Exam MLC Cheat Sheet(s)

James Nylen

November 2, 2009

1 Basics

an = (1 + i) an sn = (1 + i) sn
= 2 = 2 ; i = 2i + i2 ; d = 2d d2
Z x+t
t px = exp ( s ds)
x

1 1
Under DML: x+t = ; t px x+t =
xt x

X px
ex = k px ; under CF =
k=1
qx

Under UDD (and therefore DML): ex = ex + .5

Under DML: ex:n = (n) n px + n2 n qx

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2 Insurances
1
Ax:n = Ax:n + n Ex
1 1
1 Ax Ax:n Ax Ax:n
Ax = Ax:n + n Ex Ax+n n Ex = ; Ax+n =
Ax+n n Ex

(IA)x = Ax + px (IA)x+1
1 1
(DA)x:n = n qx + px (DA)x+1:n1

Ax = qx + px Ax+1 = qx + 2 1| qx + 2 2 px Ax+2
2
Ax = 2 qx + 2 px 2 Ax+1
i 1 1
Ax:n = Ax:n + n Ex ; Ax:n = Ax:n + n Ex
i
n| Ax = n Ex Ax+n

2.1 Under CF

(IA)x = Ax ax =
( + )2
Ax:n = Ax (1 n Ex ) + n Ex
1 q
Ax:n = Ax (1 n Ex ) = (1 n Ex )
q+i
1
Ax:n = Ax (1 n Ex )

2.2 Under DML

ax
Ax =
x
a
Ax = x
x
1 an
Ax:n =
x

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3 Annuities
1 Ax:n
ax:n =
d
Ax:n = 1 d ax:n
n
X
ax:n = k k px
k=0

ax = 1 + px ax+1
ax:n + n Ex = ax:n + 1
ax = ax:n + n| ax

n| ax = n Ex ax+n = ax ax:n
ax:n = an + n| ax = ax + an ax:n
2
Ax:n (Ax:n )2
V ar(Y = aT (x)n ) = (analogous to ax:n )
2

3.1 Under CF

ax = ax:n + n| ax = ax (1 n Ex ) + n Ex ax+n
1+i
ax:n = (1 n Ex )
q+i

4 Miscellaneous

4.1 Payable mth-ly

m m
d(m) d(m)
 
1 =1d d=1 1
m m
ax < a(m)
x < ax

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A(m)
x = 1 d(m) a(m)
x

m1
a(m)
x ax
2m
(m) 1
a =
d(m)

4.1.1 Under UDD

(m)
ax:n = (m) ax:n (m) (1 n Ex ) ($1 when pmts start - $1 when pmts end)
i
A(m)
x = Ax
i(m)

4.2 Statistics and Percentiles

p
Minimum sufficient amount = n F E[Z] + (P r) n F 2 V ar(Z)
X X
For mixtures of RVs: E[Y ] = wi E[Yi ] ; E[Y 2 ] = wi E[Yi2 ] ; ...
i i

100pth percentile of the PV RV = h for insurances, ah for annuities.

For insurances: d px h px = 1 p (where d = deferral period)
For annuities: d px h px = p
 /
T T
Under CF, P r(aT > ax ) = P r( < Ax ) = P r( < aT ) =
+

5 Premiums

E[L] = Ax P ax
1 d Ax
Under EP: Px = d=
ax 1 Ax

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 Ax
For n-pay whole life: n Px =
ax:n
1 1
Under CF: Px = P x:n = q ; Px = P x:n =
2 2
Ax (Ax )2

P
V ar(L) = 1 + (2 Ax (Ax )2 ) ; under EP =
(1 Ax )2
For FCWL under EP, CF: V ar(L) = 2 Ax

6 Reserves

6.1 Standard Formulas

1 1
Px:n = d ax:n =
ax:n d + Px:n
d Ax:n Px:n
Px:n = Ax:n =
1 Ax:n d + Px:n
Prospective formula: t Vx:n = PVFB PVFP = Ax+t:nt Px:n ax+t:nt
The following three formulas hold under EP:
ax+t:nt
Annuity-ratio: t Vx:n = 1
ax:n
Ax+t:nt Ax:n
Insurance-ratio: t Vx:n =
1 Ax:n
Px+t:nt Px:n
Premium-ratio: t Vx:n =
Px+t:nt + d
Retrospective formula: t Vx:n = AVPP AVPB = Px:n sx:t t kx
A1
where t kx = accumulated cost of insurance = x:t
t Ex

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6.2 Other Formulas
i
Under UDD: n V (Ax ) = Ax+n P (Ax ) ax+n = n Vx

For WL or term under CF: k V = 0
(k V + k ) (1 + ik+1 ) = qx+k bk+1 + px+k k+1 V = k+1 V + qx+k (bk+1 k+1 V )
Initial benefit reserve for year k = k1 V + k1
Net amount at risk for year k = bk k V
n1
X
nV = P sn qx+k (bk+1 k+1 V ) (1 + i)nk
k=0

Hattendorf: V ar(k L)
= 2 (bk+1 k+1 V )2 px+k qx+k
+ 4 (bk+2 k+2 V )2 px+k+1 qx+k+1 px+k
+ 6 (bk+3 k+3 V )2 px+k+2 qx+k+2 2 px+k
+ ...

P P
6.3 P Problems

Accumulated difference of premiums = difference in reserves

Px sx:n = n Vx + n kx = n V x + n kx (1)
Px:n sx:n = n Vx:n + n kx = 1 + n kx (2)
1 1
P x:n sx:n = n V x:n + n kx = 0 + n kx (3)
n
n Px sx:n = n Vx + n kx = Ax+n + n kx (4)
1
(4) (3) : (n Px P x:n ) sx:n = nn Vx n V x:n
1
= Ax+n
(2) (4) : (Px:n n Px ) sx:n = n Vx:n nn Vx = 1 Ax+n
(2) (1) : (Px:n Px ) sx:n = n Vx:n n Vx = 1 n Vx
1 1
(1) (3) : (Px P x:n ) sx:n = n Vx n V x:n = n Vx
n Ex 1
P x:n1 sx:n = sx:n = 1 Replace sx:n with above.
ax:n P x:n1
(nk Vx = kth reserve for n-pay WL = Ax+k n Px ax+k:nk )

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7 Multiple Lives
Z n Z n
n qxy = n px n py x+t y+t dt n qxx = (n px )2 2 x+t dt
0 0

n|m qxy = n+m qxy n qxy = n+m qx n+m qy n qx n qy

Z
exy = t px t py dt
0

ex + ey = exy + exy
Axy with common shock = Ax[=x +cs ] + Ay[=y +cs ] Axy[=x +y +cs ]
CoV (T (xy), T (xy)) = E[T (xy) T (xy)] exy exy = (ex exy ) (ey exy )

7.1 Contingent Functions

Z n
1
n q xy = P r(T (x) < T (y) T (x) < n) = t pxy x+t dt
0
Z n
2
n q xy = P r(T (y) < T (x) < n) = t px x+t t qy dt
0

7.1.1 Identities

1
n q xy + n q xy1 = n qxy
2
n q xy + n q xy2 = n qxy = n qx n qy
1 2
n q xy + n q xy = n qx

7.1.2 Under DML

1
n q xy = n qx n/2 py (x dies)(y still alive when x expected to die)
2 1
n q xy = n qx n qy 2
(both die)(right order)

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7.1.3 Under CF

1 x
q xy = x exy =
x + y
1 x 1
n q xy = x exy:n = x (exy (1 n pxy )) = n qxy = q xy n qxy
x + y

7.2 Contingent Insurances

Z
1
Axy = t t pxy x+t dt
0
Z Z
2 t
Axy = t px x+t t qy dt = t t pxy y+t Ax+t dt
0 0

7.2.1 Identities

1 2
Ax = Axy + Axy
1
Axy = Axy + Axy1
2
Axy = Axy + Axy2

7.2.2 Under DML

1
Axy = qx ay

7.2.3 Under CF

1 x
Axy =
x + y +
Z
Axy2 = t t pxy x+t Ay+t dt = Axy
1
Ay (Ay when x dies, if x dies first)
0

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7.3 Reversionary Annuities

ax|y (afailing|surviving ) = ay axy (y gets paid after x dies)

ax|y:n = ay:n axy:n
an |x = n| ax = n Ex ax+n (n = failing status)

8 Multiple Decrements
0
Y X
px(j) = p() ()
x = 1 qx = 1 qx(j) (even given no assumptions)
j j
Z 1
0 (j) 0 (j) 0 (j) (j)
qx = 1 px ; px = exp ( x+t dt)
0

X X
(j)
`(j)
x = dk `()
x = `(j)
x
k=x j

n1 (j) Z n
(j)
X d k () (j)
n qx = ()
= t px x+t dt (affected by changes in any decrement)
k=0 `x 0

(j)
If the forces of each decrement are proportional, then the qx s have the same
()
proportions relative to qx .

8.1 Density Functions

(j)
fT,J (t, j) = t p()
x x+t

(j) Z
`x () (j)
fJ (j) = P r(J = j) = ()
= t px x+t dt = qx(j)
`x 0

()
fT (t) = t p()
x x+t

(j)
x+t
fJ|T (j|t) = P r(J = j | T = t) = ()
x+t

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8.2 Under UDDMDT
0 (j) ()
px(j) = (p()
x )
qx /qx

8.3 Under UDDASDT

0 (j) 0
t qx = (t) qx(j) , 0 t 1 , for all j
0 0
For m = 2: qx(1) = qx(1) (1 12 qx(2) )
0 0 0 0 0
For m = 3: qx(1) = qx(1) (1 21 qx(2) 21 qx(3) + 13 qx(2) qx(3) )

9 Expenses

% of premium, % of benefit amount, and fixed 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 benefit is paid.
Extended EP: E[0 Le ] = 0 PVFB + PVFE = PVF(ELP)
where ELP = expense loaded premium = P + expense loading.
Expense-augmented reserve: k V E = E[k Le ] = PVFB + PVFE PVF(ELP)
Expense reserve = PVFE PVF(L = level expense loading to Px )

9.1 Asset Shares

(d) (w)
Two decrements: = death; = withdrawal
(d) (w) ()
(k AS + G (1 ck ) ek ) (1 + i) = bk+1 qx+k + k+1 CV qx+k + k+1 AS px+k
n1 h
X i (1 + i)nk
(d) (w)
n AS = G(1 ck ) ek bk+1 qx+k k+1 CV qx+k ()
k=0 nk px+k

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10 Poisson Processes
k
P r(Poisson() = k) = e
k!
Z t
m(t) = (x) dx ; effective between a and b = m(b) m(a)
0

Thinned Poisson sub-processes are independent.

10.1 Compound Poisson Processes

Let S(t) = X1 + X2 + ... + XN (t) be a process such that frequency follows

a Poisson process N (t), and severity is represented by Xi (IID per event).
Then:
E[S] = N E[Xi ]
V ar(S) = N E[Xi2 ] = N (V ar(Xi ) + (E[Xi ])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:
  t  x
t+x1 1 b
P r(X = k = x) =
x 1+b 1+b

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11 Markov Chains

Q = transition matrix for 1 period (homogeneous)

kQ = transition matrix for k periods = Qk (homogeneous)

Qn = transition matrix from time n to time n + 1 (non-homogeneous)
Q(i,j) = P r(in state j next period | in state i now) (Q(row,column) )
(i,j)
kQ = P r(in state j k periods from now | in state i now)
P (i) = Q(i,i) = P r(stay in state i for 1 period)
(i)
kP = (P (i) )k = P r(stay in state i for k periods) (6= 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).

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