Chapter 5

Fully Continuous Net

Annual Premium

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima

Fully Continuous Net Annual Premium
• Fully continuous means that both the insurance benefit and the
premium payment are continuous.

• The basic benefit is payable at the moment of death and the premium
payment are made continuously.

• We denote, 𝜋 = Net Annual Premium (NAP)

where, 𝑃ത = for continuous case
𝑃 = for discrete case

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima

Fully Continuous Net Annual Premium
By looking from insurer / Insurance side,
Profit = Annual Premium Collected – Benefit paid
Indication:
Positive value = Gain (more money comes in)
Negative value = Loss (more money pay out)
Loss = Benefit paid - Annual Premium Collected
Indication:
Positive value = Loss (more money pay out)
Negative value = Profit (more money come in)
ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima
Fully Continuous Net Annual Premium
• We denote 𝐿 𝜋 = A random variable representing loss-at-issues (at
time 0) where 𝜋 is the NAP.
• 𝐿 𝜋 = Present value of $1 benefit – Present value of premium (𝜋)
payable continuously.
𝐿 𝜋 = 𝑉 𝑡 − 𝜋(𝑎ത𝑡ഥȁ )

How to solve for π?

• Using equivalence Principal.
• Under this principle the present value of benefit equal to PV of
NAP. If these two value are same, we assume/expect no loss occur
or value of loss = 0
ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima
Fully Continuous Net Annual Premium
Assumption:
𝐸 𝐿 =0
𝐸 𝐿 = 𝐸 𝑣 𝑡 − 𝐸 𝜋ഥ
𝑎𝑡ഥȁ = 0
𝐸 𝑍𝑡 − 𝜋𝐸 𝑌 = 0
𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 − 𝜋 𝐿𝑖𝑓𝑒 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 = 0
𝐴ҧ − 𝜋𝑎ത = 0
𝐴ҧ
𝜋=
𝑎ത
𝜋 = 𝑃ത
𝜋 = Net Annual Premium (NAP)
= the premium that gives you an average or
expected value of loss = 0
= accurate amount of premium

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima

Fully Continuous Net Annual Premium
Recall: NSP
Net Single Premium = 𝐸[𝑃𝑉 𝑜𝑓 𝑓𝑢𝑡𝑢𝑟𝑒 𝑏𝑒𝑛𝑒𝑓𝑖𝑡]
Value of future benefit = Amount of premium have to pay at time (0) in a lump sum
or single amount.
= 𝐸[𝑏𝑡 𝑣 𝑡 ]
= 𝐸 𝑍𝑡
= 𝐴𝑐𝑡𝑢𝑎𝑟𝑖𝑎𝑙 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝒐𝒓 𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima

Fully Continuous Net Annual Premium
Example:
Suppose 𝑃ത = 0.05 and 𝑖 = 0.06
The loss function:
𝐿 𝑡 = 𝑣 𝑡 − 0.05𝑎ത𝑡ഥȁ = 1.06 −𝑡 − 0.05𝑎ത𝑡ഥȁ
+ve value = Loss
For 𝑡 = 1 (means that if death occur at time 1):
𝐿 1 = 𝑣 1 − 0.05𝑎ത1ഥȁ = 1.06 −1 − 0.05𝑎ത1ഥȁ = 0.8948
What this say is that for 𝑡 = 1, you (insurer) have a loss of $0.8948. You only
received 1 year premium (0.05 paid continuously) but paid out $1 at time 1.

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima

1. $1 Whole Life Insurance on (x)
ത 𝐴ҧ𝑥 ).
• NAP for $1 WL Insurance on (𝑥) = 𝑃(

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima

Example2
Let the remaining lifetime at birth random variable 𝑋 be uniform on
[0,100] and 𝛿 = 0.05. Find 𝑃(ത 𝐴ҧ30 ).

Example 3
Let the remaining future lifetime of birth random variable be
exponential with 𝜇 = 0.04 and let 𝛿 = 0.06. Find 𝑃(ത 𝐴ҧ𝑥 ) and 𝑉[𝐿].

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima

 2. $1 n-year Endowment Insurance on (x)
• For this insurance, the benefit is an n-year endowment insurance and the
payments are made as a continuous n-year temporary annuity.
• 2 possibilities:

𝑑𝑒𝑎𝑡ℎ & $1 𝑝𝑎𝑦𝑎𝑏𝑙𝑒

$1 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
𝑑𝑒𝑎𝑡h
𝜋 𝜋 𝜋 …… 𝜋 𝜋 𝜋 𝜋 …… 𝜋

Age: 𝑥 𝑥+1 𝑥+2 𝑥 + 𝑡 …… 𝑥 + 𝑛 Age: 𝑥 𝑥+1 𝑥+2 𝑥 + 𝑛 …… 𝑥 + 𝑡

Time: 0 Time: 0
𝜋 𝑠𝑡𝑜𝑝 𝜋 𝑙𝑎𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
𝑡 𝑛
𝐿 = 𝑣 − 𝜋𝑎ത𝑡ҧȁ 𝐿 = 𝑣 − 𝜋𝑎ത𝑛ത ȁ

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima
Example 4
Suppose L is a present value random variable loss-at-issue of a
$20,000 25-year endowment insurance on (30). Assuming mortality
follows De’Moivre law with 𝜔 = 100 and that 𝛿 = 0.1, Find V[L].

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima

ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima
ASC425 Actuarial Mathematics/PPSA FSKM/Shnazatulshima