Exam MLC Cheat Sheet(s)

James Nylen
November 2, 2009
1 Basics
a
n
= (1 +i) a
n
s
n
= (1 +i) s
n

= 2

=
2
; i

= 2i +i
2
; d

= 2d d
2
t
p
x
= exp (
_
x+t
x

s
ds)
Under DML:
x+t
=
1
x t
;
t
p
x

x+t
=
1
x
e
x
=

k=1
k
p
x
; under CF =
p
x
q
x
Under UDD (and therefore DML): e
x
= e
x
+.5
Under DML: e
x:n
= (n)
n
p
x
+
_
n
2
_
n
q
x
1
2 Insurances
A
x:n
= A
1
x:n
+
n
E
x
A
x
= A
1
x:n
+
n
E
x
A
x+n

n
E
x
=
A
x
A
1
x:n
A
x+n
; A
x+n
=
A
x
A
1
x:n
n
E
x
(IA)
x
= A
x
+ p
x
(IA)
x+1
(DA)
1
x:n
= n q
x
+ p
x
(DA)
1
x+1:n1
A
x
= q
x
+ p
x
A
x+1
= q
x
+
2
1|
q
x
+
2
2
p
x
A
x+2
2
A
x
=
2
q
x
+
2
p
x
2
A
x+1

A
x:n
=
i

A
1
x:n
+
n
E
x
; A
x:n
=

i

A
1
x:n
+
n
E
x
n|

A
x
=
n
E
x

A
x+n
2.1 Under CF
(

I

A)
x
=

A
x
a
x
=

( +)
2

A
x:n
=

A
x
(1
n
E
x
) +
n
E
x
A
1
x:n
= A
x
(1
n
E
x
) =
q
q +i
(1
n
E
x
)

A
1
x:n
=

A
x
(1
n
E
x
)
2.2 Under DML

A
x
=
a
x
x
A
x
=
a
x
x
A
1
x:n
=
a
n
x
2
3 Annuities
a
x:n
=
1 A
x:n
d
A
x:n
= 1 d a
x:n
a
x:n
=
n

k=0

k
k
p
x
a
x
= 1 + p
x
a
x+1
a
x:n
+
n
E
x
= a
x:n
+ 1
a
x
= a
x:n
+
n|
a
x
n|
a
x
=
n
E
x
a
x+n
= a
x
a
x:n
a
x:n
= a
n
+
n|
a
x
= a
x
+ a
n
a
x:n
V ar(Y = a
T(x)n
) =
2

A
x:n
(

A
x:n
)
2

2
(analogous to a
x:n
)
3.1 Under CF
a
x
= a
x:n
+
n|
a
x
= a
x
(1
n
E
x
) +
n
E
x
a
x+n
a
x:n
=
1 +i
q +i
(1
n
E
x
)
4 Miscellaneous
4.1 Payable mth-ly
_
1
d
(m)
m
_
m
= 1 d d = 1
_
1
d
(m)
m
_
m
a
x
< a
(m)
x
< a
x
3
A
(m)
x
= 1 d
(m)
a
(m)
x
a
(m)
x
a
x

m1
2m
a
(m)

=
1
d
(m)
4.1.1 Under UDD
a
(m)
x:n
= (m) a
x:n
(m) (1
n
E
x
) ($1 when pmts start - $1 when pmts end)
A
(m)
x
=
i
i
(m)
A
x
4.2 Statistics and Percentiles
Minimum sucient amount = nF E[Z] +(Pr)
_
nF
2
V ar(Z)
For mixtures of RVs: E[Y ] =

i
w
i
E[Y
i
] ; E[Y
2
] =

i
w
i
E[Y
2
i
] ; ...
100pth percentile of the PV RV =
h
for insurances, a
h
for annuities.
For insurances:
d
p
x

h
p
x
= 1 p (where d = deferral period)
For annuities:
d
p
x

h
p
x
= p
Under CF, Pr( a
T
> a
x
) = Pr(
T
<

A
x
) = Pr(
T
< a
T
) =
_

+
_
/
5 Premiums
E[L] = A
x
P a
x
Under EP: P
x
=
1
a
x
d =
d A
x
1 A
x
4
For n-pay whole life:
n
P
x
=
A
x
a
x:n
Under CF: P
x
= P
1
x:n
= q ;

P
x
=

P
1
x:n
=
V ar(L) =
_
1 +

_
2
(
2

A
x
(

A
x
)
2
) ; under EP =
2

A
x
(

A
x
)
2
(1

A
x
)
2
For FCWL under EP, CF: V ar(L) =
2

A
x
6 Reserves
6.1 Standard Formulas
P
x:n
=
1
a
x:n
d a
x:n
=
1
d +P
x:n
P
x:n
=
d A
x:n
1 A
x:n
A
x:n
=
P
x:n
d +P
x:n
Prospective formula:
t
V
x:n
= PVFB PVFP = A
x+t:nt
P
x:n
a
x+t:nt
The following three formulas hold under EP:
Annuity-ratio:
t
V
x:n
= 1
a
x+t:nt
a
x:n
Insurance-ratio:
t
V
x:n
=
A
x+t:nt
A
x:n
1 A
x:n
Premium-ratio:
t
V
x:n
=
P
x+t:nt
P
x:n
P
x+t:nt
+d
Retrospective formula:
t
V
x:n
= AVPP AVPB = P
x:n
s
x:t

t
k
x
where
t
k
x
= accumulated cost of insurance =
A
1
x:t
t
E
x
5
6.2 Other Formulas
Under UDD:
n
V (

A
x
) =

A
x+n
P(

A
x
) a
x+n
=
i

n
V
x
For WL or term under CF:
k
V = 0
(
k
V +
k
) (1 +i
k+1
) = q
x+k
b
k+1
+p
x+k k+1
V =
k+1
V +q
x+k
(b
k+1

k+1
V )
Initial benet reserve for year k =
k1
V +
k1
Net amount at risk for year k = b
k

k
V
n
V = P s
n

n1

k=0
q
x+k
(b
k+1

k+1
V ) (1 +i)
nk
Hattendorf: V ar(
k
L)
=
2
(b
k+1

k+1
V )
2
p
x+k
q
x+k
+
4
(b
k+2

k+2
V )
2
p
x+k+1
q
x+k+1
p
x+k
+
6
(b
k+3

k+3
V )
2
p
x+k+2
q
x+k+2 2
p
x+k
+...
6.3
PP
P
Problems
Accumulated dierence of premiums = dierence in reserves
P
x
s
x:n
=
n
V
x
+
n
k
x
=
n
V x +
n
k
x
(1)
P
x:n
s
x:n
=
n
V
x:n
+
n
k
x
= 1 +
n
k
x
(2)
P
1
x:n
s
x:n
=
n
V
1
x:n
+
n
k
x
= 0 +
n
k
x
(3)
n
P
x
s
x:n
=
n
n
V
x
+
n
k
x
= A
x+n
+
n
k
x
(4)
(4) (3) : (
n
P
x
P
1
x:n
) s
x:n
=
n
n
V
x

n
V
1
x:n
= A
x+n
(2) (4) : (P
x:n

n
P
x
) s
x:n
=
n
V
x:n

n
n
V
x
= 1 A
x+n
(2) (1) : (P
x:n
P
x
) s
x:n
=
n
V
x:n

n
V
x
= 1
n
V
x
(1) (3) : (P
x
P
1
x:n
) s
x:n
=
n
V
x

n
V
1
x:n
=
n
V
x
P
1
x:n
s
x:n
=
n
E
x
a
x:n
s
x:n
= 1 Replace s
x:n
with
1
P
1
x:n
above.
(
n
k
V
x
= kth reserve for n-pay WL = A
x+k

n
P
x
a
x+k:nk
)
6
7 Multiple Lives
n
q
xy
=
_
n
0
n
p
x n
p
y

x+t

y+t
dt
n
q
xx
=
_
n
0
(
n
p
x
)
2
2
x+t
dt
n|m
q
xy
=
n+m
q
xy

n
q
xy
=
n+m
q
x n+m
q
y

n
q
x n
q
y
e
xy
=
_

0
t
p
x t
p
y
dt
e
x
+e
y
=e
xy
+e
xy
A
xy
with common shock = A
x[=
x
+
cs
]
+A
y[=
y
+
cs
]
A
xy[=
x
+
y
+
cs
]
CoV (T(xy), T(xy)) = E[T(xy) T(xy)] e
xy
e
xy
= (e
x
e
xy
) (e
y
e
xy
)
7.1 Contingent Functions
n
q
1
xy
= Pr(T(x) < T(y) T(x) < n) =
_
n
0
t
p
xy

x+t
dt
n
q
2
xy
= Pr(T(y) < T(x) < n) =
_
n
0
t
p
x

x+t t
q
y
dt
7.1.1 Identities
n
q
1
xy
+
n
q
1
xy
=
n
q
xy
n
q
2
xy
+
n
q
2
xy
=
n
q
xy
=
n
q
x n
q
y
n
q
1
xy
+
n
q
2
xy
=
n
q
x
7.1.2 Under DML
n
q
1
xy
=
n
q
x n/2
p
y
(x dies)(y still alive when x expected to die)
n
q
2
xy
=
n
q
x n
q
y
1
2
(both die)(right order)
7
7.1.3 Under CF

q
1
xy
=
x
e
xy
=

x

x
+
y
n
q
1
xy
=
x
e
xy:n
=
x
(e
xy
(1
n
p
xy
)) =

x

x
+
y
n
q
xy
=

q
1
xy
n
q
xy
7.2 Contingent Insurances

A
1
xy
=
_

0

t
t
p
xy

x+t
dt

A
2
xy
=
_

0

t
t
p
x

x+t t
q
y
dt =
_

0

t
t
p
xy

y+t

A
x+t
dt
7.2.1 Identities

A
x
=

A
1
xy
+

A
2
xy

A
xy
=

A
1
xy
+

A
1
xy

A
xy
=

A
2
xy
+

A
2
xy
7.2.2 Under DML

A
1
xy
= q
x
a
y
7.2.3 Under CF

A
1
xy
=

x

x
+
y
+

A
2
xy
=
_

0

t
t
p
xy

x+t

A
y+t
dt =

A
1
xy

A
y
(

A
y
when x dies, if x dies rst)
8
7.3 Reversionary Annuities
a
x|y
( a
failing|surviving
) = a
y
a
xy
(y gets paid after x dies)
a
x|y:n
= a
y:n
a
xy:n
a
n |x
=
n|
a
x
=
n
E
x
a
x+n
(n = failing status)
8 Multiple Decrements

j
p

(j)
x
= p
()
x
= 1 q
()
x
= 1

j
q
(j)
x
(even given no assumptions)
q

(j)
x
= 1 p

(j)
x
; p

(j)
x
= exp (
_
1
0

(j)
x+t
dt)

(j)
x
=

k=x
d
(j)
k

()
x
=

(j)
x
n
q
(j)
x
=
n1

k=0
d
(j)
k

()
x
=
_
n
0
t
p
()
x

(j)
x+t
dt (aected by changes in any decrement)
If the forces of each decrement are proportional, then the q
(j)
x
s have the same
proportions relative to q
()
x
.
8.1 Density Functions
f
T,J
(t, j) =
t
p
()
x

(j)
x+t
f
J
(j) = Pr(J = j) =

(j)
x

()
x
=
_

0
t
p
()
x

(j)
x+t
dt =

q
(j)
x
f
T
(t) =
t
p
()
x

()
x+t
f
J|T
(j|t) = Pr(J = j | T = t) =

(j)
x+t

()
x+t
9
8.2 Under UDDMDT
p

(j)
x
= (p
()
x
)
q
(j)
x
/q
()
x
8.3 Under UDDASDT
t
q

(j)
x
= (t) q

(j)
x
, 0 t 1 , for all j
For m = 2: q
(1)
x
= q

(1)
x
(1
1
2
q

(2)
x
)
For m = 3: q
(1)
x
= q

(1)
x
(1
1
2
q

(2)
x

1
2
q

(3)
x
+
1
3
q

(2)
x
q

(3)
x
)
9 Expenses
% of premium, % of benet amount, and xed expenses are incurred
at the beginning of each policy year (% of premium expenses are only
incurred while premium is still being paid.)
Settlement charges are incurred when the death benet is paid.
Extended EP: E[
0
L
e
] = 0 PVFB + PVFE = PVF(ELP)
where ELP = expense loaded premium = P + expense loading.
Expense-augmented reserve:
k
V
E
= E[
k
L
e
] = PVFB + PVFE PVF(ELP)
Expense reserve = PVFE PVF(L = level expense loading to P
x
)
9.1 Asset Shares
Two decrements:
(d)
= death;
(w)
= withdrawal
(
k
AS +G(1 c
k
) e
k
) (1 +i) = b
k+1
q
(d)
x+k
+
k+1
CV q
(w)
x+k
+
k+1
AS p
()
x+k
n
AS =
n1

k=0
_
G(1 c
k
) e
k
b
k+1
q
(d)
x+k

k+1
CV q
(w)
x+k
_
(1 +i)
nk
nk
p
()
x+k
10
10 Poisson Processes
Pr(Poisson() = k) = e

k
k!
m(t) =
_
t
0
(x) dx ; eective between a and b = m(b) m(a)
Thinned Poisson sub-processes are independent.
10.1 Compound Poisson Processes
Let S(t) = X
1
+ X
2
+ ... + X
N(t)
be a process such that frequency follows
a Poisson process N(t), and severity is represented by X
i
(IID per event).
Then:
E[S] =
N
E[X
i
]
V ar(S) =
N
E[X
2
i
] =
N
(V ar(X
i
) + (E[X
i
])
2
)
10.2 Mixed Poisson Processes and Negative Binomial
Suppose N(t) is a Poisson process with a rate that is Gamma-distributed
with parameters (, ). Then:
N(t) NB(r = , = t )
Recall:
X (, ) E[X] = ; V ar(X) =
2
X NB(r, ) E[X] = r ; V ar(X) = r( + 1)
Suppose X NB(r, ). Let t = r, b = , x = k. Then:
Pr(X = k = x) =
_
t +x 1
x
_ _
1
1 +b
_
t
_
b
1 +b
_
x
11
11 Markov Chains
Q = transition matrix for 1 period (homogeneous)
k
Q = transition matrix for k periods = Q
k
(homogeneous)
Q
n
= transition matrix from time n to time n + 1 (non-homogeneous)
Q
(i,j)
= Pr(in state j next period | in state i now) (Q
(row,column)
)
k
Q
(i,j)
= Pr(in state j k periods from now| in state i now)
P
(i)
= Q
(i,i)
= Pr(stay in state i for 1 period)
k
P
(i)
= (P
(i)
)
k
= Pr(stay in state i for k periods) (=
k
Q
(i,i)
)
For Markov-modeled insurance, keep in mind that you can only die once (so
the probability that the insured was already dead must be subtracted out
from each probability vector).
12