Life Contingencies II & III Formulas

Analysis of Benefit Reserves

ì0 K ( x ) = 0,1,..., h - 1
ï
hL = í
K ( x)

ïbK ( x )+1 v
K ( x ) +1- h
- å p j v j -h K ( x) = h, h + 1,...
î j =h

¥ ¥

ë h L K ( x ) ³ h ùû = å bh + j +1 v j px + h qx+ h + j - å p h+ j v j px+ h
j +1
hV = Eé
j

1444
j =0
424444 3 144 j =0
2443
apv of future benefits apv of future premiums

ì0 T ( x) £ t
ï
tL = í
T ( x)

ïbT ( x ) v
T ( x )-t
- ò p u v u -t du T ( x) > t
î t

¥ ¥

t V = E éë t L T ( x ) ³ t ùû = ò bt +u v u
u px+t m x (t + u ) du - ò p t + r v r r px +t dr
0 0

ì0 K ( x ) = 0,1,..., h - 1
ï
Ch = ív bh +1 - p h K ( x) = h
ï-p K ( x ) = h + 1, h + 2,...
î h

Var éëCh K ( x ) ³ h ùû = ( v bh +1 ) qx + h px + h
2
E éëCh K ( x ) ³ h ùû = v bh +1 qx + h - p h

E [ Ch ] = ( v bh +1 qx + h - p h ) h px

Var [ Ch ] = ( v bh +1 qx + h - p h ) px h qx + ( v bh +1 ) qx + h px + h h px
2 2
h

hL = åv
j-h
C j = Ch + v h +1 L h V = v bh +1 qx + h - p h + v h +1V px + h
j=h

h +1 V = ( h V + p h )(1 + i ) - ( bh+1 - h+1V ) qx + h p h = ( bh +1 - h +1V ) v qx + h + ( v h+1V - h V )

(1 + i )
h-k
h -1

h V =å (p k - v bk +1 qx +k )
k =0 h-k px + k

h+ s V = v1- s bh +1 1- s qx + h + s + v1- s h +1V 1- s px +h + s , 0 < s < 1

(1 + i ) s
Under UDD: h + s V = {( h V + p h )(1 - s ) + ( v h+1V px+h )( s )}
s px + h

1 of 5
Life Contingencies II & III Formulas

ì0 K ( x ) = 0,1,..., h - 1
ï
ï
L h = í( v bh+1 - p h ) + ( - hV ) K ( x ) = h
ï
ïî(-p h ) + ( v h +1V - hV ) K ( x ) = h + 1, h + 2,...

E éL
ë h K ( x ) ³ h ùû = 0

ë h K ( x ) ³ h ùû = éë v ( bh +1 - h +1V ) ùû px + h qx + h
2
Var éL

Var éL
ë h K ( x ) ³ j ùû = h- j px + j Var éL
ë h K ( x ) ³ h ùû , for j £ h

Cov ëé L h , L j K ( x) ³ g ûù = 0, for g £ h < j

hL = åv
j -h
L j + hV
j=h

¥
Var éë h L K ( x ) ³ h ùû = å v 2( j - h ) j -h px + h Var éë L j K ( x ) ³ j ùû
j=h

= Var éL
ë h K ( x ) ³ h ùû + v px + h Var éë h +1 L K ( x ) ³ h + 1ùû
2

h + j -1
= åv
i =h
2( i - h )
i -h ë i K ( x ) ³ i ùû + v j px+ h Var éë h + j L K ( x ) ³ h + j ùû
px+ h Var éL 2j

Multiple Life Functions

T ( x1 x2 L xm ) = min [ T ( x1 ), T ( x2 ),..., T ( xm )] FT ( xy ) (t ) = 1 - Pr [T ( x ) > t and T ( y ) > t ]

( )
T x1 x2 L xm = max [ T ( x1 ),T ( x2 ),..., T ( xm )] FT
( xy )
(t ) = Pr [T ( x) £ t and T ( y ) £ t ]

Assuming independence: t pxy = t px t p y m xy (t ) = m x +t + m y +t

t px m x +t + t p y m y +t - t pxy m xy (t )
t pxy = t px + t p y - t px y m xy (t ) =
t px + t p y - t px y

K ( xy ) = êëT ( xy ) úû Pr [ K ( xy ) = k ] = Pr [ k < T ( xy ) £ k + 1] = k px y (1 - px + k : y +k ) = k qxy

ë ( )
Pr é K xy = k ù = k px qx +k + k py qy +k - k pxy qx +k :y +k
û

Assuming independence: qx + k : y + k = qx + k + q y +k - qx +k qy +k

2 of 5
Life Contingencies II & III Formulas

o ¥ o ¥ ¥ ¥
eu = ò t pu dt e xy = ò t p xy dt eu = å k pu exy = å k pxy
0 0
k =1 k =1

o ¥ o o o ¥
e xy = ò t pxy dt = e x + e y - e xy exy = å k pxy = ex + ey - exy
0
k =1

o 2 o 2

t t pxy dt - æç e xy ö÷ Var éëT ( xy ) ùû = 2 ò t t pxy dt - æç e xy ö÷

¥ ¥
Var [T ( xy )] = 2 ò
0
è ø 0
è ø

( )
T ( xy ) + T xy = T ( x) + T ( y ) ( )
T ( xy ) T xy = T ( x ) T ( y )

æ o o öæ o o ö
û ( )
Cov éT ( xy ), T xy ù = Cov éëT ( x), T ( y ) ùû + ç e x - e xy ÷ç e y - exy ÷
ë è øè ø

¥ ¥ n -1 n -1
Au = ò v t t pu mu (t ) dt au = ò vt t pu dt äu:n = å k Eu = å v k k pu
0 0
k =0 k =0

Axy + Axy = Ax + Ay äxy + äxy = äx + äy

1
äu:n =
d
(1 - Au:n ) au v = av - auv

n n
n q1 = ò py px m ( x + s ) ds q = ò t qx t p y m ( y + t ) dt = n q y - n q
0 s s n 2 1
xy xy 0 xy

¥
A1 = ò v s s p y s px m ( x + s ) ds
xy 0

Ay = A 1 + A 2 Axy = A1 + A 1
xy xy xy xy

Gompertz’s Law: m ( x) = Bc x c x + c y = cw m xy ( s ) = m w ( s )

Makeham’s Law: m ( x) = A + Bc x 2c w = c x + c y m xy ( s ) = m ww ( s )

Under UDD and independence assumption:

t pxy m xy ( t ) = qxy + (1 - 2t ) qx q y

i i æ 2 2 ö ¥ k +1
Axy = Axy + ç1 - + ÷ å v k pxy qx +k qy +k
d d è d i ø k =0

i i æ 1 2 2 ö ¥ k +1
Axy( m ) = Axy + ç 1 + - + ÷ å v k pxy qx +k qy +k
i(m) i (m ) è m d (m ) i ø k =0

3 of 5
Life Contingencies II & III Formulas

Multiple Decrement Models

m x( j ) (t )
fT , J (t , j ) = t px(t ) m x( j ) (t ) fT (t ) = t p x(t ) m x(t ) (t ) fJ T ( j t) =
m x(t ) (t )

t
m ò
- m x(t ) ( s ) ds
m x(t ) ( t ) = å m x( j ) ( t ) t px(t ) = e 0
t qx(t ) = 1 - t px(t )
j =1

t
1 d ( j)
m (t ) = (t )
( j)
x t qx t q ( j)
x = ò s px(t ) m x( j ) ( s ) ds
t px dt 0

é x
ù m
lx(t ) = la(t ) exp ê - ò m a(t ) ( y - a ) dy ú lx(t ) = lx(1) + ... + lx( m ) = å lx( j )
ë 0 û 123 123 j =1
those who those who
will terminate will terminate
due tocause 1 due tocause m
in the future in the future

x +1

òl m a( j ) ( y - a) dy
(t )
d x( j ) = y
x

é t ( j) ù m

ê - ò m x ( s ) ds ú t px = Õ t px
p
t x
¢ ( j)
= exp (t )
¢( j )
ë 0 û j =1

1 1 1 1

ò t px m x (t ) dt ò ò t px m x (t ) dt ò
(t ) (t )
lx(t+)t m x(t ) (t ) dt (t ) ( j)
lx(t+)t m x( j ) (t ) dt
mx(t ) = 0
1
= 0
1
mx( j ) = 0
1
= 0
1

ò òl ò òl
(t ) (t ) (t ) (t )
t p x dt x+t
dt t p x dt x +t
dt
0 0 0 0

1 1

ò t p¢x m x (t ) dt ò lx¢(+jt ) m x( j ) (t ) dt
( j) ( j)

m¢x( j ) = 0
1
= 0
1

ò t p¢x dt ò l¢
( j) ( j)
x +t
dt
0 0

qx( j )
log p¢x( j ) (t )
p¢ ( j)
=(p )
(t ) q (t )
x qx( j ) = q
x x
log px(t ) x

é 1 1 ù
Under UDD: qx(1) = qx¢(1) ê1 - ( qx¢(2) + q¢x(3) ) + ( q¢x(2)q¢x(3) ) ú
ë 2 3 û

4 of 5
Life Contingencies II & III Formulas

Applications of Multiple Decrement Theory

m ¥
A = å ò Bx( +)t v t t px(t ) m x( ( t ) dt
j j)

j =1 0

S x + h +t
( ES ) x +h+t = ( AS ) x+ h
Sx+h

m -1
0.5 S x + h + k + å S x + h + k - j + 0.5 S x + h + k - m
j =1
m Z x +h +k =
m

Insurance Models Including Expenses

Equivalence principle: E [ 0 Le ] = 0

a.p.v. of gross premiums = a.p.v. of benefits + a.p.v. of expenses

Modified Reserve Methods

( ) (
a + b a&&x: j - 1 + P a&&x:h - a&&x: j = Pa&&x:h ) a + b ax: j -1 = Pa&&x: j

P -a b -a
b = P+ b = P+
ax: j -1 a&&x: j

h Mod
V
k x:n = Ax + k:n -k - b a&&x + k : j -k - h Px:n j -k
a&&x +k :h - j = hkVx:n - ( b - h Px :n ) a&&x +k : j -k

FPT Method: 1V FPT = 0

Endowment insurance case:

Ax +1:n -1
a = A1 b=
x:1 a&&x +1:h -1

h -1
h FPT
V
k x:n = V
k -1 x +1:n -1

5 of 5
Life Contingencies I & II Formulas

Life Tables

x p0 = s ( x) t qx = Pr[T ( x) £ t ] = 1 - t px t p x s px +t = t +s px

t u
qx = t +u q x - t q x = t p x - t + u p x = t px u qx +t lx = l0 s ( x ) n d x = lx - lx + n

f ( x) - s¢( x ) 1 d æ x ö
m ( x) = X = =- lx s ( x) = 1 - FX ( x ) = exp ç - ò m (t ) dt ÷
1 - FX ( x) s( x) lx dx è 0 ø

æ x+n ö x+n
lx + n = lx exp ç - ò m ( y ) dy ÷ lx - lx + n = òl y m ( y ) dy
è x ø x

x -1 o ¥ ¥
lx = l x -1 px -1 = l0 Õ (1 - q y ) = l0 x p0 ex = ò t t px m ( x + t ) dt = ò t px dt
y =0 0 0

¥ 2
æo ö ¥ ¥
Var [T ( x )] = 2 ò t t px dt - ç ex ÷ ex = å k k px qx + k = å k px
0 è ø k =0 k =1

¥ n
Var [ K ( x )] = å ( 2k - 1) k px - ex2 n Lx = ò l x +t dt , Lx = 1 Lx
k =1 0

n o o
1
n mx = ò lx+t m ( x + t ) dt , mx = 1 mx
n Lx 0
Tx = lx ex , Tx - Tx + n = lx ex:n

o 1 o
ex = px + px ex +1 , ex = ò0 s px ds + px ex +1

1 of 9
Life Contingencies I & II Formulas

Life Insurances
¥ n
A1 = ò zt fT (t ) dt = ò v t t px m x (t ) dt Ax = lim A1 = A1
x:n n ®¥ x:n x:w - x
0 0

¥
=v ò px m x (t ) dt = v n × n px = n Ex Ax:n = A1 + A
n
A 1 t 1
x:n x:n x:n
n

m| Ax = Ax - A1 = m Ex × Ax +m ( IA) x = ò [t + 1] vt t px m x (t ) dt
x:m
0

¥ ¥ n

( IA )x = ò t × vt × t px m x (t ) dt = ò s| Ax ds ( DA) 1 = ò (n - [t ]) vt t px m x (t ) dt
x:n
0 0 0

n -1 ¥
A1 = å v k +1 × k px × qx + k Ax = å v k +1 × k px × qx + k
x:n k =0 k =0

¥
Ax:n = A1 + A
x:n
1 ( IA) x = å (k + 1) × vk +1 × k px × qx+k
x:n k =0

n -1 n -1 n -1
( DA) x:n = å (n - k ) × v
1
k +1
× k px × qx + k = å A1
x:n - j
= å ( n - k ) × k | A1
x:1
k =0 j =0 k =0

A1 = v × qx + v × px × A 1 with starting value A 1 =0

x:n x +1:n -1 x + n:0

Ax = v × qx + v × px × Ax +1 with starting value Aw = 0

Ax:n = v × qx + v × px × Ax +1:n -1 with starting value Ax + n:0 = 1

i i i
Under UDD: Ax =
d
Ax , ( IA ) 1
x:n
=
d
× ( IA) x1:n , and Ax:n = A1 + A 1
d x:n xn

i é ù
( IA) x - Ax × ( Ds )1 = ê( IA) x - æç - ö÷ Ax ú
i 1 1
Under UDD: ( IA ) x
=
d dë èd d ø û

d
Ax = - m ( x) + Ax [d + m ( x)] = d Ax - m ( x )(1 - Ax )
dx

2 of 9
Life Contingencies I & II Formulas

Life Annuities

æ - ln(1 - d y ) ö 1
If Y = aT : FY ( y ) = FT ç ÷ for 0 < y <
è d ø d

¥ ¥ ¥
ax = ò at t px m ( x + t ) dt = ò v t px dt = ò t Ex dt t

0 0 0

Ax - ( Ax )
2 2

ax = ax:1 + v px ax +1 1 = d × ax + Ax Var éë aT ùû =
d2
n n n
ax:n = E [Y ] = ò at t p x m ( x + t ) dt + n px an = ò v t t px dt = ò t Ex dt
0 0 0

1 - Ax:n
ax:n = Ax:n = 1 - d × ax:n
d
¥ ¥
a = ò v n at - n t px m ( x + t ) dt = ò v t t px dt = n Ex ax + n = ax - ax:n
n x
n n

n
a x = v px n -1
ax +1 starting value 0 ax + n = ax + n

¥ ¥
ax:n = n qx an + ò at t px m ( x + t ) dt = an + ò vt t px dt = an + n ax = an + n Ex ax +n = an + (ax - ax:n )
n n

n
ax:n 1 ¶
sx:n = =ò dt ax = m ( x) ax - Ax = m ( x ) ax - (1 - d ax )
n Ex 0 n -t E x + t ¶x

¥ ¥
1 - Ax
äx = å äk +1 k px qx + k = å v k k px = äx = 1 + v px äx +1 with äw = 0
k =0 k =0 d

A -( A ) 2 2

Var éë äK +1 ùû = x 2 x
d

n -1 n -1
äx:n = E[Y ] = å äk +1 k px qx + k + än n px = å v k px ; äx:n = 1 + v px äx +1:n -1
k
with äx + n:0 = 0
k =0 k =0

Ax:n - ( Ax:n )
2 2
1 - Ax:n é1 - Z ù
äx:n = Var[Y ] = Var ê = where Y is the p.v. r.v. for
d ë d úû d2
a temporary life annuity-due

3 of 9
Life Contingencies I & II Formulas

Life Annuities (2)

¥
ä = n Ex äx + n = äx - äx:n = å v k k px
n x n
äx = v px n -1
äx +1 with 0 äx + n = äx +n
k =n

2 2n
v n px ( äx + n - 2 äx + n ) + n2 äx - ( ä)
2
n-year deferred: Var [Y ] = n x
d

¥ ¥
äx:n = n qx än + å äk +1 t px qx + k = än + å v k k px = än + äx - äx:n = än + n äx
k =n k =n

äx:n n -1
1
&&
sx:n = =å
n Ex k =0 n - k Ex + k

¥ ¥
1 - (1 + i ) Ax
ax = E éë aK ùû = å ak k px q x + k = å v k k px =
k =0 k =1 i

1 - Ax( m ) ¥
1 ¥ h/m
ä (m)
x =
d (m)
= å
h =0
ä((hm+)1) / m h
m
px 1
m
qx + h m = åv
m h =0
h
m
px 1 = d ( m ) äx( m ) + Ax( m )

m-thly payment annuity due: Var [Y ] = éê 2 Ax( m ) - ( Ax( m ) ) ùú (d )

2 (m ) 2
ë û

1 - Ax( m )
äx( m ) = ä1( m ) äx + ä¥( m ) ( Ax - Ax(m ) ) äx( m ) = (m)
= ä¥( m ) - ä¥( m ) Ax(m )
d

s1( m ) - 1 id
UDD: ä (m)
x = ä1 äx -
(m )
( m)
Ax a (m) = s1( m ) ä1( m ) =
d i d (m )
(m)

s1( m ) - 1 s1( m ) - 1 i - i(m)

UDD: ä (m)
x = s1 ä ä -
(m ) (m )
x = a ( m ) äx - b ( m ) b (m) = =
1
d (m) d (m) i (m ) d (m )

s1( m ) - 1
UDD: ä (m)
x = ä1 äx -
(m )
(m)
Ax = ä1( m ) äx - b (m) Ax
d

UDD: äx(:mn ) = äx( m ) - n äx( m ) = ä1(m ) äx:n - b (m) A1 äx(:mn ) = a (m) äx:n - b (m) (1 - n Ex )
x:n

UDD: n äx( m ) = ä1( m ) n äx - b (m) n Ax n

äx( m ) = a (m) n äx - b (m) n Ex

æ i ( m) ö (m ) 1
1 = i ax + (1 + i ) Ax = i ( m ) a x( m ) + ç 1 + ÷ Ax ax( m ) = äx( m ) -
è m ø m

1 1 1
ax(:mn ) = äx(:mn ) - + n Ex = äx(:mn ) - (1 - n Ex )
m m m

4 of 9
Life Contingencies I & II Formulas

Benefit Premiums

ù ç1 + ( x ) ÷ = x ( x )
2 2
A æ P A ö 2
A - A
P ( Ax ) = x Var ëévT - P ( Ax ) aT ûù = éê 2 Ax - ( Ax )
2

ax ë úû ç d ø÷ (d ax )
2
è

1 1 1 - d ax d Ax
d + P ( Ax ) = Þ P ( Ax ) = -d = =
ax ax ax 1 - Ax

Ax:n 1 1 1 - d ax:n d Ax:n

P ( Ax:n ) = Þ d + P ( Ax:n ) = Þ P ( Ax:n ) = -d = =
ax:n ax:n ax:n ax:n 1 - Ax:n

æ P(A ) ÷ö Ax:n - ( Ax:n )

2 2
2

Endow. Insurance: Var [ L ] = ç 1 + x:n é A -(A ) ù=

2 2

ç d ÷ êë x:n x:n úû
(d a )
2
è ø x:n

æ 1 éd u + P ù ö -P
Whole Life Insurance: FL (u ) = 1 - FT ç - log ê ú ÷, u>
è d ë d +P û ø d

5 of 9
Life Contingencies I & II Formulas

Benefit Premiums (2)

ù æç 1 + x ö÷ = x ( x )
2 2
A P 2
A - A
- Px äK +1 ùû = é Ax - ( Ax )
2
Px = x Var éëv K +1 2

äx ë ûè d ø ( d äx )
2

1 1 1 - d äx:n d Ax:n
d + Px:n = Þ Px:n = -d = = (Also for whole life: n ® ¥ )
äx:n äx:n äx:n 1 - Ax:n

ù æ 1 + Px:n ö = x:n ( x:n )

2 2
2
A - A
Endowment Insurance: Var[ L ] = éê 2 Ax:n - ( Ax:n )
2
ç
ûú è ÷
ë ( d äx:n )
2
d ø

Ax Ax i Ax i
P ( Ax ) = UDD: P ( Ax ) = = = Px
äx äx d äx d

( )
A1 i Ax1 :n i i
UDD: P A1 = x:n
= = P1 UDD: P ( Ax:n ) = P1 + P 1
x:n äx:n d äx:n d x:n d x:n x:n

Ax:n äx:h
True fractional benefit premiums, example: h Px(:nm ) = Þ h Px(:nm ) = h Px:n
äx(:mh ) äx(:mh )

6 of 9
Life Contingencies I & II Formulas

Benefit Reserves

V = E éë t L T ( x) > t ùû
t Whole Life Ins.: t L = vT ( x )-t - P ( Ax ) aT ( x ) -t , given T ( x ) > t

V ( Ax ) = Ax +t - P ( Ax ) ax +t
t

æ P ( Ax ) ö æ P ( Ax ) ö 2
2 2

÷ éê Ax +t - ( Ax +t ) ùú
2
WLI: Var éë t L T ( x ) > t ùû = ç 1 + ÷ Var éëvT ( x )-t T ( x ) > t ùû = ç 1 +
ç d ÷ø ç d ÷ø ë û
è è

é 1 é yd + P ( Ax ) ù ù
1 - FT ( x ) êt - log ê úú
êë d êë d + P ( Ax ) úû úû
WLI: Ft L ( y ) = (general)
1 - FT ( x ) (t )

é 1 é yd + P ( Ax ) ù ù
WLI: Ft L ( y ) = Pr êT ( x + t ) ³ - log ê ú ú with aggregate mortality law
êë d êë d + P ( Ax ) úû úû

é P ( Ax:n ) ù
t V ( Ax:n ) = ë P ( Ax +t :n -t ) - P ( Ax:n ) û a x +t :n - t
é ù V ( x:n )
A = ê 1 - ú Ax +t:n -t
êë P ( Ax +t:n -t ) úû
t

1
V ( Ax:n ) = é P ( A ) a - A1 ù = P(A )s - k where t k x = A1 Ex
t êë x:n x:t úû x:n x:t t x t
t Ex
x:t x:t

ax +t P ( Ax +t ) - P ( Ax ) Ax +t - Ax
V ( Ax ) = 1 - = =
P ( Ax +t ) + d
t
ax 1 - Ax

7 of 9
Life Contingencies I & II Formulas

Benefit Reserves (2)

WLI, fully discrete: k L = v( K ( x )-k )+1 - Px ä( K ( x ) -k )+1 Þ k Vx = Ax + k - Px äx +k

2
æ P ö
WLI, fully discrete: Var éë k L K ( x ) = k , k + 1,...ùû = ç 1 + x ÷ é 2 Ax + k - ( Ax + k ) ù
2

è d ø ë û

k Vx:n = Ax + k :n -k - Px:n äx +k :n -k

2
æ P ö
Endowment Insurance: Var ëé k L K ( x ) = k , k + 1,...ùû = ç 1 + x:n ÷ éê 2 Ax + k :n -k - ( Ax + k :n - k ) ùúû
2

è d ø ë
é Px:n ù
é ù
k Vx:n = ë Px + k :n - k - Px:n û äx + k :n - k k Vx:n = ê1 - ú Ax + k :n -k
ëê Px + k :n -k ûú

1 é A1
h Vx:n = Px:n äx:h - A1 ù = Px:n &&
sx:h - h k x h kx =
x:h
E ê
ë ú
x:h û Ex
h x h

äx + k Px + k - Px Ax + k - Ax
k Vx = 1 - k Vx = k Vx =
äx Px + k + d 1 - Ax

Px = P1 + P 1 Vx
n
x:n x:n

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Life Contingencies I & II Formulas

Benefit Reserves (3)

ìA - h P ( Ax:n ) äx + k :h -k k <h<n
ïï x + k :n - k
k V ( Ax:n ) = í Ax + k :n - k h£k <n
h
(semi-continuous basis)
ï
ïî1 k =n

UDD: khV ( Ax:n ) =

i h
d
k V A1( )
x:n
+ khV æç A 1 ö÷
è x:n ø

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