Life Contingencies Single Life Model Basic Random Variables: X - Denotes The Age-At-Death Random Variable

Life Contingencies
LIFE CONTINGENCIES Single Life Model Basic Random Variables X denotes the age-at-death random variable (x) denotes a life aged x (ie someone whos already survived to age x)
denotes terminal age (unless otherwise stated, we assume = ) (no one survive past age )
T = T(x) denotes the continuous future lifetime of (x) random variable T=Xx|X>x Note that X = T(0) K = K(x) denotes the curtate future lifetime of (x) random variable This is a discretization of the T random variable.
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Life Contingencies
The Age-at-Death Random Variable: X

Supp ( X ) = (0, )
(cumulative distribution function cdf) FX ( x ) = Pr( X x ) = x q0 (Recall that F = f , the probability density function (pdf)) (survival function sf)
s X ( x ) = Pr( X > x ) = x p0 = 1 x q0 (Note that s = f )
(force of mortality fom) aka hazard rate or failure rate

( x) =
f X ( x) d = [ln( s X ( x )] s X ( x) dx
Comments and Concepts 1. The force of mortality is the rate of mortality at a particular point in time. The expression ( x )dx represents the probability that a newborn that has survived to age x dies in the next instant dx. 2. 3.
x
p0 = exp( ( s )ds )
0
q0 = Pr( X x ) = f X ( s )ds =
0
x s
p0 ( s )ds
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Life Contingencies
The (continuous) Future Lifetime Random Variable: T = T(x)

Supp (T ) = (0, x )
(pdf): f T (t ) =
f X ( x + t) Pr( X > t )
(cdf): FT (t ) = Pr(T t )= t q x = (sf): sT (t ) = Pr(T > t )= t p x =
Pr( x < X x + t ) Pr( X > x + t ) = 1 Pr( X > x ) Pr( X > x )

x +t
Pr( X > x + t ) = Pr( X > x )
p0 = 1 t q x x p0
Comments and Concepts 1. f T (t )= t p x ( x + t ) 2. t q x = 0 s p x ( x + s )ds 3.

t t
p x = exp( ( x + s )ds ) = exp(

0
x +t
( s )ds ) Also, t p x = s p x ( x + s )ds

t
4. 1 q x = q x and 1 p x = p x 5. (survival factorization) 6. (deferred mortality)

t |u n +t
p x = n p x t p x + n
qx = Pr(t < T ( x ) t + u ) =
t +u s
p x ( x + s )ds = t p x t + u p x = t + u qx t qx = t p x u qx + t
d [ t p x ] = f T (t ) = t p x ( x + t ) and so ( x + t ) = 7. dt
d [t px ] dt t px
8.
d [ t p x ]= t p x [ ( x ) ( x + t )] (Use 2nd equality in 3. above and the FTC) dx
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Life Contingencies
9. (complete expectation of life for (x), aka mean residual lifetime)

ex = E[T ( x )] = tt p x ( x + t )dt = t p x dt (The last equality is used often.)
0 0 0
10. E[(T ( x )) 2 ] = 0 t 2 t p x ( x + t )dt = 02tt p x dt (Helps us get variance of T.) 11. (n-year temporary complete expectation of life for (x); this is the expected number of years lived by (x) between ages x and x+n)
e x :n | = E[T ( x ) n ] = tt p x ( x + t )dt + nn p x =
0 0 n n t 0
p x dt
12. (Recursion Formulas)

e x = e x:n| + n p x e x + n and when n = 1 we get e x = t p x dt + p x e x +1
0 0 0 0 0 1 0 0 0 0
e x:n| = e x:m| + m p x e x + m:n m|
13. The kth percentile of T(x), denoted ck, is found by solving

ck
p x = 1 .01k
The median future lifetime of (x) is c50. 14. The mode of T is the point(s) at which the pdf f T (t ) is maximized.
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Life Contingencies
The Curtate Future Lifetime Random Variable: K = K(x)

Supp ( K ) = (0,1,2, L , x 1)
The probability distribution table for K is K 0 1 2

M
Pr Pr(0 T < 1) = Pr(0 < T 1) = q x ( = 0| q x ) Pr(1 T < 2) = Pr(1 < T 2) = 1| q x Pr(2 T < 3) = Pr(2 < T 3) = 2| q x
M
Note:
n|
q x = n p x n +1 p x = n +1 q x n q x = n p x q x + n
k
(cdf): FK ( k ) = Pr( K k ) = n| q x (Notice that Pr( K k ) = Pr(T k + 1)= k +1 q x )

n =0
Comments and Concepts 1. (curtate expectation of life for (x))

e x = E [ K ( x )] = k k | q x = k p x
k =0 k =1
(The last equality is used often. Notice the index starts at k = 1.) 2. E[( K ( x )) 2 ] = k 2 k | q x = (2k 1)k p x (Helps us get variance of K.)
k =0 k =1
3. (n-year temporary curtate expectation of life for (x); this is the expected complete number of years lived by (x) between ages x and x+n)
e x:n| = k p x
k =1 n
4. (Recursion Formulas) e x = e x:n| + n p x e x + n and when n = 1 we get e x = p x (1 + e x +1 )

e x:n| = e x:m| + m p x e x + m:n m|
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Life Contingencies
Life Table Notation

l0 = (arbitrary) number of newborns l x = l0 x p0 = (expected) number of survivors at age x (Note:
n x
p0 =
lx ) l0
d x = l x l x + n = number of deaths between ages x and x+n
(1dx = dx ) Note: n d x = d x + d x +1 + L + d x +n 1 Formulas and concepts involving life table notation 1.

n
px =
l x+n d l l and n q x = n x = x x +n = 1 n p x and lx lx lx d [l x ] d dx , and so [l x ] = l x ( x ) dx lx

n t
n|m
qx =
d x +n l x +n l x +n+m = lx lx
2. ( x ) =
3. 4.
d x = l x +t ( x + t )dt (follows since n q x =

0
p x ( x + t )dt )
Lx = the total number of years lived in the next n years by the l x people
L x = l x +t dt =
0
alive at age x
n x+n n x
l y dy = n l x + n + n d x E[T ( x) | T ( x) < n]
Note that E[T ( x) | T ( x) < n] =

d [ n Lx ] = l x + n l x = n d x dx
t t p x ( x + t )dt
n
qx
t l x + t ( x + t )dt
n
dx
5.
6. Tx = Lx the total number of years lived in the future by the l x people alive at age x 7.
n
Lx = Tx Tx + n and
d [Tx ] = l x dx
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Life Contingencies
Life Table Notation (continued) 8. e x =

0 0 Tx L and e x:n| = n x lx lx
9. E[(T ( x )) 2 ] =
2Y x where Y x = 0Tx +t dt lx
10. n m x =
dx is the n-year central mortality weight n Lx
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Life Contingencies
Extending Discrete to Continuous (Fractional Age Assumptions) (x is an integer and all formulas are valid for 0 t 1 ) UDD (Uniform Distribution of Deaths: t d x = t d x )
t
q x = t q x , and so t p x = 1 t q x , and f T (t ) = q x (a constant wrt t) qx qx and m x = 1 t qx 1 0.5q x
Then l x +t = l x t d x and ( x + t ) =
Defining V(x) to be the random variable representing the fraction of the year lived in the year in which (x) dies, we can relate the random variables T and K; namely, T(x) = K(x) + V(x), and K and V are independent. Under UDD, we have V(x) ~ U(0,1). Then e x = e x + 0.5 . Also e x:n| = e x:n| + 0.5( n q x ) and Var (T ( x )) = Var( K ( x )) + For 0 s + t 1 , t q x + s =
qx t qx and t p x + s ( x + s + t ) = 1 s qx 1 s qx
0 0
1 12
Constant Force (Exponential Interpolation: ( x + t ) = ) For 0 s + t 1 , t p x + s = e t = ( p x ) t

mx =
Balducci (Hyperbolic Interpolation)

1 l x +t = 1 1 1 + t lx l x +1 l x
( x + t) =
qx t qx and for 0 s + t 1 , t qx + s = = t ( x + s + t) 1 (1 s t ) qx 1 (1 t ) q x
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Life Contingencies
Select and Ultimate Mortality Select mortality rates are used for a period (usually 3 years or less) and are different than the ultimate (general population) rates. [x] denotes an x-year old for which select rates are used starting at age x [x] + k denotes an (x + k)-year old for which select rates are used starting at age x [x + k] denotes an (x + k)-year old for which select rates are used starting at age x + k (x + k) denotes an (x + k)-year old for which ultimate rates are used starting at age x + k Comments: 1. [x] + k = (x + k) if k exceeds the select period 2. The force of mortality for [x] is denoted x (t ) .
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Life Contingencies
Multiple-Life Models For the moment, we consider only two independent lives (x) and (y). The models can easily be extended to more than two lives. Joint-Life Status: T ( xy ) = Min{T ( x ), T ( y )} (Joint-life status fails on the earlier of the deaths of (x) and (y))
t
p xy = Pr(T ( xy ) > t ) = Pr(T ( x ) > t ) Pr(T ( y ) > t ) = t p x t p y q xy = 1 t p xy
e xy = t p xy dt
0
e xy = k p xy
k =1
t |u
q xy = t p xy t +u p xy
xy (t ) = x (t ) + y (t )
Last-Survivor Status: T ( xy ) = Max{T ( x ), T ( y )} (Last-survivor status fails on the latest of the deaths of (x) and (y)) For independent lives (x) and (y):
t
qxy = Pr(T ( xy ) t ) = Pr(T ( x ) t ) Pr(T ( y ) t ) = t qx t q y

p xy = 1 t q xy q xy = t +u q xy t q xy
t
t |u
xy (t ) =
p x x (t )+ t p y y (t ) t p xy xy (t )
t
p xy
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Life Contingencies
Contingent Probabilities Notation:

n
1 qx y = Pr((x) dies first and within the next n years)
1 qx y = Pr((x) dies first) 2 qx y = Pr((y) dies second and within the next n years)
The notation x y indicates that the joint-life status (xy) fails due to the failure of the (x) status, ie the death of (x). Contingent Probability Formulas:
n
1 qx y = 2 qxy =
n t
0 n
p xy x (t )dt q x t p y y (t )dt
Contingent Probability Relationships: 1. 2. 3. 4.

n
1 2 qx = n q x y +n qx y
1 2 qy =n q x y +n qx y
1 1 q xy = n q x y +n qx y
2 2 q xy = n q x y +n qx y
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Life Contingencies
Common Shock Model (In recent exams, this has been the only model tested in which the lifetimes of (x) and (y) are dependent.) Notation: Z = the common shock random variable. Always Z ~ EX ( mean = ) . ( = the fom of the shock)
T*(x) = future lifetime of (x) random variable in the absence of the common shock ( Pr(T * ( x ) > t )= t p * x ) T*(y) = future lifetime of (y) random variable in the absence of the common shock ( Pr(T * ( y ) > t )= t p * y) Z, T*(x), and T*(y) are all assumed mutually independent Define T ( x ) = Min{T * ( x ), Z } and define T ( y ) = Min{T * ( y ), Z } . (T(x) and T(y) are not independent, and T ( xy ) = Min{T * ( x ), T * ( y ), Z } ) Formulas:
t t t * t p x = Pr(T ( x ) > t ) = t p* x Pr( Z > t ) = t p x e * t p y = Pr(T ( y ) > t ) = t p* y Pr( Z > t ) = t p y e * * * t p xy = Pr(T ( xy ) > t ) = t p* x t p y Pr( Z > t ) = t p x t p y e
Often Tested Special Case of Common Shock Model (x) and (y) have constant forces, x and y , respectively Given: T * ( x ) ~ EX (mean = Formulas:
1
) and T * ( y ) ~ EX ( mean =
y t ( y + ) t
t t
t
x t and p* x = e
p* y = e
t
p x = e ( x + )t and p xy = e
( x + y + ) t
py = e
Special Probability: Pr((x) and (y) die within n years by the common shock)
=
n t 0
p xy dt = e
0
( x + y + ) t
dt =
( 1 e x + y +
+ y + )n
)
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Life Contingencies
Insurance Present Value Random Variables Single Life Insurance Payable At The End Of The Year Of Death (unless otherwise stated, benefit amount is 1 and age at issue is x) (PVRV = Present Value Random Variable) (SBP = Single Benefit Premium) (APV = Actuarial Present Value) 1. whole life insurance The probability distribution table for the PVRV, Z x , is
Zx
v
v2
v3
M
Probability Pr(K = 0) = q x Pr(K = 1) = 1| q x Pr(K = 2) = 2| q x

M
PVRV = Z x = v K +1 SBP = APV = E[ Z x ] = E[v K +1 ] = Ax = vqx + v 2 1| qx + L

2 E[ Z x ]= 2Ax = v 2 q x + v 4 1| qx + L . Therefore, Var ( Z x ) = Var ( v K +1 ) = 2Ax ( Ax ) 2
Comments and Concepts: (Applies to all insurances in this section.) (i) 2 A means to perform the same calculation as with A , except use double the force of interest. We will generally have for insurance that if Z is the PVRV, then E[Z] = A and E[ Z 2 ]= 2A . This will not be the situation for annuities. (ii) We can calculate probabilities involving the random variable Z by rewriting the event in terms of the random variable K.
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Life Contingencies
2. n-year term insurance (benefit is paid if death occurs within next n years) The probability distribution table for the PVRV, Z x:n | , is
1
Z x:n |
v

M Pr(K = n 1 ) =
n 1|
v3
M vn
qx
0 PVRV = Z x:n | =
1
Pr(K n ) = n p x
v K +1 L K < n 0 L K n
1 1
SBP = APV = E[ Z x:n | ] = Ax:n | = vqx + v 2 1| qx + L + v n n 1| qx

1 2 2 1 2 4 2n E[( Z x : n | ) ] = A x : n | = v q x + v 1| q x + L + v n 1| q x .
Therefore, Var ( Z x:n | ) = 2 Ax:n | ( Ax:n | ) 2

1 1 1
Comments and Concepts: The symbol x : n | is based on the contingent probability notation from page 11 of these notes. Here, the life y is n | , an n-year certain period. Observe that n-year term insurance pays a death benefit when the status
x : n | fails. That is, the death benefit is paid on the death of (x) as long as
1 1
this death occurs before the death of the n-year certain period (within n years).
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Life Contingencies
3. n-year pure endowment (benefit is paid if participant survives n years) The probability distribution table for the PVRV, Z x:n | , is
Z x:n |
1 1
Probability Pr( K < n ) = n q x Pr( K n ) = n p x

1
0
v
n
PVRV = Z x:n | =
0 L K < n
n v L K n
SBP = APV = E[ Z x:n | ] = Ax:n | = v n n p x (Another notation: n E x = A x:n| = v n n p x )

1 1 1
E[( Z x :n | ) 2 ] = 2 Ax :n | = v 2 n n p x . Therefore, Var ( Z x:n | ) = 2 Ax :n | ( Ax:n | ) 2

1 1 1 1 1
Comments and Concepts:

1
The symbol x : n | is based on the contingent probability notation from page 11 of these notes. Observe that an n-year pure endowment pays
1
when the status x : n | fails. That is, the benefit is paid on the death of the n-year certain period, n | , as long as this death occurs before the death of (x). This is equivalent to saying the benefit is paid after n years, as long as (x) survives that long.
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Life Contingencies
4. n-year endowment insurance (benefit is paid at end of year of death if participant dies before age x + n, and benefit is paid at age x + n if participant survives to age x + n) The probability distribution table for the PVRV, Z x:n | , is
Z x :n |
v
v2
v3
M vn

M Pr(K = n 1 ) =
n 1|
qx
vn
Pr(K n ) = n p x
v K +1 L K < n
n v L K n
PVRV = Z x:n | =
= Z x:n | + Z x:n |
1 1 1
SBP = APV = E[ Z x:n | ] = Ax:n | = Ax:n | + Ax:n |

E[( Z x :n | ) 2 ]= 2Ax :n | = 2 Ax :n | + 2 Ax :n | . Therefore, Var ( Z x :n | ) = 2 A x:n | ( Ax :n | ) 2
1 1
Comments and Concepts: (i) Observe that n-year endowment insurance pays when the joint life status x : n | fails. The benefit is guaranteed to be paid and will be paid at the earlier of the death of (x) and the death of n | . (ii) On a random variable level, ( Z x:n | ) 2 = ( Z x:n | ) 2 + ( Z x:n | ) 2 since Z x:n | Z x:n | = 0 . So the expectation calculations above should be clear.
1 1 1 1
(iii) WARNING: Var ( Z x:n | ) Var ( Z x:n | ) + Var ( Z x:n | ) It is easy to show that if X and Y are random variables such that their product is 0, then Cov ( X , Y ) = X Y . Therefore the correct variance formula is
1 1 1 1 Var ( Z x :n | ) = Var ( Z x : n | ) + Var ( Z x : n | ) 2 A x : n | A x : n | 1 1
(iv) With n = 1, we get A x:1| = v q x + v p x = v ( q x + p x ) = v

Pariss Exam MLC Seminar www.steveparisseminars.com Page 16 of 52
Life Contingencies
5. n-year deferred whole life insurance (benefit is paid at end of year of death if participant dies after age x + n, no benefit is paid if participant dies prior to age x + n) The probability distribution table for the PVRV, n | Z x , is
n|
Zx
0
v n +1
v n+2 M
Probability Pr( K < n ) = n q x Pr(K = n) = n| q x Pr(K = n + 1) = n +1| q x

M
0L K < n v
K +1
PVRV = n | Z x =
LK n
= Z x Z x :n |
1
SBP = APV = E[ n | Z x ]= n | Ax = Ax Ax:n |

1 1 2 2 E[( n | Z x ) 2 ]= n2|Ax = 2Ax 2 Ax : n | . Therefore, Var ( n | Z x ) = n | Ax ( n | Ax )
Comments and Concepts: (i) We also have the following APV formula:
n|
Ax = v n n p x Ax + n
(ii) Remembering the meaning of 2 A , we also get n2| Ax = v 2 n n p x 2 Ax + n (iii) The ideas above can be extended to an n-year deferred, j-year term insurance, or an n-year deferred, j-year pure endowment, or a If you are tested on one of these other insurance types, just use the basic principals learned by studying the above insurances.
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Life Contingencies
6. whole life increasing insurance beginning at 1 The probability distribution table for the PVRV, ( IZ ) x , is
( IZ ) x
v
2v 2
3v 3
M

M
PVRV = ( IZ ) x = ( K + 1) v K +1 SBP = APV = E[( IZ ) x ] = ( IA) x = Ax +1| Ax + 2| Ax + L
7. n-year term increasing insurance beginning at 1 The probability distribution table for the PVRV, ( IZ ) x:n | , is
1 1 ( IZ ) x :n |

M Pr(K = n 1 ) =
n 1|
2v 2
3v 3
M nv n
qx
0 PVRV = ( IZ ) x:n | =
1
Pr(K n ) = n p x
( K + 1) v K +1 L K < n 0 L K n
SBP = APV =
2 3 n 1 1 E[( IZ ) x : n | ] = ( IA) x : n | = v q x + 2v p x q x +1 + 3v 2 p x q x +1 + L + nv n 1 p x qn + n 1
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Life Contingencies
8. n-year decreasing insurance to 1 The probability distribution table for the PVRV, ( DZ ) x:n | , is
1 1 ( DZ ) x :n |

M Pr(K = n 1 ) =
n 1|
nv
(n 1)v
M vn
(n 2)v 3
qx
0 PVRV = ( DZ ) x:n | =
1
Pr(K n ) = n p x
(n K ) v K +1 L K < n 0 L K n
1
SBP = APV = E[( DZ ) x:n | ] = ( DA) x:n | = Ax:n | + Ax:n 1| + Ax:n 2| + L + Ax:1|
1 1 1 1 1
Remark: ( DA) x:n| + ( IA) x:n| = ( n + 1) A x:n|

1 1 1
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Life Contingencies
Insurance Payable At The Moment Of Death 1. whole life insurance PVRV = Z x = v T = e T SBP = APV = E[ Z x ] = Ax = 0 e t t p x x (t )dt
E[ Z x ]= Ax = e 2 t t p x x (t )dt
2 2 0

Therefore, Var ( Z x )= Ax ( Ax ) 2 . Important Comment on Notation: We are using a bar over Z to denote a different random variable than the random variable Z. Sometimes a bar over a random variable indicates the mean of a random sample from the same distribution as the random variable. Thats not the case here. What we mean by using the bar notation is that the insurance is paid at the time of death, and thus the PVRV is a function of the complete future lifetime random variable, T.
2. n-year term insurance PVRV = Z x:n | =

1
v T LT < n 0LT n
1 1
SBP = APV = E[ Z x:n | ] = Ax:n | = 0 v t f T (t )dt = 0 e t t p x x (t )dt

E[( Z x :n | ) 2 ]= Ax :n | = e 2 t t p x x (t )dt
1
Therefore, Var ( Z x:n | ) = Ax:n | ( Ax:n | ) 2 .

1 1 1
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Life Contingencies
3. n-year endowment insurance PVRV = Z x:n | =

v T LT < n
n v LT n
1 = Zx :n | + Z x :n | 1
SBP = APV = E[ Z x:n | ] = Ax:n | = Ax:n | + Ax:n |

1 1
E[( Z x :n | ) 2 ]= Ax :n | = Ax :n | + 2 Ax :n |
1 1
Therefore, Var ( Z x:n | ) = Ax:n | ( Ax:n | ) 2 . Comments and Concepts: (Comments (ii) (iv) are analogues to the same numbered comments in the n-year endowment insurance payable at the end of the year of death case the discrete case.) (i) Notice that the pure endowment random variable is always discrete, and so we do not have a Z x:n | random variable. Subsequently, there are no
1
actuarial symbols Ax:n | or Ax:n | . (ii) On a random variable level, ( Z x:n | ) 2 = ( Z x:n | ) 2 + ( Z x:n | ) 2 since Z x:n | Z x:n | = 0 . So the expectation calculations above should be clear.
1 1 1 1
(iii) WARNING: Var ( Z x:n | ) Var ( Z x:n | ) + Var ( Z x:n | ) It is easy to show that if X and Y are random variables such that their product is 0, then Cov( X , Y ) = X Y . Therefore the correct variance formula is
1 1
Var ( Z x:n | ) = Var ( Z x :n | ) + Var ( Z x :n | ) 2 Ax :n | Ax :n |

1 1 1 1
(iv) We do not get the nice formula in the n = 1 case that we got in the discrete case.
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Life Contingencies
4. n-year deferred whole life insurance PVRV = n | Z x =

0LT < n v LT n
T
= Z x Z x:n |
1
SBP = APV = E[n| Z x ]= n| Ax = Ax Ax:n|

1 1 E[( n | Z x ) 2 ]= n | Ax = Ax Ax :n |
Therefore, Var ( n | Z x )= n | Ax ( n | Ax ) 2 . Comments and Concepts: (These comments are analogues to the same numbered comments in the n-year deferred whole life insurance payable at the end of the year of death case the discrete case.) (i) We also have the following APV formula:
n|
A x = v n n p x A x +n
2 2
(ii) Remembering the meaning of 2 A , we also get n| A x = v 2 n n p x A x +n (iii) The ideas above can be extended to an n-year deferred, j-year term insurance, or an n-year deferred, j-year pure endowment, or a If you are tested on one of these other insurance types, just use the basic principals learned by studying the above insurances.
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Life Contingencies
Often Tested 1-Year Recursion Relationships

Ax = A x:1| + vp x Ax +1 = vq x + vp x Ax +1
1
A x:n| = A x:1| + vp x A x +1:n 1| = vq x + vp x A x +1:n 1|

1 1 1 1
A x:n| = A x:1| + vp x A x +1:n 1| = vq x + vp x A x +1:n 1|

1
The next three are the continuous analogues to the previous three.
A x = A x:1| + vp x A x +1
1
A x:n| = A x:1| + vp x A x +1:n 1|

1 1 1
1 A x:n| = A x :1| + vp x A x +1:n 1|
Non-unit Insurance (benefit payable at time T is bT) PVRV = Z = bT v T (whole life)

bT v T L T < n (n-year term) Z = 0 L T n M M 2 Z = bT2 v 2T (whole life)
2 2T bT v LT < n (n-year term) Z = 0 L T n M M
Notice that E[Z2] will not equal 2A unless the benefit is 1.
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Life Contingencies
Annuity Present Value Random Variables Single Life Life Annuities (Due) Payable At The Beginning Of The Year (all the following annuities have an annual payment of 1) 1. whole life annuity due
&& , is The probability distribution table for the PVRV, Y x && Y x &&1| a
&&2| a
Probability Pr(K = 0) = q x Pr(K = 1) = 1| q x

M
K +1
M
1 v && = a &&K +1| = PVRV = Y x
1 Zx d
&& ] = a &&x = a &&1| qx + a &&2| 1| qx + L = 1 + vp x + v 2 2 p x + L SBP = APV = E[Y x

&& ] = E 1 Z x = 1 Ax (equivalently, A = 1 d a &&x ) &&x = E[Y ( i) a x x
&& ) = (ii) Var (Y x
1 1 Var ( Z x ) = 2 (2 Ax ( Ax ) 2 ) 2 d d
(iii) We can calculate probabilities involving the random variable Y by rewriting the event in terms of the random variable K.
Page 24 of 52
Life Contingencies
2. n-year temporary life annuity due (pays 1 until the earlier of the death of the annuitant or an n-year certain period)
&& , is The probability distribution table for the PVRV, Y x :n | && Y x :n |
&&1| a &&2| a &&3| a

M Pr(K = n 1 ) =
n 1|
M &&n| a
&&n| a
qx
Pr(K n ) = n p x
1 v K +1 LK < n &&K +1| L K < n a 1 Z x :n | d = = = n && d 1 v L K n a n| L K n d
&& PVRV = Y x :n |
SBP = APV =
&& ] = a &&x :n | = a &&1| qx + L + a &&n | n 1| qx + a &&n | n p x = 1 + vp x + v 2 2 p x + L + v n 1 n 1 p x E[Y x :n |

&& ] = E &&x :n | = E[Y ( i) a x :n |
1 Z x :n | 1 Ax :n | &&x:n| ) (equivalently, Ax:n| = 1 d a = d d
&& ) = (ii) Var (Y x :n |
1 1 Var ( Z x:n | ) = 2 2 Ax :n | ( Ax:n | ) 2 2 d d
(iii) We denote the actuarial accumulated value (AAV) of an n-year &x:n| and define it by the relationship temporary annuity due by & s
&x:n| = &&x:n| = & &x:n| v n n p x . That is, & s a s &&x:n| a
v n n p x =
&&x:n| a
n
Ex
&&x:n| a
A x:n|
1
(See page 44 for a more complete discussion on AAVs.)
Page 25 of 52
Life Contingencies
3. n-year deferred life annuity due

&& , is The probability distribution table for the PVRV, n |Y x && Y
n| x
0
n| n|
&&1| a &&2| a M
Probability Pr(K < n) = n q x Pr(K = n) = n| q x Pr(K = n+1) =

M
0L K < n
n +1|
qx
&& Y && && = a && PVRV = n |Y =Y x n| K +1 n| = x x :n | &&K +1| a &&n| L K n a

n n +1 && ]= a && && && SBP = APV = E[ n |Y n +1 p x + L x n | x = a x a x : n | = v n p x + v
Comments and Concepts: ( i)

n|
&&x = v n n p x a &&x + n a
&&x = a &&x:n| + n| a &&x = a &&x:n| + v n n p x a &&x +n (ii) a && ) 2 ] = (iii) E[( n |Y x

2 2n &&x + n 2 a &&x + n )+ n2|a &&x (unlikely to see this on the exam) v n p x (a d
Page 26 of 52
Life Contingencies
4. n-year certain and life annuity due (pays 1 until the later of the death of the annuitant or an n-year certain period)
&& , is The probability distribution table for the PVRV, Y x :n | && Y x :n | &&n| a &&n +1| a &&n +2| a
Probability Pr(K < n) = n q x Pr(K = n) = n| q x Pr(K = n+1) = n +1| q x

M
&& L K < n a
n| && = && = a &&n | + n |Y PVRV = Y x x :n | && a K +1| L K n
&& ] = a && = a &&n | + n | a &&x SBP = APV = E[Y x :n | x :n |
Comments and Concepts: Observe that an n-year certain and life annuity due pays until the failure of the last-survivor status x : n | (here, the life y is n | , an n-year certain period). That is, the annuity pays until the later of the death of (x) and the death of n | , or equivalently, it pays as long as (x) is alive, with a minimum of n years.
Page 27 of 52
Life Contingencies
Life Annuities (Immediate) Payable At The End Of The Year (all the following annuities have an annual payment of 1) Comments and Concepts: When dealing with annuities immediate, use the above formulas for annuities due and relationships between annuities immediate and annuities due. Examples:
&& 1 . 1. If Yx is the PVRV for a whole life annuity immediate, then Yx = Y x 2 & & &&x 1 = v p x + v 2 p x + L and Then SBP = APV = a x = E[Yx ] = E[Yx 1] = a && ) . Var (Yx ) = Var (Y x
Important Special Formula: If i = 0, then a x = e x = E[ K ( x )] 2. If Y x:n | is the PVRV for an n-year temporary life annuity immediate,
&& then Y x:n | = Y 1 . Then SBP = APV = x : n +1| && &&x :n +1| 1 = v p x + v 2 2 p x + Lv n n p x and a x :n | = E[Y x :n | ] = E[Y 1] = a x : n +1|
&& ) Var (Y x:n | ) = Var (Y x : n +1|
Important Special Formulas: (i) If i = 0, then a x:n| = ex:n|

&&x:n| 1 + v n n p x = a &&x:n| 1+ n E x (ii) a x:n| = a
3. If n |Yx is the PVRV for an n-year deferred life annuity immediate, then && Then SBP = APV = E[ Y ]= a = a && n |Yx = n +1|Yx . n| x n | x n +1| x and
&& ) Var ( n |Yx ) = Var ( n +1|Y x
Page 28 of 52
Life Contingencies
Continuous Life Annuities (all the following annuities have an annual payment rate of 1) 1. whole life continuous annuity PVRV = Y x = a T | =
1 vT
1 Z x
SBP = APV = E[Y x ] = a x = 0 a t | t p x x (t )dt = 0 v t t p x dt Comments and Concepts: (i) a x = E[Y x ] = E (ii) Var (Y x ) =
1
1 Z x 1 A x (equivalently, A x = 1 a x ) =
Var ( Z x ) =
0
Ax ( Ax )2
(iii) If i = 0, then a x = e x . Important Comment on Notation: Just as with the case of insurance payable at the moment of death, we are using a bar over Y to denote a different random variable than the random variable Y. What we mean by using the bar notation is that the annuity is paid continuously, and thus the PVRV is a function of the complete future lifetime random variable, T.
Page 29 of 52
Life Contingencies
2. n-year temporary life continuous annuity PVRV = Y x:n | =

a T | LT < n a n | LT n =
1 Z x :n |
n n
SBP = APV = E[Y x:n | ] = a x:n | = 0 a t | t p x x (t )dt + a n | n p x = 0 v t t p x dt Comments and Concepts: (i) a x:n | = E[Y x:n | ] = E (ii) Var (Y x:n | ) =
1
1 Z x :n | 1 A x :n | (equivalently, A x:n| = 1 a x:n| ) =
Var ( Z x :n | ) =
0
Ax:n | ( Ax :n | ) 2
(iii) If i = 0, then a x:n| = e x:n| . (iv) We denote the actuarial accumulated value (AAV) of an n-year temporary continuous annuity by s x:n| and define it by the relationship
a x:n| = s x:n| v n n p x . Then s x:n| =
a x:n| a x:n| a x:n| . = = 1 v n p x n E x A x:n|

n
(See page 44 for a more complete discussion on AAVs.)
Page 30 of 52
Life Contingencies
3. n-year deferred whole life continuous annuity PVRV = n |Y x =

0LT < n 0LT < n Z x:n | Z x = n = Y x Y x :n | = a T | a n | LT n v a T n | LT n

SBP = APV = E[ n |Y x ]= n | a x = a x a x:n | = n v n a t n | t p x x (t )dt = n v t t p x dt Comments and Concepts: ( i)

n|
a x = v n n p x a x + n
(ii) a x = a x:n| + n| a x = a x:n| + v n n p x a x +n (iii) E[( n |Y x ) 2 ] =

2
v 2 n n p x a x + n a x + n
(unlikely to see this on the exam)
4. n-year certain and life continuous annuity PVRV = Y x:n | = a n | + n |Y x =

a n | LT < n a T | LT n
SBP = APV = E[Y x:n | ] = a x:n | = a n | + n | a x
Page 31 of 52
Life Contingencies
Life Annuities Due Payable mthly

(m) &&x These annuities also have an annual payment of 1. Thus the symbol C a
represents the APV of a life annuity to (x) that pays
C at the beginning of m
each of m periods per year for the life of (x). The total annual payment each year is C. Under the UDD assumption we have:
(m) &&x &&x ( m ) a = (m) a
and
(m) &&x &&x:n| ( m ) (1 n E x ) a = (m) a :n|
where the values of (m) and (m) will be given in the tables
Often Tested 1-Year Recursion Relationships

&&x = 1 + v p x a &&x +1 a &&x:n | = 1 + v p x a &&x +1:n 1| a a x = a x:1| + v p x a x +1 a x:n | = a x:1| + v p x a x +1:n 1| a x = v p x + v p x a x +1 = v p x (1 + a x +1 )
Page 32 of 52
Life Contingencies
Insurance and Annuity Present Value Random Variables Multiple Life Contingent Insurance Payable at the Moment of Death Type 1: Pays 1 on the death of (x) if (x) dies first SBP = APV = A x y = 0 v t t p xy x (t )dt
1
Type 2: Pays 1 on the death of (x) if (x) dies second SBP = APV = A x y = 0 v t t q y t p x x (t )dt
2
Interchange the roles of (x) and (y) to get similar formulas for insurance payable on the death of (y). Contingent insurance payable at the end of the year of death (Use summations instead of integrals)
Contingent Insurance Relationships 1. 2. 3. 4.

1 2 Ax = Ax y + Ax y
1 2 A y = Ax y + Ax y
1 1 A xy = A x y + Ax y
2 2 A xy = A x y + Ax y
There are similar relationships in the discrete case, i.e. no bars.
Page 33 of 52
Life Contingencies
Continuous Insurance and Annuities for Joint-Life Status (Replace x in all single life formulas by xy) 1. A xy = E[v T ( xy ) ] = 0 v t t p xy xy (t )dt 2.
2
A xy = E[v 2T ( xy ) ] = v 2 t t p xy xy (t )dt
0 2
So Var ( Z xy ) = Axy ( Axy ) 2 = variance of PVRV for insurance that pays 1 at the moment of the first death of (x) or (y) 3. a xy = 0 v t t p xy dt =
n
1 A xy
1 A xy:n|
4. a xy:n| = 0 v t t p xy dt =
This is the APV of an n-year temporary life annuity that pays continuously at a rate of 1 per year for the joint lifetimes of (x) and (y). This annuity pays until failure of the xy : n | status, which fails at the first of the death of (x), the death of (y), and the death of n | . That is, the annuity pays until the first of the death of (x) or the death of (y), up to a maximum of n years. 5. A xy:n| = 0 v t t p xy xy (t )dt
1
6. Var (Y xy ) =
(A
2
xy
( Axy ) 2 = variance of PVRV for a continuous annuity
that pays 1 per year for as long as the joint-life status (xy) survives, i.e. as long as both (x) and (y) are alive.
M
You get the idea.
Page 34 of 52
Life Contingencies
Discrete Insurance and Annuities for Joint-Life Status (Replace x in all single life formulas by xy)
1. Axy = E[v K ( xy )+1 ] = v k +1 k | q xy

k =0
2.
Axy = E[v 2 ( K ( xy ) +1) ] = v 2 ( k +1) k | q xy

k =0 2
So Var ( Z xy ) = Axy ( Axy ) 2 = variance of PVRV for insurance that pays 1 at the end of the year of the first of the death of (x) or the death of (y)
n 1
3. Axy:n| = A xy:n| + v n n p xy = v k +1 k | q xy + v n n p xy
1
k =0
&&xy = v k k p xy = 4. a
k =0
1 Axy d
&&xy:n| = v k k p xy = 5. a
k =0
n 1
1 Axy:n|
d ( Axy :n | ) 2 = variance of PVRV for an n-year temporary
&& ) = 6. Var (Y xy : n |
1 d2
(A
2
xy : n |
life annuity due that pays 1 at the beginning of each year that the joint-life status xy : n | survives, i.e. as long as both (x) and (y) are alive, up to a maximum of n years.
M
You get the idea.
Page 35 of 52
Life Contingencies
Insurance and Annuities for Last-Survivor Status Method 1: Replace x in all single life formulas by xy , or this is the same as replacing the subscript xy in the joint-life status formulas above by xy . Method 2: (This can make many computations much easier.) Make use of the following relationships. Often Used Relationships Between Joint-Life and Last-Survivor Statuses Note: T ( xy ) + T ( xy ) = T ( x ) + T ( y ) and T ( xy ) T ( xy ) = T ( x ) T ( y ) 1.
t
p xy + t p xy = t p x + t p y
2. t q xy + t q xy = t q x + t q y 3. e xy + e xy = e x + e y 4. e xy + e xy = e x + e y 5. Axy + Axy = Ax + Ay 6. a xy + a xy = a x + a y 7. Axy:n| + Axy:n| = Ax:n| + Ay:n| 8. A xy:n| + A xy:n| = A x:n| + A y:n|
1 1 1 1
9. a xy:n| + a xy:n| = a x:n| + a y:n| 10. n| a xy + n| a xy = n| a x + n| a y

11. Cov(T ( xy ), T ( xy )) = Cov(T ( x ), T ( y )) + e x e xy e y e xy
0 0 0 0
There are formulas in the continuous case too ( a s and A s), and there are other formulas, e.g. n-year deferred insurance, pure endowments, .
Life Contingencies
Loss Random Variables and Reserves We focus on the single life case with issue age x. The ideas can be extended to the multiple life case, as will be seen in some of the examples that well do. Loss-at-issue Random Variable Suppose insurance is purchased with annual premiums of Q. Then the random variable representing the loss-at-issue will be of the form L = Z Q Y . Examples: 1a. Fully Continuous Whole Life Insurance of 1 with premiums of Q for life
Q Q = 1 + Z x Q Q E [ L] = A x Q a x = 1 + A x 2 2 Q Q 2 Var ( L) = 1 + Var Z x = 1 + Ax ( Ax ) 2 L = Z x Q Y x = Z x Q 1 Z x
( )
1b. Fully Discrete Whole Life Insurance of 1 with premiums of Q for life
L = Z x Q Yx = Z x Q
1 Zx Q Q = 1 + Z x d d d Q Q &&x = E[ L] = Ax Q a 1 + Ax d d
2 2
Q Q Var ( L) = 1 + Var (Z x ) = 1 + (2 Ax ( Ax ) 2 ) d d
2a. Fully Continuous n-year Endowment Insurance of 1 with premiums of Q

L = Z x :n | Q Y x :n | = Z x :n | Q 1 Z x:n |
Q E[ L] = A x:n| Q a x:n| = 1 + A x:n| 2 2 Q Q 2 Var ( L) = 1 + Var Z x :n | = 1 + Ax:n | ( Ax :n | ) 2
Q Q = 1 + Z x :n | Q
Page 37 of 52
Life Contingencies
2b. Fully Discrete n-year Endowment Insurance of 1 with premiums of Q

&& = Z Q L = Z x:n | Q Y x :n | x :n | &&x:n| E[ L] = Ax:n| Q a
2
Q Q = 1 + Z x : n | d d d Q Q = 1 + Ax:n| d d
1 Z x :n |
Q Q Var ( L) = 1 + Var Z x:n | = 1 + 2 Ax :n | ( Ax:n | ) 2 d d
( )
You get the idea. There are many combinations of the type of insurance purchased and the method of paying premiums. We use one more example to illustrate the concept of the loss-at-issue random variable.
3. Insurance n-year term with benefit of 1 payable at the moment of death Premiums - paid at the beginning of each year for h ( n) years (This is called h-payment, n-year term insurance. During the first h years, premiums are paid while living and the benefit is paid upon death. During the next n h years, the insurance is already paid in full and so no premiums are paid, but the benefit is still paid upon death. After n years, the policy has expired and no benefit will be paid upon death.)
&& L = Z x :n | Q Y x :h | &&x:h| E [ L] = A x:n| Q a
1
(If youre asked about variance of this one, skip it. )
Page 38 of 52
Life Contingencies
Calculating Premiums Method 1: Percentiles The premium Q is found by solving a probability equation such as Pr( L > 0) = 0.05 (probability of a positive loss is 5%). This equation can be solved by writing the event first in terms of the random variable Z and then in terms of the random variable T (or K). Then use the distribution of T (or K) to solve the probability equation. We will illustrate this with examples.
Method 2: Equivalence Principle The premium when found using the equivalence principle is called the benefit premium. The premium Q is found by solving the equation E[ L] = 0 . This is the same equation as the one obtained by setting the APV at issue of benefits equal to the APV at issue of premiums. Examples and Notation: 1. For fully discrete insurance of 1, benefit premiums are
Px = Ax = whole life insurance with premiums paid for life &&x a
1 Ax :n| = n-year term insurance with at most n premiums &&x:n| a
1 Px :n| =
Px:n| =
Ax:n|
&&x:h| a
= h-payment n-year endowment insurance
You get the idea. Important Fact: Px:n| = P x:n| + P x:n|

1 1
Page 39 of 52
Life Contingencies
2. For fully continuous insurance of 1, benefit premiums are

P( A x ) = Ax = whole life insurance with premiums paid for life ax
n|
P ( n| A x ) =
Ax
a x:k |
= k-payment n-year deferred whole life insurance
You get the idea.
3. For semi-continuous insurance of 1, benefit premiums are

P( A x ) = Ax = whole life insurance with premiums paid for life &&x a
1 Ax :n| = h-payment n-year term insurance h P ( A x:n| ) = &&x:h| a 1
You get the idea. Notice the notation suggests, as is correct, that the benefit is paid at the moment of death, and the premiums are paid at the beginning of each year. 4. mthly benefit premiums
Px(12 ) = Ax = fully discrete whole life insurance with premiums (12 ) &&x a
of
P ( 4 ) ( A x:n| ) =
Px(12 ) paid at the beginning of each month for life 12
A x:n| = semi-continuous n-year endowment insurance (4) &&x a :n|
with premiums of
M
P ( 4 ) ( A x:n| ) paid at the beginning 4
of each quarter until death of the insurance expires You get the idea.
Life Contingencies
Special Relationships When Using Benefit Premiums Fully Continuous or Fully Discrete Whole Life or Endowment Insurance For fully continuous or fully discrete whole life insurance or endowment insurance, the variance of the loss-at-issue random variable had a factor of
Q Q 1 + (continuous case) or 1 + (discrete case). d
If Q is the benefit premium, then we have 1. Fully Continuous Whole Life - Q = P( A x ) =

a x + Ax Ax 1 1 Q = = = 1 + = 1 + ax ax a x 1 Ax
Ax ax
2. Fully Continuous n-year Endowment Insurance - Q = P( A x:n| ) =

A x:n| 1 1 a x:n| + A x:n| Q = = = 1 + = 1 + a x:n| a x:n| a x:n| 1 A x:n|
A x:n| a x:n|
3. Fully Discrete Whole Life - Q = Px =
Ax &&x a
&&x + Ax Ax d a 1 1 Q = = = 1 + = 1 + &&x &&x &&x 1 Ax d d a d a d a
4. Fully Discrete n-year Endowment Insurance - Q = Px:n| =

&&x:n| + Ax:n| Ax:n| d a 1 1 Q = = = 1 + = 1 + &&x:n| &&x:n| &&x:n| 1 Ax:n| d d a d a d a
Ax:n|
&&x:n| a
Page 41 of 52
Life Contingencies
Prospective Loss At Time t Random Variable Notation: t L denotes the prospective loss at time t random variable
t
L = PVFBRVx +t PVFPRV x +t , where
PVFBRVx+t = PVRV of Future Benefits from age x + t, and PVFPRVx+t = PVRV of Future Premiums from age x + t Note:
0
L = L = loss-at-issue random variable.
Terminal (End of Year) Reserves Notation: tV denotes the tth year terminal (EOY) reserves
t
V = E[ t L | T ( x) t ]
( tV = E[ t L | K ( x) t ] in the discrete case)
Prospective Calculation of Reserves:

t
V = APVFBx +t APVFPx +t , where
APVFBx+t = APV of Future Benefits from age x + t, and APVFPx+t = APV of Future Premiums from age x + t Benefit reserves means the premiums are the benefit premiums. Benefit reserves can be calculated either prospectively or retrospectively. Retrospective Calculation of Benefit Reserves: [See Page 44 for a discussion of Actuarial Accumulated Value (AAV) of contingent payments.]
t
V = AAVPPx +t AAVPB x +t , where
AAVPPx+t = AAV of Past Premiums up to age x + t, and AAVPBx+t = AAV of Past Benefits up to age x + t
Page 42 of 52
Life Contingencies
Examples of Prospective Terminal Benefit Reserves and Notation: (Insurance Benefit = 1) 1. Fully Discrete Whole Life Insurance
t
&&x + t V x = Ax +t Px a
2. Fully Discrete n-year Pure Endowment

t
&&x +t:n t| (Important Fact: V x:n| = A x +t:n t| P x:n| a

1 1 1
V x:n| = 1 )
1
3. Fully Discrete n-year Endowment Insurance

t
1 &&x + t:n t| = t V x V x:n| = Ax +t:n t| Px:n| a = 1) :n| + t V x:n| (Important Fact: nV x:n| 1
4. Fully Discrete h-payment Whole Life Insurance

h t
&&x +t:h t| Lt < h Ax +t h Px a Vx = Ax +t Lt h
5. Fully Continuous n-year Term Insurance

t
V ( A x:n| ) = A x +t:n t| P( A x:n| ) a x +t:n t|

1 1 1
6. Fully Continuous n-year Deferred Life Annuity

n t| a x +t P( n| a x ) a x + t:n t| L t < n V ( n| a x ) = a x +t Lt n
7. Semi-continuous Whole Life Insurance

t
&&x +t V ( A x ) = A x +t P( A x ) a
You get the idea.
Page 43 of 52
Life Contingencies
Special Benefit Reserve Formulas Whole Life and Endowment Insurance 1. tV x = 1

1 &&x +t a P P x:t| &&x +t = x = ( Px + t Px ) a 1 &&x a P x:t|
2. tVx:n| = 1
&&x + t :n t | a &&x:n| a
&&x + t :n t | = ( Px + t :n t | Px:n| ) a
a P( A x ) P( A x:t| ) 3. t V ( A x ) = 1 x +t = [ P( A x +t ) P( A x )] a x +t = 1 ax P( A x:t| )
1
4. t V ( A x:n| ) = 1
a x + t :n t | = [ P ( A x + t :n t | ) P ( A x:n| )] a x + t :n t | a x:n |
Terminal vs Initial Reserves and Retrospective Actuarial Calculations Calculate terminal reserves for the tth year by calculating reserves at the end of the tth year. In a prospective calculation, the benefit for the tth year will not be included, but the premium for the (t+1)st year is included. Calculate initial reserves for the tth year by calculating reserves at the beginning of the tth year. In a prospective calculation, the premium for the tth year will not be included. The initial reserves for the (t+1)st year will exceed the terminal reserves for the tth year by the amount of premium paid at time t. The retrospective calculation of reserves relies on being able to calculate the Actuarial Accumulated Value (AAV) of contingent payments. For a contingent payment at time k, the AAV at time n is calculated by actuarially accumulating the APV at time 0 of the contingent payment to time n. The APV at time 0 of a contingent payment is the interest discounted value of the expected payment. If a payment C is made at time k contingent on event E, then the APV at time 0 of the payment is C Pr( E ) v k . The AAV at time n of
C Pr( E ) v k C Pr( E ) (1 + i ) 1 this payment is AAVn = APV0 = = v n n px n Ex n px
n k
Page 44 of 52
Life Contingencies
Special Variance Formulas for (Conditional) Loss At Time t Random Variable Fully Continuous or Fully Discrete Whole Life or Endowment Insurance For fully continuous or fully discrete whole life insurance or endowment insurance, the variance of the (conditional) loss at time t random variable is (See P. 33 of these notes.) 1. Fully Continuous Whole Life Insurance
P( A x ) Var ( t L | T ( x) t ) = 1 +
2
(A
2
x +t
1 ( A x +t ) = 1 Ax
2
(A
2
x +t
( A x +t ) 2
2. Fully Continuous n-year Endowment Insurance (t < n)

P ( A x :n | ) Var ( t L | T ( x ) t ) = 1 + 1 = 1 A x :n |
2 2
(A
2
x + t :n t |
( A x + t :n t | ) 2
(A
2
x + t :n t |
( A x + t :n t | ) 2
)
)
2 2 Ax +t ( Ax +t )
2
3. Fully Discrete Whole Life Insurance

1 P Var ( t L | K ( x) t ) = 1 + x 2 Ax + t ( Ax +t ) 2 = 1 A d x
2
4. Fully Discrete n-year Endowment Insurance (t < n)

Px:n| Var ( t L | K ( x) t ) = 1 + d
2
(A
2
x + t ::n t |
1 ( Ax + t::n t | ) = 1 A x:n|
2
(A
2
x + t ::n t |
( Ax + t::n t | ) 2
Page 45 of 52
Life Contingencies
Recursive Relationship for Insurance Terminal Reserves (often tested)

t
V = bt +1 v q x +t Qt + t +1V v p x +t , where
Qt = premium at time t, and bt+1 = death benefit at time t+1
Recursive Relationship for Variance of (Conditional) Loss At Time t Discrete Random Variable
Var ( t L | K ( x) t ) = (v(bt +1 t +1V )) p x + t q x +t + v 2 p x +t Var ( t +1 L | K ( x) t + 1)
2
where bt+1 = death benefit at time t+1
Approximating Benefit Reserves at Fractional Durations (0 < s < 1)

V = (1 s )( t V + Qt ) + s ( t +1V ) = (1 s )( t V ) + s ( t +1V ) + (1 s )(Qt )
t+s
where Qt = premium at time t Note: (1 s)(Qt ) is called the unearned premium
Page 46 of 52
Life Contingencies
Expense Augmented Models Unless otherwise stated, assume expenses are paid BOY Exception: Settlement expenses are paid at the time benefit is paid Replace benefits by benefits plus expenses and replace premiums by expense loaded premiums in the random variable expressions discussed above. All formulas use the same concept as in the non-expense model. The following illustrates this. Recursion Relation for Expense Augmented Terminal Reserves
t
Vea = (bt +1 + se) v q x + t + E t Qt + t +1Vea v p x + t , where
= expense augmented terminal reserves at time t se = settlement expenses Et = BOY expenses paid at time t Qt = expense loaded premium at time t (usually more in 1st year)
t ea
Comments on Expense Loaded Premiums 1. Generally, part of the expense loaded premium will depend on the face amount of the policy. The amount of the expense loaded premium that does not depend on the face amount of the policy is called the policy fee. 2. Letting Qt denote the expense loaded premium at time t, and letting Pt denote the benefit premium at time t, then et = Qt Pt is called the expense loading at time t. 3. The expense loaded premium pays expenses, but not any profit. The contract premium is charged in order to expect a profit. Separating Benefits and Expenses in an Expense Augmented Model
t ea
V = tVben + tVexp , where

t ben
V V
t exp
= reserves as before in the non-expense model (using the premiums Qt) = expense reserves = APVF(expenses)x+t APVF(expense loadings)x+t
Page 47 of 52
Life Contingencies
Multiple Decrement Models Two random variables: T(x) future lifetime of (x) random variable J mode of decrement random variable Notation:
t ( j) qx = Pr((x) departs within t years by decrement j)
( j) px has no meaning
( ) qx = Pr((x) departs within t years) =
( j) qx
( ) ( ) px = Pr((x) survives all decrements for t years) = 1 t q x
( j) x (t ) = force of mortality due to decrement j
( ) x (t ) = total force of mortality =
( j) x
(t )
Multiple Decrement Service Table Notation

( ) lx = the total number that have survived all decrements to age x
( j) lx = the total number at age x that will eventually depart by cause j
( ) dx = the total number departing in next n years

( ) ( ) dx = lx
( j) dx = the total number departing in next n years by cause j

( j) ( j) dx = lx
Page 48 of 52
Life Contingencies
Multiple Decrement Model Facts:

( ) ( j) x (t ) 1. f T ,J (t , j )= t p x ( ) ( ) 2. f T (t )= t p x x (t ) ( ) ( j) ( j) 3. f J ( j ) = 0 t p x x (t )dt = q x ( ) dx ( ) lx ( j) dx ( ) lx
( ) ( ) ( ) = s px x ( s )ds = 4. t q x 0
( j) ( ) ( j) = s px x ( s )ds = 5. t q x 0
6.
t |u
( ) qx
( ) ( ) t px t +u p x d ( ) ( ) ( ) = t +u q x t qx = u (x)+t lx p ( ) q ( ) t x u x +t ( j) dx = ( )+t lx u
7.
t |u
q =t p q
( j) x 0 ( )
( ) x u
( j) x +t
( ) dt = expected time until decrement 8. E[T ] = e x = 0 t p x ( ) 9. Pr( K ( x ) = k ) = Pr( k T ( x ) < k + 1)= k | q x ( j) (t ) x ( ) x (t )
10. Pr( J = j | T = t ) = f J |T ( j | t ) = 11. Pr( J = j | T t ) = 12. f T |J (t | j ) =

t ( j) qx ( ) t qx
f T , J (t , j ) f J ( j)
13. E[T | J = j ] = 0 t is by decrement j
f T , J (t , j ) f J ( j)
dt = expected time until departure, given the cause
Page 49 of 52
Life Contingencies
Associated Single Decrement Tables (Absolute Rates of Decrement) (Associated single decrement events are independent)
Probability Formulas:
( j) ( j) ( j) = exp( x p ( s )ds) x (t ) = x 0 t
d ( j) [ t p ] x dt ( j ) t px
( j) ( j) ( j) ( j) q = 1 t p = s p x ( s )ds x x x 0
( ) ( j) = t p px x j
Calculating Total Probabilities: If given associated single decrement probabilities (primes) then calculate total probabilities by
t ( ) ( j) = t p px and x j t ( ) ( ) qx = 1 t p x
If given multiple decrement probabilities (no primes) then calculate total probabilities by
t ( ) ( j) qx = t qx and j t ( ) ( ) px = 1 t q x
Page 50 of 52
Life Contingencies
Relating Multiple Decrement Probabilities (no primes) to Associated Single Decrement Probabilities (primes) Two Cases: Case 1: MUDD ( j) ( j) ( t qx = t qx ; UDD assumption in the multiple decrement model) Important Formula:
p
( j) x
=( s p )
( ) x
( j) qx
(t ) qx
Case 2: SUDD ( t qx( j ) = t qx( j ) ; UDD assumption in the associated single decrement model)
(1) (1) (2) = q 1 q Important Formulas: q x (2 decrement case) x x
1 2
1 (2) 1 ( 2 ) ( 3) (1) (1) ( 3) = q 1 ( q + q q qx q (3 decrement case) x x x )+ x x 3 2
Interchange the roles of the superscripts to get probabilities of departing by causes other than cause 1. For example, interchanging the roles of 1 and 2 in the 3 decrement case gives us the probability
1 (1) 1 (1) ( 3) ( 2) (2) ( 3) = q 1 ( q + q q qx q x x x )+ x x 3 2
It is unlikely that you will see more than 3 decrements. Timing of Decrements If some decrements happen at a fixed point in time, then calculate 1-year mortality probabilities in the associated single decrement table by using the formula q x( j ) =
( j) dx , where NAR x( j ) is the number at risk for decrement j, at ( j) NAR x ( j) x ( j) dx = always. lx
age x. Note that q
Page 51 of 52
Life Contingencies
Asset Shares This concept is based on a double decrement model, death and withdrawal. The death benefit at time h is denoted by h DB . If withdrawal occurs at time h, then a cash value, denoted h CV , is paid at that time. We let h AS denote the asset share at time h. Assume 0 AS = 0 . There are two main formulas. Recursion Formula:
h (d ) ( w) ( ) AS + G (1 ch ) E h =( h +1 DB + h +1 se) v q x + h + ( h +1 CV + h +1 se ) v q x + h + v p x + h h +1 AS
where G = contract premium ch = percentage of contract premium expense at time h Eh = other non-settlement expenses at time h h+1se = settlement expenses at time h+1 (d ) qx + h = probability that (x+h) dies by age x+h+1 ( w) q x + h = probability that (x+h) withdraws by age x+h+1
Time 0 Actuarial Present Value Formula:

( ) APV0 ( n AS ) = v n n p x n AS
= APV0(Premiums paid from time 0 through n-1, backing out non-settlement expenses) APV0(Benefits + settlement expenses from time 1 through n)
Page 52 of 52

Life Contingencies Single Life Model Basic Random Variables: X - Denotes The Age-At-Death Random Variable

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Life Contingencies Single Life Model Basic Random Variables: X - Denotes The Age-At-Death Random Variable

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Life Contingencies

Pariss Exam MLC Seminar www.steveparisseminars.com

The Age-at-Death Random Variable: X

(force of mortality fom) aka hazard rate or failure rate

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The (continuous) Future Lifetime Random Variable: T = T(x)

(cdf): FT (t ) = Pr(T t )= t q x = (sf): sT (t ) = Pr(T > t )= t p x =

Pr( x < X x + t ) Pr( X > x + t ) = 1 Pr( X > x ) Pr( X > x )

Pr( X > x + t ) = Pr( X > x )

Comments and Concepts 1. f T (t )= t p x ( x + t ) 2. t q x = 0 s p x ( x + s )ds 3.

p x = exp( ( x + s )ds ) = exp(

( s )ds ) Also, t p x = s p x ( x + s )ds

4. 1 q x = q x and 1 p x = p x 5. (survival factorization) 6. (deferred mortality)

d [ t p x ]= t p x [ ( x ) ( x + t )] (Use 2nd equality in 3. above and the FTC) dx

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9. (complete expectation of life for (x), aka mean residual lifetime)

12. (Recursion Formulas)

e x:n| = e x:m| + m p x e x + m:n m|

13. The kth percentile of T(x), denoted ck, is found by solving

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The Curtate Future Lifetime Random Variable: K = K(x)

The probability distribution table for K is K 0 1 2

(cdf): FK ( k ) = Pr( K k ) = n| q x (Notice that Pr( K k ) = Pr(T k + 1)= k +1 q x )

Comments and Concepts 1. (curtate expectation of life for (x))

4. (Recursion Formulas) e x = e x:n| + n p x e x + n and when n = 1 we get e x = p x (1 + e x +1 )

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Life Table Notation

d x = l x l x + n = number of deaths between ages x and x+n

(1dx = dx ) Note: n d x = d x + d x +1 + L + d x +n 1 Formulas and concepts involving life table notation 1.

l x+n d l l and n q x = n x = x x +n = 1 n p x and lx lx lx d [l x ] d dx , and so [l x ] = l x ( x ) dx lx

d x = l x +t ( x + t )dt (follows since n q x =

Note that E[T ( x) | T ( x) < n] =

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Life Table Notation (continued) 8. e x =

dx is the n-year central mortality weight n Lx

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q x = t q x , and so t p x = 1 t q x , and f T (t ) = q x (a constant wrt t) qx qx and m x = 1 t qx 1 0.5q x

Constant Force (Exponential Interpolation: ( x + t ) = ) For 0 s + t 1 , t p x + s = e t = ( p x ) t

Balducci (Hyperbolic Interpolation)

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p xy = Pr(T ( xy ) > t ) = Pr(T ( x ) > t ) Pr(T ( y ) > t ) = t p x t p y q xy = 1 t p xy

qxy = Pr(T ( xy ) t ) = Pr(T ( x ) t ) Pr(T ( y ) t ) = t qx t q y

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Contingent Probabilities Notation:

Contingent Probability Relationships: 1. 2. 3. 4.

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Probability Pr(K = 0) = q x Pr(K = 1) = 1| q x Pr(K = 2) = 2| q x

PVRV = Z x = v K +1 SBP = APV = E[ Z x ] = E[v K +1 ] = Ax = vqx + v 2 1| qx + L

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Probability Pr(K = 0) = q x Pr(K = 1) = 1| q x Pr(K = 2) = 2| q x

SBP = APV = E[ Z x:n | ] = Ax:n | = vqx + v 2 1| qx + L + v n n 1| qx

Therefore, Var ( Z x:n | ) = 2 Ax:n | ( Ax:n | ) 2

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Probability Pr( K < n ) = n q x Pr( K n ) = n p x

SBP = APV = E[ Z x:n | ] = Ax:n | = v n n p x (Another notation: n E x = A x:n| = v n n p x )

E[( Z x :n | ) 2 ] = 2 Ax :n | = v 2 n n p x . Therefore, Var ( Z x:n | ) = 2 Ax :n | ( Ax:n | ) 2

Comments and Concepts:

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Probability Pr(K = 0) = q x Pr(K = 1) = 1| q x Pr(K = 2) = 2| q x

SBP = APV = E[ Z x:n | ] = Ax:n | = Ax:n | + Ax:n |

(iv) With n = 1, we get A x:1| = v q x + v p x = v ( q x + p x ) = v