Chapter 3: Assurance-Vie (ACT-2250)

∗
Zied Ben Salah, Ph.D.

July 7, 2016

1 Introduction and definitions

1.1 Introduction
In this chapter, we will consider a cashflow of contingent payments, i.e. the payments depend on
uncertain events modeled as a random variable. The (APV) actuarial present value of a cashflow
of payments is the expectation of its present value at the time of purchase of this cashflow. This
expected present value is also called the expected present value and the net single premium. A
contingent cashflow is a cashflow whose payments are uncertain. Usually, we are able to estimate
the probability that a contingent payment is made.

1.2 The general life insurance

We will consider a cashflow of contingent payments, i.e. the payments depend on uncertain
events modeled as a random variable. Central theme is to quantify the value today of a (ran-
dom) amount to be paid at a random time in the future. The main application is in life insurance
contracts, but could be applied in other contexts (credit risk for example).

In this chapter, we use the following notation:

• T , or Tx or T (x), denote the length of the time interval from issue to death;
• bT is the benefit function;
• ν T is the interest discount factor from the time of payment back to the time of policy issue.
To find the APV for an insurance contract we need a computation is in two steps. First,
we take the present value(PV) random variable bT ν T . Then, we calculate the expected value
E bT ν T which is referred to the actuarial present value (APV). The following examples provide
an illustration of this computation.
Example 1.1 Consider a policy which consists of a payment of $50,000 contingent upon retire-
ment in 15 years (if the person is still alive). Suppose that the probability of a 45 year old to
retire in 15 years is 0.82. That is
15 p45 = 0.82.

Assume, a 6%interest compounded annually.

∗
Mailing address: Zied Ben Salah. Department of Mathematics and Statistics. University of Montreal. CP.
6128 succ. centre-ville. Montreal, Quebec. H3C 3J7. CANADA. Email: bensalah@dms.umontreal.ca

1
 • Define the present value(PV) random variable.

• Find the actuarial present value of the contingent payment.

Solution:

• The present value(PV) random variable is given by


 0, if T ≤ 15,
Z= (1.1)
 15
ν , if T > 15,
1
where ν = 1.06 .

• The actuarial present value of the contingent payment is

AP V = 50000(1.06)−15 × 0.82 = 17, 107.87

Example 1.2 • Consider the simple illustration of valuing a three-year term insurance pol-
icy issued to age 35 where if he dies within the first year, a $1,000 benefit is payable at the
end of his year of death. If he dies within the second year, a $2,000 benefit is payable at
the end of his year of death. If he dies within the third year, a $5,000 benefit is payable at
the end of his year of death.

• Assume a constant interest rate of 5% and the following extract from a mortality table:

x 35 36 37 38
qx 0.005 0.006 0.007 0.008
Calculate the APV of the benefits.
Solution
The APV of the benefits is the expected value of the cost of this contract, i.e.

AP V = 1000νq35 + 2000ν 2 p35 q36 + 5000ν 3 p35 p36 q37 ,

1
where ν = 1.05 . Then,

AP V = 1000(1.05)−1 ×0.005+2000(1.05)−2 ×(1−0.005)0.006+5000(1.05)−3 ×(1−0.005)(1−0.006)0.007 = 45.49448

In general, we want to understand the entire distribution of the PV random variable. Other
ways of summarizing the distribution such as variances and percentiles/quantiles may be useful.
in the rest of this chapter, we are interested in some standard life insurance contracts:
(a) Insurances payable at the moment of death: continuous.

(b) Insurances payable at the end of year of death: discrete

We denote by Z , the present value random variable. This gives the value, at policy issue, of
the benefit payment, issued age is usually denoted by x. In the case where the benefit is payable
at the moment of death, Z clearly depends on the time-until-death T (x) . For simplicity, we
drop the subscript x for age-at-issue. In the case where the benefit is payable at the end of year
of death, Z clearly depends on the curtate future lifetime K(x). For simplicity, we drop the
subscript x for age-at-issue.

2
2 Insurances payable at the moment of death
2.1 Term life
An n−year term life insurance provides payment if the insured dies within n years from issue.
For a unit of benefit payment, we have

 1, if T ≤ n,
bT = (2.1)
0, if T > n,


The present value random variable is

 T
 ν , if T ≤ n,
Z= (2.2)
0, if T > n,


The expected value E[Z] is called the APV of this insurance and we use the actuarial notation:
Z n Z n
1 t
Ax:n| = E[Z] = ν fT (x) (t)dt = ν t t px µx+t dt.
0 0

If we assume that we have a constant force of interest δ, then

ν = e−δ

It follows that the j−th moment of the distribution of Z can be expressed as

Z n Z n
j
E[Z ] = jt
ν t px µx+t dt = e−jδ t px µx+t dt.
0 0

This is actually equal to the APV but evaluated at the force of interest jδ. i.e.

E[Z j ]@δ = E[Z]@jδ .

This is known as the rule of moments. We use the notation

1
E[Z 2 ] = 2 Ax:n| .

It follows that the variance can be expressed as

 2
1 1
V ar[Z] = 2 Ax:n| − Ax:n| .

Example 2.1 We consider an n−year term insurance issued at age x and we assume that T (x)
has an exponential with T (x) ∼ Exp(λ).
1
• Find the APV Ax:n|

• Determine the variance V (Z).

• For a 10 years term insurance, we have δ = 0.05 and λ = 0.001. Compute the APV and
the variance of the present value r.v.
Solution:

3
 1
• To find the APV Ax:n| , we use the definition
Z n
1
Ax:n| = e−δt fT (x) (t)dt.
0

Since T (x) has an exponential with T (x) ∼ Exp(λ) then

fT (x) (t) = λe−λt .

Hence,
Z n
1
Ax:n| = e−δt λe−λt dt
0
λ h i
= 1 − e−n(λ+δ) .
λ+δ

• The variance V (Z) is given by

 2
1 1
V ar[Z] = 2 Ax:n| − Ax:n| .

Hence,
λ h i  λ h i2
−n(λ+2δ) −n(λ+δ)
V ar[Z] = 1−e − 1−e .
λ + 2δ λ+δ

• For a 10 years term insurance, we have δ = 0.05 and λ = 0.001. The APV is

1 0.001 
1 − e−0.51 = 0.01177442.

Ax:10| =
0.051
The variance of the present value r.v.
0.001 
1 − e−1.01 − (0.01177442)2 = 0.003467492.

V ar[Z] =
0.101

2.2 Whole life

For a whole life insurance, benefits are payable following death at any time in the future. For a
unit of benefit payment, i.e. bT = 1, so that the present value random variable is

Z = νT .

Note that the whole life insurance is the limiting case of term life insurance as n → ∞. The
APV notation for whole life
Z ∞
E[Z] = Ax = ν t t px µx+t dt.
0

If ν = e−δ the variance of Z is given by

2
V ar[Z] = 2 Ax − Ax .

4
Example 2.2 We consider a whole life insurance issued at age x and we assume that T (x) has
an exponential with T (x) ∼ Exp(λ).
• Find the APV E(Z)

• Determine the variance V(Z).

• We have δ = 0.05 and λ = 0.001. Compute the APV and the variance of the present value
r.v.
Solution:

• The APV Ax is given by Z ∞

Ax = e−δt fT (x) (t)dt.
0
Since T (x) has an exponential with T (x) ∼ Exp(λ) then

fT (x) (t) = λe−λt .

Hence,
Z ∞
Ax = e−δt λe−λt dt
0
λ
= .
λ+δ

• The variance V (Z) is given by

2
V ar[Z] = 2 Ax − Ax .

Hence,
 2
λ λ
V ar[Z] = − .
λ + 2δ λ+δ
• For a 10 years term insurance, we have δ = 0.05 and λ = 0.001. The APV is
0.001
Ax = = 0.01960784.
0.051
The variance of the present value r.v.
0.001
V ar[Z] = − (0.01960784)2 = 0.009516523.
0.101

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2.3 pure endowment
For an n-year pure endowment insurance, a benefit is payable at the end of n years if the insured
survives at least n years from issue. The present value r.v.

 0, if T ≤ n,
Z= (2.3)
 n
ν , if T > n,

The APV for pure endowment:

n Ex = ν n n px .
The variance
V ar[Z] = ν 2n n pxn qx .
We can also express the present value random variable based on an indicator function

Z = ν n I(Tx > n).

Example 2.3 We consider an n−year pure endowment issued at age x and we assume that T (x)
has an exponential with T (x) ∼ Exp(λ).
• Find the APV E(Z)

• Determine the variance V(Z).

• For a 10 years pure endowment, we have δ = 0.05 and λ = 0.001. Compute the APV and
the variance of the present value r.v.
Solution:

• The APV is given by

n Ex = ν n n px .
Since T (x) has an exponential with T (x) ∼ Exp(λ) then

n px = e−nλ .

Hence,
n Ex = e−n(λ+δ)

• The variance V (Z) is given by

 2
V ar[Z] = e−n(λ+2δ) − e−n(λ+δ) .

i.e.
V ar[Z] = e−n(λ+2δ) − e−n(2λ+2δ) = e−n(λ+2δ) (1 − e−nλ ).

• For a 10 years term insurance, we have δ = 0.05 and λ = 0.001. The APV is

10 Ex = e−10(λ+δ) = e−0.51 = 0.6004956

The variance of the present value r.v.

V ar[Z] = e−10(λ+2δ) − (0.6004956)2 = 0.364219 − (0.6004956)2 = 0.003624034.

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2.4 endowment insurance
• For an n−year endowment insurance, a benefit is payable if death is within n years or if
the insured survives at least n years from issue, whichever occurs first.
• The present value r.v.
 T
 ν , if T ≤ n,
Z= (2.4)
ν n , if T > n,


• We can write Z as Z = ν min(T,n)

• APV for endowment insurance
1
Ax:n| = n Ex + Ax:n| .

• Variance of Z using the rule of moments

 2
V ar[Z] = 2 Ax:n| − Ax:n| .

Example 2.4 We consider an n−year endowment insurance issued at age x and we assume that
T (x) has an exponential with T (x) ∼ Exp(λ).
• Find the APV E(Z)
• Determine the variance V(Z).
• For a 10 years endowment insurance, we have δ = 0.05 and λ = 0.001. Compute the APV
and the variance of the present value r.v.
Solution:
We know that
1
Ax:n| = n Ex + Ax:n| .
If T (x) ∼ Exp(λ), we have
1 λ h i
Ax:n| = 1 − e−n(λ+δ) ,
λ+δ
and
n Ex = e−n(λ+δ) .
It follows that
λ h i
Ax:n| = e−n(λ+δ) + 1 − e−n(λ+δ) .
λ+δ
Using the rule of the moments, we find
−n(λ+2δ) λ h i
2 Ax:n| = e + 1 − e−n(λ+2δ) .
λ + 2δ
Then, we can find the variance using
 2
2
V ar[Z] = Ax:n| − Ax:n| .

For a 10 years endowment insurance, we have δ = 0.05 and λ = 0.001. we find

Ax:n| = 0.6004956 + 0.01177442= 0.61227.

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2.5 deferred insurance
For an n−year deferred whole insurance, a benefit is payable if the insured dies at least n years
following issue. The present value r.v. is

 0, if T ≤ n,
Z= (2.5)
 T
ν , if T > n,
The APV for deferred insurance
Z ∞
n| Ax = ν t t px µx+t dt
n

The Variance of the PV Z is
2

V ar[Z] = 2 n| Ax − n| Ax .
Note that an n−year deferred whole insurance at age (x) is similar to a whole life insurance
issued at age (x + n). It follows that

n| Ax = n| Ex · Ax+n .

The factor n| Ex is a discount factor.

Example 2.5 We consider an n−year deferred endowment issued at age x and we assume that
T (x) has an exponential with T (x) ∼ Exp(λ).
• Find the APV E(Z)
• Determine the variance V(Z).
Solution:

• The APV n| Ax is given by

Z ∞
n| Ax = ν t fT (x) (t)dt
n
Since T (x) has an exponential with T (x) ∼ Exp(λ) then

fT (x) (t) = λe−λt .

Hence,
Z ∞
n| Ax = e−δt λe−λt dt
n
λe−n(λ+δ)
= .
λ+δ

• The variance V (Z) is given by

2
V ar[Z] = 2 n| Ax − n| Ax .

Hence,
!2
λe−n(λ+2δ) λe−n(λ+δ)
V ar[Z] = − .
λ + 2δ λ+δ

8
2.6 Examples
Example 2.6 Find expressions for the APV for the same types of insurances in the case where
the mortality follows De Moivre’s law.
Solution: The mortality follows De Moivre’s law. Then,

X ∼ U nif (0, ω),

and
Tx ∼ U nif (0, ω − x).
It follows that
1
fT (x) (t) = t px µx+t = ,
ω−x
for 0 ≤ t ≤ ω − x. We obtain the following APVs:

1. the n-year term insurance

Z n
1
Ax:n| = ν t fT (x) (t)dt
Z0 n
1
= νt dt
0 ω−x
Z n
1
= ν t dt
ω−x 0
an|
= ,
ω−x

2. the whole life insurance

Z ω−x
Ax = ν t fT (x) (t)dt
0
Z ω−x
1
= νt dt
0 ω−x
Z ω−x
1
= ν t dt
ω−x 0
aω−x|
= ,
ω−x

3. the pure endowment:

n Ex = ν n n px .
the survival probability n px is given by
Z ω−x
1 n
p
n x = dt = 1 − .
n ω−x ω−x

Then,  
n n
n Ex =ν 1− .
ω−x

9
 4. the n-year endowment insurance
1
Ax:n| = n Ex + Ax:n| .

Then, 
n
 an|
n
Ax:n| =ν 1− + .
ω−x ω−x

5. the n-year deferred insurance

  a
n n ω−x−n|
n| Ax = n Ex Ax+n =ν 1−
ω−x ω−x−n

Example 2.7 For a whole life insurance of $1,000 on (x) with benefits payable at the moment
of death, you are given:

 0.04, if 0 < T ≤ 10,
δt = (2.6)
0.05, if T > 10,


and

 0.006, if 0 < T ≤ 10,
µx+t = (2.7)
0.007, if T > 10,


Calculate the actuarial present value for this insurance.

Solution:
Let Z be the PV of this contract. We have
 
1
AP V = E(Z) = 1000 Ax:10| + 10 Ex Ax+10 .

For 0 < t ≤ 10, we have a constant force of mortality, 0.006, (Exponential distribution) and a
constant force of interest, 0.04. It follows that

1 0.006
1 − e−0.046×10 = 0.04809344.


Ax:10| =
0.046
and
10 Ex = e−0.046×10 = 0.631283.
Similarly, for 10 < t , we have a constant force of mortality, 0.007, (Exponential distribution)
and a constant force of interest, 0.05. Then,
0.007
Ax+10 = = 0.122807.
0.057
We obtain
AP V = E(Z) = 1000(0.1256195) = 125.6195

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Equivalent probability calculations: We can also compute probabilities of Z using the distribution
of T (x).
Consider the present value random variable Z for a whole life issued to age x, we hav

P r(Z ≤ α) = P r(e−δT ≤ α)
= P r(−δT ≤ ln(α))
 
ln(α)
= Pr T ≥ −
δ
= u px ,

where u = − ln(α)
δ .

3 Insurances payable at EOY of death

Let us consider life insurances that provide the payment of the benefits at the end of the year.
These insurance contracts are the discrete version of the continuous contract analyzed in the
previous section. The discrete version is based on the discrete random variable K(x) which is
the curtate future lifetime. K, Kx or K(x) denote the curtate future lifetime from issue to death.

3.1 Term life

An n-year term insurance is an insurance that pays benefits only if death occurs within n years.
It pays benefit at the end of year of death. The benefit function is given by

 1, if K = 0, 1, ..., n − 1
bK+1 = (3.1)
0, if otherwise,


We define the present value of the benefit Z as

 K+1
 ν , if K = 0, 1, ..., n − 1
Z= (3.2)
0, otherwise ,


The expected value of Z, the APV, is denoted by

A1x:n| = E[Z]

One has,
n−1
X
A1x:n| = ν k+1 P r(K(x) = k)
k=0
n−1
X
= ν k+1 k px qx+k .
k=0

Using a life table, we can compute the APV as follows

n−1
X dx+k
A1x:n| = ν k+1
lx
k=0

11
if ν = e−δ (i.e. the force of interest or the interest rate are constant) then

V (Z) = 2 A1x:n| − [A1x:n| ]2 .

Note that 2 A1 is the APV of n−year term insurance that pays $1 at the EOY of death using
x:n|
a force of interest 2δ.

3.2 Whole life

A whole life insurance which pays benefit of $1 at the end of year of death has the following
benefit function
bK+1 = 1.
The present value random variable for this benefit is

Z = ν K+1 .

We use the following actuarial notation

Ax = E[Z].

The actuarial present value APV is given by

∞
X
Ax = ν k+1 P r(K(x) = k)
k=0
∞
X
= ν k+1 k px qx+k .
k=0

Note that if ν = e−δ then

V (Z) = 2 Ax − [Ax ]2 .

3.3 Endowment insurance

An n− year endowment life insurance assumes that the sum insured is payable at the EOY of
death, if this occurs within the first n years, otherwise at the end of the nth year. The present
value r.v. Z is
 K+1
 ν , if K = 0, 1, ..., n − 1
Z= (3.3)
ν n , otherwise ,


12
The APV for this insurance is denoted by Ax:n| . It is the sum of the APV of a (discrete) term
and a pure endowment, i.e.,
Ax:n| = A1x:n| + n Ex .

Note that if ν = e−δ , we use the rule of the moments and we find the variance as follows

V (Z) = 2 Ax:n| − [Ax:n| ]2 .

3.4 Deferred insurance

An n−year deferred whole insurance, a benefit is payable at the end of the year if the insured
dies at least n years following issue. The present value r.v. Z is

 0, if K = 0, 1, ..., n − 1
Z= (3.4)
 K+1
ν , otherwise ,

We have the following notation

E(Z) = n| Ax
Note that we have
n| Ax = n Ex Ax+n = ν n n px Ax+n .
If we assume a constant force of interest we use the rule of moments to find the variance of Z.

3.5 Recursive relationships

We consider recursive relations involving the actuarial present values and second moments of the
types of life insurance.

For a whole life insurance, we have

Ax = νqx + νpx Ax+1

It means that a whole life insurance policy for (x) is the same thing as a 1-year term policy with
payment at year end, plus, if x survives an additional year, a whole life policy starting at age
x + 1. A more general relation of the previous one is the following

Ax = A1x:n| + n| Ax

i.e. a whole life insurance that pays 1 at the end year of death is equivalent to an n year term
policy plus an n year deferred policy.
For term insurance, we have
A1x:n| = νqx + νpx A1x+1:n−1| ,

an n year term policy is the same thing as a 1-year term policy and an (n-1) year term policy at
age x + 1; provided that the insured is still alive at x + 1.
For endowment insurance, we establish the following recursion

Ax:n| = νqx + νpx Ax+1:n−1| .

i.e., an n-year endowment policy is the same thing as a 1-year term policy and an (n-1)-year
term policy at age x + 1, given that insured is still alive at x + 1

13
Remark 3.1 It is possible to find similar recursive relations about second moments (see exercises
and the following example).

Example 3.1 For a whole life insurance on (41) with death benefit payable at the end of the
year of death, let Z be the present value random variable for this insurance. Find V ar(Z) given

• i = 0.05

• p40 = 0.9972

• A41 − A40 = 0.00822

• 2 A41 − 2 A40 = 0.00433

Solution: We know that

V ar(Z) = 2 A41 − (A41 )2 .
We have the following recursive relationship

A40 = νq40 + νp40 A41 = e−δ q40 + e−δ p40 A41 . (3.5)

If we substitute δ by 2δ is Eqn.3.5, we find that

2
A40 = e−2δ q40 + e−2δ p40 2 A41 . (3.6)

We also have
A41 − A40 = 0.00822, (3.7)
and
2
A41 − 2 A40 = 0.00433. (3.8)
Note that we have i = 0.05, then δ = ln(1 + i) = 0.04879016. From Equations (3.5) and (3.7),
we obtain the value of A41

e−δ q40 + 0.00822

A41 = = 0.21649621.
1 − e−δ p40

From Equations (3.6) and (3.8), we obtain the value of 2 A41

2 e−2δ q40 + 0.00433

A41 = = 0.07192616.
1 − e−2δ p40
Thus,
V ar(Z) = 0.07192616 − (0.21649621)2 = 0.02505555.

3.6 Examples
Example 3.2 Consider a mortality that assumes a constant force of mortality. Find the expres-
sion for E(Z) for term and whole discrete life insurances.
Solution
IfT (x) has an exponential with T (x) ∼ Exp(λ) then

fT (x) (t) = λe−λt ,

14
and
ST (x) (t) = t px = e−λt .
Then, we obtain

P r(Kx = k) = P r(k ≤ Tx < k + 1) = k px − k+1 px = e−kλ − e−(k+1)λ = e−kλ (1 − e−λ ).

Let p = e−λ , then

P r(Kx = k) = pk (1 − p).
We find the following APV:

1. An n−term insurance
n−1
X
A1x:n| = ν k+1 P r(K(x) = k)
k=0
n−1
X
= ν k+1 pk (1 − p)
k=0
n−1
X
= ν(1 − p) ν k pk
k=0
1 − ν n pn
= ν(1 − p) ,
1 − νp

2. A whole life insurance

∞
X
Ax = ν k+1 P r(K(x) = k)
k=0
∞
X
= ν k+1 pk (1 − p)
k=0
∞
X
= ν(1 − p) ν k pk
k=0
1
= ν(1 − p)
1 − νp
ν(1 − p)
= .
1 − νp
We can also write
ν(1 − p) e−δ − e−(λ+δ) eλ − 1
Ax = = = .
1 − νp 1 − e−(λ+δ) eλ+δ − 1

Example 3.3 Consider a mortality that assumes a uniform distribution of mortality. Find the
expression for E(Z) for term and whole discrete life insurance.
Solution
The mortality follows De Moivre’s law. Then,

Tx ∼ U nif (0, ω − x).

15
It follows that
1
fT (x) (t) = .
ω−x
It follows that the mass function for the curtate future lifetime Kx is
Z k+1
1
P r(Kx = k) = P r(k ≤ Tx < k + 1) = fT (x) (t)dt = .
k ω−x
We find the following APV:
1. An n−term insurance
n−1
X
A1x:n| = ν k+1 P r(K(x) = k)
k=0
n−1
X 1
= ν k+1
ω−x
k=0
n−1
1 X k+1
= ν
ω−x
k=0
ν 1 − νn
=
ω−x 1−ν
1 1 − νn
=
ω−x i
an|
=
ω−x
2. A whole life insurance
ω−x−1
X
Ax = ν k+1 P r(K(x) = k)
k=0
ω−x−1
X 1
= ν k+1
ω−x
k=0
ω−x−1
1 X
= ν k+1
ω−x
k=0
ν 1 − ν ω−x
=
ω−x 1−ν
1 1 − ν ω−x
=
ω−x i
aω−x|
=
ω−x
3.7 Insurance payable m-thly
We assume the year is divided into m periods and that benefits are paid m−thly. Consider the
case where we have just one year term and the benefit is payable at the end of the mth of the
year of death.
m−1
1(m)
X
A = ν (r+1)/m · mr px · 1 qx+ mr .
x:1| m
r=0

16
Proposition 3.1 Under the UDD assumption, we have

1(m) i
A = A1x:1| .
x:1| i(m)
Proof. Recall that
m−1
1(m)
X
A = ν (r+1)/m · r px · 1 qx+ mr .
x:1| m m
r=0

Note that for r = 0, 1, ..., m − 1 we have

r
0≤ < 1.
m
It follows that under the UDD assumption, we write
r
r px = 1 − r qx = 1 − · qx . (3.9)
m m m
We also have
1 qx+ mr = 1 − 1 px+ mr ,
m m

and
r+1 px = r
m
px · 1 px+ mr .
m m

We obtain
r+1 px 1− r+1 qx
m m
1 qx+ mr = 1 − =1− .
m r
m
px 1− r
m
qx
Then under the UDD assumption, we find

1 − r+1
m · qx
1
· qx
1 qx+ mr = 1 − r = mr . (3.10)
m 1 − m · qx 1 − m · qx

From Equations (3.9) and (3.10), we obtain

1
r px · 1 qx+ mr = · qx .
m m m

17
It follows that
m−1
1(m)
X 1
A = ν (r+1)/m · · qx
x:1| m
r=0
m−1
1 X
= · qx ν (r+1)/m
m
r=0
m−1
ν 1/m X
= · qx ν r/m
m
r=0
ν 1/m 1−ν
= · qx .
m 1 − ν 1/m
Recall that
ν 1/m 1 1
1/m
= 1 = (m) ,
m(1 − ν ) m((1 + i) m − 1) i
and
1 − ν = iν.
Then,
1(m) i i
A = νqx = A1x:1| .
x:1| i(m) i(m)
We can generalize this to
1(m) i
A = A1x:n| .
x:n| i(m)
For other types, we can also similarly derive the following under the UDD assumption

• whole life insurance:

i
A(m)
x = Ax .
i(m)
• deferred life insurance
(m) i
n| Ax = n| Ax .
i(m)
• endowment insurance:
(m) i
A = A1x:n| + n Ex
x:n| i(m)
Given that
lim i(m) = δ,
m→∞

and that the mthly insurance becomes continuous insurance if m → ∞, we can establish the
following relationships

• whole life insurance:

i
Ax = Ax .
δ
• term insurance
1 i
Ax:n| = A1x:n| .
δ

18
4 mthly insurance under the CFM assumption
The exponential interpolation is equivalent to constant force assumption and we have

ln(lx+t ) = (1 − t) ln(lx ) + t ln(lx+1 ).

The form obtained using exponential interpolation is also called the constant force of mortality
form of the number of living.

Proposition 4.1 Under the constant force of mortality assumption, we have

s px = (px )s ,

s qx = 1 − (1 − qx )s ,
and
µx+s = µx = − ln(px ),
for 0 ≤ s < 1.

Proof. For 0 ≤ s < 1, we have

ln(lx+s ) = (1 − s) ln(lx ) + s ln(lx+1 ).

which is equivalent to
ln(lx+s ) − ln(lx ) = s ln(lx+1 ) − s ln(lx ),
i.e.    
lx+s lx+1
ln = s ln .
lx lx
Then, we obtain
s px = (px )s ,
It follows that
s qx = 1 − s px = 1 − (px )s = 1 − (1 − qx )s .
We recall the definition of the force of mortality
d
µx+s = − ln(s px ).
ds
Note that
ln(s px ) = ln ((px )s ) = s ln(px ).
It implies that
µx+s = − ln(px ).

Example 4.1 Let ly denote the expected number of individuals alive at age y and ω the limiting
age. We consider a whole life issued to (x) that pays 1$ at the moment of the death. We want to
find the APV of this policy under the constant force of mortality assumption. Recall the definition
of the APV of this policy
Z ω−x Z ω−x
t
Ax = ν fT (t)dt = ν t t px µx+t dt.
0 0

19
We need to use the he constant force of mortality assumption to find the density fT (t) (or
t px µx+t ). But we are allowed to use this assumption only for fractional ages. Without loss
of generality, we assume that ω − x ∈ N. First, we rewrite the APV as follows
ω−x−1
X
Ax = Ik ,
k=0

where Z k+1
Ik = ν t t px µx+t dt.
k
Simple manipulations lead to

Z 1
Ik = ν s+k s+k px µx+k+s ds
0
Z 1
= νk ν s k pxs px+k µx+k+s ds.
0

Now it is possible to use the CFM assumption because 0 ≤ s ≤ 1. We obtain

s px+k = (px+k )s ,

and
µx+k+s = µx+k = − ln(px+k ).
Thus,
Z 1
k
Ik = −ν k px ln(px+k ) ν s (px+k )s µx+k+s ds
0
Z 1
= −ν k k px ln(px+k ) e(−δ+ln(px+k ))s ds
0
e (−δ+ln(p x+k ))
−1
= −ν k k px ln(px+k )
−δ + ln(px+k )
1 − e(−δ+ln(px+k ))
= ν k k px ln(px+k )
−δ + ln(px+k )
1 − νpx+k
= ν k k px ln(px+k )
−δ + ln(px+k )

Using the life table, we have

lx+k+1
px+k = ,
lx+k
and
lx+k
k px = .
lx
Then, we obtain Ik , for k = 0, 1, ..., ω − x.

20
5 Exercises
• Question 1:
You are currently 45 years old. It is found that your mortality follows De Moivre’s Law
with ω = 90. You purchase a whole life insurance policy that pays a benefit of $1,000,000
at the moment of death. Calculate the actuarial present value of your death benefits.
Assume an annual effective interest rate of 10%.
Solution:
The mortality follows De Moivre’s law. Then, the actuarial present value
Z 90−45
Ax = 1, 000, 000 ν t fT (45) (t)dt
0
Z 45
1
= 1, 000, 000 ν t dt
0 45
Z 45
1
= 1, 000, 000 ν t dt
45 0
1 1 − ν 45
= 1, 000, 000
45 δ
i.e.
1
1 − ν 45 1 − (1+i) 45
Ax = 1, 000, 000 = = 229958.1
45δ 45 ln(1 + i)
with i = 0.14.

• Question 2:
For a group of individuals all age x; of which 30% are smokers (S) and 70% are non-smokers
(NS). We define
S
S 1 − νT
aT = ,
δ
NS
1 − νT
aN S
T =
δ
and
1 − νT
aT =
δ
you are given:

– δ = 0.1.
S
– Ax = 0.444
NS
– Ax = 0.286
– T is the future lifetime of (x)
– V ar[aST ] = 8.8818
– V ar[aN S
T ] = 8.503

Calculate V ar[aT ] for an individual chosen from this group.

Solution
We have
1 − νT
aT = .
δ

21
Then
1−Z
aT =
δ
where Z is the present value of a whole life insurance that pays $1 at the moment of death.
Then,
V ar[Z]
V ar[aT ] = .
δ2
We need to find the variance of Z. We know that

2
V ar[Z] = E(Z 2 ) − [E(Z)]2 = 2 Ax − Ax .

Then,
2A

2
x − Ax
V ar[aT ] = .
δ2
We also have

Ax = E(Z)
S NS
= 0.3Ax + 0.7Ax
= 0.3 × 0.285316 + 0.7 × 0.166826
= 0.3334

and
2
Ax = E(Z 2 )
S NS
= 0.32 Ax + 0.72 Ax .
S NS
We use the variances V ar[aST ] = 8.8818 and V ar[aN S 2 2
T ] = 8.503 to obtain Ax and Ax .
Since, we have
 2
2 AS − AS
x x
V ar[aST ] = 2
,
δ
and  2
2 AN S − AN S
x x
V ar[aN S
T ]= .
δ2
It follows that  2
2 S S
Ax = δ 2 V ar[aST ] + Ax = 0.285316,

and
NS 2
 
2 NS
Ax = δ 2 V ar[aN
T
S
] + A x = 0.166826,

We get
2 S NS
Ax = 0.32 Ax + 0.72 Ax
= 0.202373.

Hence,
2A

2
x − Ax
V ar[aT ] = = 9.121744
δ2

22
• Question 3:
For a group of individuals all age x; of which 30% are smokers (S) and 70% are non-smokers
(NS), you are given:

– T is the future lifetime of (x)

– δ = 0.08.
– The constant force of mortality for smokers is 0.06
– The constant force of mortality for non-smokers is 0.03.

Calculate V ar[aT ] for an individual chosen from this group.

Solution:
We have
1 − νT
aT = .
δ
Then
1−Z
aT =
δ
where Z is the present value of a whole life insurance that pays $1 at the moment of death.
Then,
V ar[Z]
V ar[aT ] = .
δ2
We know that
2
V ar[Z] = E(Z 2 ) − [E(Z)]2 = 2 Ax − Ax .
Then,
2A

2
x − Ax
V ar[aT ] = .
δ2
We also have

Ax = E(Z)
S NS
= 0.3Ax + 0.7Ax ,

and
2
Ax = E(Z 2 )
S NS
= 0.32 Ax + 0.72 Ax .

Recall that for a constant force of interest δ and a constant force of mortality µ, we have
µ
Ax = ,
µ+δ
and
2 µ
Ax = .
µ + 2δ
It follows that
S µS 0.06
Ax = S
= = 0.4285714
µ +δ 0.06 + 0.08
2 S µS
Ax = = 0.2727273
µS + 2δ

23
 NS µN S
Ax = = 0.2727273,
µN S + δ
and
2 NS µN S
Ax = = 0.1578947.
µN S + 2δ
We obtain
S NS
Ax = 0.3Ax + 0.7Ax
= 0.3 × 0.4285714 + 0.7 × 0.2727273
= 0.3194805,

and
2 S NS
Ax = 0.32 Ax + 0.72 Ax .
= 0.3 × 0.2727273 + 0.7 × 0.1578947
= 0.1923445.

We conclude that
2A

2
x − Ax 0.1923445 − 0.31948052
V ar[aT ] = = = 14.10574
δ2 0.082

• Question 4
Z is the present-value random variable for a whole life insurance of 1 payable at the moment
of death of (x): You are given

– δ = 0.06.
– The force of mortality is constant µ.
– 2 Ax = 0.25.

Calculate the value ofµ.

Solution:
Recall that for a constant force of interest δ and a constant force of mortality µ, we have
µ
Ax = ,
µ+δ
and
2 µ
Ax = .
µ + 2δ
It follows that
2δ 2 Ax
µ= = 0.04.
1 − 2 Ax
• Question 5:
Consider a three-year term insurance policy issued to age 40 where if he dies within the
first year, a $2,000 benefit is payable at the end of his year of death. If he dies within the
second year, a $4,000 benefit is payable at the end of his year of death. If he dies within the
third year, a $6,000 benefit is payable at the end of his year of death. Assume a constant
force of interest of 5% and the following extract from a mortality table:

24
 x 40 41 42 43
qx 0.005 0.006 0.007 0.008

Calculate the APV and the variance of the benefits

Solution
Let Z be the present value r.v. of the benefits. The APV of the benefits is the expected
value of the cost of this contract, i.e.

AP V = E(Z) = 2000νq40 + 4000ν 2 p40 q41 + 6000ν 3 p40 p41 q42 ,

1
where ν = 1.05 . Then,

AP V = 2000(1.05)−1 (0.005) + 4000(1.05)−2 (1 − 0.005)(0.006)

+ 6000(1.05)−3 (1 − 0.005)(1 − 0.006)(0.007)
= 67.06685.

The variance of Z is given by

V ar(Z) = E(Z 2 ) − AP V 2 ,

where
E(Z 2 ) = 20002 ν 2 q40 + 40002 ν 4 p40 q41 + 60002 ν 6 p40 p41 q42 = 282708.5
We obtain,
V ar(Z) = 282708.5 − 67.066852 = 278210.5

• Question 6:
The mortality is De Moivre with ω = 100, and the force of interest is δ = 0.10. A person
aged 40 wants to buy a 25-year term life insurance, with a death benefit of e0.03t payable
at the moment of death.

a) Define the present value random variable Z for this special contract.
b) Find the expected and the variance of Z.

Solution:
Let T be the future lifetime of this person. The present value random variable Z is given
by
 −T δ 0.03T
 e e = e−0.07T , if T ≤ 25,
Z= (5.1)
0, if T > 25,


The mortality follows De Moivre’s law. Then,

X ∼ U nif (0, 100),

and
T ∼ U nif (0, 60).
It follows that
1
fT (t) = t p40 µ40+t = ,
60

25
 for 0 ≤ t ≤ 60. It follows that
Z 25
E(Z) = e−0.07t fT (t)dt
0
Z 25
1
= e−0.07t dt
60 0
1
1 − e−0.07×25


=
60 × 0.07
= 0.1967205.

The variance of Z is given by

V ar(Z) = E(Z 2 ) − [E(Z)]2 ,

where the second moment is computed as follows

Z 25
2
E(Z ) = e−0.14t fT (t)dt
0
Z 25
1
= e−0.14t dt
60 0
1
1 − e−0.14×25


=
60 × 0.14
= 0.1154527.

We obtain
V ar(Z) = 0.1154527 − 0.19672052 = 0.07675374.

• Question 7:
You are given that the probability density function of T (70) is

0.05, 0 ≤ t ≤ 10
fT (70) (t) = ,
0.5e−(t−10) , t > 10

and the force of interest is 6%. The following policies with benefits payable at the moment
of death are issued to (70)
Z1 = Present value random variable of a 5 year deferred life insurance of 10
Z2 = Present value random variable of a 10 year term life insurance of 20
Find E[Z1 ], E[Z2 ], V ar[Z1 ], V ar[Z2 ], and Cov[Z1 , Z2 ].
Solution:
Z1 the present value random variable of a 5 year deferred life is given by

 0, if T (70) ≤ 5,
Z1 = (5.2)
10e−0.06T (70) , if T (70) > 5,


Z2 the present value random variable of a 10 year term life insurance of 20 is defined as

 20e−0.06T (70) , if T (70) ≤ 10,



Z2 = (5.3)
0, if T (70) > 10,


26
The APVs E[Z1 ] and E[Z2 ] are as follows
Z ∞
E[Z1 ] = 105| A70 = 10 e−0.06t fT (70) (t)dt
5

and Z 10
1
E[Z2 ] = 20A70:10| = 20 e−0.06t fT (70) (t)dt.
0
We obtain
Z ∞
E[Z1 ] = 10 e−0.06t fT (70) (t)dt
5
Z 10 Z ∞
−0.06t
= 10 efT (70) (t)dt + 10 e−0.06t fT (70) dt
5 10
Z 10 Z ∞
= 10 0.05e−0.06t dt + 10 0.5e−(t−10) e−0.06t dt
5 10
Z 10 Z ∞
= 10 0.05e−0.06t dt + 10 0.5e−(t−10) e−0.06t dt
5 10
Z ∞
0.05 −0.3 −0.6 −0.6
= 10 (e −e ) + 5e e−t e−0.06t dt
0.06 0
0.5 −0.3 −0.6 5 −0.6
= (e −e )+ e
0.06 1.06
= 4.188789,

and
Z 10
E[Z2 ] = 20 e−0.06t fT (70) (t)dt
0
Z 10
= e−0.06t dt
0
1
= (1 − e−0.6 )
0.06
= 7.519806.

The variances V ar[Z1 ] and V ar[Z2 ] are given by

V ar[Z1 ] = E[Z12 ] − (E[Z1 ])2 ,

and
V ar[Z2 ] = E[Z22 ] − (E[Z2 ])2 .

27
We obtain the following values for the second moments
Z ∞
2
E[Z1 ] = 100 e−0.12t fT (70) (t)dt
5
Z 10 Z ∞
−0.12t
= 100 e fT (70) (t)dt + 100 e−0.12t fT (70) dt
5 10
Z 10 Z ∞
= 100 0.05e−0.12t dt + 100 0.5e−(t−10) e−0.12t dt
5 10
Z 10 Z ∞
= 100 0.05e−0.12t dt + 100 0.5e−(t−10) e−0.12t dt
5 10
Z ∞
0.05 −0.6
= 100 (e − e−1.2 ) + 50e−1.2 e−t e−0.12t dt
0.12 0
5 −0.6 −1.2 50 −1.2
= (e −e )+ e
0.12 1.12
= 23.76356,

and
Z 10
E[Z22 ] = 400 e−0.12t fT (70) (t)dt
0
Z 10
= 20 e−0.12t dt
0
20
= (1 − e−1.2 )
0.12
= 116.4676,

Then, we have
V ar[Z1 ] = 23.76356 − 4.1887892 = 6.217607.
and
V ar[Z2 ] = 116.4676 − 7.5198062 = 59.92012
The covariance Cov[Z1 , Z2 ] is defined as

Cov[Z1 , Z2 ] = E[Z1 Z2 ] − E[Z1 ]E[Z2 ],

where
Z 10
E[Z1 Z2 ] = 200 e−0.12t fT (70) (t)dt
5
Z 10
= 10 e−0.12t dt
5
10 −0.6
= (e − e−1.2 )
0.12
= 20.63479

Then,
Cov[Z1 , Z2 ] = 20.63479 − 4.188789 × 7.519806 = −10.86409.

28
• Question 8:
For a whole life insurance of $1,000 on (x) with benefits payable at the moment of death,
you are given:

 0.05, if 0 < t ≤ 15,
δt = (5.4)
0.07, if t > 15,


and

 0.008, if 0 < t ≤ 15,
µx+t = (5.5)
0.009, if t > 15,


Calculate the actuarial present value for this insurance.

Solution:
Let Z be the PV of this contract. We have
 
1
AP V = E(Z) = 1000 Ax:15| + 15 Ex Ax+10 .

For 0 < t ≤ 15, we have a constant force of mortality, 0.008, (Exponential distribution)
and a constant force of interest, 0.05. It follows that

1 0.008
1 − e−0.058×15 = 0.4189515


Ax:15| =
0.058
and
15 Ex = e−0.058×15 = 0.4189515
Similarly for15 < t , we have a constant force of mortality, 0.009, (Exponential distribution)
and a constant force of interest, 0.07. Then,
0.009
Ax+15 = = 0.1139241
0.079
We obtain
AP V = E(Z) = 1000 × 0.1278733 = 127.8733

• Question 9:
For a whole life insurance on (50) with death benefits bt payable at the moment of death,
you are given

– Mortality follows De Moivre’s law with ω = 110.

– bt = 10000(1.1)t , for t ≥ 0.
– δ = 0.05.
– Z denotes the present value random variable for this insurance.

Find the value of E(Z) and V ar(Z).

Solution:
Let T be the future lifetime of this person. The present value random variable Z is given
by
Z = 10000(1.1)T e−δT ,

29
 Since (1.1)T = eln(1.1)T , we write

Z = 10000e(ln(1.1)−δ)T = 10000eδ0 T ,

where
δ0 = ln(1.1) − δ = 0.09531018 − 0.05 = 0.04531018.
The mortality follows De Moivre’s law. Then,

X ∼ U nif (0, 110),

and
T ∼ U nif (0, 60).
It follows that
1
fT (t) = ,
60
for 0 ≤ t ≤ 60. It follows that
Z 60
E(Z) = 10000eδ0 t fT (t)dt
0
10000 25 δ0 t
Z
= e dt
60 0
10000  δ0 ×60 
= e −1
60 × δ0
= 52082.66.

The variance of Z is given by

V ar(Z) = E(Z 2 ) − [E(Z)]2 ,

where the second moment is computed as follows

Z 60
2
E(Z ) = 100002 e2δ0 t fT (t)dt
0
100002 25 2δ0 t
Z
= e dt
60 0
100002  2δ0 ×60 
= e −1
60 × 2δ0
= 4208083000

We obtain
V ar(Z) = 1495479527.

• Question 10:
Let Z1 denote the present value random variable of an n−year term insurance of $1, while
Z2 that of an n-year deferred insurance of $1, with death benefit payable at the moment
of death of (x). You are given:
1 1
– Ax:n| = 0.01 and 2 Ax:n| = 0.0005
2
– n| Ax = 0.1 and n| Ax = 0.0136.

30
 Calculate the coefficient of correlation given by

Cov(Z1 , Z2 )
ρ= p .
V ar(Z1 )V ar(Z2 )

Solution: The r.vs Z1 and Z2 are defined as

 T
 ν , if T ≤ n,
Z1 = (5.6)
0, if T > n,


and item The present value r.v. is


 0, if T ≤ n,
Z2 = (5.7)
ν T , if T > n,


Then, we obtain the covariance Cov(Z1 , Z2 ) as follows

Cov(Z1 , Z2 ) = E(Z1 Z2 ) − E(Z1 )E(Z2 )

1
= 0 − Ax:n| n| Ax
= −0.001

We also have  2
1 1
V ar[Z1 ] = 2 Ax:n| − Ax:n| = 0, 0004,

and
2
V ar[Z2 ] = 2 n| Ax − n| Ax = 0.0036.
Thus,
Cov(Z1 , Z2 ) 5
ρ= p =− .
V ar(Z1 )V ar(Z2 ) 6

• Question 11:
The mortality follows an Exponential distribution with λ = 0.002, and the force of interest
is δ = 0.10. A person aged 40 wants to buy a 25-year term life insurance, with a death
benefit of e0.04t payable at the moment of death.

(a) Define the random variable Z.

(b) Find the expected value of Z.
(c) Find the variance of Z.

Solution:

(a) The present value is given by the random variable Z where

 −T (δ−0.04)
 e , if 0 < t ≤ 125,
Z=
0, if t > 25,


31
 (b) It follows that the expected value of Z is
Z 25
E[Z] = e−T (δ−0.04) fTx (t)dt
0
Z 25
= λ e−T (λ+δ−0.04) dt
0
λ h i
= 1 − e−25(λ+δ−0.04)
λ + δ − 0.04
= 0.0258466.

(c) In order to calculate the variance of Z, we first find the second moment. Using the
expression of the expected value obtained in (b), one can state that

λ h i
E[Z 2 ] = 1 − e−25(λ+2(δ−0.04)) = 0.01581466.
λ + 2(δ − 0.04)

Thus,
V ar(Z) = 0.01581466 − (0.0258466)2 = 0.01514661.

• Question 12:
Let Z be the present value r.v. of a whole life insurance of $1 on (x) with benefits payable
at the moment of death. You are given:

 0.05, if 0 < t ≤ 15,
δt =
0.07, if t > 15,


and

 0.008, if 0 < t ≤ 15,
µx+t =
0.009, if t > 15,


(a) Find t px the survival function of T (x).

(b) Calculate the actuarial present value for this insurance i.e. E(Z).
(c) Determine the variance of Z.
(d) Find the probability that the APV of this life insurance is adequate to cover this
insurance. i.e. P r(Z ≤ E(Z)).

Solution:

(a) We know that t px the survival function of T (x) is given by

 Z t 
t px = exp − µx+s ds .
0

It follows that
– If t ≤ 15:
t px = exp (−0.008t) .

32
 – If t > 15

t px = 15 px (t−15 px+15 )
= exp (−0.008(15)) exp (−0.009(t − 15))
= exp (0.015 − 0.009t) .

i.e.

 exp (−0.008t) , if 0 < t ≤ 15,
t px =
exp (0.015 − 0.009t) , if t > 15,


(b) The present value for this insurance Z is given by

Z = νT .

The expected value of Z is

Z ∞
E[Z] = e−tδt µx+tt px dt.
0

We know that for the interval [0, 15] we have a constant force of mortality µx+t = 0.008
and for the interval ]15, ∞[ the force of mortality is µx+t = 0.009. It implies that
Z 15 Z ∞
−0.058t
E[Z] = 0.008e dt + 0.009e0.015−0.079t dt
0 15
0.008   0.009e0.015
= 1 − e−0.058(15) + e−0.079(15)
0.058 0.079
= 0.08014461 + 0.08028753
= 0.1604321.

(c) First, we find the second moment of Z, i.e.

Z 15 Z ∞
2 −0.108t
E[Z ] = 0.008e dt + 0.009e0.015−0.149t dt
0 15
0.008   0.009e0.015
= 1 − e−0.108(15) + e−0.149(15)
0.108 0.149
= 0.05941491 + 0.05475527
= 0.1141702.

The variance of Z is

V ar(Z) = E[Z 2 ] − (E[Z])2 = 0.08843172.

(d) The probability that the APV of this life insurance is adequate to cover this insurance,

33
 i.e. P r(Z ≤ E(Z)), is given as follows

P r(Z ≤ E(Z)) = P r(ν T ≤ E(Z))

= P r ν T ≤ E(Z), T ≤ 15 + P r ν T ≤ E(Z), T > 15

= P r e−0.05T ≤ E(Z), T ≤ 15 + P r e−0.07T ≤ E(Z), T > 15

   
ln(E[Z]) ln(E[Z])
= Pr − ≤ T, T ≤ 15 + P r − ≤ T, T > 15
0.05 0.07
= P r (36.59769 ≤ T, T ≤ 15) + P r (26.14121 ≤ T, T > 15)
= 0 + P r (26.14121 ≤ T )
= 26.14121 px
= exp (0.015 − 0.009(26.14121))
= 0.8023014.

• Question 13:
Let Z be the present value r.v. of a whole life insurance of $1 on (x) with benefits payable
at the moment of death. You are given:

 0.05, if 0 < t ≤ 15,
δt =
0.07, if t > 15,


and

 0.008, if 0 < t ≤ 15,
µx+t =
0.009, if t > 15,


(a) Find t px the survival function of T (x).

(b) Calculate the actuarial present value for this insurance i.e. E(Z).
(c) Determine the variance of Z.
(d) Find the probability that the APV of this life insurance is adequate to cover this
insurance. i.e. P r(Z ≤ E(Z)).

Solution:

(a) We know that t px the survival function of T (x) is given by

 Z t 
t px = exp − µx+s ds .
0

It follows that
– If t ≤ 15:
t px = exp (−0.008t) .
– If t > 15

t px = 15 px (t−15 px+15 )
= exp (−0.008(15)) exp (−0.009(t − 15))
= exp (0.015 − 0.009t) .

34
 i.e.

 exp (−0.008t) , if 0 < t ≤ 15,
t px =
exp (0.015 − 0.009t) , if t > 15,


(b) The present value for this insurance Z is given by

Z = νT .

The expected value of Z is

Z ∞
E[Z] = e−tδt µx+tt px dt.
0

We know that for the interval [0, 15] we have a constant force of mortality µx+t = 0.008
and for the interval ]15, ∞[ the force of mortality is µx+t = 0.009. It implies that
Z 15 Z ∞
−0.058t
E[Z] = 0.008e dt + 0.009e0.015−0.079t dt
0 15
0.008   0.009e0.015 −0.079(15)
= 1 − e−0.058(15) + e
0.058 0.079
= 0.08014461 + 0.08028753
= 0.1604321.

(c) First, we find the second moment of Z, i.e.

Z 15 Z ∞
E[Z 2 ] = 0.008e−0.108t dt + 0.009e0.015−0.149t dt
0 15
0.008   0.009e0.015
= 1 − e−0.108(15) + e−0.149(15)
0.108 0.149
= 0.05941491 + 0.05475527
= 0.1141702.

The variance of Z is

V ar(Z) = E[Z 2 ] − (E[Z])2 = 0.08843172.

(d) The probability that the APV of this life insurance is adequate to cover this insurance,
i.e. P r(Z ≤ E(Z)), is given as follows

P r(Z ≤ E(Z)) = P r(ν T ≤ E(Z))

= P r ν T ≤ E(Z), T ≤ 15 + P r ν T ≤ E(Z), T > 15

= P r e−0.05T ≤ E(Z), T ≤ 15 + P r e−0.07T ≤ E(Z), T > 15

   
ln(E[Z]) ln(E[Z])
= Pr − ≤ T, T ≤ 15 + P r − ≤ T, T > 15
0.05 0.07
= P r (36.59769 ≤ T, T ≤ 15) + P r (26.14121 ≤ T, T > 15)
= 0 + P r (26.14121 ≤ T )
= 26.14121 px
= exp (0.015 − 0.009(26.14121))
= 0.8023014.

35
• Question 14:
For a population at age x; of which 25% are smokers (S) and 75% are non-smokers (NS),
you are given:

– δ = 0.08.
– The constant force of mortality for smokers is 0.06
– The constant force of mortality for non-smokers is 0.03.

We define
1 − νT
Y1 =
δ
1 − ν min(T,n)
Y2 =
δ
(a) Calculate E[Y1 ] for an individual chosen from this group.
(b) Calculate V ar[Y1 ] for an individual chosen from this group.
(c) Calculate E[Y2 ] for an individual chosen from this group.
(d) Calculate V ar[Y2 ] for an individual chosen from this group.

Solution
Let T be the future lifetime of (x). Assuming a constant force of interest δ and an Expo-
nential distribution of T with T ∼ Exp(λ). One can show that

1 λ h i
Ax:n| = 1 − e−n(λ+δ) ,
λ+δ
and
λ
Ax = .
λ+δ
(a) We have
1 − νT
Y1 = a T = .
δ
Then
1 − E(ν T ) 1 − Ax
E(Y1 ) = = ,
δ δ
where
S NS
Ax = 0.25Ax + 0.75Ax .
Using (a), we find

S µN S 0.06
Ax = N S
= = 0.4285714
µ +δ 0.06 + 0.08
and
NS µS 0.03
Ax = S
= = 0.2727273.
µ +δ 0.03 + 0.08
It follows that
1 − 0.25(0.4285714) − 0.75(0.2727273)
E(Y1 ) = = 8.603896,
0.08

36
(b) The variance is given by
V ar[ν T ]
V ar[aT ] = .
δ2
We know that
2
V ar[ν T ] = 2 Ax − Ax .
Then,
2A

2
x − Ax
V ar[aT ] = .
δ2
We also have
S NS
Ax = 0.25Ax + 0.75Ax
= 0.3116883,

and
2 S NS
Ax = 0.252 Ax + 0.752 Ax
= 0.25 ∗ (0.2727273) + 0.75 ∗ (0.1578947)
= 0.1866028.

We obtain

2A

2
x − Ax 0.1866028 − 0.31168832
V ar[Y1 ] = = = 13.97706.
δ2 0.082
(c) Let
1 − ν min(T,n)
Y2 = .
δ
We define Z = ν min(T,n) . Then,
1 − E[Z]
E(Y2 ) = .
δ
Recall that for a constant force of mortality, we have

1 λ h i
Ax:n| = 1 − e−n(λ+δ) ,
λ+δ
and
n Ex = ν n n px = e−n(λ+δ) .
Using the conditional expectation, we obtain
!
λ(s) h −n(λ(s) +δ)
i
−n(λ(s) +δ) λ(ns) h (ns)
i (ns)
E[Z] = 0.25∗ (s) 1−e +e +0.75∗ (ns) 1 − e−n(λ +δ) + e−n(λ
λ +δ λ +δ

(d) The variance of Y2 is given as

V [Z]
V [Y2 ] = ,
δ2
Then,
V [Z] = E[Z 2 ] − (E[Z])2 .

37
 Using the conditional expectation and the rule of the moment, we obtain
!
λ (s) h i
(s) (s)
E[Z 2 ] = 0.25 ∗ 1 − e−n(λ +2δ) + e−n(λ +2δ) +
λ(s) + 2δ
!
λ(ns) h (ns)
i (ns)
+ 0.75 ∗ 1 − e−n(λ +2δ) + e−n(λ +2δ) .
λ(ns) + 2δ

• Question 15:
The mortality follows an Exponential distribution with λ = 0.002, and the force of interest
is δ = 0.10. A person aged 40 wants to buy a 25-year term life insurance, with a death
benefit of e0.04t payable at the moment of death.

(a) Define the random variable Z.

(b) Find the expected value of Z.
(c) Find the variance of Z.

Solution:

(a) The present value is given by the random variable Z where

 −T (δ−0.04)
 e , if 0 < t ≤ 125,
Z=
0, if t > 25,


(b) It follows that the expected value of Z is

Z 25
E[Z] = e−T (δ−0.04) fTx (t)dt
0
Z 25
= λ e−T (λ+δ−0.04) dt
0
λ h i
= 1 − e−25(λ+δ−0.04)
λ + δ − 0.04
= 0.0258466.

(c) In order to calculate the variance of Z, we first find the second moment. Using the
expression of the expected value obtained in (b), one can state that

λ h i
E[Z 2 ] = 1 − e−25(λ+2(δ−0.04)) = 0.01581466.
λ + 2(δ − 0.04)

Thus,
V ar(Z) = 0.01581466 − (0.0258466)2 = 0.01514661.

• Question 16
A 40 years old buys a whole life policy insurance which will pay $150,000 at the end of
the year of the death. Suppose that the force of mortality is µ = 0.01 and δ = 0.07.
Find the mean and the standard deviation of the present value random variable of this life
insurance.
Solution:

38
 The mean of the present value random variable Z is the APV and it is given by E(Z) =
150, 000 · A40 . Note that for a constant force of mortality model we have (see example 4.2).

eµ − 1
A40 = = 0.120669.
eµ+δ − 1
i.e.
E(Z) = 150, 000 · A40 = 150, 000 × 0.120669 = 18100.35.
The variance V ar(Z) is

V ar(Z) = (150, 000)2

2
A40 − (A40 )2 .


Using the rule of the moments, we find

2 eµ − 1
A40 = = 0.06210161.
eµ+2δ − 1
It follows that

V ar(Z) = (150, 000)2 0.06210161 − (0.120669)2 = (150, 000)2 ×0.0475406 = 1069663500.

 

The standard deviation of Z is

p
std(Z) = V ar(Z) = 32705.71.

• Question 17
Consider the life table

x lx
80 250
81 217
82 161
83 107
84 62
85 28
86 0

An 80 year old buys a whole life policy insurance which will pay $50000 at the end of the
year of his death. Suppose that i = 6.5%. Find the probability that the APV of this life
insurance is adequate to cover this insurance.
Solution:
First, we need to find the probability function of K(80). Note that

k d80+k
0 250-217=33
1 217-161 =56
2 161-107 =54
3 107-62=45
4 62-28=34
5 28-0 =28

39
Then,

k P r(K(80) = k)
0 33 ÷ 250 = 0.132
1 56 ÷ 250 = 0.224
2 54 ÷ 250 = 0.216
3 45 ÷ 250 = 0.180
4 34 ÷ 250 = 0.136
5 28 ÷ 250 = 0.112

Let Z be the present value r.v. of this life insurance, we have

1
Z = 50000ν K(80)+1 = 50000 .
(1 + i)K(80)+1
The APV for this whole life insurance, AP V = E(Z), is given by
5  k+1
X 1
E(Z) = 50000A80 = 50000 P r(K(80) = k).
1+i
k=0

We obtain,

AP V = (50000)(1.065)−1 × 0.132 + (50000)(1.065)−2 × 0.224

+ (50000)(1.065)−3 × 0.216 + (50000)(1.065)−4 × 0.180
+ (50000)(1.065)−5 × 0.136 + (50000)(1.065)−6 × 0.112
= 50000 × 0.8161901
= 40809.51.

The probability that the APV of this life insurance is adequate to cover this insurance is
given by

1
P r[AP V ≥ Z] = P r[AP V ≥ 50000 ]
(1 + i)K(80)+1
1
= P r[40809.51 ≥ 50000 ]
(1.065)K(80)+1
50000
= P r[(1.065)K(80)+1 ≥ ]
 40809.51 
50000
= P r[K(80) + 1 ≥ ln ÷ ln(1.065)]
40809.51
= P r[K(80) + 1 ≥ 3.225224]
= P r[K(80) ≥ 2.225224].

K(80) is a discrete r.v. then,

P r[AP V ≥ Z] = P r[K(80) ≥ 2.225224]

= P r[K(80) ≥ 3]
= 0.180 + 0.136 + 0.112
= 0.428.

40
• Question 18
Jess and Jane buy a whole life policy insurance on the day of their birthdays. Both policies
will pay $50000 at the end of the year of death. Jess is 45 years old and the net single
premium of her insurance is $25000. Jane is 44 years old and the net single premium of
her insurance is $23702. Suppose that i = 0.06. Find the probability that a 44 year old
will die within one year.
Solution:
We have
50000A45 = 25000,
and
50000A44 = 23702.
Then,
A45 = 0.5,
and
A44 = 0.47404.
Note that we have the following recursive relationship

A44 = νq44 + νp44 A45 .

We use p44 = 1 − q44 and we obtain

q44 ν(1 − A45 ) = A44 − νA45 ,

i.e.
A44 − νA45 (1 + i)A44 − A45
q44 = = = 0.0049648.
ν(1 − A45 ) 1 − A45

• Question 19
A 30 years old buys a whole life policy insurance which will pay $20000 at the end of the
year of his death. Suppose that px = 0.9, for each x ≥ 0, and i = 5%. Find the actuarial
present value of this life insurance.
Solution:
The actuarial present value of this life insurance APV is

AP V = 20000A30
∞
X
= 20000 ν k+1 k p30 q30+k
k=0
∞  k+1
X 1
= 20000 k p30 q30+k .
1+i
k=0

We know that px = 0.9, for each x ≥ 0. It follows that

q30+k = 1 − p30+k = 0.1,

and
k−1
Y k−1
Y
k p30 = p30+l = 0.9 = (0.9)k .
l=0 l=0

41
 We obtain

AP V = 20000A30
∞  k+1
X 1
= 20000 k p30 q30+k
1+i
k=0
∞  k+1
X 1
= 20000 0.1 (0.9)k
1+i
k=0
∞ 
0.9 k

2000 X
=
1+i 1+i
k=0
2000 1
= 0.9
1 + i 1 − 1+i
= 13333.33.

• Question 20
A five-year term insurance policy is issued to (45) with benefit amount of $10,000 payable
at the end of the year of death. Mortality is based on the following select and ultimate life
table:

x l[x] l[x]+1 l[x]+2 lx+3 x+3

45 5282 5105 4856 4600 48
46 4753 4524 4322 4109 49
47 4242 4111 3948 3750 50
48 3816 3628 3480 3233 51

Calculate the APV for this insurance if i = 5%.

Solution:
The APV for this five-year term insurance policy is

AP V = 10000A1[x]:5|
4
X
= 10000 ν k+1 k p[x] q[x]+k .
k=0

Note that
l[x]+k
k p[x] = ,
l[x]
and
l[x]+k − l[x]+k+1
q[x]+k = .
l[x]+k
It follows that
l[x]+k − l[x]+k+1
k p[x] q[x]+k = .
l[x]

42
 4
X
AP V = 10000 ν k+1 k p[x] q[x]+k
k=0
−1 −2
l[x] − l[x]+1 l[x]+1 − l[x]+2
 
1 1
= 10000 + 10000
1+i l[x] 1+i l[x]
−3 −4
l[x]+2 − l[x]+3 l[x]+3 − l[x]+4
 
1 1
+ 10000 + 10000
1+i l[x] 1+i l[x]
−5
l[x]+4 − l[x]+5

1
+ 10000
1+i l[x]
−1 −2
l[x] − l[x]+1 l[x]+1 − l[x]+2
 
1 1
= 10000 + 10000
1+i l[x] 1+i l[x]
−3 −4
l[x]+2 − lx+3
 
1 1 lx+3 − lx+4
+ 10000 + 10000
1+i l[x] 1+i l[x]
 −5
1 lx+4 − lx+5
+ 10000
1+i l[x]

For x = 45, we find

−1 −2
l[45] − l[45]+1 l[45]+1 − l[45]+2
 
1 1
AP V = 10000 + 10000
1+i l[45] 1+i l[45]
−3 −4
l[45]+2 − l45+3
 
1 1 l45+3 − l45+4
+ 10000 + 10000
1+i l[45] 1+i l[45]
 −5
1 l45+4 − l45+5
+ 10000
1+i l[45]
10000 l[45] − l[45]+1 l[45]+1 − l[45]+2 l[45]+2 − l45+3 l45+3 − l45+4 l45+4 − l45+5
 
= + + + +
l[45] 1+i (1 + i)2 (1 + i)3 (1 + i)4 (1 + i)5
 
10000 5282 − 5105 5105 − 4856 4856 − 4600 4600 − 4109 4109 − 3750
= + + + +
5282 1.05 1.052 1.053 1.054 1.055
= 2462.698

• Question 21
Suppose interest rate i = 6% and mortality is based on the following life table:

x 90 91 92 93 94 95 96 97 98 99 100
lx 800 740 680 620 560 500 440 380 320 100 0

Calculate:

(a) A94 ;
(b) A1 ;
90:5|
(4)
(c) 3| A92 under the UDD assumption;
(d) A95:3| .

Solution:

43
(a) A94 is given by
∞
X d94+k
A94 = ν k+1 .
l94
k=0
Since l100 = 0, we obtain
5
X d94+k
A94 = ν k+1
l94
k=0
5
X l94+k − l94+k+1
= ν k+1
l94
k=0
5  k+1
X 1 l94+k − l94+k+1
=
1+i l94
k=0
= 0.7907128.

(b) A1 is as follows
90:5|
4
X d90+k
A190:5| = ν k+1
l90
k=0
Hence,
4  k+1
X 1 l90+k − l90+k+1
A190:5| =
1+i l90
k=0
= 0.3159273.
(4)
(c) Under the UDD assumption 3| A92 is given by

(4) (4) i
3| A92 = 3 E92 A95 = 3 E92 A95 .
i(4)
We have
1
i(4) = 4[(1 + i) 4 − 1) = 0.05869538,
1 1 l95 1 500
3 E92 = 3 p92 = = = 0.6173671,
1.063 1.063 l92 1.063 680
and
4  k+1
X 1 l95+k − l95+k+1
A95 = = 0.8187343.
1+i l95
k=0
Thus, we obtain
(4)
3| A92 = 0.5166945.
(d) By definition the APV for a 3-year endowment insurance A95:3| is given by

A95:3| = A195:3| + 3 E95 ,

where the APV of the pure endowment 3 E95 is

1 1 l98 1 320
3 E95 = 3 3 p95 = 3
= = 0.5373563,
1.06 1.06 l95 1.063 500

44
 and for the 3-year term insurance
2  k+1
X 1 l95+k − l95+k+1
A195:3| = = 0.3207614.
1+i l95
k=0

Then,
A95:3| = 0.3207614 + 0.5373563 = 0.8581177.

• Question 22
For a three-year term insurance of 1000 on [50], you are given: Death benefits are payable
at the end of the quarter of death. Mortality follows a select and ultimate life table with
a two-year select period:

x l[x] l[x]+1 lx+2 x+2

50 9706 9687 9661 52
51 9680 9660 9630 53
52 9653 9629 9596 54

We assume that deaths are uniformly distributed over each year of age and i = 5%.
Calculate the APV for this insurance
Solution:
Under the UDD assumption, the APV is given by
i
AP V = 1000 A[50]:3| .
i(4)
The APV of 3-year term insurance payable at the end of the year is as follows
−1 −2 −3
l[50] − l[50]+1 l[50]+1 − l[50]+2 l[50]+2 − l50+3
  
1 1 1
A[50]:3| = + +
1+i l[50] 1+i l[50] 1+i l[50]
l[50] − l[50]+1 l[50]+1 − l50+2 l50+2 − l50+3
 
1
= + +
l[50] 1+i (1 + i)2 (1 + i)3
 
1 9706 − 9687 9687 − 9661 9661 − 9630
= + +
9706 1.05 1.052 1.053
= 0.007053057.

We also have
i(4) = 4((1.05)0.25 − 1) = 0.04908894.
Thus,
i
AP V = 1000 A[50]:3| = 7.183957.
i(4)
• Question 23
You are given that i = 10% and

x 80 81 82 83 84 85
lx 600 500 375 225 75 0

a) Define Z1 and Z2 such that E [Z1 ] = A80 and E [Z2 ] = A81:3| .

b) Compute A80 , A81 , A81:3| and 2| A80 .

45
 c) Compute V ar [Z1 ] and V ar [Z2 ].
h i
d) Compute Pr [Z1 > A80 ] and Pr Z2 > A81:3| .
e) Compute A80 and A81:3| under U DD.

Solution:
Note that l85 = 0 then K80 ∈ {0, 1, 2, 3, 4}.

a) We define Z1 as

1
Z1 = ν K80 +1 = ,
(1 + i)K80 +1
where K80 ∈ {0, 1, 2, 3, 4}.
We define Z2 as

1

 (1+i)K81 +1
, if K81 = 0, 1, 2
Z2 = (5.8)
1
, if K81 = 3,


(1+i)3

b) A80 is given by
4
X 1
A80 = P r(K80 = k)
(1 + i)k+1
k=0
4
X 1 l80+k − l80+k+1
= k+1
(1 + i) l80
k=0
= 0.7598887.

The APV A81 is obtained using the recursion

A80 = νq80 + νp80 A81 .

It follows that
A80 − νq80
A81 =
νp80
(1 + i)A80 − q80
=
p80
(1 + i)A80 − 1 + p80
=
p80
l80+1
(1 + i)A80 − 1 + l80
= l80+1
l80
= 0.8030531.

The APV A81:3| is given by

A81:3| = A181:3| + 3 E81 ,

46
 where
1 1 l84
3 E81 = 3 3 p81 = 3
= 0.1126972,
(1 + i) (1 + i) l81
and
2
X 1
A181:3| = P r(K81 = k)
(1 + i)k+1
k=0
2
X 1 l81+k − l81+k+1
= k+1
(1 + i) l81
k=0
= 0.7006011.

Hence,
A81:3| = A181:3| + 3 E81 = 0.7006011 + 0.1126972 = 0.8132983.
The APV 2| A80 is as follows
2| A80 = 2 E80 · A82 .
Thus,
1 1 l82
2 E80 = 2 p80 = = 0.5165289,
(1 + i)2 (1 + i)2 l80
and
2
X 1
A82 = P r(K82 = k)
(1 + i)k+1
k=0
2
X 1 l82+k − l82+k+1
= k+1
(1 + i) l82
k=0
= 0.8444778.

c) The variance V ar [Z1 ] is given as follows

V ar [Z1 ] = E (Z12 ) − (E [Z1 ])2 ,

 

where
(E [Z1 ])2 = (A80 )2 = 0.75988872 = 0.5774308.
The second moment is
4
X 1
E (Z12 ) =
 
2(k+1)
P r(K80 = k)
k=0
(1 + i)
4
X 1 l80+k − l80+k+1
= (2(k+1)
(1 + i) l80
k=0
= 0.5859738

then
V ar [Z1 ] = 0.008542935.
The variance of Z2 V ar [Z2 ] is defined as follows

V ar [Z2 ] = E (Z22 ) − (E [Z2 ])2 ,

 

47
 where
(E [Z2 ])2 = 0.81329832 = 0.6614541.
The second moment is given by

1 l84
E (Z22 ) = 2 A181:3| +
 
6
,
(1 + i) l81
where
2
2
X 1
A181:3| = 2(k+1)
P r(K81 = k)
k=0
(1 + i)
2
X 1 l81+k − l81+k+1
= 2(k+1)
(1 + i) l81
k=0
= 0.5808578.

Then,
E (Z22 ) = 0.5808578 + 0.08467109 = 0.6655289.
 

Hence,
V ar [Z2 ] = 0.6655289 − 0.6614541 = 0.0040748.

d) The probability Pr [Z1 > A80 ] is equivalent to

   
1 − ln(A80 )
Pr [Z1 > A80 ] = Pr > A80 = Pr − 1 > K80 .
(1 + i)K80 +1 ln(1 + i)

We have
− ln(A80 )
− 1 = 1.880944.
ln(1 + i)
it follows that
l82 − l80
Pr [Z1 > A80 ] = Pr [1.880944 > K80 ] = Pr [K80 ≤ 1] = = 0.375.
l80
h i
To find the probability Pr Z2 > A81:3| , recall that

1

 (1+i)K81 +1
, if K81 = 0, 1, 2
Z2 = (5.9)
1
, if K81 = 3,


(1+i)3

and
A81:3| = 0.8132983.
Note that if K81 = 3
1
Z2 = = 0.7513148,
(1 + i)3
It means that if Z2 > A81:3| then K81 ≤ 2. It follows that

48
  
h i 1
Pr Z2 > A81:3| = Pr > A81:3|
(1 + i)K81 +1
" #
− ln(A81:3| )
= Pr − 1 > K81
ln(1 + i)
= Pr [1.356131 > K81 ]
= Pr [K81 ≤ 1]
l83 − l81
=
l81
= 0.55.

e) The apv A80 and A81:3| under U DD are given by

i i
A80 = A80 = A80 = 0.7972797,
δ ln(1 + i)
and
i i
A81:3| = A81:3| = A = 0.8533173.
δ ln(1 + i) 81:3|
• Question 24
We are given that the mortality is De Moivre with ω = 100, and that i = 10%. Consider Z1
the present value random variable of a fully discrete 10-year endowment insurance issued
to (20) with a death benefit of $1000 and a survival benefit of $2000. Consider Z2 , the
present value random variable of a fully discrete 20-year term life insurance with benefit
of $1000, issued to the same insured aged 30.

a) Define Z1 and Z2 .
b) Compute E [Z1 ] and E [Z2 ] .
c) Compute V ar [Z1 ] and V ar [Z2 ] .
d) Compute Pr [Z1 > E [Z1 ]] and Pr [Z2 > E [Z2 ]] .
e) Compute Cov (Z1 , Z2 ) .

Solution:

a) The PV r.v. Z1 is given by

 1000ν K+1 , if K = 0, 1, ..., 9



Z1 = (5.10)
2000ν 10 , if K = 10, 11, ..., 79,


and Z2 is

 1000ν K+1 , if K = 0, 1, ..., 19



Z2 = (5.11)
0, if K = 20, 21, ..., 79,


(5.12)

49
(b) The APV E [Z1 ] is given by
9
X
E [Z1 ] = 1000 ν k+1 P r(K(20) = k) + 2000ν 10 P r(K(20) ≥ 10)
k=0
9
X 1
= 1000 + 2000ν 10 P r(T (20) ≥ 10)
ν k+1
80
k=0
9 Z 80
1 X k+1 1
= 1000 ν + 2000ν 10 dt
80 10 80
k=0
ν 1 − ν 10 70
= 1000 + 2000ν 10
80 1 − ν 80
1 1 − ν 10 70
= 1000 + 2000ν 10
80 i 80
= 751.5078.

and E [Z2 ]

19
X
E [Z2 ] = 1000 ν k+1 P r(K(20) = k)
k=0
19
X 1
= 1000 ν k+1
80
k=0
19
1 X k+1
= 1000 ν
80
k=0
ν 1 − ν 20
= 1000
80 1 − ν
1 1 − ν 20
= 1000
80 i
= 106.4195

c) Compute V ar [Z1 ] is as follows

V ar [Z1 ] = E (Z1 )2 − (E [Z1 ])2 .

 

The second moment is given using the rule of the moments. Recall that

ν 1 − ν 10 70
E [Z1 ] = 1000 + 2000ν 10 .
80 1 − ν 80
It follows that
ν 2 1 − ν 20 70
E (Z1 )2 = 10002 + 20002 ν 20
 
80 1 − ν 2 80
= 570928.7.

Then,
V ar [Z1 ] = 570928.7 − (751.5078)2 = 6164.727.

50
 The variance V ar [Z2 ] is defined as follows
V ar [Z2 ] = E (Z2 )2 − (E [Z2 ])2 .
 

The second moment is given by

ν 2 1 − ν 40
E (Z2 )2 = 10002
 
80 1 − ν 2
= 58208.64
. The variance is
V ar [Z2 ] = 58208.64 − (106.4195)2 = 46883.53.

d) Recall that

1000ν K+1 , if K = 0, 1, ..., 9



Z1 = (5.13)
2000ν 10 = 771.0866, if K = 10, 21, ..., 79,


and E [Z1 ] = 751.5078. To find the probability Pr [Z1 > E [Z1 ]], we compute the
probability Pr [Z1 ≤ E [Z1 ]]. Since 2000ν 10 = 771.0866 > E [Z1 ] = 751.5078, we
write h \ i
Pr [Z1 ≤ E [Z1 ]] = Pr {1000ν K+1 ≤ E [Z1 ]} {K = 0, 1, ..., 9} .
Note that
 
K+1 E [Z1 ]
1000ν ≤ E [Z1 ] ⇔ K ≥ ln ÷ ln(ν) = 1.997304
1000
It follows that
9
X 1 1
Pr [Z1 ≤ E [Z1 ]] = Pr [1.997304 ≤ K ≤ 9] = Pr [{K = 2, 3, ..., 9}] = = .
80 10
k=2

Then,Pr [Z1 > E [Z1 ]] = 0.9.

To compute Pr [Z2 > E [Z2 ]], we recall the definition of Z2 , i.e.,

 1000ν K+1 , if K = 0, 1, ..., 19



Z2 = (5.14)
0, if K = 20, 21, ..., 79,


(5.15)
It follows that
h \ i
Pr [Z2 > E [Z2 ]] = Pr {1000ν K+1 > E [Z2 ]} {K = 0, 1, ..., 19}
h \ i
= Pr {K < 22.50605} {K = 0, 1, ..., 19}
= Pr [{K = 0, 1, ..., 19}]
19
X 20
=
80
k=0
= 0.25.

51
 e) The covariance Cov (Z1 , Z2 ) is defined as follows

Cov (Z1 , Z2 ) = E (Z1 Z2 ) − E (Z1 ) E (Z2 ) .

The product Z1 Z2 is given by

10002 ν 2K+2 , if K = 0, 1, ..., 9







Z1 Z2 = 2000000ν 10 ν K+1 , if K = 10, 11, ..., 19 (5.16)




0, if K = 20, 21, ..., 79,


(5.17)

It follows that
2 19
1 − ν 20
2ν
X 1
E (Z1 Z2 ) = 1000 + 2000000 ν 10 ν k+1
80 1 − ν 2 80
k=10
ν 2 1 − ν 20 2000000 11 1 − ν 20
= 10002 + ν
80 1 − ν 2 80 1 − ν 10
= 28859.84 + 12140.61
= 41000.45.

Hence,
Cov (Z1 , Z2 ) = 41000.45 − 751.5078 × 106.4195 = −38974.63.

• Question 25
We are given that the mortality is De Moivre with ω = 100, and that i = 10%. Consider
Z1 the present value random variable of an 20-year endowment insurance with benefit of
$1000 payable at the end of the year of death issued to (20). Consider Z2 , the present
value random variable of a 10-year deferred insurance with benefit of $1000, issued to the
same insured aged 20.

a) Define Z1 and Z2 .
b) Compute E [Z1 ] and E [Z2 ] .
c) Compute V ar [Z1 ] and V ar [Z2 ] .
d) Compute Pr [Z1 > E [Z1 ]] and Pr [Z2 > E [Z2 ]] .
e) Compute Cov (Z1 , Z2 ) .

Solution:

a) The PV r.v. Z1 is given by

 1000ν K+1 , if K = 0, 1, ..., 19



Z1 = (5.18)
1000ν 20 , if K = 20, 21, ..., 79,


52
 and Z2 is

 0, if K = 0, 1, ..., 9
Z2 = (5.19)
1000ν K+1 , if K = 10, 11, ..., 79,


(5.20)

(b) The APV E [Z1 ] is given by

19
X
E [Z1 ] = 1000 ν k+1 P r(K(20) = k) + 1000ν 20 P r(K(20) ≥ 20)
k=0
19
X 1
= 1000 + 1000ν 20 P r(T (20) ≥ 20)
ν k+1
80
k=0
19 Z 80
1 X k+1 1
= 1000 ν + 1000ν 20 dt
80 20 80
k=0
ν 1 − ν 20 60
= 1000 + 1000ν 20
80 1 − ν 80
= 217.9023

and E [Z2 ]

79
X
E [Z2 ] = 1000 ν k+1 P r(K(20) = k)
k=10
79
X 1
= 1000 ν k+1
80
k=10
79
1 X
= 1000 ν k+1
80
k=10
ν ν 10 − ν 80
= 1000
80 1 − ν
= 48.13189

c) Compute V ar [Z1 ] is as follows

V ar [Z1 ] = E (Z1 )2 − (E [Z1 ])2 .

 

The second moment is given using the rule of the moments. Recall that

ν 1 − ν 20 60
E [Z1 ] = 1000 + 1000ν 20 .
80 1 − ν 80
It follows that
ν 2 1 − ν 40 60
E (Z1 )2 = 10002 + 10002 ν 40
 
80 1 − ν 2 80
= 74779.83.

53
 Then,
V ar [Z1 ] = 74779.83 − (217.9023)2 = 27298.42.
The variance V ar [Z2 ] is defined as follows
V ar [Z2 ] = E (Z2 )2 − (E [Z2 ])2 .
 

The second moment is given by

ν 2 ν 20 − ν 160
E (Z2 )2 = 10002
 
80 1 − ν
= 8847.821
. The variance is
V ar [Z2 ] = 8847.821 − (48.13189)2 = 6531.142.

d) Recall that
1000ν K+1 , if K = 0, 1, ..., 19


Z1 = (5.21)
1000ν 20 = 148.6436, if K = 20, 21, ..., 79,


and E [Z1 ] = 217.9023. Since 1000ν 20 = 148.6436 ≤ E [Z1 ] = 217.9023, we write

h \ i
Pr [Z1 > E [Z1 ]] = Pr {1000ν K+1 ≤ E [Z1 ]} {K = 0, 1, ..., 19} .

Note that
 
K+1 E [Z1 ]
1000ν > E [Z1 ] ⇔ K < ln ÷ ln(ν) − 1 = 14.98684
1000
It follows that
14
X 1 15
Pr [Z1 > E [Z1 ]] = Pr [K < 14.98684] = Pr [{K = 2, 3, ..., 9}] = = .
80 80
k=0

To compute Pr [Z2 > E [Z2 ]], we recall the definition of Z2 , i.e.,


 0, if K = 0, 1, ..., 9
Z2 = (5.22)
1000ν K+1 , if K = 10, 11, ..., 79,


(5.23)
It follows that
h \ i
Pr [Z2 > E [Z2 ]] = Pr {1000ν K+1 > E [Z2 ]} {K = 10, 11, ..., 79}
h \ i
= Pr {K < 40.87179} {K = 10, 11, ..., 79}
= Pr [{K = 0, 1, ..., 40}]
40
X 1
=
80
k=0
41
=
80

54
 e) The covariance Cov (Z1 , Z2 ) is defined as follows

Cov (Z1 , Z2 ) = E (Z1 Z2 ) − E (Z1 ) E (Z2 ) .

The product Z1 Z2 is given by



 0, if K = 0, 1, ..., 9



Z1 Z2 = 10002 ν 2K+2 , if K = 10, 1, ..., 19 (5.24)




10002 ν 20 ν K+1 , if K = 20, 21, ..., 79,


(5.25)

It follows that
19
X 79
X
2 2k+2
E(Z1 Z2 ) = 1000 ν P r(K = k) + 10002 ν 20 ν k+1 P r(K = k)
k=10 k=20
19 79
!
10002 X X
= ν 2k+2 + ν 20 ν k+1
80
k=10 k=20
9 59
!
10002 X X
= ν 22 ν 2k + ν 41 νk
80
k=0 k=0
10002 1 − ν 20 60
 
41 1 − ν
= ν 22 + ν
80 1 − ν2 1−ν
= 10285.46

Then,
Cov (Z1 , Z2 ) = 10285.46 − 217.9023(48.13189) = −202.5895

• Question 26
A discrete whole life insurance compensates for inflation. The benefit, is increasing with
the force of inflation, which is λ = 4%. The initial benefit is $1,000 and we assume a
constant force of mortality µ. Find E [Z] and V ar [Z] if the force of interest is δ = 10%
and the force of mortality is µ = 4%.
Solution:
The present value r.v. Z is given in terms of inflation rate π as follows

Z = 1000(1 + π)K ν K+1 ,

where π is linked to the force of inflation λ and we have

1 + π = eλ .

It follows that
Z = 1000eλK e−δ(K+1) .
We can write Z as
Z = 1000e−λ e−(δ−λ)(K+1) .

55
 It implies that this special insurance is similar to a discrete whole life insurance that pays
1000e−λ at the end of the year of death but using a new force of interest: instead of δ, we
use δ − λ. Then, we find E(Z) and V (Z)
∞
X
E(Z) = 1000e−λ e−(δ−λ)(k+1) P r(Kx = k)
k=0
∞
X
= 1000e−λ e−(δ−λ)(k+1) e−kµ (1 − e−µ )
k=0
∞
X
−λ −µ −δ−λ
= 1000e (1 − e )e e−k(δ+µ−λ)
k=0
− e−λ (1 e−µ )e−δ+λ
= 1000
1 − e−δ−µ+λ
(1 − e−µ )e−δ
= 1000
1 − e−δ−µ+λ
= 372.827.

In order to obtain the second moment, we substitute λ and δ by 2λ and 2δ. It follows that

(1 − e−µ )e−2δ
E(Z 2 ) = 10002
1 − e−2δ−µ+2λ
= 217122.4.

The variance is
V (Z) = 217122.4 − (372.827)2 = 78122.43.

• Question 27
Consider a constant force of mortality λ = 5%, and a force of interest defined as

δ1 = λ, 0 ≤ t ≤ 10
δt = .
δ2 = 2λ, t > 10

a) Define Z1 and Z2 such that E [Z1 ] = A 1 and E [Z2 ] =5| Ax .

x: 15|
b) Compute E[Z1 ] and E[Z2 ].
c) Compute V ar [Z1 ] and V ar [Z2 ].
d) Find Cov [Z1 , Z2 ].
e) Find P [Z1 < E[Z1 ]] and P [Z2 < E[Z2 ]].

Solution:
First, recall that for the exponential model and constant force of interest, we have the
following APV
eλ − 1
Ax = λ+δ ,
e −1
n Ex = e−n(λ+δ) ,
and
eλ − 1  −n(λ+δ)

A1 = 1 − e .
x: n| eλ+δ − 1

56
a) The random variable Z1 is given as follows
 K+1
 ν , if K = 0, 1, ..., 14
Z1 = (5.26)
0, if K = 15, 16, ...,


We define Z2 as

 0, if K = 0, 1, ..., 4
Z2 = (5.27)
ν K+1 , if K = 5, 6, ...,


b) The expected values are

– For the 15-year term insurance, we have the following decomposition

E[Z1 ] = A 1 = A1 + 10 Ex A 1 ,
x: 15| x: 10| x+10: 5|

where
eλ − 1  −10(λ+δ1 )

A1 = 1 − e
x: 10| eλ+δ1 − 1
eλ − 1  
= 2λ 1 − e−20λ
e −1
= 0.3081604,

10 Ex = e−10(λ+δ1 ) = e−20λ = 0.3678794,

and
eλ − 1  −5(λ+δ2 )

A 1 = 1 − e
x+10: 5| eλ+δ2 − 1
eλ − 1  
= 3λ 1 − e−15λ
e −1
= 0.1671608.

Then,
E[Z1 ] = 0.3081604 + 0.3678794(0.1671608) = 0.3696554.
– For the 5-year deferred insurance, we have the following decomposition

E[Z2 ] = 5| Ax
= 5 Ex Ax+5
= 5 Ex A 1 + 10 Ex+5 Ax+10 ,
x+5: 5|

where
eλ − 1  −5(λ+δ1 )

A 1 = 1 − e
x+5: 5| eλ+δ1 − 1
eλ − 1  
= 2λ 1 − e−10λ
e −1
= 0.1918173,

57
 5 Ex = e−5(λ+δ1 ) = e−10λ = 0.6065307,
10 Ex = e−10(λ+δ1 ) = e−20λ = 0.3678794,
and
eλ − 1
Ax+10 =
eλ+δ2 − 1
eλ − 1
= 3λ
e −1
= 0.1671608.

Then,

E[Z2 ] = 0.6065307(0.1918173) + 0.3678794(0.3168124) = 0.2328918.

c) The variances V ar [Z1 ] and V ar [Z2 ] are given as follows

– For policy 1, the seconde moment is

E[Z12 ] =2 A 1 =2 A 1 +2 10 Ex2 A 1 ,
x: 15| x: 10| x+10: 5|

where

2 eλ − 1  −10(λ+2δ1 )

A1 = 1 − e
x: 10| eλ+2δ1 − 1
eλ − 1  
= 3λ 1 − e−30λ
e −1
= 0.246122,
2
10 Ex = e−10(λ+2δ1 ) = e−30λ = 0.2231302,
and

2 eλ − 1  −5(λ+2δ2 )

A 1 = 1 − e
x+10: 5| eλ+2δ2 − 1
eλ − 1  
= 5λ 1 − e−25λ
e −1
= 0.1287972.

Then,
E[Z12 ] = 0.246122 + 0.2231302(0.1287972) = 0.2748605.
The variance is

V [Z1 ] = 0.2748605 − (0.3696554)2 = 0.1382154.

– For policy 2, the seconde moment is

 
E[Z2 ] = 5 Ex 2 A 1
2 2
+2 10 Ex+5 2


Ax+10 ,
x+5: 5|

58
 where

2 eλ − 1  −5(λ+2δ1 )

A 1 = 1 − e
x+5: 5| eλ+2δ1 − 1
eλ − 1  
= 3λ 1 − e−15λ
e −1
= 0.1671608,
2
5 Ex = e−5(λ+2δ1 ) = e−15λ = 0.4723666,
2
10 Ex = e−10(λ+2δ1 ) = e−30λ = 0.2231302,
and
eλ − 1
Ax+10 =
eλ+2δ2 − 1
eλ − 1
= 5λ
e −1
= 0.1805159.

Then,

E[Z22 ] = 0.4723666(0.1671608) + 0.2231302(0.1805159) = 0.1192397.

Then, we obtain the variance

V [Z2 ] = E[Z22 ] − (E[Z2 ])2 = 0.1192397 − (0.2328918)2 = 0.06500111.

d) The covariance Cov [Z1 , Z2 ] is

Cov [Z1 , Z2 ] = E [Z1 Z2 ] − E[Z1 ]E[Z2 ],

The product of the two present values is as follows



 0, if K = 0, 1, ..., 4



Z1 Z2 = ν 2(K+1) , if K = 5, 6, ..., 14 (5.28)





0, if K = 15, 16, ...,

Then,
   
2 2 2 2
E [Z1 Z2 ] = 5 Ex A 1 + 10 Ex A 1
x+5: 5| x+10: 5|
= 0.4723666(0.1671608) + 0.2231302(0.1287972)
= 0.1076997.

Hence,

Cov [Z1 , Z2 ] = 0.1076997 − 0.3696554(0.2328918) = 0.02160999.

59
e) The rv Z1 is defined as
 K+1
 ν , if K = 0, 1, ..., 14
Z1 = (5.29)
0, if K = 15, 16, ...,


It follows that

P [Z1 < E[Z1 ]] = P ν K+1 < E[Z1 ], K = 0, 1, ..., 9 + P ν K+1 < E[Z1 ], K = 10, ..., 14
   
h i
= P e−δ1 (K+1) < E[Z1 ], K = 0, 1, ..., 9
h i
+ P e−10δ1 e−δ2 (K−9) < E[Z1 ], K = 10, ..., 14
h i
= P e−λ(K+1) < 0.3696554, K = 0, 1, ..., 9
h i
+ P e−10λ e−2λ(K−9) < 0.3696554, K = 10, ..., 14
 
ln(0.3696554)
= P K>− − 1, K = 0, 1, ..., 9
λ
ln(e10λ 0.3696554)
 
+ P K>− − 1, K = 10, ..., 14
2λ
= P [K > 18.90368, K = 0, 1, ..., 9] + P [K > 3.951841, K = 10, ..., 14]
= P [K = 10, ..., 14]
= P [10 ≤ T < 15]
= e−10λ − e−15λ
= 0.1341641.

Z2 is given as

 0, if K = 0, 1, ..., 4
Z2 = (5.30)
ν K+1 , if K = 5, 6, ...,


60
 0:2328918

P [Z2 < E[Z2 ]] = P ν K+1 < E[Z2 ], K = 5, 6, ...

 
h i
= P e−δ1 (K+1) < E[Z2 ], K = 5, 6, ..., 9
h i
+ P e−10δ1 e−δ2 (K−9) < E[Z2 ], K = 10, 11, ...,
h i
= P e−δ1 (K+1) < 0.2328918, K = 5, 6, ..., 9
h i
+ P e−10δ1 e−δ2 (K−9) < 0.2328918, K = 10, 11, ...,
 
ln(0.2328918)
= P K>− − 1, K = 5, 6, ..., 9
λ
ln(e10λ 0.2328918)
 
+ P K>− − 1, K = 10, 11..
2λ
= P [K > 28.14363, K = 0, 1, ..., 9] + P [K > 8.571813, K = 10, 11, ...]
= P [K = 10, 11, ...]
= P [10 ≤ T ]
= e−10λ
= 0.6065307.

• Question 28
You have the following information: A 1 = 0.2, 33 px−4 = 0.665, 4 px−4 = 0.950, i = 5%.
x: 29|
Compute the value of a 30-year endowment insurance issued to (x) .
Solution:
Let Z be the present value r.v. of a 30-year endowment insurance issued to (x) . We have
 K+1
 ν , if Kx = 0, 1, ..., 29
Z= (5.31)
ν 30 , if Kx = 30, 31, ...,


That is equivalent to
 K+1
 ν , if Kx = 0, 1, ..., 28
Z= (5.32)
ν 30 , if Kx = 29, 30, ...,


We define the r.v. Z1 as

 K+1
 ν , if Kx = 0, 1, ..., 28
Z1 = (5.33)
0, if Kx = 29, 30, ...,


Z1 is the present value of a 29-year term insurance. It follows that

E(Z) = E(Z1 ) + ν 30 P r(Kx ≥ 29).

We know that
E(Z1 ) = A 1 = 0.2,
x: 29|

61
 and
P r(Kx ≥ 29) = P r(Tx ≥ 29) = 29 px .
The survival probability 29 px is obtained from

33 px−4 = 4 px−4 · 29 px .

It follows that
33 px−4 0.665
E(Z) = A 1 + (1 + i)−30 = 0.2 + 1.05−30 = 0.3619642
x: 29| 4 px−4 0.950

• Question 29
An insurance pays $500 at the end of the year of death if the insured, today aged x, dies
before having attained age x + 15. Otherwise, at the end of the 15 years, this insurance
pays $1000 and reimburses the single benefit premium to the insured. Compute the value
of this insurance if the mortality is De Moivre with ω = x + 30, and i = 10%.
Solution:
Let Z be the present value r.v. of this special insurance and Z1 the present value r.v. of
15-term insurance that pays $500 at the end of the year of death if the insured, today aged
x, dies before having attained age x + 15. We have

 500ν K+1 , if Kx = 0, 1, ..., 14



Z1 = (5.34)
0, otherwise ,


and
500ν K+1 , if Kx = 0, 1, ..., 14


Z= (5.35)
(1000 + E(Z))ν 15 , if Kx = 15, 16, ..., ω − x − 1 = 29.


It follows that E(Z) is

E(Z) = E(Z1 ) + (1000 + E(Z))ν 15 P r (Kx ≥ 15) ,

i.e
E(Z1 ) + ν 15 P r (Kx ≥ 15)
E(Z) = ,
1 − ν 15 P r (Kx ≥ 15)
Tx ∼ U nif (0, ω − x = 30) then

1 1
P r (Kx = k) = = .
ω−x 30
It follows that
ω−x−1 29
X X 1 14
P r (Kx ≥ 15) = P r (Kx = k) = = ,
30 30
k=15 k=15

62
 and
14
X
E(Z1 ) = 500ν k+1 P r (Kx = k)
k=0
14
X 1
= 500ν k+1
30
k=0
500 1 − ν 15
=
30 i
= 126.768.

We obtain
E(Z) = 268.4776.

• Question 30
A special whole life insurance pays a benefit of $10 at the end of the year of death if death
occurs during the 1st, 3rd, 5th, 7th, ... year, and pays a benefit of $20 payable at the
moment of death if death occurs during the 2nd, 4th, 6th, 8th, ... year. The mortality is
De Moivre with ω = 100. Define the actuarial present value random variable and compute
the single benefit premium of this insurance issued to (20), if δ = 0.05.

• Question 31
The mortality is De Moivre with ω = 102, and the effective interest rate is i = 0.10.
A person aged 95 wants to buy a 1-year deferred life insurance with a death benefit of
bt = (1000 − t2 ) payable at the end of the year of death.

(a) Define the present value random variable Z for this special contract.
(b) Find the probability function of Z.
(c) Find the expected and the variance of Z.

Solution:

(a) The present value random variable Z for this special contract is given by


 0, if K95 = 0,
Z= 2
(5.36)
 1000−K

K +1 ,
95
if K95 = 1, 2, 3, 4, 5, 6.
(1+i) 95

(b) The probability function of Z is as follows

z P r(Z = z)
0 P r(K95 = 0) = 1 ÷ 7 = 0.1428571
825.6198 P r(K95 = 1) = 1 ÷ 7 = 0.1428571
748.3095 P r(K95 = 2) = 1 ÷ 7 = 0.1428571
676.8663 P r(K95 = 3) = 1 ÷ 7 = 0.1428571
610.9866 P r(K95 = 4) = 1 ÷ 7 = 0.1428571
550.3621 P r(K95 = 5) = 1 ÷ 7 = 0.1428571
494.6844 P r(K95 = 6) = 1 ÷ 7 = 0.1428571

63
 (c) The expected of Z is
X
E(Z) = zP r(Z = z) = 558.1184.
The variance of Z is given by
V ar(Z) = E(Z 2 ) − (E(Z))2 ,
where X
E(Z 2 ) = z 2 P r(Z = z) = 374382.7.
Then,
V ar(Z) = E(Z 2 ) − (E(Z))2 = 374382.7 − (558.1184)2 = 62886.55.

• Question 32
Consider a portfolio composed of a very large number of policies, where each policy has an
expectation of $2, and a standard deviation of $2. We observe that a fund constituted of
140% of the value of all the single net premiums is needed in order to cover the claims in
94.5% of the times. We also know that Φ (1.6) = 0.945. If the standard deviation of every
policy increases to $3, what would be the new surcharge (per policy) needed so that the
funds provides the same protection to the insurer?
Solution:
Let n be the size of this portfolio and S the aggregate loss amount to be paid for the whole
portfolio. We also denote by Zi , i = 1, 2, ..., n, the individual risk for each contract. Then,
we have
Xn
S= Zi ,
i=1
where Zi are i.i.d. with Zi ∼ Z. The variance of S is given by V (S) = nV (Z).
Let θ be the surcharge per policy then the amount of premiums collected by the insurer is
n
X
P = (1 + θ)E(Zi ) = n(1 + θ)E(Z).
i=1

The current surcharge per policy is 40% and we have

P r (S ≤ 1.4nE(Z)) = 94.5.
Using the normal approximation, we find
 
S − nE(Z) 0.4nE(Z)
Pr √ ≤√ = 94.5 = Φ (1.6) ,
nstd(Z) nstd(Z)
where std(Z) = 2 is the standard deviation of Z. Then, we find
√
0.4nE(Z) 0.4 nE(Z)
√ = = 1.6,
nstd(Z) std(Z)
the new surcharge per policy θ needed so that the funds provides the same protection to
the insurer is as follows √
θ nE(Z)
= 1.6,
3
then,
3
θ = 0.4 × = 1.5 ∗ 0.4 = 0.6
std(Z)

64
• Question 33
Find Ax: 20| , if we suppose a uniform distribution of deaths (U DD) over each year of age,
and given the following information: Ax = 0.161365, 20 px = 0.879182, 20| Ax = 0.101171,
i = 0.06.
Solution:
Note that
i
Ax: 20| = A1x: 20| + 20 Ex ,
δ
where
1
20 Ex = 20 px = 0.2741331,
(1 + i)20
and A1 is given by
x: 20|

A1x: 20| = Ax − 20| Ax = 0.161365 − 0.101171 = 0.060194.

Thus,
0.06
Ax: 20| = 0.060194 + 0.2741331 = 0.3361154.
ln(1.06)
• Question 34
For a whole life insurance of 1000 on (80), with death benefits payable at the end of the
year of death, you are given:
– Mortality follows a select and ultimate mortality table with a one-year select period.
– q[80] = 0.5q80
– i = 0.06
– 1000A80 = 679.80
– 1000A81 = 689.52
Calculate 1000A[80]
Solution:
We have the following recursive relationship
Ax = νqx + νpx Ax+1 .
For select table, we have
A[x] = νq[x] + νp[x] A[x]+1 .
We have a one-year select table, then
A[x]+1 = Ax+1 .
It follows that
1
1000A[80] = 1000νq[80] + νp[80] A81 = 1000 (0.5q80 + (1 − p80 )A81 ) .
1+i
We use
A80 = νq80 + νp80 A81
to find q80 . Hence,
A80 − νA81
q80 = = 0.01838865.
ν(1 − A81 )
We obtain,
1000A[80] = 647.2028.

65
• Question 35
Two life insurance policies to be issued to (40) are actuarially equivalent:

– A whole life insurance of 10 payable at the end of the year of death.

– A special whole life insurance, also payable at the end of the year of death, that pays
5 for the first 10 years and B thereafter.

You are given:

1. 10A40 = 3.0
2. 10A50 = 3.5
3. 10A1 = 0.9
40::10|
4. 10 E40 = 0.6

Calculate the value of B.

Solution:
These two life insurances are equivalent then the APV for the second insurance must satisfy

AP V = 10A40 .

Note that the second insurance is similar to 10-year term insurance that pays 5 at the end
of the year of death plus a 10-year deferred insurance that pays B at the end of the year
of death. It follows that

AP V = 5A140::10| + B 10 E40 A50 = 10A40 .

We obtain
10A40 − 5A1
40::10|
B= = 12.14286
10 E40 A50

• Question 36
Each of 100 independent lives purchases a 5-year deferred whole life insurance of 10 payable
at the moment of death. You are given: µ = 0.004 and δ = 0.006. Let F be the aggregate
amount the insurer receives from the 100 lives. Using a Normal approximation, calculate
F such that the probability the insurer has sufficient funds to pay all claims is 0.95.
Solution
Let Zi be the present value of each contract and S the aggregate amount to be paid for
the whole portfolio. We have
X100
S= Zi ,
i=1

F is such that the probability the insurer has sufficient funds to pay all claims is 0.95, i.e.

P R(S ≤ F ) = 0.95.

The r.vs Zi are i.i.d then,

100
X
E(S) = E(Zi ) = 100E(Z),
i=1

66
and
100
X
V (S) = V (Zi ) = 100V (Z).
i=1

Z is the present value r.v. for a 5-year deferred whole life insurance of 10 payable at the
moment of death. It follows that
µ
E(Z) = 10e−5(δ+µ) = 3.804918,
µ+δ
and
µ
E(Z 2 ) = 102 e−5(2δ+µ) = 23.07791.
µ + 2δ
Then,
V (Z) = 23.07791 − (3.804918)2 = 8.600509.
It follows that
E(S) = 100E(Z) = 380.4918
and
V (S) = 100V (Z) = 860.0509
Using the normal approximation, we find
!
F − E(S)
P r(S ≤ F ) = P r Y ≤ p = 0.95,
V (S)

where Y ∼ N (0, 1). Hence,

F − E(S)
p = Φ−1 (0.95) = 1.644854.
V (S)

We obtain,
F = Φ−1 (0.95)
p
V (S) + E(S) = 428.7298.

67