1

Financial Nodelling
Survival Nodels Extract
Survival Nodels
Binomial and Poisson Nodels
Estimating the Mortality Rate
This leads to the estimate for the mortality rate of:



|
N
i
N
i
x i i x i
q b d q a D E
1 1
1 1 1 | [

x
x
N
i
N
D i
i i
x
E
d
b a
d
q
i

1 0 :
1 1
`
The denominator is the initial exposed-to-risk , E
x
E
x
counts each death as being at risk until the end of
the year of age
Survival Nodels
Exposed to Risk
The Principle of Correspondence
We need deaths and exposures to be defined
consistently
The principle of correspondence states that:
a life alive at time t should be included in the exposure
at age x at time t if and only if, were that life to die
immediately, he or she would be counted in the death
data d
x
at age x
This means the age definition used in calculating the
number of deaths must be the same as the age
definition used in calculating the exposed to risk
Exact Calculation of Central Exposed to Risk
1. All dates of birth
2. All dates of entry into the observation
3. All dates of exit from the observation
!f we have the cause of the exit from of
observation we can also calculate d
x
(and hence the initial exposure)
c
x
E To calculate exactly we need:
2
Exact Calculation of Central Exposed to Risk
{cont'd)
Date A is the latest of:
- the date of reaching age label x
- the start of the investigation
- the date of entry
Date B is the earliest of:
- the date of reaching age label x + 1
- the end of the investigation
- the date of exit
We need to allow for leap years and only count
either the date of entry or the date of exit
c
x
E Then for a life with age label x is the time from
date A to date B where:
Survival Nodels
Nethods of Graduation
Graduation by Parametric Formula
To obtain the parameters we can
- maximise the likelihood
- minimise the
2
statistic
- minimise the value of least squares
We should also consider
- information from other investigations
- statistical methods are not sufficient
- check results against previous knowledge
- potential financial risks
- life cover don't underestimate mort (annuities ?)
- trends in mortality rates
- looking at the future, adjust past rates accordingly
Graduation by Parametric Formula
The graduation process:
1. select a graduation formula
2. determine the parameter values
3. calculate graduated rates
+. perform statistical tests
Chi-square test
Testing crude rates against standard table rates for m age
groups, the
2
-statistics have a
2
distribution with m degrees
of freedom
!t is important to note that the data on which the observed
deaths are based is not the same as the data on which the
expected deaths are based.
!n testing adherence of a graduation this is not the case - we
calculate the expected deaths using the graduated rates
which are based on the observed deaths
!n this case the
2
-statistic still has the same form:

m x
x x
x
o
x
o
x
x
o
x x
q q E
q E d
1
) 1 (
) (
2

m x
x x
x
o
c
x
x
o
c
x x
E
E d
1
2
1
2
1
2
) (
P
P
or
but reducing the degrees of freedom:
- by 1 for each parameter fitted (parameterised grad or std table)
- by an appropriate amount for `constraints' in fitting to standard table
- by `some' for graphical graduation
Survival Nodels
Graduation and Statistical Tests
3
Graduation and Statistical Tests
!n practice a mortality investigation will
provide data for all ages, not just for single
year of age (x, x+1)
We will use these crude, unadjusted rates to
derive smoothed mortality rates at each age
The smoothing process will remove random
sampling errors and improve the reliability of
the rates
The process of smoothing is called
graduation.
Features of a graduation
We desire certain features of a graduation:
- smoothness
- adherence to data (aka goodness of fit)
- suitability for the purpose in hand
Smoothness and adherence to data are usually
conflicting requirements
Rates that are smooth but show little adherence to
data are said to be overgraduated
Rates that have good adherence to data but are
insufficiently smooth are said to be undergraduated
The `art' is finding a satisfactory compromise
Standardised Deviations
Under the Binomial model we define the deviation at
age x as:
Actual deaths - Expected deaths
s
x x x
q E d
x
o
x x
q E d
) 1 (
s
x
s
x x
s
x x x
x
q q E
q E d
z

) 1 (
x
o
x
o
x
x
o
x x
q q E
q E d

or
and the (individual) standardised deviation is
or
!f we have sufficient independent lives at each age x,
we can assume, by CLT, that z
x
~ Normal(0,1)
and all the z
x
's at different ages are mutually
independent
Chi Square {
2
) Test
The test statistic is assumed to have a

2
distribution with degrees of freedom as
follows:
- m, the number of age groups that we are
considering, if we are comparing the experience
with a standard table
- a figure less than m if we are testing the
adherence to data of a graduation
We test X against the upper 5 percentage
point of the relevant
2
distribution. The test
fails if X is greater than this value.
There should be an expected frequency of at
least 5 in each class interval
2

x all
x
z X
Standardised Deviations Test
This test is used to check whether there are a
number of excessively large deviations
...under the hypothesis that each z
x
~Normal(0,1)
We look at how many of the m z
x
's fall into
various possible intervals and test for normality
e.g. with eight possible intervals for the z
x
's we
would expect the number of z
x
's in each interval to
be as follows:
!nterval (-,-3) (-3,-2) (-2,-1) (-1,0) (0,1) (1,2) (2,3) (3, )
Expected
number
0 0.02m 0.1+m 0.3+m 0.3+m 0.1+m 0.02m 0

Standardised Deviations Test

We are testing the observed number of z
x
's in
each interval against the expected number

x
E
E A
X
2
Nore formally, we can look at
...which will have a
2
distribution with the
degrees of freedom equal to the number of
intervals less 1 (eg 7 in the previous example)
!f the number in each interval is small, group
together
Looking at the standardised deviations is a
good all round test for most problems