Multiple Lives Model using Markov Chain

Common Shock Model

Actuarial Mathematics II

Lecture 9

Dr. Shaiful Anuar

Institute Of Mathematical Sciences
University of Malaya

Lecture 9 Actuarial Mathematics II

 Multiple Lives Model using Markov Chain
Common Shock Model

Table of contents

1 Multiple Lives Model using Markov Chain

Example
Example
Example

2 Common Shock Model

Example
Example

Lecture 9 Actuarial Mathematics II

 Example
Multiple Lives Model using Markov Chain
Example
Common Shock Model
Example

Multiple Lives Model using Markov Chain

Now, we relate the concept of multiple lives model introduced

earlier in the framework of probabilistic model to stochastic
model using Markov chain.
The following diagram shows the multiple lives model with
transition intensities whereby x and y denote the age of
husband and wife, respectively.

Both Alive µ01

x+t:y +t Husband alive
(0) (1)

µ02
x+t:y +t µ13
x+t

Wife alive µ23

y +t Neither alive
(2) (3)

Lecture 9 Actuarial Mathematics II

 Example
Multiple Lives Model using Markov Chain
Example
Common Shock Model
Example

The probabilities that have been introduced before for this

model have the following equality in Markov model notation:
00
(i) t pxy = t pxy
01 02 03
(ii) t qxy = t pxy + t pxy + t pxy
00 01 02
(iii) t pxy = t pxy + t pxy + t pxy
03
(iv) t qxy = t pxy
1
R t 00 02
(v) t q xy = 0 t pxy µx+s:y+s ds
2
R t 01 13
(vi) t qxy = 0 t pxy µx+s ds
From above, we find the expression for the actuarial present
value of the various life insurances:
R∞ 00 01 02 23
(i) Āy = 0 v t (t pxy µx+t:y+t + t pxy µy+t )dt
R ∞ t 00 02 01 13
(ii) Āx = 0 v (t pxy µx+t:y+t + t pxy µx+t )dt
R∞ 00 01
(iii) Āxy = 0 v t t pxy (µ + µ02x+t:y+t )dt
R ∞ t 01 x+t:y+t
(iv) Āxy = 0 v (t pxy µ13 + p 02 23
µ )dt
1
R ∞ t 00 02x+t t xy y+t
(v) Āxy = 0 v t pxy µx+t:y+t dt
Ā2xy = 0 v t t pxy
R∞ 01 13
(vi) µx+t:y+t dt

Lecture 9 Actuarial Mathematics II

 Example
Multiple Lives Model using Markov Chain
Example
Common Shock Model
Example

The actuarial present value of annuities are given as follows:

R∞ 00 02
(i) āy = 0 v t (t pxy + t pxy )dt
R ∞ t 00 01
(ii) āx = 0 v (t pxy + t pxy )dt
R∞ 00
(iii) āxy = 0 v t t pxy dt
R ∞ t 00 01 02
(iv) āxy = 0 v (t pxy + t pxy + t pxy )dt

Lecture 9 Actuarial Mathematics II

 Example
Multiple Lives Model using Markov Chain
Example
Common Shock Model
Example

Example 1
In a joint life model, state 0 is when both are alive, state 1 is when
only the husband is alive, state 2 is when only the wife is alive, and
state 3 is when neither is alive. Given that:
(i) µ01
x+t:y +t = 0.02t
(ii) µ02
x+t:y +t = 0.04t
Calculate the probability that the joint status fails between times 3
and 5.

Lecture 9 Actuarial Mathematics II

 Example
Multiple Lives Model using Markov Chain
Example
Common Shock Model
Example

Solution

Lecture 9 Actuarial Mathematics II

 Example
Multiple Lives Model using Markov Chain
Example
Common Shock Model
Example

Example 2
Consider a multiple lives model. Given that:
(i) µ01
x+t:y +t = 0.02
(ii) µ02
x+t:y +t = 0.04
(iii) µ13
x+t = 0.10
(iv) µ23
y +t = 0.03
Calculate the probability, given both are alive at time 0, that
neither will be alive at time 20.

Lecture 9 Actuarial Mathematics II

 Example
Multiple Lives Model using Markov Chain
Example
Common Shock Model
Example

Solution

Lecture 9 Actuarial Mathematics II

 Example
Multiple Lives Model using Markov Chain
Example
Common Shock Model
Example

Solution

Lecture 9 Actuarial Mathematics II

 Example
Multiple Lives Model using Markov Chain
Example
Common Shock Model
Example

Example 3
For two independent lives (x) and (y), the transition probability
matrix is given as follows:

0 1 2 3
 
0 0.85 0.1 0.04 0.01
1 0 0.95 0 0.05 

2 0 0 0.9 0.1 
3 0 0 0 1

i = 0.05.
1 .
Calculate Axy:3

Lecture 9 Actuarial Mathematics II

 Example
Multiple Lives Model using Markov Chain
Example
Common Shock Model
Example

Solution

Lecture 9 Actuarial Mathematics II

 Multiple Lives Model using Markov Chain Example
Common Shock Model Example

Common Shock Model

Another important model that are commonly used is the

common shock model.
This model allows additional transition to the common
multiple lives model, that is, both lives die at the same time,
for instance due to car accident.
The following diagram illustrates a common shock model.

Both Alive µ01

x+t:y +t Husband alive
(0) (1)
µ03
x+t:y +t
µ02
x+t:y +t µ13
x+t

Wife alive µ23

y +t Neither alive
(2) (3)

Lecture 9 Actuarial Mathematics II

 Multiple Lives Model using Markov Chain Example
Common Shock Model Example

In a special case whereby µ03 is constant:

(i) µ13 02
x+t = µx+t:y+t + µ
03

(ii) µy+t = µx+t:y+t + µ03

23 01

Lecture 9 Actuarial Mathematics II

 Multiple Lives Model using Markov Chain Example
Common Shock Model Example

Example 4
Consider two lives (x) and (y ) in a common shock model. Given
that:
(a) µ01 23 2
x+t:y +t = µx+t = 0.03t − 0.01
(b) µ02 13
x+t:y +t = µy +t = 1/(50 − t) − 0.01, t < 50
(c) µ03
x+t:y +t = 0.01
Calculate the probability that the joint status fails during the fifth
year.

Lecture 9 Actuarial Mathematics II

 Multiple Lives Model using Markov Chain Example
Common Shock Model Example

Solution

Lecture 9 Actuarial Mathematics II

 Multiple Lives Model using Markov Chain Example
Common Shock Model Example

Example 5
The mortality of (x) and (y) follows a common shock model.
Given that:
(a) µ01
x+t:y +t = 1/(50 − t), t < 50
(b) µ02
x+t:y +t = 0.05
(c) µ03
x+t:y +t = 0.02
Calculate the probability that (x) and (y) die simultaneously within
10 years.

Lecture 9 Actuarial Mathematics II

 Multiple Lives Model using Markov Chain Example
Common Shock Model Example

Solution

Lecture 9 Actuarial Mathematics II