Life Contingencies and life table

Long Term Actuarial Math

By
Mr. Ghulam Nabi
Lecturer CSAS, PU
 2 Whole life assurance contracts

• We begin by looking at the simplest

assurance contract, the whole life assurance,
which pays the sum assured on the
policyholder’s death. For the moment we
ignore the premiums which the policyholder
might pay.
• We will use this simple contract to introduce
important concepts, in particular the expected
present value (EPV) of a payment contingent
on an uncertain future event.
• We
  will then apply these concepts to other types
of life insurance contracts.
• In mathematics of finance, the present value at
time 0 of a payment of 1 to be made at time t is
t
0

  𝑡
𝑉

• Suppose, however, that the time of payment is not

certain but is a random variable, say H .
• Then the present value of the payment is , which
is also a random variable.
• A whole life assurance benefit is a payment of this
type.
 Question 1.2
• Why is the time to payment a random
variable?
 2.1 Present value random variable

• For the moment we will introduce two

conventions, which can be relaxed later on.
• Convention 1: we suppose that we are
considering a benefit payable to a life who is
currently aged x , where x is an integer.
• Convention 2: we suppose that the sum
assured is payable, not on death, but at the end
of the year of death (based on policy year).
• These will not always hold in practice, of course, but
they simplify the application of life table functions.
•  
• Under these conventions we see that the
whole life sum assured will be paid at time
Kx + 1, where Kx denotes the curtate random
future lifetime of a life currently aged x .
• Let the sum assured be S , then the present
value of the benefit is S, a random variable.
 2.2 The expected present value

• Since
  Kx is discrete random variable with a whole
number value:
• As E(X) =

• Here the value of Kx = K

• We can also express this in terms of p and q
(survival and death probability) notation.
• Question
  1.3
• Explain the formula given above in previous
slide, by general reasoning.
• Question 1.4
• What is E [t an interest rate of 0%?
 Actuarial notation for the expected
present value
• E
  [ is the expected present value (EPV) of a
sum assured of 1, payable at the end of the
year of death.
• Such functions play a central role in life
insurance mathematics and are included in
the standard actuarial notation. We define:
• If the sum assured is S , then the EPV of
the benefit is S Ax .
• Values of Ax at various rates of interest are
tabulated in (for example) AM92, which
can be found in “Formulae and Tables for
Examinations”.
• Example
Find A40 (AM92 at 6%).
Solution
• 0.12313
 Question 1.5
• What are A30 and A70 , based on the mortality of
AM92 (Ultimate) at 6% pa interest?
• Comment on the relative values of these two
figures.
 2.3 Variance of the present value
random variable
• var[X
  ] = E(-
• for any random variable X , and:
• var[g(X) ] = E(-
• Turning now to the variance of , we
have:
• var[ ] = E(-
• This can also be written as:
• The
  “trick” used here is to notice that is the same
as , except that we have replaced v by . So we are
effectively using a new interest rate ( i *, say) for
which
• v* = , ie
• =( If we invert this equation and subtract 1, we
find that the new interest rate required is i* = (-1.
• So provided we can calculate EPVs at any
rates of interest, it is easy to find the
variance of a whole life benefit.
• Note that:

• Values of are tabulated at various rates

of interest in (for example) AM92“Formulae
and Tables for Examinations”.
 Question 1.6
• Claire, aged exactly 30, buys a whole life
assurance with a sum assured of £50,000
payable at the end of the year of her death.
Calculate the standard deviation of the present
value of this benefit using AM92 Ultimate
mortality and 6% pa interest.