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You are on page 1of 37

BY MATHEMATICAL FORMULA

by

L. K. Chan, Ph.D.

and

ABSTRACT

of statistical estimation. The method of maximum likelihood

is used to determine the estimates of the parameters. Theory

is developed to allow for estimation without resorting to the

usual "exposure" formulas. Both single and multiple decrement

models are considered. Theoretical results are obtained for

some specific mortality models. Numerical procedures to obtain

the estimates are considered.

London, Canada.

Group, University of Western Ontario, London, Canada. N6A 5B9

Council of Canada.

-27-

A STATISTICAL APPROACH TO GRADUATION

BY MATHEMATICAL FORMULA

INTRODUCTION

1

Kimeldorf and Jones (1967)

applied Bayesian statistical principles to graduation by introduc-

essentially Bayesian.

introduce prior mformation by assuming an analytic form of the

of Miller 1 s monograph. The graduation is then cast into a parametric

multiple decrement models are. considered.

tional assumptions, as are used traditionally to determine "exposures",

types of data considered here are very general.

-28-

2.

the sample.

The determination of the parameters is often not a simple

values is selected.

the sample size is large (cf: Cramer, 1946, Chapter 33). Incident-

-29-

3.

being acquainted with the techniques discussed will make the reader

indicate the sort of analytic results that the user might obtain

for his particular model. These results, when used in this paper,

direct.

DISTRIBUTION THEORY

the mortality study at age x. ~t T denote a random variable

representing the time to death of this individual. The cumulative

F!t:x! if t < 0

if 0 $ t $ oo.

0 $ t < oo.

-3G-

4 0

X

m (k)

L llx

k=l

The joint pdf of T and K (the random variable which takes on values

(k)

f(t,k:x) 0'5t<oo

tpx ~x+t

i 1., 2, ... , m.

It can be easily seen that the marginal pdf of the random variable T

(k)

f(t,klt s:x) = t-sPx+s Oss<t<

> ~x+t

The probability that death was a result of the k-th cause given

to denote the pdf of the variables in parentheses.

-31-

5.

the age of death falls. For multiple decrement models, the cause

n

L C II L.

~

i=l

1 2 1'

e1, e2 , , 91' which maximize

L(8 ,8 , ,8r).

1

The maximum likelihood estimates are usually

2

obtained by differentiating the log likelihood, l (81, 82,0 0 0 > 81')

1 2

the derivatives to zero and solving the system of r equations,

0, i = 1, ... Jl 1",

of base e = 1.71828).

-32-

6.

individual. Here we first develop the likelihood functions Li

in various ways.

s' and s" denote the age limits of the interval in which death

likelihood function is

s'-xPx s''-s'qs''

-33-

7.

B r

-J lls ds + Zogs"-s'qs,

X

If n' sample members fall into the interval, the log likelihood

is multiplied by n'.

individuals observed do not die while under observation but die after

z be a random variable denoting the age at withdrawal of this

withdrawal. Let

T min(Y,Z)

and A y,; z

0 y >z

-34-

8 0

C(z) does not involve the parameters under study, C(z) can be

t t

a{-J \1

8

ds + log \lt} + U-a! {- r \1

8

ds}

X )X

t

-J \ls ds +a log \lt

X

reduces to

- ( \1

8

dx + log \ly

X

reduces to

z

- J \1 8 ds.

X

lives for each of the following seven types of data. Some of the

but are of interest to statisticians and are included for the sake

-35-

9.

the parameters. The log likelihoods for each of the seven situations

are given below. Since we are concerned with the maximization of the

the sample.

n n

- I JJ

8

ds + I Zog l.ly.

i=l i=l .,_

For each sample member, either the exact age at death, Yi, or

n

n

z - I ~ 8 ds + I ai Zog ~t.

i=l i=l .,_

Suppose that all members enter the study at the same age, i.e.

-36-

10.

J+1 sj-1

-I

j=1

n.

J

JX

\l

s

ds

1

Withdrawals are restricted to the ages s , s , , sJ. The

1 2

frequency of entrants and withdrawals are recorded at each age

8.

J J J

I

j=1

{nj+1 + "'.-e

J J

.} I

so

~

s

ds +

j=1

I n. Zog

J sj -sj_ 1

q

sj_ 1

J J

sj respectively.

y. s j-1

-I1 J -z. ~s as + I1 n.

X

J JX

-37-

11.

s.

JJ ~s ds -

so

For each sample member either the exact age at death, the

is recorded.

~ 8 ds

'1- '1- '1-

'1-

-38-

12.

DEVELOPMENT OF THE LIKELIHOOD FUNCTION-MULTIPLE DECREMENT

"(k)

y-x P x "y

y

-J ~s ds + Zog ~y

(k)

, s "]

as a result of the kth cause.

(k)

s'-x px s"-s'qs,

8 I

(k)

~ ds + Zog s"-s 1 qs 1

-J 8

X

(3) Either the age at death and the cause or the age at withdrawal

is recorded.

lives for each of the seven types of data considered in the single

-39-

13.

n

I

i=l (f " ) X

ds + Zog ~ ".))

Yi

~

!.

~ (k)}

m n (k)

I I ( i ~s ds + Ik Zog

k=l i=l yi

l- xi

where h is the sum over sample members dying of the kth cause.

l

m n (k}

I -I 11 ds

k=l i=l 8

n.Jsj-l"d +

J ~s s

X

sj-1

n.

J f ds + f

X j=l

-40-

14.

assuming that the cause of death of survivors to age sJ, i.e. those

dying after age sJ, is unknown; where nj,k is the number of deaths

sfj-1 J m

l \l

8

ds + I I n . log q (k)

j=1 k=1 J,k srsj-1 Bj-1

m J+1

I [- I

k=1 j=1

unknown.

m

I

k=1

where I 1 ,k is the summation over all deaths due to the kth cause

-41-

15.

m J (k)

I [- L (UJ .-e .) ds + L Zog \J

k=l j=O J J 1, k yi

(k)

lis

\.1

8

ds

r

s.'

(k.)

1-

-l:c \Js ds + Lc Zog s 1-'!-a.' qs.'

1- 1-

xi

".

m

I [-I A ( i

k=l

(k)

\Js ds + LA , k zog (k)

\J

yi

- IB I 1- IJ;k) ds

xi xi

\Js ds + Lc,k ogs!'-s.' qs.' l

1- 1- 1-

-42-

16.

where LA,k and Lc,k are the corresponding summations over deaths

written as

The estimation can then be done separately for each force of

mortality.

of the form 8

.-s.

J J- 1 q~~)l

J-

which can be written as

dt.

For Types I and II, i.e. when there is no grouping, the form

log likelihood for the single decrement model using the same

-43-

17.

MORTALITY MODELS

Mortality Model A.

r

of the form ).lx = a(x)b(8) where j a(x)dx = m and b(8) is a positive

y

differentiable and strictly monotonic function of 8. Some examples

follow:

AI. 8

AI I. 8x

-44-

18.

over a certain age, each member in the sample observed at that age

Mortality Model B.

1 exp {X-~}

o --o- .

the former notation rather than the traditional form since ~ and o

are location and scale parameters, making the computations some what

less complicated. Also, the mode of the distribution, i.e. the age

and o we have somewhat better intuitive feeling for the shape of the

Model A will be investigated in both sample types where there

is no grouping present, i.e. Types I and II, and, the types where

in the sample types involving grouping only since in the ungrouped

-65-

19.

/

studied.

equations for both the single and multiple decrement cases will

be proposed.

(1) Types I and II samples for single and multiple decrement cases

is a special case of Type II. For the sinqle decrement case, the

log likelihood is

t.

n '/.

- I Jx.

a(s)ds b(e) + nA log b(e) + aonstant

i=l

'/.

t.

'/.

a(s) ds}

Jx.

'/.

-46-

20.

(2) Types III to VII samples for single and multiple decrement

cases

types are special cases. For the single decrement case, the log

likelihood is

yi "i

a(s) ds b(a) + nA Log b(a) - I8 J a(s) ds b(a)

Jx..,_ x..,_

X

8 '!

"' exp{-a(si,s! b(a) )a(si,s! b(e) ds.

Js .,_~

8 ~,

.,_ exp{-a(si,s)b(a))c(s,s!ds

Js .,_~

Let

and

-47-

21.

Let y > 0,

where y = l/b(6)

that g(y) is strictly increasing and convex with slope not exceeding

y 0 > y

1 2

-48-

22.

Then it can be shown [4.2], that y 0 > y1 > > y* and that the

sequence iy ,y ,y , . } converges toy*. This sequence can then

0 1 2

be used to determine the root iteratively. The iterative procedure

= e0 0 =

which has solution e where y 1/b(e J. Using two terms of

0

the approximation the likelihood equation is then approximately

)

Finite sample properties of bre 0 J and b(euJ were studied by

b r eu J

-49-

23.

0

of b(9*).

\'le now consider the Type VII sample for the multiple deere-

ment case when the force of mortality for each cause of death has

the form

Let nAk and nCk denote the numbers of deaths of the kth cause

where the exact ages of death are recorded and where intervals of

m

(k)

then I ~,., a(x) Let b Then the

k=l

k 1, ... , m.

k = l , ... ,m.

If a (x), a (xJ, ... , ak(x) are not the same, the system of

1 2

likelihood equations is

-so-

24.

t:

s '! m

a (l (s) ck(xi,s) exp{- I ca(xi,s) ba rea) l ds

m .,_ 8=1

+ I Ic" , k 1, ... , m

t:

s '! m

<>=1

a (l (s) exp{- I ca(xi,s) bare an ds

.,_ a=1

i=1 i=1

n t.-~ xi-~ xi - ~

- L {exp(~) - exp(---

0

--)) + LA 0

- n A Zog o

i=1

-51-

25.

L{exp(yi/a) - exp(xi/a)) y + a, UJhere y

n exp(~/a)

L{exp(ti/a) - exp(xi/a))

function;

and only i f

n

I for a Type I sample

i=l

and

n n

I I (t.-

,_ yJ 2 for a Type II sample;

i=l i=l

of the parameters.

-52-

26.

ages at entry from the average at death must be greater than the

standard methods can be used. Note that the first equation involves

g(a) = a

asymptotic to

n 2 2 n

I ry i x.)/ I (yJ -xi) - y

i=l '1- i=l "

-53-

27.

0

close to the root, the Newton-Raphson method is known to converge.

(2) Types III and IV samples from the single decrement case

g.= exp(ej/a),

J

1

z 0

[s j exp(sj/a) + sj-1 exp(ej_/a) ]/2,

J

l so exp(s 0 /a),

0

l 0 s 0 exp(s /a),

J J

m.

J

[8 j exp(sj/a) - sj-1 exp(sj_ 1 /a) l/2

J+1 J J

I (n.+w.-e.)

J J J j + I (w. -e.) m.

J J J

- I n .m. aoth(a hj)

J J

0

j=1 j=1 j=1

where a exp(~/a).

I t can be shown [ 2 5]

0 that any solution to the above

-54-

28.

ungrouped cases.

the initial guess and plotting its contours. This method will

THE TWO CAUSE MAKEHAM MODEL AND THE !1AXIMUM LIKELIHOOD SOLUTION

PROCEDURE

= a

-55-

29.

(2)

~X

For the general sample, i.e., Type VII, when there are no

n

nA 2 exp(~/o) = LA exp(yi/o) + I 8 exp(ai/o) - I exp(xi/o)

i=l

n

LA yi exp(yi/o) + I 8 ai exp(ai/o) - I xi exp(xi/o)

i=l

n + 0

i=l

most one local maximum which exists if and only if nAl > 0,

nA 2 > 1 and

pond to the previous symbols but for outcomes in intervals. The

-56-

30.

n

LA exp(yi/o) + I8 exp(zi/o) - L exp(xi/o)

i=l

where

I ..

J'L

and

1, J i = exp(x/o), J3i=x-xi

2

6

without grouping.

-57-

31.

one solution of the likelihood equation which is a consistent

normal distribution.

CONCLUSIONS

The main purpose of this paper was to point out and demon-

-58-

32.

form over the whole age range considered, but of separate forces

Department of Mathematics

The University of l"lestern Ontario

London, Ontario, Canada N6A 5B9

-59-

REFERENCES

ponential Failure Models--When the Data are Grouped",

Technometrics, 15, No. 2, pp. 271-277.

Princeton University Press.

Society of Actuaries.

Premiums and Reserves in Multiple Decrement Theory",

Transactions of the Society of Actuaries, 16, pp. 1-16.

Problem in Life-Testing", Technometrics, 13, No. 2,

pp. 289-301.

Graduation", Transactions of the Society of Actuaries,

19, pp. 66-112.

tuarial Monographs", No. 1} Actuarial Society of America and

American Institute of Actuaries.

Distributions UsefuZ in Actuariat Apptications, Ph.D.

Thesis. University of Western Ontario.

tiatty Grouped Samptes from Independent not Identicatty

Distributed Random Variabtes I. Technical Report No.

1973-2, University of Ume~, Sweden.

-60-

SOME INSIGHTS INTO ALLOCATING

by

Charles E. Johnson

[Author's Note: The author does not intend to be original with the material

presented in this paper but only intends to express the views contained herein.)

EXTRACT ~~ ~ODUCTION

Federal Income Taxes among various lines or business. For this purpose, the

Federal Income Ta.xes for a company may be broken down into a Separate Company Tax

for each line of business and a Marriare Tax for the company as a whole.

For allocation purposes, the Federal Income Taxes may be divided into two

parts:

The Separate Company Tax is the tax calculated for each line of business treatin<

the line of business as if it was a separate company in the same tax position* as

the com?any as a whole. The Marriage Tax (positive or negative) is the difference

between the tax for the company as a whole and the sum of the Separate Com?any

Taxes. Therefore,< the main problem in allocating the Federal Income Taxes among

How does each line or business contribute to the overall tax for the company as

a whole? The answer to this question may lie in the All But Method. This method

determines a tax for each line or business by taking the difference between the tax

for the com?anY as a whole and the tax for the same company but which excludes the

-61-

2

assuming the same tax position as that for the company as a whole. This All But

Tax may be broken dovn into a Separate Company Tax and a Marriage Tax from the

All But Method. This Marriage Tax for each line of business is the difference

between the All But Tax for that line of business and its Separate Company Tax.

Can the Marriage Tax for the company as a whole be allocated amen~ various

lines of business according to the All But Marriage Taxes? Fact: An allocation

method should have at least two characteristics in common with the thin~ it is

allocating:

Tax to each line of business according to the direction the Marria~e Tax is actually

Marriage Tax to each line of business according to how tar in either direction the

Therefore, allocating the Marriage Tax for the company as a whole among various

lines of business according to the All But Marriage Taxes would appear to be theoreti-

cally plausible. But, this may not be practical because the Marriage Tax for the

company as a whole may be large compared to the actual tax (unknown, but supposedly

approximated by the Separate Company Tax) for any one line of business, causing an

allocated tax which is a vide deviation from the Separate Company Tax.

allocating the Marriage Tax for the company as a whole according to the All But

Taxes. This approach tends to give a tax for each line of business which is a

smooth ascent (or descent) from the Separate Company Tax--as well as being theoreti-

cally plausible.

-62-

3

And, or course, there are other techniques such as allocating the Federal

CONCLUSION

For allocation purposes, the Federal Income Taxes for a company may be broken

down into a Separate Company Tax for each line or business and a Marriage Tax for

the company as a vhole. The main problem in allocating the Federal Income Taxes

A tax position defines the elements through which t&Xes are paid.

-63-

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