm:n-~ - Ax+m

h-payment reserves:

~V

Relation between various terminal re


serves (whole life/endowment only):

hr7' A
)
Ie' ~ '"ix:nl

1
(I - m~~)(l- nV.,,+m)(l-

Exam ?vI -

Contil1j2; l lcieb - LG D

Chapter 8: Benefit Reserves


Notations:
death benefit payable at the end of year of death for the j-th policy year
71J~l: benefit premium paid at the beginning of the j-th policy year
bt : death benefit payable at the moment of death
7ft: annual rate of benefit premiums payable continuously at t
Benefit reserve:

br

00

hI!

00

= Lbh+j

j]Jx+h qx+h-tj -

j=O

j=O

ul)x+tfJ~,(t + n)dl1

7ft+u V

li

P2'+t dv

Recursion relations:
hI! + 7fh
(" ~7

l'

+ 7fh)(l + i)

(hI! +

+ 11 Px+h . h+1 If
+ 11x+h . h+1 If

f]x--;-h . bh-'-l

qx+h .

(l+i)

h+ll!

h+1 V)

Terminology:
"policy year h+ 1"
the policy year from time t = h to time t
"h V +
== initial benefit reserve for policy year h + 1
terminal benefit reserve for polky year h
terminal benefit reserve for policy year h + 1
Net amount at Risk for policy year h

= h+1

+1

='let Amount Risk


\Vhen the death benefit is defined as a function of the reserve:

For each preminm P, the cost of providing the ensuing year's death benefit, based on the net amount at

risk at age .T + h, is :
- h-ti V). The leftover, P - vqx,h(/)h+l - h+IV) is the source of reserve

creation. Accullmlated to age :r + 'TI, we have:

71-1

L
h=O

htl it)]

(1

n~1

- L1Hlx+h(bhl-l -

11-'-1 V)(l

h=O

If the death benefit is equaJ to the benefit reserve for the first

If the death benefit is equal to

h=O

Exam

Life Contingencies - LGD(:)

policy yean,

plus the benefit reserve for the fiTst n policy years

71-1

nV=V~m-

17

If the death benefit is equal to $1 pIue; the benefit reserve for the first n policy years ane
COllfltant
nV =

Reserves at fractional durations:


(h1/

+ 7Th)(l +

+
+ 7T h)(l +

sPx+h' h~:.sV

UDD

'*

(hll

V +8'
Vl~8

h+.sV

UDD
i.E.

'*

h+8V

his 1/)

I-sqx+h+s . bh + 1

. l-sPx+h+s

(1-8)("V+7Th)+"("+lVr)
(1 .'\)(h1/)+
V)+

(1-.5)(7Th)
'-..r---"

unearned premium

Next year losses:

Ah
E[Ah]

losses incurred from time h

to

+1

V01'[A h l

The Hattendorf theorem

~"

Exam Ivi - Life ContingEl1cies

LGDZ:

10

qxlh

==

Chapter 9: Multiple Life Functions


Joint survival function:
(,~,

t)

Last survivor status T(xy):

Pr[T(.1:)

T(J::Y) + T(.TY)
T(:ry) . T(XIJ)

> 8&T(y) > *1


(t,t)

Pr[T(:r.)

> t and T(y) > tj

+ h(xy)
Fy(xy) +
tP:1'1I + tP.TY

J oint life status:

FT(t)

Axy+

Prlmin(T(:r),T(y)).s; t]

i'i. xy

T(:r.)

+ T(y)

T(:r.) . T(y)

+
FT(x) +
tPx + tl)y
== Ax + -,,4y

+
+

ex

+ ey

Independant lives
Complete expectation of the last-survivor
status:

tjJ2' . tPy

t!J"

+ tqy

tq," . tqll

tl'Tydt

Complete expectation of the joint-life sta


tus:

(Xl

t1i xy dt

Variances:
00

PDF joint-life status:

FarfT(l1)]

(t)

tl)u dt

J
J
00

Var[T(.I:Y)]

t . tPxy dt

Independant lives

(t)

\/ar[T(;ry)]

+ t) + I-L(Y + t)
tJ)ylf.L(:r. + t) + f.1(Y + t)]

t t'Pxy dt

t])x .

Notes:
For joint-life Htat1lH, work with p's:

Curtate joint-life functions:


/,])xy

/,P2' . kPy

k(jxy

kqx

Pr[K = k]

k(jy -

k])xy -

nPxll =

[IL]

For last-survivor status, work with q's:


kqx . Ic(jy

[IL]

k+1Pxy

kPxy . qx+k,y+"

"Exactly one" status:

kPxy'
IJx+k

nPxy -

nPx

00

E[K(;ry)]

2.:: kP,ry

Life Com.inl'?>~ncies - LGDCS

nPxy

+ nPy

11

px' nPy

+ nqy - 211.I]x
+ o.y - 20 xy

n!]x

Exam

n])2' ' nPy

11

. n(jy

Common shock model:

Insurances:

(t)

(t) . 8 z (t)

1-

ST*(x)(t) .
(t)

1 - Oo.xy

(t) .

(t) . C- At

(t)

(t)

'T*(y)

j1(;r

(t) . 8.,(t)
Premiums:

(t) . C- At

8Y*(X)(t) .

J1xy(t)

+ t) + J1(Y + t) + A

d
1 _ d

Insurance functions:

A"

Ofj,~.

. "p." . qu+k

-d

k=Q

L
k=O

k]

Pl'[E(

Annuity functions:

00

00

. kPxy'

)' v

tPu dt

00

k=O

Reversionary annuities:
A reversioanry annuity is payable during the ex
istence of one status n only if another status v
has failed. E.g. an annuity of 1 per year payable
continnollsly to (y) after the death of (x).

Variance of insurance functions:

- (An)2

Vor[Z]
Vor[Z]

2Axy

,VY(x y )]

(A~:

(A 2 y)2

i1xy)( Ay

Covariance of T(:ry) and T(x!7):

Call [T(:ry), T(.TY)]

Call [T(;r) ,T(y)]


C01l
T(y)]
(ex

Exa,m 1..,{

Life Contingencie~ - LCD@

(e y

+ {E fT(;r)]

+
[IL]

12

E [T(:J:Y)]}' {(E [T(y)]

E :Tery)]}

Chapter 10 & 11: Multiple Decrement Models


Notations:

Probability density functions:

hAt, j)

.Joint PDF:

probability of decrement in the next

t yearH due to caUHe .7

fA.j)

Marginal PDF of J:

(t)
00

q~j)

iX'

probability of decrement in the next

f:r,J(tLi)dt

= /

t yearH due to all caUHes

Marginal PDF of T:

f:r(t)

(t)

j=l

171

the force of decrement d He only

LhAt,

to decrement j

hlrUlt) = ---,.---

Conditional PDF:
Il~T)

the force of decrement due to all

causeH simultaneously

rn

Survivorship group:

Group of l~T) people at some age a at time t


o.

Each member of the group has a joint pdf for

time until decrement and cause of decrement.

j=l

probability of surviving t yearH


despite all decrementH
1
t

-/

T.~a+n

(B)ds

(l

tP~~), fL!!) (t)dt

:r--a
m

j=1

Derivative:

171

Ll~)
j

) _!idt (

cce

Integral forms of tqx :


Associated single decrement:
t

probability of decrement from caUHe j only

p~;T) , p,~)

e~p -I"~) (,' )d'1

1 - tq~(j)

Exam IvI - Life Contingencie~

LGD

13

Basic relationships:

Actuarial present values

rn

II

I(;)

t Px

Irh<;tead of summing the benefit8 for each pos


sible cause of death, it is often easier to write
the benefit as one benefit given regardless of the
cause of death and add/8ubtract other henefit8
according to the ca,lse of death.

;=1

UDD for multiple decrements:

t
t.

Premiums:
q~T)
p(T)
x

Decrements uniformly distributed in the


associated single decrement table:
t

= q~(l)

(1
(1

l(1) (

qx

EXtn11 rvI

1-

1 .1(2) \
-q
I
2

~
2

1(1))

Qx

1(2)
. -

"2 Qx

Life Contingl;'ncies - LGDe~

1
2

...1.

~ql(2)
x

. 3

ql(3))
x

14

Chapter 15: lVlodels Including Expenses


Notations:
G

b
G /b

expense loaded ( or gross) premium


face amount of the policy
per unit gross premium

Expense policy fee:

The portion of G that is independent of b.

Asset shares notations:


G

level ann11al contract premimn

kAS

asset share assigned to the policy at time t

Ck

fraction of premium paid for expenses at k

Ck

expenseH paid per policy at time t

cG is the expel1xe premium)

probability of decrement by death


probability of decrement by withdrawal

"CiI

cash amount due to the policy holder as a withdrawal benefit


death benefit due at time t

b"

Recursion formula:
(1

+ i)

Direct formula:

G(l

Ch) - eh

h+1 Cl1

h=O

EXalTI l\j - Life COTIringencies - LGD@

15

Constant Force of Mortality


Chapter 3

S CJ:)

Z"
nPJ:

E[T]

E'X]

nPx)
1

Var[.1:] =

1/or[T]

Chapter 6

p.

llqx =

ln2
.
]
= Mechan,X
p.

Yledian[T]

P(A~,)

For fully discrete whole

Px = E[K]

ex

P;':11i

wi EP,

qar

For fully continuous whole life, w IEP.

Chapter 4

1/ m'[Loss] =

Chapter 7
/-1.

+ (j

O. t 2: 0

t V(A)
x

f."

O. k=O,l,2 ....

f.."+26

Ax (1

nEx)

For

discrete whole life, assuming

Vo1'[ "Los.s]

p.

If = 0, 1,2, ...

For fully continuous whole


1/a/' [ tLo.~81

q+i

as:mming EP,

1,4 x , t 2: 0

Chapter 9

For two COllstant forces, i. e.


and Il.F acting on (y), we have:

Chapter 5
1

p.+
1

ax
(hy

+i

1 +i
qJ,y
e xy

1Jxy

qJ'Y
Exam fvI

Lift Contingencies - LGD<9

16

+i

acting on (.1:)

De Moivre's Law
Chapter 3

1-

8(.1; )

W
W -;r

Ax

l o - - ex: (w -

.1;)

A~:7il

1
W -.r

!J.('r)

a 2(w-x) I
2(w - x)
ow-xl
W -.r
07il
W -.r
(Io)w_xl

2AX

:r

=-

(IA)x

W -.1:

W -.T

w-.r-T/
w-.r

qx = !J.('r) = h(.r) ,
1

,,1','
t1J x

p(.r

+ t)

"2(lx + Ix+d

w-;r:
- 2 - = E[T]

(Io)w-xl
w-.r
(Io)7il
w-.r

(Io)7il

(IA)x

O.:s; t < W

-.T

(IAX:7il
(IAX:7il

W -.1:

= Median[T]

.r _ ~ = E[K]

2
2

(w-.r)2

W -

Vor[T]

Chapter 5
No useful formulas: use ii. x
chapter 4 formulas.

12

(w _.r)2 -1
12
qx
2dx

1 - ~qx
lx + l1:+1

E[8].

0(.1;)

W-;]:

1
2

--
(= MDML with p.
3
2(w - .1:)
3
y-x]Jx Cyy + y-1,qx cy

=-

+ '2 "qx

e1 ':7il +

T/

'2 "l]x

Chapter 4
w-:r:

a'7il
w-.r

Age 30, w = 100

{o}

Age 15, w = 85

Modified De Moivre's Law


Chapter 3

ft(;r)

"Px

V or[T]

(1- ~r
10

(w-.1:)C ex: (w -----:;-

.r)

Chapter 9

W -.1:

c
w

2c+ 1

-.r

o.

w -

.1:

-.r

= E[T]

c+1
Exam rvI - Life Contingenciet> - LGD

2c

ex wIth j.t = -
w -.r

w-.T-n)C
w

= 2/(w - .1:))

For two lives with different w's, simply translate


one of the age by the difference in w's. E.g.

a'w_xl

8(.r)

an.d t h e

Chapter 9

nnPx

1-Ax
d-

17