Chapter 3: Survival Distributions and Life Tables

Distribution function of X: Force of mortality flea:):

Fx(:r) = Pr(X S; :1;)

/1(:1:)
Survival function B(.1:): 8' (x)

sex)
Relations between survival functions and
Probability of death between age :r and force of mortality:
age y:

Pr(.r < X S; z) F.J( (z) - Fx (:1:)

- B(Z)
exp ( -I "(Y)d ll )

Probability of death between age

age y given survival to age :r::
and
nPx exp
(
- !
x+n
p.(y)ely
)

Pr(:1; < X S; zlX > Derivatives:

d

dt t(jx

d
Notations: dt tPx tPx . It (:r: + t)
d
tlJx PriT(.r) tl -T
dt'"

prob. (3:) dies within t years d

distribution function of T(a:) -L

dt x

tPx Pr[T(:c) > t] d

-1
attains age ;1; +t
Mean and variance of T and ](:

E[T(:r)] complete expectation of life

Pr[t < Tel') t + 'Ill
t+ul]x -

t])a' t+u])x
t(jx =./
o
tP:B elt

tPx' u(]x-t-t curtate expectation of life

ex)
Relations with survival functions:

00

Vo.7:T(:r:) ]
2./
.
o
,J
t . tPx u,t ,2
- ex

00

Curtate future lifetime (K(:r) greatest Vo:r[K(.r}]

2)2k -1) kP:r 2
e".
integer in T(x)): k=l

Pr[K(.l') k] Pr[k T(:r) < k + 1] Total lifetime after age .r: Ta

k]Jx k+lPx ex;

kP", . qx+k
T-r: ./ lx+t dt
klJx o

Exam rv[ Life C;onting;;;ncicH - LGD@ 1

~, Varying benefit insul'ances: Interest theory reminder
1 vn
(IA)x = ./It + IJlIt, tPx !/'x(t)dt
am
1 l,n i
0fll
0 n'fll
5 8
./It +
11
1 1 1
(L4)~:m IJI/ ' t1Jxlt x(t)dt /5 '
00Cl -
i d
0 - nvn
(X) (Ia)fll
(IA)", ./ t ' l,t , tP:r p'o,(t)dt
0
11 1
(IO)OCl
(IA);"fll ./ t ' 7,t , tPx It x (t)dt 52
(n + l)Ofll (Ia)fll + (Da)m
0
11
-
5
CD"4.);':fll ./(n ItJ ' tPx fJ,x(t)dt
i'IJ
0 1 1 +i
T1
id 12
(DA);':fll ./(n - t)vt , tPdl'x(t)dt
0
Doubling the constant force of interest 5
(IA)x Ax + VP:L,(1A)x+l
lIqx + 1)1'rr' + 1 +i -4 (1 + i)2
v 1)2
(DA)~:fll nvqx + vpx(DA)x~l:n_ll
-4 2i + i2
(IA);:fll + (15A);:fll
d --+ 2d d 2
(IA)~:fll + (D)l)~:fll = (n + l)A;:fll
i 2i + i 2

(IA )~:fll + (DA)~:fll (n + l)A~;m -+

5 25

Accumulated cost of insurance: Limit of interest rate i = 0:

A o, 1
A~:fll nqx
n!Ax 11}1X

Share of the survivor: Ax:fll

1 mlnqx
accumulation factor
(JA)x 1 +e:r:
(IA)x eo,

Exam l'vl - Life Cont.ingenciel$ - LC;D'V 4

 Chapter 5: Life Annuities

Whole life annuity: ax Recursion relations

J
00

Elan] at! t]Jx + t)dt +

o + nl
00 ,x,)
1 +vpx
Jvt'tPxdt
o
J
o
tEx dt
2
1 + v Px

1l or [an]

n-year temporary annuity:

(Iii)x
n n

J
o
v
t
. tllx dt = J
0 Whole life annuity due: 0,,;
1l oriY] 00

E[ii K+lll L 11k. kPx

'..=0
n-year deferred annuity:
Yor[oK+lll
J JtE~,dt
rAJ OC.

1,t . tPx dt
n n
n-yr temporary annuity due:

'11-1
2
Vor[Y] aX!n) E[Y] = Lv k
. k]lx
k=O

n-yr certain and life annuity:

n-yr deferred annuity due:

+ na,x +
ex)

E[Y] = L . kP"
Most important identity k=n

1 ba'T + )Ix

1 )Ix

1 ba'x:111
n-yr certain and life due: ii'x:111
1 - (2b)

d
1 Ax:111 0111 +L v
k
. kllx
d k=n
1 (lii J ;:111 + +n,O'T

Exam f,/l - Life COlltingencieh 5

Whole life immediate: ax Accumulation function:

=L . ~'P2: 11

1
k=1
=/-1o

m-thly annuities Limit of interest rate i 0:

;=0
ax ---+ ex
Vo.r[Y] ii,x 1 + c 2:
II x ex
1
rn. o.x:11I cx:rrl
1 ;=0
(ra) .. (m)
-(I ---+ 1+
o'x:nl ax:-:m 'm
ex:rrl

6
 Chapter 6: Benefit Premiums

Loss function:
h-payment insurance premiums:
Loss PV of Benefit,s - PV of Premiums

Fully continuous equivalence premiums

(whole life and endowment only):

P(Ax)
ii",
A,,;
(L4 x
P(A",) x:h\
1
1
P(A:r) =- -6

[
(l,;r

\/ar[L] (1 + ~r . 2]
(A,,:)
Pure endowment annual premium PJ::~:
it is the reciprocal of the actuarial accumulated
value because the share of the survivor who
Var[L] has deposited P:r:4 at the beginning of each year
for n years is the contractual $1 pure endow
Var[L] ment, i.e.

Fully discrete equivalence premiums (1)

(whole life and endowment only):
P minus P over P problems:

The difference in magnitude of level benefit pre

miums is solely attributable t.o the investment

P(A,,:) Px
feature of the contract. Hence, comparisons of

dAa: the policy values of survivors at age :/: + n lllay

P(Ax)
1- Ax he done by ana.lyzing future benefits:

1
P(Ax) d

( pr
ax l'"
( n Px - P x:nl)8 x :m

VadL] 1+ d [ (A,,:) 2]

2Ax (Ax?
\/ar[L]
(dii.".)2

<Ax - (Ax)2

\/ar[L] =
(1- A."Y lVIiscellaneous identities:

Semicontinuous equivalence premiums: P(A x :nl )

P(Ax:m) +6

m-thly equivalence premiums:

p(m) 1
#
+d

Exa.m tv! LIfe Contin)1;en-C'ies - LGD(':;: 7

/~.
Chapter 7: Benefit Reserves

Benefit reserve tV:

Variance of the loss function
The expected value of the prospect.ive loss at

time t.

Continuous reserve formulas:

Vad tL] assuming EP
Prospective: t V(Ax) Ax+t - P(Ax)a.x+t

Retrospective: tti(Ax) = P(AT).'lT;t]--

Premium diff.:
Var[t L ] ass1lming EP
Paid-np Ins.:

Cost of insurance: funding of the accumu

Annuity res.: tV(A;t.) = 1
lated costs of the death claims incurred between
age ;1: and x + t by the living at t, e.g.

Discrete reserve formulas: 4E x

qT
lkx =
lX+1 P.T

ACCUilmlated differences of premiums:

~Vx - n~::nl)
Ax-;-n 0 = A~'+n
.~Vx- nVT

- ~Vr
AXTm:n-~ - Ax+m
h-payment reserves:
~V Relation between various terminal re
serves (whole life/endowment only):
hr7' A )
Ie' ~ '"ix:nl = 1
(I - m~~)(l- nV.,,+m)(l-

Exam ?vI - Contil1j2; l lcieb - LG D 8

 Chapter 8: Benefit Reserves

Notations:
br death benefit payable at the end of year of death for the j-th policy year
71J~l: benefit premium paid at the beginning of the j-th policy year
bt : death benefit payable at the moment of death
7ft: annual rate of benefit premiums payable continuously at t
Benefit reserve:
00 00

hI! = Lbh+j j]Jx+h qx+h-tj - L

j=O j=O

V
U
ul)x+tfJ~,(t + n)dl1 L 7ft+u V
li
U P2'+t dv
o

Recursion relations:

hI! + 7fh l' f]x--;-h . bh-'-l + 11 Px+h . h+1 If

(" ~7 + 7fh)(l + i) qx+h . + 11x+h . h+1 If
(hI! + (l+i) h+ll! + - h+1 V)

Terminology:
"policy year h+ 1" the policy year from time t = h to time t = h+1
"h V + == initial benefit reserve for policy year h + 1
terminal benefit reserve for polky year h
terminal benefit reserve for policy year h + 1

Net amount at Risk for policy year h +1

='let Amount Risk

\Vhen the death benefit is defined as a function of the reserve:

For each preminm P, the cost of providing the ensuing year's death benefit, based on the net amount at

risk at age .T + h, is : - h-ti V). The leftover, P - vqx,h(/)h+l - h+IV) is the source of reserve

creation. Accullmlated to age :r + 'TI, we have:

71-1

L
h=O
- htl it)] (1 +
n~1

- L1Hlx+h(bhl-l - 11-'-1 V)(l +

h=O

If the death benefit is equaJ to the benefit reserve for the first 17 policy yean,

If the death benefit is equal to plus the benefit reserve for the fiTst n policy years
71-1

nV=V~m- L +
h=O

Exam R Life Contingencies - LGD(:) 9

 If the death benefit is equal to $1 pIue; the benefit reserve for the first n policy years ane qxlh == q
COllfltant

nV =

Reserves at fractional durations:

(h1/ + 7Th)(l + sPx+h' h~:.sV +

UDD '* (hll + 7T h)(l +
V +8' his 1/)

h+.sV Vl~8 . I-sqx+h+s . bh + 1 + . l-sPx+h+s .

UDD '* h+8V (1-8)("V+7Th)+"("+lVr)
i.E. (1 .'\)(h1/)+ V)+ (1-.5)(7Th)
'-..r---"
unearned premium

Next year losses:

Ah losses incurred from time h to h +1

E[Ah] o

V01'[A h l

The Hattendorf theorem

~"

Exam Ivi - Life ContingEl1cies LGDZ: 10

 Chapter 9: Multiple Life Functions

Joint survival function: Last survivor status T(xy):

(,~, t) Pr[T(.1:) > 8&T(y) > *1 T(J::Y) + T(.TY) T(:r.) + T(y)

(t,t) T(:ry) . T(XIJ) T(:r.) . T(y)

Pr[T(:r.) > t and T(y) > tj + h(xy) +

Fy(xy) + FT(x) +
J oint life status: tP:1'1I + tP.TY tPx + tl)y
Axy+ == Ax + -,,4y
FT(t) = Prlmin(T(:r),T(y)).s; t]
i'i. xy +
+ +
+ ex + ey
Independant lives

tjJ2' . tPy Complete expectation of the last-survivor

status:
t!J" + tqy tq," . tqll

Complete expectation of the joint-life sta

J
o
tl'Tydt

tus:
(Xl

= J
o
t1i xy dt
Variances:
00

PDF joint-life status: FarfT(l1)] 2 J t tl)u dt

(t) o

J
00

Var[T(.I:Y)] 2 t . tPxy dt
o
Independant lives

+ t) + I-L(Y + t)
\/ar[T(;ry)] 2 J
o
t t'Pxy dt

(t) t])x . tJ)ylf.L(:r. + t) + f.1(Y + t)]

Notes:
For joint-life Htat1lH, work with p's:
Curtate joint-life functions:
nPxll = n])2' ' nPy

/,])xy /,P2' . kPy [IL] For last-survivor status, work with q's:
k(jxy kqx + k(jy - kqx . Ic(jy [IL]
Pr[K = k] k])xy - k+1Pxy

kPxy . qx+k,y+"

"Exactly one" status:

kPxy' =

nPxy - nPxy
IJx+k +

00 nPx + nPy 2 11 px' nPy

E[K(;ry)] 2.:: kP,ry n!]x+ nqy - 211.I]x . n(jy
1
+ o.y - 20 xy

Exam Life Com.inl'?>~ncies - LGDCS 11

Common shock model: Insurances:
(t) (t) . 8 z (t)
1- Ofj,~.
ST*(x)(t) .
1 - Oo.xy
(t) (t) .
1
(t) . C- At
(t) (t) 'T*(y) (t) . 8.,(t)
Premiums:
8Y*(X)(t) . (t) . C- At
J1xy(t) = j1(;r + t) + J1(Y + t) + A d

1 _ d
Insurance functions:

A" = L
k=Q
. "p." . qu+k 1
-d

L
k=O
Pl'[E( k]
Annuity functions:
00
00
. kPxy' t
)' v . tPu dt
00 o

k=O

Reversionary annuities:
Variance of insurance functions: A reversioanry annuity is payable during the ex
Vor[Z] - (An)2 istence of one status n only if another status v
2Axy (A 2 y)2 has failed. E.g. an annuity of 1 per year payable
Vor[Z]
continnollsly to (y) after the death of (x).
,VY(x y )] (A~: i1xy)( Ay

Covariance of T(:ry) and T(x!7):

Call [T(:ry), T(.TY)] Call [T(;r) ,T(y)] + {E fT(;r)]

E [T(:J:Y)]}' {(E [T(y)] E :Tery)]}
C01l T(y)] +
(ex (e y [IL]

Exa,m 1..,{ Life Contingencie~ - LCD@ 12

 Chapter 10 & 11: Multiple Decrement Models

Notations: Probability density functions:

.Joint PDF: hAt, j) (t)

probability of decrement in the next
t yearH due to caUHe .7
Marginal PDF of J: fA.j) = 00 q~j)
iX'

= probability of decrement in the next = / f:r,J(tLi)dt

t yearH due to all caUHes o
m

L
j=l
Marginal PDF of T: f:r(t)
171
(t)

= LhAt,
the force of decrement d He only
to decrement j
Conditional PDF: hlrUlt) = ---,.---
Il~T) the force of decrement due to all

causeH simultaneously

rn
Survivorship group:

L
j=l
Group of l~T) people at some age a at time t o.

Each member of the group has a joint pdf for

probability of surviving t yearH time until decrement and cause of decrement.

despite all decrementH

1
t
T.~a+n
-/ (B)ds
e (l
/ tP~~), fL!!) (t)dt
:r--a
m

L j=1
Derivative: 171

Ll~)
j cce 1

) _!idt (

Integral forms of tqx :

Associated single decrement:

t
probability of decrement from caUHe j only
p~;T) , p,~)
e~p -I"~) (,' )d'1
/ S

o
[

1 - tq~(j)

Exam IvI - Life Contingencie~ LGD 13

Basic relationships: Actuarial present values

rn
I(;)
II
;=1
t Px
Irh<;tead of summing the benefit8 for each pos
sible cause of death, it is often easier to write
the benefit as one benefit given regardless of the
cause of death and add/8ubtract other henefit8
according to the ca,lse of death.
UDD for multiple decrements:
t Premiums:
t. q~T)
p(T)
x

Decrements uniformly distributed in the

associated single decrement table:
t

= q~(l) (1 1 .1(2) \
-q
2 x )
I

(1 ~ 1(1))
Qx
2
l(1) (
qx \ 1-
1
"2 Qx
1(2)
. -
1
2
...1.
. 3
~ql(2)
x
. ql(3))
x

EXtn11 rvI Life Contingl;'ncies - LGDe~ 14

 Chapter 15: lVlodels Including Expenses

Notations:

G expense loaded ( or gross) premium

b face amount of the policy
G /b per unit gross premium

Expense policy fee:

The portion of G that is independent of b.

Asset shares notations:

G level ann11al contract premimn

kAS asset share assigned to the policy at time t = k
Ck fraction of premium paid for expenses at k cG is the expel1xe premium)
Ck expenseH paid per policy at time t = k
probability of decrement by death
probability of decrement by withdrawal
"CiI cash amount due to the policy holder as a withdrawal benefit
b" death benefit due at time t = k

Recursion formula:

(1 + i)

Direct formula:

f G(l Ch) - eh h+1 Cl1

h=O

EXalTI l\j - Life COTIringencies - LGD@ 15

 Constant Force of Mortality

Chapter 3

S CJ:)

Z"
nPJ:
1
E[T] E'X]

nPx)
1
1/or[T] Var[.1:] = Chapter 6
p.
llqx = P;':11i

ln2 . ]
Yledian[T] = Mechan,X P(A~,) p

p.
ex Px = E[K] For fully discrete whole wi EP,
qar

For fully continuous whole life, w IEP.

Chapter 4 1/ m'[Loss] =

Chapter 7
/-1. + (j O. t 2: 0
t V(A)
x
f."
f.."+26 O. k=O,l,2 ....
Ax (1 nEx) For discrete whole life, assuming

Vo1'[ "Los.s] p. If = 0, 1,2, ...

For fully continuous whole as:mming EP,

q+i 1/a/' [ tLo.~81 1,4 x , t 2: 0

Chapter 9

For two COllstant forces, i. e. acting on (.1:)

and Il.F acting on (y), we have:

Chapter 5

1
p.+
1

ax
(hy +i
1 +i
qJ,y +i
1Jxy
e xy
qJ'Y

Exam fvI Lift Contingencies - LGD<9 16

 De Moivre's Law

Chapter 3 a 2(w-x) I
2AX
:r 2(w - x)
8(.1; ) 1-
W ow-xl
W -;r Ax
W -.r
l o - - ex: (w - .1;)
W 07il
1 A~:7il W -.r
!J.('r) =-
W -.r
(Io)w_xl
(IA)x
W -.1:

W -.T

w-.r-T/ (Io)w-xl
,,1',' (IA)x
w-.r
w-.r
t1J x p(.r + t) qx = !J.('r) = h(.r) , O.:s; t < W -.T
(Io)7il
(IAX:7il
1 w-.r

"2(lx + Ix+d
(Io)7il
w-;r: (IAX:7il
W -.1:
- 2 - = E[T] = Median[T]
W - .r _ ~ = E[K]

2 2
Chapter 5
(w-.r)2 No useful formulas: use ii. x 1-Ax
- d- an.d t h e
Vor[T]
12 chapter 4 formulas.
(w _.r)2 -1
12 Chapter 9
qx 2dx

1 - ~qx lx + l1:+1

1 W-;]:
0(.1;) E[8]. =-
2
-- (= MDML with p. = 2/(w - .1:))
3
n 2(w - .1:)
nnPx + '2 "qx 3
y-x]Jx Cyy + y-1,qx cy
T/
e1 ':7il + '2 "l]x
Chapter 4
For two lives with different w's, simply translate
a'w_xl one of the age by the difference in w's. E.g.
w-:r:
a'7il
w-.r Age 30, w = 100 {o} Age 15, w = 85

Modified De Moivre's Law

Chapter 3
V or[T]
8(.r) (1- ~r
(w-.1:)C ex: (w -
Chapter 9
c
10 -----:;- .r) W -.1:

c 2c+ 1
ft(;r)
w -.r o. 2c
ex wIth j.t = -
w-.T-n)C w -.r
"Px ( w -.r
w - .1: = E[T]
c+1

Exam rvI - Life Contingenciet> - LGD 17