Exam MLC

Raise Your Odds with Adapt

SURVIVAL DISTRIBUTIONS
SURVIVAL DISTRIBUTIONS
Probability Functions
Actuarial Notations
# $ = Probability that survives years
= Pr $ >
= $
# $ = Probability that dies within years
= Pr $
= $
# $ + # $ = 1
#|3 $ = Probability that survives years
and dies within the following years
= # $ 3 $D#
= # $ #D3 $
= #D3 $ # $
Life Table Functions
G $ = $ $DG
$D#
# $ =
$
$ $D#
# $
=
# $ =
$
$
$D# $D#D3
3 $D#
=
#|3 $ =
$
$
Force of Mortality
$
$D# =
$

$D# = ln $
d

$D# = ln # $
d
$ = # $ $D#
# $

# $

= exp
=

#|3 $

.
M $
#D3

$DM d

$DM d

.
M $

$DM d

Mortality Laws
Constant Force of Mortality
$ =
RS#

# $ =
Uniform Distribution
1
$ =
,
0 <


,
0
# $ =

,
0 +
#|3 $ =

Beta Distribution

$ =
,
0 <

Y
,
0
# $ =

Gompertzs Law
$ = $ ,
> 1
$ # 1
# $ = exp
ln
Makehams Law
$ = + $ ,
> 1
$ # 1
# $ = exp
ln

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Moments
Complete Future Lifetime

$ =

General

# $

$ =
2

$ =
+ 1

$ =

Constant Force of Mortality

Uniform Distribution
Beta Distribution

# $

Uniform Distribution

$:G| = G$ + G $

Curtate Future Lifetime

$ =

bcd

b|$ =

bcd

$:G| =

bcd

b $

b|$ + G $ =

Uniform Distribution

$:G| = $:G| 0.5 G.$

Recursive Formulas

$ = $:G| + G $ $DG

bcd

$:G| = $:f| + f $ $Df:GRf| ,

b $

Term Life

<

$:G| = $:fRd| + f $ 1 + $Df:GRf| ,

Fractional Ages
UDD 0 + 1
$DM = 1 $ + $Dd
M $ = $
$
M $D# =
1 $
$
$DM =
1 $
$ = M$ $DM

35

34

Whole Life

$ = $:G| + G $ $DG = $:GRd| + G $ 1 + $DG

$ = $ 1 + $Dd
$:G| = $:f| + f $ $Df:GRf| ,
<
$:G| = $ 1 + $Dd:GRd|

33

33

INSURANCE
INSURANCE
Level Annual Insurance
Type of
EPV
Insurance
Discrete

32

32

Uniform Distribution

$ = $ 0.5
n-year Temporary Curtate Future Lifetime
GRd

30
31

n-year Temporary Complete Future Lifetime

$:G| =

Read the 2-year select and ultimate mortality table

from the left to the right and then continue
downwards.
$
$ Dd
$ Dh

+ 2

<

Constant Force of Mortality 0 + 1

$DM = $ dRM $Dd M
M
M $ = M $D# = $
$DM = ln $
Select and ultimate mortality
A person is selected at the age when the policy is
first purchased.

Select mortality is written as $ D# where is the

selected age and is the number of years after
selection.
After a certain number of years of select period,
mortality is called the ultimate mortality.
$ D# = $D# .

Deferred Life
Pure
Endowment
Endowment
Insurance

$ =

$ =

bcO

bDd b|$

Continuous
]

# # $ $D# d

Discrete
d$:G| = $ G $ $DG

Continuous
d
= $ G $ $DG
$G|

G|$
G|$

Discrete
= $ d$:G| = G$ $DG

Continuous
= $ d
= G$ $DG
$G|

Discrete
G
d
=
G $ = G $
$:G|
Continuous
N/A
Discrete

= d$:G| + G $
$:G|

Continuous

= d
+ G $
$:G|
$:G|

EPV under Constant Force of Mortality

Discrete
Continuous

$ =
$ =
+
+

=
1 G $
d$:G| =
1 G $ d
$:G|
+
+

G|$ =
G|$ =
+ G $
+ G $
G $

= G G

G $

= R(SDo)G

EPV under Uniform Distribution

Discrete
Continuous
rR$|
rR$|
$ =
$ =


G|
G|
d$:G| =
d
=
$:G|




G
G
G $ =
G $ =

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m-thly Insurance
(f)

bcO

bDd /f

Recursive Formulas

()

b d $
|
f f

Discrete
$ = $ + $ $Dd
$ = $ + h $ $Dd + h h$ $Dh
d$:G| = $ + $ d
$Dd:GRd|
$:G| = $ + $ $Dd:GRd|
G|$ = $ GRd|$Dd
d
d
$:G| = $ $Dd:GRd|

Continuous
$ = d$:d| + $ $Dd
h
$ = d$:d| + $ d
$Dd:d| + h$ $Dh
d
$:G| = d$:d| + $ d

$Dd:GRd|
$:G| = d$:d| + $ $Dd:GRd|
G|$

= $ GRd|$Dd

Variances

Var $

Discrete
= h$ $ h

Relationship between , and

(Under UDD Assumption)

$ = $

d
d

$:G| =
$:G|

G|$ =
G| $
d
$:G| = $:G| + d
$:G|

(f)
$ = (f) $

2 + h h
h
$ =
$
2


ANNUITIES
ANNUITIES
Level Annual Annuities
Type of
EPV
Annuities
Due; Discrete

Var $:G| = h$:G| $:G|

Continuous
Var $ = h$ $ h
h

$ =

Temporary
Life

SDho

Increasing and Decreasing Insurance

$ = $ + d|.$ + h|.$ +

d
$:G|

d
$:G|

d
$:G|
d
$:G|
d
$:G|

# # $ $D# d
G

+
+

# # $ $D# d
d
$:G|
d
$:G|
d
$:G|

= + 1 d
$:G|
= + 1
= d
$:G|

d
$:G|

EPV under Constant Force

Discrete
Continuous

h
1
$ =

$ =

+
h
+

EPV under Uniform Distribution

Discrete
Continuous
rR$|
rR$|
$ =

$ =

G|
G|
d

d

$:G| =
$:G| =


G|
G|
d

d

$:G| =
$:G| =

Deferred
Whole Life

# # $ $D# d

bcO

b b $

Immediate; Discrete
$ = $ 1
Continuous

Whole Life

Var $:G| = $:G| $:G|

Note: h and h are calculated similar to and
respectively, but with double the force of interest,
. Equivalently, replace with h , or replace with
2 + h . For example, under constant force, h$ =
u
S
and h$ =
.
w
uDhvDv

$ =

# $ d

Immediate; Discrete
$:G| = $:G| 1 + G $
Continuous
$:G| = $ G $ $DG
Due; Discrete
G|$ = $ $:G| = G $ $DG
Immediate; Discrete
G|$ = $ $:G| = G $ $DG
Continuous
G|$ = $ $:G| = G $ $DG

= G G

G $

= R(SDo)G

Discrete
$ = 1 + $ $Dd
$:G| = 1 + $ $Dd:GRd|
G|$ = $ GRd|$Dd
Continuous
$ = $:d| + $ $Dd
$:G| = $:d| + $ $Dd:GRd|
G|$ = $ GRd|$Dd

Relationship between Insurances and Annuities

Discrete
Continuous
$ = 1 $
$ = 1 $
$:G| = 1 $:G|
$:G| = 1 $:G|

Variances

Discrete

$ $ h

h
h
h
$:G| $:G|
Var $:G| = Var $:GRd| =

h

Continuous
h
$ $ h
Var $ =

h
h
h
$:G| $:G|
Var $:G| =
h

Increasing and Decreasing Annuities

Var $ = Var $ =

$:G|

Due; Discrete
$:G| = $ G $ $DG

EPV under Constant Force of Mortality

Discrete
Continuous
1 +
1
$ =

$ =

+
+
1 +
1
$:G| =
1 G $ $:G| =
1 G $
+
+
1 +
1


G|$ =
G|$ =
+ G $
+ G $
G $

Recursive Formulas

$:G|

$:G|

$:G|

# # $ d

1
+

if is constant

# # $ d

$:G|

$:G|

= $:G|

= + 1 $:G|

Annuities with m-thly Payments

UDD Assumption
(f)

(f)

= $ ()

$:G| = $:G| ()(1 G$ )

(f)
G|$

= G|$ G $

Woolhouses Formula (3 terms)

1 h 1
(f)
$ $

$ +
12h
2

1
f
1 G $
$:G| $:G|
2
h 1
+ G$ $DG +

12h $

1
f
G|$

G|$
2 G $
h 1

+

12h G $ $DG
1 1
+
$ $
2 12 $

Recursive Formulas
d
d
$:G| = $:G| + $

d
$:G|

d
$:G|

d
$Dd:GRd|
d
$:GRd|

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Copyright 2016 Coaching Actuaries. All Rights Reserved. 2

PREMIUMS
PREMIUMS
Net Premiums PREMIUMS
Net Premiums
Calculate net premiums using the equivalence
Calculate net premiums using the equivalence
principle:
principle:
(premiums) = (benefits)
(premiums)
= (benefits)
Name
Type
Name
Type
Fully Discrete
$ Fully Discrete
1
$
$ = 1 = $
$ = $ = 1 $
Whole
$ Fully Continuous
1 $
$
Whole
Life Insurance
Life Insurance
$Fully Continuous
1
$
$ = 1 = $
$ = $ = 1 $
$ Fully Discrete
$
1 $
$:G| Fully Discrete
$:G|
1
$:G| = 1 = $:G|
$:G| = $:G| = 1 $:G|
Endowment
$:G| $:G|
1
Endowment
Fully Continuous $:G|
Insurance
Insurance
$:G|
$:G| Fully Continuous
1
$:G| = 1 = $:G|
$:G| = $:G| = 1 $:G|
$:G| $:G|
1
Fully Discrete $:G|
d
Fully Discrete
d
$:G|
$:G|
$:G|
Term
$:G|
Term
Life Insurance
Fully Continuous
Life Insurance
Fully Continuous
d
$:G|
d
$:G|
$:G|

$:G|
Fully Discrete
Deferred Life
Fully Discrete
Deferred Life
Insurance
G|$

Insurance
G|$

$:G|

(premiums

$:G|
(premiums
Fully Continuous
payable during
Fully Continuous
payable during
deferral
G|$

deferral
period)
G|$:G|$
period)
$:G|
Fully Discrete
Fully Discrete
Deferred Life
G|$
Deferred Life
Insurance
G|$
$

Insurance
$

(premiums
Fully Continuous
(premiums
Fully Continuous
payable for
G|$
payable for
life)
G|$
$
life)
$
Fully Discrete
Deferred Life
Fully Discrete
Deferred Life
Annuity
G|$


Annuity
G|$:G|$

(premiums
$:G|
(premiums
Fully Continuous
payable during
Fully Continuous
payable during
deferral
G|$

deferral
period)
G|$:G|$
period)
$:G|
Note: Numerator and denominator of net premium
Note: Numerator and denominator of net premium
formula can be substituted with any other EPV
formula can be substituted with any other EPV
expression depending on premium payment
expression depending on premium payment
frequency and nature of death benefit (e.g. -thly
frequency and nature of death benefit (e.g. -thly
premiums, continuous premiums, death benefit
premiums, continuous premiums, death benefit
paid at moment of death).
paid at moment of death).
Gross Premiums
Gross Premiums
If gross premiums are calculated using the
If gross premiums are calculated using the
equivalence principle, then:
equivalence principle, then:
(premiums) = (benefits) + (expenses)
(premiums)
Net Future Loss = (benefits) + (expenses)
Net Future Loss
O = (benefits) (premiums)
(benefits)
O==face amount,

= (premiums)
premium
= face amount, = premium

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Whole
Whole
Life
Life

Discrete
Discrete

O = $ +

O = $ h +

h h
Var O = +
$ h
h $

Var O = +
$ $ h

O = $:G| +
O = $:G|h +

h
h

EndowEndowment
ment
Insurance
Var O = + h $:G| $:G| h
h
Insurance Var O = +
$:G| $:G|

Continuous
Continuous

O = $ +
Whole
O = $ h +
Whole

Life
Var O = + h hh$ $ h
Life
Var O = +
$ $ h

Endow O = $:G| +

Endow O = $:G|h +

ment
h
ment Var = + h h
Insurance

O
$:G| h
h $:G|
Insurance Var O = +
$:G| $:G|

Gross Future Loss

Gross Future Loss

O = (benefits) + (expenses)
O = (benefits) + (expenses)
(premiums)
(premiums)
Portfolio Percentile Premium Principle
Portfolio Percentile Premium Principle
Under normal approximation and given the
Under normal approximation and given the
probability of a loss on a portfolio of policies
probability of a loss on a portfolio of policies
equals 1
, solve for the premium per policy
equals 1
, solve for the premium per policy
such that:
such that:
O
O + O = 0

= 0
O +

RESERVES
RESERVES
RESERVES
Net Premium Reserve
Net Premium Reserve
Prospective Method
Prospective Method
# = # (future ben.) # (future prem.)
= (future ben.) (future prem.)
#
#
#

Retrospective Method
Retrospective Method
O (past prem.) O (past ben.)
# = O (past prem.) O (past ben.)

# $
# =

# $
Recursive Formula
Recursive Formula
bRd + bRd 1 + b $DbRd
b = bRd + bRd 1 + b $DbRd
$DbRd

b =
$DbRd
If b = FA + b (where FA is level) and
premiums are level, then:
If b = FA + b (where FA is level) and
b
premiums are level, then:
b
$DRd 1 + bR
b = b| FA

FA

1 + bR
b|
b
cd $DRd

cd
Gross Premium Reserve
Gross Premium Reserve
Prospective Method

Prospective Method
# = # (f. ben.) + # (f. exp.) # (f. prem.)

= # (f. ben.) + # (f. exp.) # (f. prem.)

Retrospective Method

Retrospective Method
# = [O (p. prem.) O (p. ben.)
# = [O (p. prem.) O (p. ben.)
O p. exp.) / # $

O p. exp.) / # $
Recursive Formula

Recursive Formula
# =
bRd + bRd bRd 1 +
+
# =
bRd + bRdbRd 1
$DbRd b + b /$DbRd
Expense Reserve $DbRd b + b /$DbRd

Expense Reserve
# = # (f. exp.) # (f. exp. loadings)
= # (f. exp.) # (f. exp. loadings)
#
exp. loadings = gross premium net premium
exp. loadings = gross premium net premium

# = # #
# = # #

Modified Reserve
Modified Reserve
Full preliminary term (FPT): one-year term
Full preliminary term (FPT): one-year term
insurance followed by an insurance issued to life
insurance followed by an insurance issued to life
one year older.
one year older.
FPT net premium
d
FPT net premium
First-year valuation premium: $:d|
= $
d
=
$
First-year valuation premium: $:d|
$Dd
Renewal valuation premium: $Dd = $Dd
Renewal valuation premium: $Dd = $Dd
$Dd
FPT reserve
FPT reserve

# $ = #Rd$Dd
= #Rd$Dd
# $
Treat reserves after first year as if the policy were
Treat reserves after first year as if the policy were
issued one year later.
issued one year later.
Reserve between Premium Dates
Reserve between Premium Dates
M
dRM
b + b 1 + M bDd M $Db dRM
bDd M$Db
bDM = b + b 1 +

M $Db
bDM =
M $Db
for 0 < < 1
for 0 < < 1
Thieles Differential Equation
Thieles Differential Equation
d

d = + +
d ## = ## ## + ## ## ## + ## ## $$ D#
D#
d
= gross premium, = level expense,

= gross premium,
= level expense,
= face amount,
= settlement expense
= face amount, = settlement expense

Eulers Method
Eulers Method
From + to :
From + to :
#D # # # + # $ D#
# = #D # # # + # $ D#
1 + $ D# +
=

#
1 + $ D# +
From to :
From to
:
#R = # 1 $ D# +
=

1
+

#
#R
# # $# D#
+ # $ D#

+
# $ D#

#
#
#
Policy Alterations
Policy Alterations
To calculate face amount or duration of new
To calculate face amount or duration of new
altered contract, use equivalence principle:
altered contract, use equivalence principle:
# + # future prem. = # future ben.
+ future prem. = future ben.
#
#
#

Surrenders
Surrenders
Paid-up term policy (extended term)
d
Paid-up term policy (extended term)
# $ = d
$D#:G|
# $ = d
$D#:G|

#
$
$D#:G| + PE GR# $D# for endowment
d
# $ = $D#:G| + PE GR# $D# for endowment
insurance, where PE = pure endowment amt.
insurance, where PE = pure endowment amt.
Reduced paid-up policy
Reduced paid-up policy
# $
# $ = # $

$D#
=

# $
$D#
= cash surrender value,
= face amount
= cash surrender value, = face amount

MARKOV CHAINS
MARKOV CHAINS
MARKOV CHAINS
Discrete Probabilities
v
Discrete Probabilities
# $v : probability that a life in state at time is in
# $ : probability that a life in state at time is in
state (where may equal ) at time +
vv state (where may equal ) at time +
# $vv : probability that a life in state at time
# $ : probability that a life in state at time
remains in state until time +
remains in state until time +
: transition matrix

: transition matrix
Homogeneous Markov chain: Only one transition
Homogeneous Markov chain: Only one transition
matrix needed for all periods
matrix needed for all periods
Non-homogeneous Markov chain: One transition
Non-homogeneous Markov chain: One transition
matrix needed for each period
v
matrix needed for each period
Perform matrix multiplication to calculate # $v .
Perform matrix multiplication to calculate

# $ .

Copyright 2016 Coaching Actuaries. All Rights Reserved. 3

Continuous Probabilities
vv
# $

= exp

Discrete Insurances
=

$DM d

O v

Eulers Method
v
#D $

v
# $

vb
# $

bcO
b

vb
# $

bcO
b

$ =

v
# $

b
$D#

Ro# # $vb $D# d

Annuity pays benefit as long as one remains in

state j:
v
$
v

$ =

$vv =

O
]

v
Ro# # $ d

$D# #

cO
v

+ #

cd

cO
v

$D# #

+ #

MULTIPLE DECREMENT MODELS
MULTIPLE DECREMENT MODELS
Probabilities
=

# $

cd
#Rd
bcO

# $

b $

$Db

#|3 $ = # $

Life Table Formulas

$ =

cd

b $

$ b $

$Db = $

$Db =

#D3Rd
bc#

b $

$Db

= $ b $

$Db

$D# # d

()
$D#

cd

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()

d # $
d

# $
G

= exp
#

()
# $

()

$DM d

d # $
d

d

ln # $
d

= M$ , 0 1
UDD in Associated Single Decrement Tables
(UDDASDT)
For 2 decrements:
h
h $
(d)
d

,
0 1
# $ = $
2
For 3 decrements:
h

h
h $ + $
$ $
d
d

+
,
# $ = $
2
3

0 1


MULTIPLE LIVES
MULTIPLE LIVES
Joint Life
$ = min $ ,
# $

+ # $ = 1

= #$ #D3 $
#D3 $

$ =

$ =

#D3 $

# $

= # $ 3 $D#:D#
]

O
]

bcd

# $

b $

+ # $ = 1

$DM + DM d

= # $ #D3 $ =
]

# $

O
]

#D3 $

# $

b $

bcd

$ = 1 $

Independent Lives
# $

= # $ #
# $

$ =

# D# + # # $ $D#
# $

Relationship between () Status and

() Status
$ + $ = $ +
# $ + # $ = # $

$ + $ = $ +

$ + $ = $ +

()

# $

$ =

()

() ()

= exp

$ =

M $ $DM d

= # $

# $

#|3 $

$DM d

Independent Lives
# $ = # $ #
$D#:D# = $D# + D#
Last Survivor
$ = max $ ,

$DM d

#|3 $ = # $ 3 $D#:D#

()
M $

M $

3 $D# =

()

# $
UDD in Multiple-Decrement Tables (UDDMDT)

$D# =

Eulers Method
v
v
= # v 1 # + #
#R

cd

= exp

()

# $

# : difference between benefit and premium

in state
v
# : benefit for transitioning from state to
+

()

$DbRd b

Fractional Ages
UDD in the multiple decrement table:
()
()
0 1
M $ = $ ,
Constant forces of decrement:

M
1 $

M $ =

$
Associated Single Decrement Tables
The associated single decrements are independent.

for constant force, where v is the

Thieles Differential Equation

d
v
v = # # v #
d #

# $

()
# $

bcO
d

()
# $

sum of forces of interest out of state

()
$D#

b b $

S Do

()

Premiums and Reserves

Insurance pays benefit upon transition to state j:
]

# # $

$D# =

b
$D#

# $

$D# # $ $D#
G

()

b bRd$

Forces of Decrement

Kolmogorovs Forward Equations

d
v
= Rate of entry into state
d # $
Rate of leaving state
G

vv
M $ $DM #RM $DM d

bcd

Continuous Insurances

For permanent disability model:

# $ =

+ #

Cov $ , $ = Cov $ , + $ $ $

Cov $ , = 0 if $ and are independent

$ + $ = $ +
$ + $ = $ +
G $

+ G $ = G$ + G

d
G $

Contingent Probabilities

d
G $
d
G $

h
G $

h
G $
h
G $

d
G $
d
G $
d
G $

# $

# $

# $

d
G $
G
G

D#

= G $

h
G $

$D#

1 # $D#

1 # $ D#

= G $

h
+ G $
= G $

h
+ G $
= G

h
= G $
+ G $ G
Contingent Insurance
d$ + d
$ = $

h$ + h
$ = $
d$ + h$ = $

d$ h
$ = $ $ = $
Reversionary Annuities
$| = $

$ = 1 $

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PENSION MATHEMATICS
PENSION MATHEMATICS
Replacement Ratio, R

1st year pension after retirement

salary in the final year of work

Salary Rate Assumption

Salaries increase continuously

salary rate at age

=

$ salary rate at age

Salary Scale Assumption

Salaries increase at discrete intervals

salary earned between age and + 1
=

$ salary earned between age and + 1

Final average salary over the last 3 years (e.g.

retire at age 65)

1
h + +
=3
Salary between age and + 1
$

Salary rate to salary scale: $ =

$D# d

Salary scale to salary rate: $ = $RO.

Normal Contribution

# = d$OO #Dd # + EPV(mid-year exits benefits)

TUC if the actuarial liability is calculated with

the traditional unit method
PUC if the actuarial liability is calculated with
the projected unit method.
Under constant and independent of salary accrual
rate with no exit benefits:
TUC: O

GDd

1 PUC: O

INTEREST RATE RISK

INTEREST RATE RISK
Replicating Cash Flows
Spot rate, # : effective interest rate paid by a zerocoupon bond maturing at time
: Present value of 1 paid at time
1
=

1 + # #
Forward rate, , + : yield paid at time 0 by a
zero-coupon bond bought at time and maturing
for 1 at time +
1 + #Db #Db

b
1 + , +
=
=

+
1 + # #
Variance of loss per policy

Var d
Var
= Var v +

PROFIT TESTS PROFIT TESTS
Asset Shares
b =
bRd + bRd bRd 1 +

()

$DbRd b + b

$DbRd

$DbRd

$DbRd

b CV

()

+ b

1
= gross premium, = level expenses, = face
amount, = settlement expenses paid on
decrement , = cash value
Profits for Traditional Products
Profit Vector, Prb
Profit per policy in force at the beginning of each
year
Prb = bRd + bRd bRd 1 +

$DbRd b +
()
$DbRd b

$DbRd

Profit Signature, b
Profit per policy issued
b = Prb bRd$ , 1
b = Prb , = 0

Change in reserve
b = 1 +

bRd

b CV

Profit Margin
The ratio of the NPV to the (expected) present
value of future premiums.

Discounted Payback Period (DPP)

Solve for lowest such that

bcO

b b = 0.

Universal Life
General
AV# = AV#Rd + # # COI# 1 +
COI# = u $D#Rd DB# AV#

Type A (Death Benefit = Face Amount)

AV#Rd + # # 1 + $D#Rd FA
AV# =

1 $D#Rd

Type B (Death Benefit = Face Amount + AV )

AV# = AV#Rd + # # 1 + $D#Rd FA

Corridor Factor,
AV#Rd + # # 1 +
AV# =

1 + $D#Rd 1

If AV# > death benefit, set death benefit =

AV# .

Note: For all types, replace $D#Rd with

$D#Rd 1 + u if u
Gain by Source
Total Profit = bRd + b b 1 +

$DbRd b + b $DbRd b

Total Gain = Actual Profit Expected Profit

Components of Gain ( = assumed, = actual):

Interest: bRd + b b
Expense: b b 1 + + $DbRd b b

$DbRd
b + b b
Mortality: $DbRd

Lapse: $DbRd $DbRd

kCV

+ b

()

$DbRd b

IRR: GbcO b b = 0
b
NPV = ]
bcO b ,
where = discount/hurdle rate
Partial NPV
NPV =

bcO

b b ,

where = discount/hurdle rate

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