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

Va·r[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