Chapter 3: Survival Distributions and Life Tables

Distribution function of X: FX (x) = Pr(X x) Survival function s(x): s(x) = 1 FX (x) Probability of death between age x and age y: Pr(x < X z) = FX (z) FX (x) = s(x) s(z) Probability of death between age x and age y given survival to age x: Pr(x < X z|X > x) = = Notations:
t qx

Force of mortality (x): (x) = fX (x) 1 FX (x) s (x) = s(x)

Relations between survival functions and force of mortality: x s(x) = exp

n px

(y)dy
0 x+n

= exp
x

(y)dy

FX (z) FX (x) 1 FX (x) s(x) s(z) s(x)

Derivatives: d t qx dt d t px dt d Tx dt d Lx dt d x e dt =
t px

(x + t) = fT (x) (t)

= t px (x + t) = lx = dx = (x)x 1 e

= Pr[T (x) t] = prob. (x) dies within t years = distribution function of T (x)

t px

= Pr[T (x) > t] = prob. (x) attains age x + t = 1 t qx

Mean and variance of T and K: E[T (x)] complete expectation of life

t|u qx

= Pr[t < T (x) t + u] = = =

t+u qx t px t px

t qx
t+u px

x = e
0

t px dt

u qx+t

E[K(x)] curtate expectation of life

Relations with survival functions:

t px t qx

ex =
k=1

k px

s(x + t) s(x) s(x + t) = 1 s(x) =

V ar[T (x)] = 2
0

t t px dt 2 ex (2k 1) k px e2 x

Curtate future lifetime (K(x) greatest integer in T (x)): Pr[K(x) = k] = Pr[k T (x) < k + 1] = = =
k px k+1 px k px qx+k k| qx

V ar[K(x)] =
k=1

Total lifetime after age x: Tx

Tx =
0

lx+t dt

Exam M - Life Contingencies - LGD c

Total lifetime between age x and x + 1: Lx Lx = Tx Tx+1

1 1

Central death rate: mx mx = lx lx+1 Lx lx lx+n n Lx

=
0

lx+t dt =
0

lx t px dt
n Lx

n mx

Total lifetime from age x to x + n:

n1 n Lx = Tx Tx+n = k=0 n

Fraction of year lived between age x and age x + 1 by dx : a(x)

1

Lx+k a(x) =

t t px (x + t) dt
0 1 t px 0

= (x + t) dt

=
0

lx+t dt

Lx lx+1 lx lx+1

Average lifetime after x: x e x = e Tx lx

Recursion formulas: E[K] = ex = px (1 + ex+1 ) E[T ] = x = px (1 + x+1 ) + qx a(x) e e ex = ex: n + n px ex+n x = x: n + n px x+n e e e E[K (m + n)] = ex: m+n = ex: m + E[T (m + n)] = x: m+n e = x: m + e ex+m: n m px
m px ex+m: n

Average lifetime from x to x + 1: x: 1 e x: 1 e Lx = lx

Median future lifetime of (x): m(x) P r[T (x) > m(x)] = 1 s(x + m(x)) = s(x) 2

Exam M - Life Contingencies - LGD c

Chapter 4: Life Insurance

Whole life insurance: Ax

Discrete whole life: Ax

E[Z] = Ax =
0

v t t px x (t)dt

E[Z] = Ax =
k=0

v k+1 k px qx+k
k| qx

V ar[Z] =

Ax (Ax )2 =

v k+1
k=0
2

n-year term insurance: Ax: n

1

V ar[Z] =

Ax (Ax )2

E[Z] = Ax: n =
1

v t t px x (t)dt
0

Discrete n-year term: A1 n x:

n1

V ar[Z] =

A1 n (A1 n )2 x: x: E[Z] = A1 n = x: v k+1 k px qx+k

k=0

m-year deferred whole life:

m| Ax

V ar[Z] =

Ax: n (A1 n )2 x:
1

E[Z] = m| Ax =
m

v t t px x (t)dt Discrete n-year endowment: Ax: n

n1

1 m| Ax = Ax Ax: m

n-year pure endowment: Ax: n

1

E[Z] = Ax: n =
k=0
2

v k+1 k px qx+k + v n n px

E[Z] = Ax: n = v n px n Ex V ar[Z] = 2Ax:1 (Ax:1 )2 = v 2n n px n qx n n

1

V ar[Z] = Ax: n (Ax: n )2 Ax: n = A1 n + Ax:1 x: n

n-year endowment insurance: Ax: n

n

Recursion and other relations: Ax = A1 n + n| Ax x: 2 Ax = 2A1 n + n|2Ax x: n| Ax = n Ex Ax+n 1 Ax = A + n Ex Ax+n

x: n

E[Z] = Ax: n =
0

v t t px x (t)dt + v n n px

V ar[Z] = 2Ax: n (Ax: n )2 1 Ax: n = Ax: n + Ax:1 n

Ax = vqx + vpx Ax+1 m-yr deferred n-yr term:

m|n Ax m|n Ax

Ax = v 2 qx + v 2 px 2Ax
1 = vqx + vpx Ax+1: n1

A1 n x:
m|n Ax

m Ex

= A1 m+n x: = m| Ax

1 Ax+m: n A1

= vpx = v

(m1)|n Ax+1

x: m

Ax: 1 Ax: 2

m+n| Ax

= vqx + v 2 px

Exam M - Life Contingencies - LGD c

Varying benet insurances:

Interest theory reminder an an = = = = = = = = 1 vn i 1 vn i = an 1 1 1 , a = , a = i d a n nv n i n an 1 2 (Ia) n + (Da) n i iv 1 1+i = 2 id i

(I A)x =
0 n

t + 1 v t t px x (t)dt

(I A)1 n x:

=
0

t + 1 v t t px x (t)dt

a (Ia) n

(IA)x =
0 n

t v t px x (t)dt

(Da) n (Ia) (n + 1)a n s1 (Ia)

(IA)x: n

=
0 n

t v t t px x (t)dt

(DA)1 n x:

=
0 n

(n t )v t t px x (t)dt

d = =

(DA)1 n x:

=
0

(n t)v t t px x (t)dt

(IA)x = Ax + vpx (IA)x+1 = vqx + vpx [(IA)x+1 + Ax+1 ] (DA)1 n x: (IA)1 n x: (I A)1
x: n
1 = nvqx + vpx (DA)x+1: n1

Doubling the constant force of interest 1 + i (1 + i)2 v v2 i 2i + i2 d 2d d2 i 2i + i2 2 Limit of interest rate i = 0: Ax 1 A1 n x:

n| Ax i=0 i=0 i=0 i=0 i=0 i=0

+ (DA)1 n = nA1 n x: x: 1 + (DA)x: n = (n + 1)A1 n x: + (DA)1 n = (n + 1)A1 n x: x:

(IA)1 n x:

Accumulated cost of insurance: A1 n x: n kx = n Ex Share of the survivor: 1 (1 + i)n accumulation factor = = n Ex n px

n qx n px

Ax: n
m|n Ax

1
i=0 m|n qx

(IA)x 1 + ex (IA)x x e

Exam M - Life Contingencies - LGD c

Chapter 5: Life Annuities

Whole life annuity: ax

Recursion relations a t t px (x + t)dt

0

ax = E[ T ] = a

ax = ax: 1 + vpx ax+1 ax = ax: n +

2

n| ax

ax = 1 + vpx ax+1
t Ex dt

=
0
2

v t px dt =
0

ax = 1 + v 2 px 2ax+1 = 1 + vpx ax+1: n1 = a(m) n Ex ax+n x = vpx + vpx ax+1: n1 = ax + vpx (I)x+1 a
(m)

ax: n ax: n ax: n

(m)

V ar[ T ] = a

Ax (Ax )2 2

ax = vpx + vpx ax+1 (I)x = 1 + vpx [(I)x+1 + ax+1 ] a a

t Ex dt 0

n-year temporary annuity: ax: n

n n

ax: n

=
0
2

v t t px dt = Ax: n (Ax: n )2 2 n| ax

Whole life annuity due: ax

V ar[Y ] =

ax = E[ K+1 ] = a
2

v k k px

n-year deferred annuity:

V ar[ K+1 ] = a
t Ex dt

Ax (Ax d2

k=0 2 )

n| ax n| ax

=
n n

v t t px dt =
n

= v n px ax+n = n Ex ax+n 2 2n V ar[Y ] = v n px (x+n 2ax+n ) (n| ax )2 a

n-yr temporary annuity due: ax: n

n1

ax: n

= E[Y ] =
k=0
2

v k k px

V ar[Y ] = n-yr certain and life annuity: ax: n ax: n = ax + a n ax: n = an + n| ax = a n + n Ex ax+n

Ax: n (Ax: n )2 d2 n| ax

n-yr deferred annuity due:

n| ax Most important identity 1 = x + Ax a 1 Ax ax = x: n = 1 x: n a A 2 Ax: n = 1 (2) 2ax: n 1 Ax d 1 Ax: n ax: n = d 1 = dx: n + Ax: n a ax =

= E[Y ] =
k=n

v k k px

= ax ax: n =
n Ex

ax+n

n-yr certain and life due: ax: n ax: n = ax + a n ax: n

= an +
k=n

v k k px

= a n +n| ax

Exam M - Life Contingencies - LGD c

Whole life immediate: ax

Accumulation function:
n

ax = E[ K ] = a
k=1

v k k px sx: n

ax =

1 (1 + i)Ax i

ax: n = = n Ex
0

1 nt Ex+t

m-thly annuities a(m) = x V ar[Y ] = a(m) x ax: n

(m)

Limit of interest rate i = 0: 1

2

(m) Ax d(m) (m) (m)

ax ex ax 1 + ex e ax x ax: n ax: n ax: n ex: n 1 + ex: n1 x: n e

i=0 i=0 i=0 i=0 i=0

i=0

(Ax )2 (d(m) )2 1 = a(m) x m 1 (m) = ax: n (1 n Ex ) m Ax

Exam M - Life Contingencies - LGD c

Chapter 6: Benet Premiums

Loss function: Loss = PV of Benets PV of Premiums Fully continuous equivalence premiums (whole life and endowment only): Ax ax Ax 1 Ax 1 ax 2 P 2 Ax (Ax )2 1+ 2 Ax (Ax )2 (x )2 a 2 Ax (Ax )2 (1 Ax )2 h-payment insurance premiums: Ax ax: h Ax: n ax: h Ax ax: h Ax: n ax: h

h P (Ax )

= = = =

P (Ax ) = P (Ax ) = P (Ax ) = V ar[L] = V ar[L] = V ar[L] =

h P (Ax: n ) h Px h Px: n

1 Pure endowment annual premium Px: n : it is the reciprocal of the actuarial accumulated value sx: n because the share of the survivor who 1 has deposited Px: n at the beginning of each year for n years is the contractual $1 pure endowment, i.e. 1 Px: n sx: n = 1

Fully discrete equivalence premiums (whole life and endowment only): Ax = Px ax dAx 1 Ax 1 d ax P 2 2 1+ Ax (Ax )2 d 2 Ax (Ax )2 (dx )2 a 2 Ax (Ax )2 (1 Ax )2

(1)

P (Ax ) = P (Ax ) = P (Ax ) = V ar[L] = V ar[L] = V ar[L] =

P minus P over P problems: The dierence in magnitude of level benet premiums is solely attributable to the investment feature of the contract. Hence, comparisons of the policy values of survivors at age x + n may be done by analyzing future benets:
1 ( n Px Px: n )x: n s 1 Px: n 1 Px: n Px: n n Px = 1 Ax+n = 1 Px: n 1 Px: n Px: n = 1= 1 Px: n

= Ax+n =

n Px

(Px: n n Px )x: n s
1 (Px: n Px: n )x: n s

Semicontinuous equivalence premiums: Ax P (Ax ) = ax m-thly equivalence premiums: P#

(m)

Miscellaneous identities: P (Ax: n ) Ax: n = P (Ax: n ) + Ax: n ax: n ax: n = = = Px: n Px: n + d 1 P (Ax: n ) + 1 Px: n + d

A# a#
(m)

Exam M - Life Contingencies - LGD c

Chapter 7: Benet Reserves

Benet reserve t V : The expected value of the prospective loss at time t. Continuous reserve formulas: Prospective: Retrospective: Premium di.: Paid-up Ins.: Annuity res.: Death ben.: Premium res.: a t V (Ax ) = Ax+t P (Ax )x+t A1 s V (Ax ) = P (Ax )x: t x: n t t Ex (Ax ) = P (Ax+t ) P (Ax ) ax+t tV P (Ax ) Ax+t t V (Ax ) = 1 P (Ax+t ) ax+t t V (Ax ) = 1 ax Ax+t Ax t V (Ax ) = x 1A (Ax+t ) P (Ax ) P t V (Ax ) = P (Ax+t ) +

Variance of the loss function V ar[ t L] = V ar[ t L] = V ar[ t L] = V ar[ t L] = 2 P 2 Ax+t (Ax+t )2 2 Ax+t (Ax+t )2 assuming EP (1 Ax )2 2 P 2 1+ Ax+t: nt (Ax+t: nt )2 2 Ax+t: nt (Ax+t: nt )2 assuming EP (1 Ax: n )2 1+

Cost of insurance: funding of the accumulated costs of the death claims incurred between age x and x + t by the living at t, e.g.
4 kx

= =

dx (1 + i)3 + dx+1 (1 + i)2 + dx+2 (1 + i) + dx+ lx+4 A1 4 x:

4 Ex

Discrete reserve formulas:

k Vx k Vx: n k Vx: n t Vx: n k Vx k Vx k Vx

= Ax+k Pk ax+k = = Px+k: nk Px: n ax+k: nk 1 Px: n Px+k: nk

1 kx

dx qx = lx+1 px

Accumulated dierences of premiums: Ax+k: nk

1 ( n Px Px: n )x: n s

= = = =

n n Vx n n Vx

1 n Vx: n )

= Px: n sx: n t kx ax+k = 1 ax Px+k Px = Px+k + d Ax+k Ax = 1 Ax

= Ax+n 0 = Ax+n ( n Px Px )x: n s (Px: n Px )x: n s ( m Px: n s m Px )x: m n Vx n Vx

m m Vx

= Px ax+n
n Vx: n m m Vx: n

= 1 n Vx = Ax+m: nm Ax+m Relation between various terminal reserves (whole life/endowment only):
m+n+p Vx

h-payment reserves:
h tV h k Vx: n h kV

= Ax+t: nt h P (Ax: n )x+t: ht a = Ax+k: nk h Px: n ax+k: hk = Ax+k: nk

(m) (m) h Px: n ax+k: hk

(Ax: n ) = Ax+k: nk h P (Ax: n )x+k: hk a

h 1(m) k Vx: n

= 1 (1
m Vx )(1

n Vx+m )(1 p Vx+m+n )

Exam M - Life Contingencies - LGD c

Chapter 8: Benet Reserves

Notations: bj : death benet payable at the end of year of death for the j-th policy year j1 : benet premium paid at the beginning of the j-th policy year bt : death benet payable at the moment of death t : annual rate of benet premiums payable continuously at t Benet reserve:
hV

=
j=0

bh+j+1 v

j+1

j px+h qx+h+j

j=0

h+j v j j px+h

tV

=
0

bt+u v u u px+t x (t + u)du

0

t+u v u u px+t du

Recursion relations:
hV

+ h = v qx+h bh+1 + v px+h

h+1 V

h+1 V

(h V + h )(1 + i) = qx+h bh+1 + px+h (h V + h )(1 + i) = + qx+h (bh+1

h+1 V h+1 V

Terminology: policy year h+1 the policy year from time t = h to time t = h + 1 h V + h initial benet reserve for policy year h + 1 h V terminal benet reserve for policy year h h+1 V terminal benet reserve for policy year h + 1 Net amount at Risk for policy year h + 1 Net Amount Risk bh+1
h+1 V

When the death benet is dened as a function of the reserve: For each premium P , the cost of providing the ensuing years death benet , based on the net amount at risk at age x + h, is : vqx+h (bh+1 h+1 V ). The leftover, P vqx+h (bh+1 h+1 V ) is the source of reserve creation. Accumulated to age x + n, we have:
n1 nV

=
h=0

[P vqx+h (bh+1
n1

h+1 V

)] (1 + i)nh )(1 + i)nh

= Psn
h=0

vqx+h (bh+1

h+1 V

If the death benet is equal to the benet reserve for the rst n policy years
nV

= Psn

If the death benet is equal to $1 plus the benet reserve for the rst n policy years
n1 nV

= Psn
h=0

vqx+h (1 + i)nh

Exam M - Life Contingencies - LGD c

 If the death benet is equal to $1 plus the benet reserve for the rst n policy years and qx+h q constant
nV

= P s n vq n = (P vq) n s s

Reserves at fractional durations: ( h V + h )(1 + i)s =

s px+h

h+s V

+ s qx+h v 1s + s qx+h (v 1s bh+1 + v

1s h+s V

UDD ( h V + h )(1 + i)s = (1 s qx+h ) h+s V + s qx+h v 1s =

h+s V h+s V

)
h+1 V

1s

1s qx+h+s

1s px+h+s

UDD i.e.

h+s V h+s V

= (1 s)( h V + h ) + s(h+1 V ) = (1 s)( h V ) + (s)(h+1 V ) + (1 s)(h ) unearned premium

Next year losses: h losses incurred from time h to h + 1

h+1 V

E[h ] = 0 V ar[h ] = v 2 (bh+1 The Hattendorf theorem V ar[ h L] = V ar[h ] + v 2 px+h V ar[ h+1 L] = v 2 (bh+1 V ar[ h L] = v 2 (bh+1
h+1 V h+1 V

)2 px+h qx+h

)2 px+h qx+h + v 2 px+h V ar[ h+1 L] )2 px+h qx+h )2 px+h px+h+1 qx+h+1 )2 px+h px+h+1 px+h+2 qx+h+2 +

+v 4 (bh+2 +v 6 (bh+3

h+2 V h+3 V

Exam M - Life Contingencies - LGD c

10

Chapter 9: Multiple Life Functions

Joint survival function: sT (x)T (y) (s, t) = P r[T (x) > s&T (y) > t]
t pxy

Last survivor status T (xy): T (xy) + T (xy) = T (x) + T (y) T (xy) T (xy) = T (x) T (y) fT (xy) + fT (xy) = fT (x) + fT (y) FT (xy) + FT (xy) = FT (x) + FT (y)
t pxy

= sT (x)T (y) (t, t) = P r[T (x) > t and T (y) > t]

Joint life status: FT (t) = P r[min(T (x), T (y)) t] =

t qxy

+ t pxy = t px + t py xy + Axy = Ax + Ay A axy + axy = ax + ay e e xy + xy = x + y e e exy + exy = ex + ey

n| qxy

= 1 t pxy Independant lives

t pxy t qxy

n| qx

n| qy

n| qxy

= =

t px t qx

t py + t qy t qx t qy

Complete expectation of the last-survivor status:

xy = e Complete expectation of the joint-life status:

0

t pxy dt

exy =
t pxy dt 1

k pxy

xy = e
0

Variances:

PDF joint-life status: fT (xy) (t) = xy (t) =

t pxy

V ar[T (u)] = 2 xy (t) V ar[T (xy)] = 2

0 0

t t pu dt (u )2 e

fT (xy) (t) fT (xy) (t) = 1 FT (xy) (t) t pxy

t t pxy dt (xy )2 e

Independant lives xy (t) = (x + t) + (y + t) fT (xy) (t) =

t px

V ar[T (xy)] = 2
0

e t t pxy dt (xy )2

t py [(x + t) + (y + t)]

Notes: For joint-life status, work with ps:

n pxy

Curtate joint-life functions:

k pxy

= n px n py

k px

k py [IL]
k+1 pxy

For last-survivor status, work with qs:

n qxy

k qxy =

k qx + k qy k qx k qy [IL] k pxy k pxy k pxy

= n qx n qy

P r[K = k] = = =

qx+k:y+k qx+k:y+k =
k| qxy

Exactly one status:

[1] n pxy

qx+t:y+t = qx+k + qy+k qx+k qy+k [IL] exy = E[K(xy)] =

1 k pxy

= = =

n pxy n px n qx

n pxy + n py 2 n p x n p y

+ n qy 2 n qx n qy

[1] axy

= ax + ay 2xy a

Exam M - Life Contingencies - LGD c

11

Common shock model: sT (x) (t) = sT (x) (t) sz (t) = sT (x) (t) et sT (y) (t) = sT (y) (t) sz (t) = sT (y) (t) et sT (x)T (y) (t) = sT (x) (t) T (y) (t) sz (t) = sT (x) (t) sT (y) (t) et xy (t) = (x + t) + (y + t) + Insurance functions:

Insurances: Ax = 1 x a xy = 1 xy A a xy = 1 xy A a

Premiums: Px = Pxy = Pxy = 1 d ax 1 d axy 1 d axy

Au =
k=0

v k+1 k pu qu+k v k+1 P r[K = k]

k=0

= Axy =
k=0

Annuity functions:

v k+1 k pxy qx+k:y+k v

k=0 k+1

au =
0
2

v t t pu dt Au (Au )2 2

Axy =

( k px qx+k + k py qy+k k pxy qx+k:y+k )

var[Y ] =

Variance of insurance functions: V ar[Z] = V ar[Z] =

2 2

Au (Au )2

Axy (Axy )2 Cov[v T (xy) , v T (xy) ] = (Ax Axy )(Ay Axy )

Reversionary annuities: A reversioanry annuity is payable during the existence of one status u only if another status v has failed. E.g. an annuity of 1 per year payable continuously to (y) after the death of (x). ax|y = ay axy

Covariance of T (xy) and T (xy): Cov [T (xy), T (xy)] = Cov [T (x), T (y)] + {E [T (x)] E [T (xy)]} {(E [T (y)] E [T (xy)]} = Cov [T (x), T (y)] + (x xy ) (y xy ) e e e e = (x xy ) (y xy ) [IL] e e e e

Exam M - Life Contingencies - LGD c

12

Chapter 10 & 11: Multiple Decrement Models

Notations: Probability density functions: Joint PDF: Marginal PDF of J: fT,J (t, j) = t p( ) (j) (t) x x fJ (j) = =
0 (j) qx

(j) t qx

= probability of decrement in the next t years due to cause j

( ) t qx

= probability of decrement in the next t years due to all causes

m

fT,J (t, j)dt

=
j=1

(j) t qx

Marginal PDF of T :

fT (t) = t p( ) ( ) (t) x x
m

(j) x

= = the force of decrement due only to decrement j Conditional PDF: fJ|T (j|t) =
j=1

fT,J (t, j) x (t) x (t)

( ) (j)

( ) x

= the force of decrement due to all causes simultaneously

m

=
j=1 ( ) t px

(j) x

= probability of surviving t years despite all decrements

( = 1 t qx )
t R 0

Survivorship group: ( ) Group of la people at some age a at time t = 0. Each member of the group has a joint pdf for time until decrement and cause of decrement.
(j) n dx ( = la ) ( = la ) xa m ( ) n dx ( ) xa pa xa+n (j) n qx

= e

x (s)ds

( )

( ) t pa

(j) (t)dt a

=
j=1 m

(j) n dx

Derivative:
( la ) =

(j) la j=1

d dt

( ) t px

d = dt

( ) t qx

t p( ) x

( ) x

(j) qx

dx lx

(j)

( )

Integral forms of t qx :

Associated single decrement:

(j) t qx (j) t px

t (j) t qx

=
0 t

( ) s px

(j) (s)ds x

= probability of decrement from cause j only t = exp

0

(j) (s)ds x

( ) t qx

=
0

( ) s px

( ) (s)ds x

= 1 t qx(j)

Exam M - Life Contingencies - LGD c

13

Basic relationships: t ( ) = exp (1) (s) + + (m) (s) ds t px x x

0 m ( ) t px (j) t qx (j) t px

Actuarial present values

m

A=
j=1

Bx+t v t t p( ) (j) (t)dt x x

(j)

(i) t px i=1 (j) t qx ( ) t px

Instead of summing the benets for each possible cause of death, it is often easier to write the benet as one benet given regardless of the cause of death and add/subtract other benets according to the cause of death. Premiums:
( Px ) = ( ) (j) Px = k=0

UDD for multiple decrements:

(j) t qx ( ) t qx (j) qx (j) = t qx ( = t qx ) ( ) t px (j) qx ( ) t px

= =

(j) (t) x =
(j) qx qxt

Bk+1 v k+1 k px qx+k

k=0

( )

( )

( )

(j) (t) x
(j) t px

(j) qx

v k k px
k=0 (j) Bk+1 v k+1 k=0

( )

1 t qx

k px qx+k
( )

( )

(j)

( ) t px

v k k px

Decrements uniformly distributed in the associated single decrement table:

(j) t qx

= t qx(j)

1 (1) qx = qx(1) 1 qx(2) 2 1 (2) qx = qx(2) 1 qx(1) 2 1 1 1 (1) qx = qx(1) 1 qx(2) qx(3) + qx(2) qx(3) 2 2 3

Exam M - Life Contingencies - LGD c

14

Chapter 15: Models Including Expenses

Notations: G expense loaded ( or gross) premium b face amount of the policy G/b per unit gross premium

Expense policy fee: The portion of G that is independent of b. Asset shares notations: G level annual contract premium
k AS

asset share assigned to the policy at time t = k expenses paid per policy at time t = k probability of decrement by death probability of decrement by withdrawal cash amount due to the policy holder as a withdrawal benet

ck fraction of premium paid for expenses at k (i.e. cG is the expenxe premium) ek (d) qx+k (w) qx+k
k CV

bk death benet due at time t = k Recursion formula: [ k AS + G(1 ck ) ek ] (1 + i) = qx+k bk+1 + qx+k = Direct formula:
n1 n AS = h=0 k+1 AS (d) (w) k+1 CV

+ px+k +

( )

k+1 AS

(d) qx+k (bk+1

k+1 AS)

(w) qx+k ( k+1 CV

k+1 AS)

G(1 ch ) eh vqx+h bh+1 vqx+h h+1 CV

( ) nh Ex+h

(d)

(w)

Exam M - Life Contingencies - LGD c

15

Constant Force of Mortality

Chapter 3 (x) = > 0, x s(x) = e
n px x

(IA)x = Ax ax = (I A)x (IA)x (Ia)x

lx = l0 ex = en = (px )n 1 x = e = E[T ] = E[X] x: n = x (1 n px ) e e 1 V ar[T ] = V ar[x] = 2 mx = ln2 Median[T ] = = Median[X] px ex = = E[K] qx px V ar[K] = (qx )2 Chapter 4 Ax =
2

( + )2 (1 + i) = Ax ax = ( + )(q + i) q(1 + i) = Ax ax = (q + i)2 1 = (x )2 = a ( + )2 1+i q+i

2

(I)x = (x )2 = a a Chapter 6

1 Px = vqx = Px: n P (Ax ) = = P (A1 n ) x:

For fully discrete whole life, w/ EP, V ar[Loss] = p 2Ax For fully continuous whole life, w/EP, V ar[Loss] = 2Ax Chapter 7
tV

Ax

A1 n x:
n Ex

+ = + 2 = Ax (1 n Ex ) = e
n(+)

(Ax ) = 0, t 0
k Vx

= 0, k = 0, 1, 2, . . .

For fully discrete whole life, assuming EP, V ar[ k Loss] = p 2Ax , k = 0, 1, 2, . . . For fully continuous whole life, assuming EP, V ar[ t Loss] = 2Ax , t 0 Chapter 9 For two constant forces, i.e. M acting on (x) and F acting on (y), we have: Axy = M + F M + F + 1 M + F + 1 M + F qxy qxy + i 1+i qxy + i pxy qxy

(IA)x = Ax =
2

Ax = =

Ax: n

( + )2 q q+i q q + 2i + i2 Ax (1 n Ex )

Chapter 5 ax =
2

ax = ax =

ax = =

ax: n ax: n

1 + 1 + 2 1+i q+i (1 + i)2 q + 2i + i2 ax (1 n Ex )

axy = xy = e Axy = axy = exy = 16

= ax (1 n Ex )

Exam M - Life Contingencies - LGD c

De Moivres Law
Chapter 3 s(x) = 1 lx qx
n|m qx n px t px (x
2

+ t) Lx x e ex

V ar[T ] V ar[K] mx a(x) x: n e x: n e Chapter 4

x x = l0 ( x) 1 = (x) = x m = x xn = x = qx = (x) = fT (x), 0 t < x 1 = (lx + lx+1 ) 2 x = = E[T ] = Median[T ] 2 x 1 = E[K] = 2 2 2 ( x) = 12 ( x)2 1 = 12 qx 2dx = = 1 lx + lx+1 1 2 qx 1 = E[S] = 2 n = n n px + n q x 2 n = ex: n + n qx 2 a x x an x

Ax = Ax =

a 2(x) 2( x) a x x an x (Ia) x x (Ia) x x (Ia) n x (Ia) n x

A1 n x:

(IA)x = (IA)x = (IA)1 n x: (IA)1 n x: = =

Chapter 5 No useful formulas: use ax = chapter 4 formulas. Chapter 9

1Ax d

and the

xx = e xx = e xy = e

x ( MDML with = 2/( x)) 3 2( x) 3 eyy ey yx px + yx qx

Ax = A1 n x: =

For two lives with dierent s, simply translate one of the age by the dierence in s. E.g. Age 30, = 100 Age 15, = 85

Modied De Moivres Law

Chapter 3 s(x) = 1 x c x
c

V ar[T ] = Chapter 9 ( x)c xx = e

( x)2 c (c + 1)2 (c + 2)

lx = l0 (x) =
n px

x = e

c x xn c x x = E[T ] c+1 17

x 2c + 1 2c x

x with = e

Exam M - Life Contingencies - LGD c

Uniform Distribution of Deaths (UDD)

Chapter 3
t qx

Chapter 6 = t qx , 0 t 1 qx , 0t1 = 1 tqx = lx t dx , 0 t 1 sqx = , 0s+t1 1 tqx 1 = V ar[K] + 12 1 qx = (x + ) = 2 1 1 qx 2 1 = lx dx 2 1 = 2 1 = px + q x 2 = qx , 0 t 1 P (Ax ) = P (A1 n ) = x: P (Ax: n ) =
(m) Px =

(x + t) lx+t
s qx+t

V ar[T ] mx Lx a(x) x: 1 e
t px (x

Px: n

(m)

= =

(m) n Px hP (m)

(A1 n ) = x:

i Px i 1 P x: n i 1 1 + Px: n P x: n Px (m) (m)(Px + d) Px: n 1 (m) (m)(Px: n + d) n Px 1 (m) (m)(Px: n + d) i 1(m) hP x: n

Chapter 7
h (m) k Vx: n h (m) (Ax: n ) kV

+ t)

= = =

h k Vx: n h kV

1 + (m) h Px: n k Vx: h

(m)

Chapter 4 Ax =
(m) Ax =

1 (Ax: n ) + (m) h P (m) (Ax: n ) k Vx: h

A1 n x: (I A)1 n x: Ax: n
n| Ax
2

= = = =

Ax =

i Ax i A (m) x i i 1 A x: n i (IA)1 n x: i 1 i Ax: n + Ax:1 = A1 n + n Ex n x: i Ax n| 2i + i2 2 Ax 2

h k V( Ax: n )

i h 1 1 V + h Vx: h k k x: h

Chapter 10 UDDMDT
(j) t qx (j) qx ( qx ) (j) t px (j) = t qx

= (j) (0) x = ( ) (0) x = = =

( ) t px
(j) qx ( ) qx

(j) x ( ) x

qx qx

(j) ( )

1 t qx
( )

Chapter 5 a(m) x a(m) x (m) ax: n with: = = m1 ax 2m (m)x (m) a

1 t qx

( )

UDDASDT
(j) t qx

ax: n

(m)

(m)x: n (m)(1 n Ex ) a id (m) = (m) (m) 1 i d i i(m) m1 and (m) = (m) (m) 2m i d (m) (m) = ax n Ex ax+n

= t qx(j)

1 (1) qx = qx(1) 1 qx(2) 2 1 (2) qx = qx(2) 1 qx(1) 2 1 1 1 (1) qx = qx(1) 1 qx(2) qx(3) + qx(2) qx(3) 2 2 3

Exam M - Life Contingencies - LGD c

18

Chapter 1: The Poisson Process

Poisson process with rate : P r[N (s + t) N (s) = k] = et E[N (t)] = t V ar[N (t)] = t Interarrival time distribution: The waiting time between events. Let Tn denote the time since occurence of the event n 1. Then the Tn are independent random variables following an exponential distribution with mean 1/. P r[Ti t] = 1 et fT (t) = et 1 E[T ] = 1 V ar[T ] = 2 Waiting time distribution: Let Sn be the time of the n-occurence of the event, i.e. Sn = n Ti . i=1 Sn has a gamma distribution with parameters n and = 1/ Sn GammaRV[ = n, =

(t)k k!

Sum of Poisson processes: If N1 , , Nk are independent Poisson processes with rates 1 , , k then, N = N1 + + Nk is a Poisson process with rate = 1 + + k . Special events in a Poisson process: Let N be a Poisson process with rate . Some events i are special with a probability P r[event is special] = i and Ni counts the spe cial events of kind i. Then, Ni is a Poisson process with rate i = i and the Ni are independent of one another. If the probability i (t) changes with time, then
t

E[Ni (t)] =
0

(s)ds

Non-homogeneous Poisson process: (t) intensity function m(t) mean value function
t

=
0

(y)dy [m(t)]k k!

1 ]

P r[N (t) = k] = em(t)

P r[Sn t] =
j=n

et

(t)j j!

Compound Poisson process:

N (t)

fSn (t) = et E[Sn ] = V ar[Sn ] = n n 2

(t)n1 (n i)!

X(t) =
i=1

Yi

N (t) PoissonRV w/ rate

E[X(t)] = t E[Y ] V ar[X(t)] = t E[Y 2 ]

Two competing Poisson processes: Probability that n events in the Poisson process (N1 ,1 ) occur before m events in the Poisson process (N2 ,2 ):
n+m1 1 2 P r[Sn < Sm ] = k=n 1 2 P r[Sn < S1 ] = 1 2 P r[S1 < S1 ] = n+m1

k 1 1 + 2 1 1 + 2
n

1 1 + 2

2 1 + 2

n+m1k

Exam M - Loss Models - LGD c

Chapter 2&3: Random Variables

k-th raw moment: k = E[X k ] k-th central moment: k = E[(X )k ] Variance: V ar[x] = 2 = E[X 2 ] E[X]2 = 2 = 2 2 Standard deviation: = = V ar[X] Coecient of variation: / Skewness: E[(X )3 ] 3 1 = = 3 3 Kurtosis: 1 = E[(X )4 ] 4 = 4 4 Y = (X u) = Limited loss: X X<u u Xu
x>d k

Left censored and shifted variable: Y L = (X d)+ = 0 X<d X d X d

Moments of the left censored and shifted variable:

E[(X

d)k ] +

=
d

(x d)k f (x)dx (x d)k p(x)

= e (d)[1 F (d)]

Limited expected value:

0 u

E[X u] =
u

F (x)dx +
0

S(x)dx

Left truncated and shifted variable (aka excess loss variable): Y P = X d|X > d Mean excess loss function: eX (d) e(d) = E[Y P ] = E[X d|X > d] S(x)dx = d 1 F (d) E[X] E[X d] = 1 F (d) Higher moments of the excess loss variable: ek (d) = E[(X d)k |X > d] x

=
0

[1 F (x)]dx if X is always positive

Moments of the limited loss variable:

u

E[(X u) ] =

xk f (x)dx + uk [1 F (u)] xk p(x) + uk [1 F (u)]

xu

Moment generating functions mX (t): mX (t) = E[etX ] Sum of random variables Sk = X1 + +Xk :
k

(x d)k f (x)dx 1 F (d) (x d)k p(x)

x>d

mSk (t) = 1 F (d)

j=1

mXj (t)

Exam M - Loss Models - LGD c

Chapter 4: Classifying and Creating distributions

k-point mixture ( ai = 1): If X is a Normal distribution (, V ) and follows a Normal distribution (, A), then the resulting distribution is a Normal distribution (, A + V ) Splicing (aj > 0, aj = 1): c0 < x < c1 . . . ck1 < x < ck

FY (y) = a1 FX1 (y) + + ak FXk (y) fY (y) = a1 fX1 (y) + + ak fXk (y) E[Y ] = a1 E[X1 ] + + ak E[Xk ]
2 2 E[Y 2 ] = a1 E[X1 ] + + ak E[Xk ]

Tail weight: existence of moments light tail hazard rate increases light tail Multiplication by a constant , y > 0: y 1 y Y = X FY (y) = FX ( ) and fY (y) = fX ( ) Raising to a power: > 0 : FY (y) = FX (y ) 1 fY (y) = y 1 fX (y ) Y = X < 0 : FY (y) = 1 FX (y ) fY (y) = y 1 fX (y ) > 0: transformed distribution = 1: inverse distribution < 0: inverse transformed Exponentiation: Y = eX FY (y) = FX (ln(y)) 1 fY (y) = y fX (ln(y))

a1 f1 (x) . . f (x) = . ak fk (x)

Discrete probability function (pf ): pk = P r[N = k]

Probability generating function (pgf ): PN (z) = E[z N ] = p0 + p1 z + p2 z 2 + P (1) = E[N ] P (1) = E[N (N 1)] Poisson distribution: pk = e k k!

P (z) = e(z1) E[N ] = V ar[N ] =

Mixing: The random variable X depends upon a parameter , itself a random variable . For a given value = , the individual pdf is fX| (x|). fX (x) = fX| (x|)f ()d

Negative Binomial distribution: Number of failures before success r with probability of success p = 1/(1 + ) pk = k+r1 k 1+
k

If X is a Poisson distribution with parameter , and follows a Gamma distribution with parameters (, ), then the resulting distribution is a Negative Binomial distribution with parameters (r = , = ) If X is an Exponential distribution with mean 1/ and is a Gamma distribution with parameters (, ), then the resulting distribution is a 2-parameter Pareto distribution with parameters ( = , = 1 )
Exam M - Loss Models - LGD c

1 1+

P (z) = [1 (z 1)]r E[N ] = r V ar[N ] = r(1 + ) If N1 and N2 are independent Negative Binomial distributions with parameters (r1 , ) and (r2 , ), then N1 + N2 is a Negative Binomial distribution with parameters (r = r1 + r2 , ) 3

 If N is a Negative Binomial distribution with parameters (r, ) and some events j are special with probability j , then Nj , the count of special events j, is a Negative Binomial distribution with parame ters (j = r, j = j ) r Geometric distribution: Special case of the negative binomial distribution with r = 1 pk = k (1 + )k+1 1 1 (z 1)

Compound frequency and (a, b, 0) class: Let S be a compound distribution of primary and secondary distributions N and M with pn = P r[N = n] and fn = P r[M = n]. If N is a member of the (a, b, 0) class gk = 1 1 af0
k k

a+
j=1

jb k

fj gkj

g0 = Pprim (f0 ) gk = k j fj gkj

j=1

P (z) = [1 (z 1)]1 = E[N ] = V ar[N ] = (1 + )

Mixed Poisson models: If P (z) id the pgf of a Poisson distribution with rate drawn from a discrete random variable , then P (z|) = e(z1) P (z) = p (1 )e1 (z1) + + p (n )en (z1) Exposure modications on frequency: n policies in force. Nj claims produced by the j-th policy. N = N1 + + Nn . If the Nj are independent and identcally distributed, then the probability generating function for N is PN (z) = [PN1 (z)]n If the company exposure grows to n , let N represent the new total number of claims, PN (z) = [PN1 (z)]n = [PN (z)] Conditional expectations:
n n

Binomial distribution: Counting number of successes in m trials given a probability of sucess q m q k (1 q)mk k P (z) = [1 + q(z 1)]m pk = E[N ] = mq V ar[N ] = mq(1 q) The (a, b, 0) class: pk b =a+ pk1 k a > 0 negative binomial or geometric distribution a = 0 Poisson distribution a < 0 Binomial distribution Compound frequency models: P (z) = Pprim (Psec (z))

E[X| = ] =

xfX| (x|)dx

E[X] = E [E[X|]] V ar[X] = E [V ar[X|]] + V ar[E[X|]] The variance of the random variable X is the sum of two parts: the mean of the conditional variance plus the variance of the conditional mean.

Exposure modications on frequency for common distributions: N Parameters for N Parameters for N Poisson = n n Negative Binomial r, r = n r, = n
Exam M - Loss Models - LGD c

Chapter 5: Frequency and Severity with Coverage Modications

Notations: X amount of loss Y L amount paid per loss YP amount paid per payment Eect of deductible for various distributions: X : exp[mean ] Y P : exp[mean ] X : uniform[0, ] Y P : uniform[0, d]

X : 2Pareto[, ] Y P : 2Pareto[ = , = + ] Per loss variable: Loss elimination ratio: fY L (0) = FX (d) fY L (y) = fx (y + d) FY L (y) = FX (y + d) Per payment variable: fY P (y) = FY L (y) = fx (y + d) 1 FX (d) FX (y + d) FX (d) 1 FX (d) LERX (d) = relations: c(X d) = (cX) (cd) c(X d)+ = (cX cd)+ A = (A b) + (A b)+ Ination on expected cost per loss: E[Y L ] = (1 + r) E(X) E X d 1+r E[X d] E[X]

Relations per loss / per payment variable: = Y L |Y L > 0 E[Y L ] E[Y P ] = P r[Y L > 0] E[(Y L )k ] E[(Y P )k ] = P r[Y L > 0] Simple (or ordinary) deductible d: X = X Y Y
L P L

YP

Ination on expected cost per payment:

P

(1 + r) E(X) E X 1 FX
d 1+r

E[Y ] =

d 1+r

u-coverage limit: YL = X u YP
L

= (X d)+ = X d|X > d = E[X] E[X d]

= X u|X > 0
u

E[Y ] = E[X u] =
0

E[Y ] = E[(X d)+ ] E[Y P ] = E[X d|X > d] E[X] E[X d] = 1 FX (d) Franchise deductible d: X = X Y Y
L P

[1 Fx (x)]dx

u-coverage limit with ination: E[X u] (1 + r)E X u 1+r

= 0 if X < d, X if X > d = X|X > d,

u-coverage limit and d ordinary deductible: Y L = (X u) (X d) YP

L

P P Yfranchise = Yordinary + d

= (X u) (X d)|X > 0 = (X u) d|X > d

E[Y ] = E[X] E[X d] + d[1 FX (d)] E[Y ] = E[X|X > d] E[X] E[X d] = +d 1 FX (d)
Exam M - Loss Models - LGD c

E[Y ] = E[X u] E[X d] E[X u] E[X d] E[Y P ] = 1 FX (d) 5

u-coverage limit and d ordinary deductible with ination: E[Y L ] = (1 + r) E X

P

Probability of payment for a loss with deductible d: v = 1 FX (d) Unmodied frequency: The number of claims N (frequency) does not change, only the probabilities associated with the severity are modied to include the possibility of zero payment. Bernoulli random variable: N = 0 @ 1p 1 @ p

d u E X 1+r 1+r E X
d 1+r d 1+r

E X

E[Y ] = (1 + r)

u 1+r

1 FX

Coinsurance factor : First calculate Y L and Y P with deductible and limits. Then apply Y L = Y L Y P = Y P

E[N ] = p V ar[N ] = (1 p)p

Deductible, limit, ination and coinsurance: d 1+r u u = 1+r E[Y L ] = (1 + r) {E[X u ] E[X d ]} E[X u ] E[X d ] E[Y P ] = (1 + r) 1 FX (d ) d = E[Y L ] = 2 (1 + r)2 E (X u )2 E (X d )2 2d E[X u ] + 2d E[X d ] Modied frequency: N (the modied frequency) has a compound distribution: The primary distribution is N , and the secondary distribution is the Bernoulli random variable I. The probability generating function is PN (z) = PN [1 + v(z 1)] The frequency distribution is modied to include only non-zero claim amounts. Each claim amount probability is modied by dividing it by th eprobability of a non-zero claim. For common distributions, the frequency distribution changes as follows (the number of positive payments is nothing else than a special event with probability = v) N Parameters for N Parameters for N Poisson = v Binomial m, q m = m, q = vq Negative Binomial r, r = r, = v
2

Exam M - Loss Models - LGD c

Chapter 6: Aggregate Loss Models

The aggregate loss compound random variable:
N

n-fold convolution of the cdf of X:

k

S =
j=1

Xj

FX

(n)

(k) =
j=0

FX

(n1)

(k j)fX (j)

E[S] = E[N ] E[X] V ar[S] = E[N ] V ar[X] + V ar[N ] E[X]2 S (E[S], V ar[S]) if E[N ] is large

FX (k) =

(0)

0 , k<0 1 , k0

Pdf of the compound distribution:

Probability generating function: PS (z) = PN [PX (z)] Notations: fk = P r[X = k] pk = P r[N = k] gk = P r[S = k] Compound probabilities: g0 = PN (f0 ) gk = if P r[X = 0] = f0 = 0

fS (k) =
n=0

pn fX (k)

(n)

Cdf of the compound distribution:

FS (k) =
n=0

p n FX

(n)

(k)

Mean of the compound distribution:

E[S] =
k=0

k fS (k) =
k=0

[1 FS (k)]

p0 P r[sum of Xs = k] + p1 P r[sum of one X = k] + p2 P r[sum of two Xs = k] +

Net stop-loss premium:

E [(S d)+ ] =

(x d)fS (x)dx
d

If N is in the (a, b, 0) class, then g0 = PN (f0 ) gk = 1 1 af0

k j=1

E [(S d)+ ] =
d+1

(x d)fS (x)
d1

jb a+ k

fj gkj

E [(S d)+ ] = E[S] d

x=0

(x d)fS (x)

n-fold convolution of the pdf of X:

(n) fX (k) (n)

E [(S d)+ ] =
d

[1 FS (d)]
d1

= P r[sum of n Xs = k]
k

fX (k) =
j=0 (1) (0)

fX

(n1)

(k j)fX (j)

= E[S]
x=0

[1 FS (d)]

fX (k) = fX (k) = fk fX (k) = 1 , k=0 0 , otherwise

Linear interpolation a < d < b: E [(S d)+ ] = da bd E [(S a)+ ]+ E [(S b)+ ] ba ba

Recursion relations for stop-loss insurance: E [(S d 1)+ ] = E [(S d)+ ] [1 FS (d)] E [(S sj )] = E [(S sj+1 )] + (sj+1 sj )P r[S sj+1 ] where the sj s are the possible values of S, S : s0 = 0 < s1 < s2 < and P r[S sj+1 ] = 1 P r[S = s0 or S = s1 or or S = sj ]
Exam M - Loss Models - LGD c

Last Chapter: Multi-State Transition Models

Notations: Q(i,j) = P r[Mn+1 = j|Mn = i] n
(i,j) k Qn (i) Pn (i) k Pn

= P r[Mn+k = j|Mn = i] = Q(i,i) n = P r[Mn+1 = = Mn+k = i|Mn = i]

Theorem:
k Qn k Qn

= Qn Qn+1 Qn+k1 = Qk for a homogeneous Markov chain

Inequality:
(i) k Pn (i) = Pn Pn+1 Pn+k1 k Q(i,i) n (i) (i)

Cash ows while in states:

lC (i)

= cash ow at time l if subject in state i at time l = present value of 1 paid k years after time t = n made while in state i, given that the subject is in state s at t = n

AP Vs@n (C ) = actuarial present value at time t = n of all future payments to be

k vn (i)

AP Vs@n (C (i) ) =
k=0

(s,i) k Qn

n+k C

(i)

k vn

Cash ows upon transitions:

l+1 C (s,i) l Qn (i,j)

= cash ow at time l + 1 if subject in state i at time l and state j at time l + 1 = probability of being in state i at time l and in state j at time l + 1 transition from state i to state j

AP Vs@n (C

(i,j) Qn+l (i,j)

) = actuarial present value at time t = n of a cash ow to be paid upon

AP Vs@n (C (i,j) ) =
k=0

(s,i) k Qn

Qn+k

(i,j)

n+k+1 C

(i,j)

k+1 vn

Exam M - Loss Models - LGD c