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You are on page 1of 3

See Dickson et al. Solutions Manual for assigned problems.

1. (a)

35

7| a

(12)

(b) 120

a35:15

(c) 2

(2)

50

1/4| a

= 2v 1/4

1/4 p50

(2)

a

50+(1/4)

(12)

(d) 12 I (12) a 65

(e)

20:10

15| a

2. First, note that the probability of survival for t years under the new mortality table can be expressed

as

t

t

0

0

0

0

t px = px px+1 px+t1 = (1 + r) px px+1 px+t1 = (1 + r) t px .

Thus, the APV of a (discrete) whole life annuity-due can be evaluated as

a

x =

v t t p0x =

t=0

v t (1 + r) t px =

t=0

v 0t t px = a

0x

t=0

which is the APV of a (discrete) whole life annuity-due evaluated using the old mortality table but at

the rate of interest j where j satisfies

1+r

1

=

.

1+j

1+i

Solving for this new rate of interest, we get

j=

ir

1+r

provided i > r. [This requirement of i > r is to ensure we are not discounting at a negative interest

rate.] If r > 0, we would expect survival probabilities in the new table to be higher which will make

annuity payments to be more likely and therefore will increase the annuity value. For the annuity value

to be higher, then the discount rate must be smaller. Vice versa holds.

3. Note that, under Gompertz law, we have that the probability of survival for t years can be written as

Z t

Z t

x

s

p

=

exp

ds

=

exp

bc

c

ds

t x

x+s

0

exp bc

x

t

c 1 / log c = ebc (c 1)/ log c .

t

Now, consider the substandard case. The probability of survival for t years in the substandard mortality

table can be written as

Z t

Z t

0

0

= exp

x+s ds = exp (1 + k)

x+s ds

t px

0

= e

=e

where r satisfies

cx+r = cx (1 + k)

1

=t px+r

or equivalently

r = log(1 + k)/ log c.

Thus, it becomes straightforward to see that

a

0x =

vtt p0x =

t=0

x+r .

v t t px+r = a

t=0

Note that the APV of life annuities decreases with age, i.e. the older one gets, the cheaper the cost

of life annuities is (generally). This is because survival becomes less likely as we age. Thus, in this

case where we have substandard mortality rates, survival is therefore less likely for substandard than

for the standard, in which case, we would therefore expect a cheaper cost of life annuities. To make

the cost less expensive, one could therefore rate up the age, as in this situation where Gompertz law is

assumed. [Indeed, you can extend this rating up of age principle in the case of Makeham law. Try it!]

4. By actuarial equivalence, we are required to solve for K from the equation

100000 = K

a10 + K

40

10| a

so that

K=

a

10

We know that

a

10 =

and that

a

50 =

= K

a10 + K v 10

10 p40

a

50

100000

.

50

+ v 10 10 p40 a

1 v 10

= 8.435332

d

1 0.32907

1 A50

=

= 17.44418.

d

0.04/1.04

1

A40:10

= A40 v 10

10 p40

A50

we get

v 10

10 p40

1

A40 A40:10

A50

0.23056 0.01151

= 0.665664.

0.32907

K=

100000

100000

=

= 4, 988.21.

8.435332 + 0.665664 (17.44418)

20.04729

5. We are interested in the probability that the present value random variable of the annuity exceeds the

expectation. Now we know that

1 eT (x)

a

T (x) =

.

Rt

Now under the constant force assumption, t px = e 0 x+s ds = e0.06t . Also, we know that the APV

of the life annuity is

Z

Z

a

x =

v t t px dt =

e0.06t .e0.04t dt

t=0

t=0

Z

=

e0.1t dt = 10 [0 1] = 10

t=0

log (1 10)

log 0.6

1 eT (x)

> 10 = P T (x) >

= P T (x) >

P

0.04

Given the constant force of mortality, we can easily obtain the distribution of the exact future lifetime.

We know that t px = P (T (x) > t), so that

log 0.6

log 0.6

P T (x) >

= exp 0.06

= 0.46476.

0.04

0.04

Thus, the required probability is equal to 0.4648. If the net single premium is a

x for the life annuity,

then it has the interpretation of the probability that the premium is insufficient to pay the benefits.

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