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eduktodos@hotmail.com http://eduktodos.dyndns.org Society of Actuaries’ Textbook
ON
LIFE
CONTINGENCIES
BY
CHESTER WALLACE JORDAN, Jr.
Fellow of the Society of Actuaries
Professor of Mathematics
Williams College
Sxconp Epition
Published by
THE SOCIETY OF ACTUARIES
1991 Copyright 1967
The Society of Actuaries
Chicago, Ilinois
Library of Congress Catalog Card Number 67-31240 PREFACE FOR THE SOCIETY OF ACTUARIES
The first edition, published in 1952, has admirably served the
purpose for which it was commissioned—to provide a modern
text on Life Contingencies, applicable to the benefits commonly
offered by life insurance companies in the United States and
Canada. That it has served so well is due to the fortunate combina-
tion of technical ability and expository talent of the author, C.
Wallace Jordan, Professor of Mathematics at Williams College
and Fellow of the Society of Actuaries, and to the members of the
Society’s Education and Examination Committee who assisted
him, particularly Morton D. Miller, who determined in large
measure the scope of the first edition and persuaded Professor
Jordan to be its author, and David H. Harris, who devoted much
time and thought to the organization and preparation of the text.
When it became evident that an updated textbook was desirable,
Paul T. Rotter, then General Chairman of the Society’s Education
and Examination Committee, prevailed upon Professor Jordan to
revise his book. Once again, Professor Jordan has applied to the
task his many talents which, with his unfailing good humor, were
so successful in producing the first edition. Zehman I. Mosesson,
F.S.A., made a painstaking review of the revised manuscript and
page proofs and worked closely with the author, as did John A.
Fibiger, F.S.A.
The Board of Governors of the Society of Actuaries is most
appreciative of the great amount of work and talent contributed
by Professor Jordan toward the education of actuarial students,
both past and to come. The usefulness of the second edition not
only to those studying life contingencies but also to those engaged
in actuarial practice will be a source of gratification to all con-
cerned.
Haroup R, Lawson Juiius VocEL
President General Chairman
Society of Actuaries Education and Examination
Committee
Bert A. WINTER
Chairman
Advisory Committee on Education and Examinations
August, 1967 EXCERPTS FROM THE AUTHOR’S PREFACE
TO THE FIRST EDITION
This book was prepared for the Society of Actuaries as a text
for students of life contingencies. The material included forms a
survey of the fundamental principles of life contingencies with
applications to American life insurance practice.
In designing the pedagogic approach, the author has been
mindful of the needs of those many actuarial students who must.
acquire their knowledge of life contingencies without the assistance
of an instructor. Since the text is their only teacher, these students
deserve particularly full discussions of the basic concepts. Accord-
ingly, a special effort has been made to give careful and meaningful
explanations of such fundamental ideas as the mortality table, the
force of mortality, reserves, and the various multiple-life statuses.
Emphasis is constantly placed on a relatively small number of
primary principles, and attention is drawn to the unity inherent in
the different branches of the subject.
It is important for the student to test his comprehension of the
text at frequent intervals by solving problems. Collections of exer-
cises are placed at the end of each chapter, and the student should
turn to the exercises as he completes each section of a chapter.
Answers are given for all the exercises, either on the same page
when the form of the answer gives no clue as to the method of
solution, or at the end of the book.
The mathematical symbols used in the book are based on the
International Actuarial Notation. A few new symbols are intro-
duced; in particular, the following new usages should be noted:
(Ia), and (IA), for the present values of a continuous increasing
annuity and insurance, P'"! for an apportionable premium payable
m times a year, and §,-z| for the value of a foreborne annuity-due
in place of the older symbol ,u,. No previous knowledge of the
International Code is assumed here; each symbol is defined at its
first appearance, and an Index to Notation shows the page on
which each definition is given.
The material in this book has been obtained from many sources,
including the author’s own experience in practical actuarial work
and in teaching. The author was first introduced to life contin-
vii viii EXCERPTS FROM THE AUTHOR’S PREFACE TO THE FIRST EDITION
gencies through the textbook of the British Institute of Actuaries
written by George King and revised by E. F. Spurgeon, and his
present task has been greatly simplified by the existence of this
excellent text. The importance of King’s work in systematizing the
subject of life contingencies cannot be overemphasized. Another
writer whose work has been a more recent influence is Ernst
Zwinggi.
The preparation of the new text has afforded the opportunity of
consolidating in a single volume a large body of material which
has previously been available to students only through scattered
papers in the actuarial journals. The author thus counts as his col-
laborators a large and distinguished company of actuaries upon
whose published contributions he has drawn. These original sources
are listed in the appended bibliography. The names of the various
actuarial journals are abbreviated as follows:
TSA Transactions of the Society of Actuaries
TASA Transactions of the Actuarial Society of America
RAIA Record of the American Institute of Actuaries _
JIA Journal of the Institute of Actuaries (Great Britain)
Many persons have assisted in the preparation of the manuscript.
The major contribution has been that of Mr. David H. Harris,
FS.A., who served as editorial consultant for the whole project on
behalf of the Society of Actuaries. During the past three years, he
has generously devoted many hours to a careful reading of each
successive draft of the entire manuscript. His critical comments
and creative suggestions have contributed greatly to the improve-
ment of the literary style, the clarity of the exposition, and the
form of the mathematical demonstrations. The author considers
himself most fortunate to have had the assistance of so able a
collaborator.
The author is also indebted to Mr. Harry Walker, F.S.A., and
to Mr. Robert D. Acker, F.S.A., both of whom read the whole
manuscript. Their valuable criticisms resulted in conspicuous im-
provements in the original text.
Finally, the author wishes to express his appreciation to the
members of the Education and Examination Committee, and espe-
cially to Mr. F. Bruce Gerhard, Mr. Morton D. Miller, Mr. Charles
A. Spoerl, and Mr. Bert: A. Winter, not only for their efficient
handling of many administrative details, but also for their warm
interest and encouragement while the work was in progress. AUTHOR’S PREFACE TO THE SECOND EDITION
The general plan of the first edition has been retained, but there
has been some rearrangement of the material together with the
addition of a new chapter on pension plans and disability benefits
(Chapter 16). The chapter on population problems has been com-
pletely rewritten and expanded, and it is now included in Part I
as Chapter 8. In Part II, the two short chapters on the Last-Sur-
vivor Status and the Generalized Multiple-Life Status have been
combined and now appear as Chapter 10. In the other chapters,
changes were made wherever it seemed possible to clarify the ex-
position and improve the form of the mathematical demonstra-
tions. The exercise sets were also revised and expanded.
The Bibliography has been enlarged and up-dated to include the
relevant literature of the past fifteen years. In order to avoid inter-
Tupting the text with references and footnotes, a section has been
added at the end of each chapter which cites the more useful
sources and relates them to the context of the chapter.
The task of reviewing the manuscript for the Society of Actuaries
was undertaken by Zehman I. Mosesson, F.S.A., and it is a great
pleasure to acknowledge the special contributions which he has
made. His helpful suggestions and wise counsel are reflected in
countless improvements throughout the book.
Valuable help was also received from John A. Fibiger, F.S.A.,
who worked closely with Mr. Mosesson in reviewing each succes-
sive draft of the entire manuscript. His comments, particularly on
style and nomenclature, were an important influence.
Many other members of the Society of Actuaries were helpful
either in reading drafts of individual chapters or in suggesting im-
provements in the treatment of certain topics. The following were
Particularly generous in their assistance: Dwight K. Bartlett,
Murray L. Becker, M. David R. Brown, Edward F. Dalton, Carl
H. Fischer, Harry Gershenson, Harold G. Ingraham, Jr., John H.
Miller, James J. Olsen, Robert B. Shapland, Charles L. Trow-
bridge, Charles B. H. Watson, and Howard Young.
Thanks are due also to those members of the Education and
Examination Committee who handled the administrative details.
Paul T. Rotter, F. S. A., was influential in getting the project
ix x AUTHOR'S PREFACE TO THE SECOND EDITION
started. Robert J. Johansen, F.S.A., and Julius Vogel, F.S.A.,
assisted in many ways while the work was in progress. Their en-
couragement, support, and cooperation were important factors in
the completion of the work.
Williamstown, Massachusetts C. Wattace Jorpan
May 1, 1967 TABLE OF CONTENTS
Preface for the Society of Actuaries...................... Vv
Author’s Preface to the Second Edition................... ix
Part I. Single-Life Functions
1. The Measurement of Mortality... Sodaccuqcaaac 3
2. Life Annuities... 37
3. Life Insurance... 65
4, Net Annual Premiums... 81
5. Net Level Premium Reserves. .... . beeee eee. 96
6. The Expense Factor..............
(ie opecial el Opts) te eee
8. Population Theory............
Part II. Multi-Life Functions
i) The Joint Life Status) ete 191
10. Last-Survivor and General Multi-Life Statuses... ... 210
11. Contingent Functions............. : ee 225)
12. Compound Contingent Functions................... 246
13. Reversionary Annuities........... soak vo. 255
Part III. Multiple-Decrement Functions
14. Multiple-Decrement Tables............. a rifl
15. Tables with Secondary Decrements bocce e eee 291
16. A Generalized Model................. -... 305
Appendix I. Tables
A. The Commissioners 1958 Standard Ordinary Mortality
cable seveee ss 833
B. Life Table for White Males: United States, 1959-61... 346
Appendix II. Derivatives of Actuarial Functions......... 349
Answers to the Exercises.....................2.......... 851
Bibliography
Index to Notation... cece eee eee
General Index... 0.2.22... 0. cece cece ence eee ees Part I
SINGLE-LIFE FUNCTIONS Cuaprer 1
THE MEASUREMENT OF MORTALITY
1. Introduction
The systematic analysis of the contingencies of human life forms
the foundation of an actuary’s work. In the solution of problems
involving these contingencies, he requires some type of quantita-
tive measure of their effects; and, in financial problems, he requires
also a set of principles by which the measurements may be com-
bined with interest functions to produce monetary values.
The actuary’s first concern is with the contingencies of death
and survival. In this chapter, the problem of giving quantitative
expression to observed mortality patterns will be considered, and
the various functions which have been used for this purpose will
be defined and examined. In the chapters that follow, formulas will
be developed in which mortality functions and interest functions
are combined to produce monetary values for life annuities and
insurances.
2. The survival function
The normal mortality pattern observed among human lives is
generally familiar. The elimination of individual lives by death,
rather rapid in infancy, slows down during childhood, then in-
creases throughout adolescence and middle-life, accelerating as the
end of the life-span is approached. In-setking a numerical measure
of the extent of these effects, we begin by defining a fundamental
probability function.
Let x represent the age in years of a human life. Then z may
have any value from 0 to the upper limit of the life-span.
Consider now the probability that a new life, aged 0, will sur-
vive to attain age z. We may regard this probability as a function
of x, and will refer to it as the survival function, s(x).
What properties may we attribute to this function from our
general knowledge of the normal mortality pattern described
above? In the first place, it is clear that s(x) is a decreasing func-
tion as x increases, since the probability of surviving to age z is
greater than the probability of surviving to age x + t, for ¢ > 0.
3 4 THE MEASUREMENT OF MORTALITY (cH. 1
Secondly, since we are confining our attention to normal patterns
of mortality, it is convenient and reasonable to assume that s(x)
is a continuous function of z. In addition, we know two specific
values of s(x). When x = 0, s(x) has the value 1, and at the upper
end of the life-span, s(t) = 0. If we denote by the symbol w the
smallest value of x for which s(x) vanishes, we can express this
last condition as s(w) = 0, where w is some value probably near
100. Summarizing, s(x) 1s @ continuous function of x, defined on the
interval 0 < x < w, which decreases from the value s(0) = 1 to the
value s(w) = 0.
The student should realize that the designation of a terminal
age w is merely a convenient simplifying device. No fact of experi-
ence supports the assumption that a life can survive for n years
but not for n years and one second. On the other hand, the proba-
bilities of survival to advanced ages are extremely small, and in
practical work it is helpful to be able to assume that these proba-
bilities become negligible at a certain specified age. It would there-
fore be more realistic to state that the values of s(x) are negligible
for z 2 w. However, we shall retain the more precise condition
8(w) = 0 because of its convenience in the mathematical analysis
that follows.
A typical s(x) curve, derived from experience, is shown in Figure
1. It is difficult to find a mathematical expression, involving a small
number of parameters, which will fit this curve closely over its
entire range. If, however, we sacrifice the requirement of close fit,
we can find many simple functions which satisfy the conditions on
s(x) summarized above. Let us then, for purposes of illustration,
regard as a survival function any mathematical expression that
satisfies the above analytic conditions, whether or not its graph
closely follows the typical s(x) curve of Figure 1. Our objective
here is not so much to reproduce the normal mortality pattern as to
illustrate through the use of simple functions the manner in which
quantitative measurements .of mortality may be obtained when a
particular mathematical law of survival is assumed.
The simplest type of expression satisfying the required condi-
tions on s(z) is a linear function. Consider, for example,
a(x) = L— O:
dt7 liptthegt
The total decrement from I, pro-
duced in a year is
1 1
f Lester dL = ~t|
0 o
= hath =4,
and the annual decrement per unit
Ghnsoc.
Just as i represents the effective rate of interest corresponding 16 THE MEASUREMENT OF MORTALITY {cH. 1
to the operation of the varying (or constant) force 5 throughout a
yearly period, so g. may be interpreted as the effective annual rate
of mortality corresponding to the operation of the varying force »
throughout the year of age x toz + 1.
Further insight into the nature of the force of mortality may be
gained by analyzing formula (1.9) in terms of the definition of the
derivative. The derivative of 1, may be expressed as
- Leth — Le
and yu, , from (1.9), may then be written
ge = Tim 2 = Pet = hipy M96, (7)
a0 lL reo h
Now the expression “ may be regarded as an annual rate of mor-
tality based upon the mortality during the age interval z to z + h.
For example, if h = 4, 4 becomes 2-4g., which represents twice
the probability that (2) will die within half a year. As h approaches
0, the limit of this expression, the force of mortality, may be de-
scribed as the nominal annual rate of mortality based upon the
intensity of mortality at the instant of attaining age zx.
It is now easy to see why the values of », normally exceed 1 at
the beginning and end of the mortality table. Infant mortality is
high in the period immediately following birth. Considering the
first 24 hours of life, for example, the value of ,,,go may exceed
1465 So that the ratio “ exceeds 1. As shorter intervals of time are
taken, the ratio may increase still more. Now consider the upper
end of the mortality table. Since there are no survivors at age w,
we may write ..g: = 1, which is true for all z. Now if z is such
an age that w — z is less than 1, it will follow that
a—29 >41,
o-Z
and hence values of #s exceeding 1 will occur in the year of age
w—ltow.
Values of u, greater than 1 are occasionally encountered when sxc. 5] ESTIMATION OF fs WW
we are dealing with hypothetical survival functions not closely
related to the normal pattern of mortality. For example, if
1, = (100 — x), O0<¢2¢ 100,
it is easy to verify that yu, is greater than 1 at all ages.
5. Estimation of yz, from the mortality table
When 1, is defined in terms of a mortality table and the under-
lying mathematical law is unknown, values of y, can be determined
only approximately.
From formula (1.12) with n = 1,
P= Spree et,
whence, taking logarithms, we have
1
log pz = — [ Mrte at. (1.18)
The definite integral represents the mean value of » between the
ages z and x + 1. If we approximate this mean value by ue44, We
have”
Mey = —logp.. (1.192)
If we integrate uz4, between ¢ = —1 and t = 1, we find
1
[were dt = —10g pos — log ps
and this is twice the mean value of » between the ages z — 1 and
z + 1. This leads to the following approximation:
—4 (log ps1 + log pz)
4} (log Lea ~ log le41)-
Ms
(1.19b)
Other approximations for yu, can be derived by the use of numerical
methods. A simple approximation for Df, is
Df. 5 x (en — fo-n)-
2 The sign = is used to denote an approximation. 18 THE MEASUREMENT OF MORTALITY (cu. 1
Using h = 1,
-_t wlar-ln_ adatd
i a a a
The formula is exact if J, is a polynomial of the second degree. If
we assume that /, is a polynomial of the fourth degree, the follow-
ing formula can be derived:
Blea — Leen) — (lea — Lens)
| 1a :
Other formulas may be obtained by using the relation connect-
ing the differential operator with the finite difference operator A:
oe
3 :
(1.20)
(1.21)
2
D= bg (i+4)=4-$4
For example,
te = — f Die = — } (Ale — $4 + ae 460)
= hd - dade + Mal 2). (1.22)
6. Methods for fractional ages
Consider the problem of evaluating the probability 1;p0 that a
life aged 30 will survive at least 4 months. If the mathematical
Jaw for J, is known, we can readily compute [9 and Uso 1/3 , and hence
determine the required probability exactly as ee However, if le
30
is defined only by a mortality table, it becomes necessary to ob-
tain a value for ti01;3 by some approximation method. Using the
data of Table 2, we note that li, = 94,401 and Jy, = 94,254. The
simplest solution is to interpolate linearly between these two val-
ues, obtaining 01/3 = to — 14 (lo — In) = 94,352.
It is of course possible to improve this estimate by examining
the differences of J, in the neighborhood of I and adopting an
appropriate numerical formula. The linear interpolation is widely
used, however, and is considered to be sufficiently accurate for
many practical purposes. Since we shall have frequent use for it in
our later theory, let us examine the nature of the assumption that
it involves. sEc. 6] METHODS FOR FRACTIONAL AGES 19
The approximation which it produces may be expressed ana-
lytically as
a for integral x
lege RL: — Ue — Lens) and0
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