SURVIVAL DISTRIBUTIONS AND LIFE TABLES 3.1 Introduction Chapter 1 was dedicated to showing how insurance can increase the expected utility of individuals facing random losses. In Chapter 2 simple models for sin- gle-period insurance policies were developed. The foundations of these models were Bernoulli random variables associated with the occurrence or nonoccurrence of a loss. The occurrence of a loss, in some examples, resulted in a second random process generating the amount of the loss. Chapters 4 through 8 deal primarily with models for insurance systems designed to manage random losses where the randomness is related to how long an individual will survive. In these chapters the time-until-death random variable, T(x), is the basic building block. This chapter develops a set of ideas for describing and using the distribution of time-until-death and the distribution of the corresponding age-at-death, X. We show how a distribution of the age-at-death random variable can be sum- marized by a life table, Such tables are useful in many fields of science. Conse- quently a profusion of notation and nomenclature has developed among the vari- ous professions using life tables. For example, engineers use life tables to study the reliability of complex mechanical and electronic systems. Biostatisticians use life tables to compare the effectiveness of alternative treatments of serious diseases. Demographers use life tables as tools in population projections. In this text, life tables are used to build models for insurance systems designed to assist individuals facing uncertainty about the times of their deaths. This application determines the viewpoint adopted. However, when it provides a bridge to other disciplines, notes relating the discussion to alternative applications of life tables are added. A life table is an indispensable component of many models in actuarial science. In fact, some scholars fix the date of the beginning of actuarial science as 1693. In that year, Edmund Halley published “An Estimate of the Degrees of the Mortality of Mankind, Drawn from Various Tables of Births and Funerals at the City of Chapter 3 Survival Distributions and Life TablesBreslau.” The life table, called the Breslau Table, contained in Halley's paper re- mains of interest because of its surprisingly modern notation and ideas. 3.2 Probability for the Age-at-Death In this section we formulate the uncertainty of age-at-death in probability concepts. 3.2.1 The Survival Function Let us consider a newborn child. This newborn’s age-at-death, X, is a continuous- type random variable. Let Fy(x) denote the distribution function (4.f.) of X, FQ) =Pr(X<3x) x20, 21) and set s(x) =1-FyQ)=PHX>x) x20. (3.2.2) We always assume that F,(0) = 0, which implies s(0) = 1. The function s(x) is called the survival function (s.f.). For any positive x, s(x) is the probability a new- born will attain age x. The distribution of X can be defined by specifying either the function F,(x) or the function s(x). Within actuarial science and demography, the survival function has traditionally been used as a starting point for further devel- opments. Within probability and statistics, the d.f. usually plays this role. However, from the properties of the df, we can deduce corresponding properties of the survival function. Using the laws of probability, we can make probability statements about the age- at-death in terms of either the survival function or the distribution function. For example, the probability that a newborn dies between ages x and z (x < z) is Pr(x < X <2) = Fy(z) — Fy(x) = s(x) — st). 3.2.2 Time-until-Death for a Person Age x The conditional probability that a newborn will die between the ages x and z, given survival to age x, is '¢(2) = F(x) T= Fy@) Priv < X= 7|X > 2) = 908) = st2) eae 3.2.3) The symbol (2) is used to denote a life-age-x. The future lifetime of (x), X = x, is denoted by T(). 52 ‘Section 3.2 Probability for the Age-at-DeathWithin actuarial science, itis frequently necessary to make probability statements about T(2). For this purpose, and to promote research and communication, a set of symbols, part of the International Actuarial Notation, was originally adopted by the 1898 International Actuarial Congress. Symbols for common actuarial functions and principles to guide the adoption of new symbols were established. This system has been subject to constant review and is revised or extended as necessary by the International Actuarial Association's Permanent Committee on Notation. These no- tational conventions are followed in this book whenever possible. ‘These symbols differ from those used for probability notation, and the reader may be unfamiliar with them. For example, a single-variate function that would be written q(x) in probability notation is written q, in this system. Likewise, a multi- variate function is written in actuarial notation using combinations of subscripts, superscripts, and other symbols. The general rules for defining a function in ac- tuarial notation are given in Appendix 4. The reader may want to study these forms before continuing the discussion of the future-lifetime random variable. To make probability statements about T(x), we use the notations ae = PHT) t] FeO. (3.2.5) The symbol ,q, can be interpreted as the probability that (x) will die within t years; that is, q, is the d.f. of T(2). On the other hand, ,p, can be interpreted as the prob- ability that (x) will attain age x + 1; that is, »p, is the sf. for (x). In the special case of a life-age-0, we have T(0) = X and Po= SX) x20. 3.2.6) If t = 1, convention permits us to omit the prefix in the symbols defined in (3.2.4) and (3.2.5), and we have 4 r{(x) will die within 1 year}, Py = Pr{(x) will attain age x + 1]. There is a special symbol for the more general event that (x) will survive f years and die within the following u years; that is, (x) will die between ages x + + and x +f + u, This special symbol is given by ahs = Pelt < Tex) st + u] tells ~ = Pe Ps 27) As before, if u = 1, the prefix is deleted in ,,9,, and we have ,, At this point it appears there are two expressions for the probability that (x) will die between ages x and x + u. Formula (3.2.7) with t = 0 is one such expression; (823) with z = x + wis a second expression. Are these two probabilities different? Formula (3.2.3) can be interpreted as the conditional probability that a newborn Chapter 3 Survival Distributions and Life Tableswill die between ages x and z = x + u, given survival to age x. The only information on the newborn, now at age x, is its survival to that age. Hence, the probability statement is based on a conditional distribution of survival for newborns. On the other hand, (3.2.7) with t = 0 defines a probability that a life observed at age x will die between ages x and x + 1. The observation on the life at age x might include information other than simply survival. Such information might be that the life has just passed a physical examination for insurance, or it might be that the life has commenced treatment for a serious illness. Life tables for situations where the observation of a life at age x implies more than simply survival of a newborn to age x are discussed in Section 3.8, where additional notation for those life tables is introduced. We will continue development of the theory without further refer- ence to the distinction between (3.2.3) and (3.2.7), and we assume that until that section, observation of survival at age x will yield the same conditional distribution of survival as the hypothesis that a newborn has survived to age x; that is, wiPo _ 0 +f) Po SIX) six + 8) 3a)” 1 (8.28) (3.2.9) Under this approach, (3.2.7), and its many special cases, can be expressed as s(x + t) — sx +t +n) 3@) [sen] fe t= set tt s(x) s(x +t) Px Ave (3.2.10) —_———_ 3.2.3 Curtate-Future-Lifetime ‘A discrete random variable associated with the future lifetime is the number of future years completed by (x) prior to death. It is called the curtate-future-lifetime of (x) and is denoted by K(x). Because K(x) is the greatest integer in T(x), its p.f. is Pr{Kix) = Prik = Tx) 0 f(x) = 0 ni) =0 Fy@)=1 s(@) =0 lim fgfG)dt=1 SS weeds = » Funetinna in Terms of Relationships FyQ) Fy (x) 1 Fx) F(z) FxQX)/T1 = Fy) sx) 1 sta) 500) (a) 5'@)/ 0) fx) Se fetwdu SE fwd Sxl) AOS: food wx) 1 = expl=S5 wit) dtl expl—Ji w(t) dt} wxexpl=S5 w(t) df} w(x) k= = =— If A refers to the complement of the event A within the sample space and Pr(A) + 0, the following expresses an identity in probability theory: Pr(A U B) = Pr(A) + Pr(A) Pr(B\A). Rewrite this identity in actuarial notation for the events A = [T(x) = #] and B = [F< T@s0 ELE] = by s(x). We denote E[¢(3)] by 1,; that is, I, represents the expected number of survivors to age x from the /, newborns, and we have 1, = hy s(u). 3.1) Moreover, under the assumption that the indicators J; are mutually independent, 8(Q) has a binomial distribution with parameters 1 = I, and p = s(x). Note, however, that (3.3.1) does not require the independence assumption. 38 Section 3.3 Life TablesIna similar fashion, ,9, denotes the number of deaths between ages x and x + 1 from among the initial /y lives. We denote E[,.9,] by ,,. Since a newborn has prob- ability s(x) — s(x + m) of death between ages x and x + m we can, by an argument similar to that for [,, express 1d, = EL,9,) = bfs(x) ~ soe + 1] by ~ deans (33.2) When 1 = 1, we omit the prefixes on ,9, and ,4, From (3.3.1), we see that mo = we) (3.3.3) and 34) Since Fy pA) = In Po MX) = In fx), the factor 1, (x) in (3.3.4) can be interpreted as the expected density of deaths in the age interval (x, x + dx). We note further that I, = Ip exp[—So u(y) dy], (3.3.5) dosn = be expl— Fe w(y) dy], (3.3.6) Fe deen = FE" Ly wy) ay. 3.7) For convenience of reference, we call this concept of |, newborns, each with survival function s(x), a random survivorship group. 3.3.2 Life Table Example In “Life Table for the Total Population: United States, 1979-81” (Table 3.3.1), the functions ,q,,1,, and ,d, are presented with I, = 100,000. Except for the first year of life, the value of t in the tabulated functions ,q, and ,d, is 1. The other functions appearing in the table are discussed in Section 3.5, ‘The 1979-81 US. Life Table was not constructed by observing 100,000 newborns until the last survivor died. Instead, it was based on estimates of probabilities of death, given survival to various ages, derived from the experience of the entire US. population in the years around the 1980 census. In using the random survi- vorship group concept with this table, we must make the assumption that the probabilities derived from the table will be appropriate for the lifetimes of those who belong to the survivorship group. Chapter 3 Survival Distributions and life Tables 59Life Table for the Total Population: United States, 1979-81 wm @) ) «@) © © a Average Proportion Remaining Dying lifetime Proportion of ; , ‘Average Persons Alive Stationary Population” __ Number of at Beginning __Of 100,000 Born Alive _ Years Lived Years of ‘Age Interval Cfage ber in This, Remaining Period of Interval ing at_ Number Years Lived and All__at Beginning Life between Dying during Beginning of Dying during inthe Age Subsequent of Age Two Ages Interval "Age Interval Age Interval Interval Age Intervals Interval xtortt a 1 le is T. a Days 04 0.00469 100 000 463 2737387758 73.88 17 0.00246 99597 245, 16857387485, 7422 7-28 0.00139 99292 138 5708 7385850 7438 28-365 0.00418 99154 a4 913577380142 7443 Years 0-4 0.01260 100000 1260 98973 7387758, 73.88 12 0.00093 98 740 92 98694 7 DARTRE 7382 23 6.00065 93 648 64 98617 7190091 72.89 34 6.00050 98 584 49 98560 7091474 7193 +5 0.00040 98 535 40 98515 6 992914 7097 5-6 0.00037 98.495 36 98477 6 894399 70.00 6? 0.00033 98 459 33 98442 6 795922 69.02 7-8 0.00030 98426 30 98.412 6 697 490 68.05 89 0.00027 98396 26 98383 6 599068 67.07 9-10 0.00023 98370 2 98358 6 500685 66.08 10-11 .00020 98347 19 98338 6402327 «65.10 na 0.00019 98.328 19 98319 6303989 6.11 3 0.0005 98 309 24 982976205670 «63.12 44 0.00037 98 285 7 98266 © G1U7373— «GA 115 0.00053 98 248 52 98222 6009107 61.16 15-416 0.00069 98 196 oa 98163 5.910885 60.19 16-17 0.00083 98129 2 98087 5.812722 59.24 17-18 0.00095 98 047 34 98000 5714635, 58.28 1819 0.00105 97953 102 97902 5616635 5734 19-20 0.00112 97 851 no 9779 5518733. 5640 20-21 0.00120 ora 118 97682 5.40937 58.46 a2 0.00127 97 623 14 97561 5323255 5453, 2-23 0.00132 97 499 129 97435 5225684 «53.60 23-24 o.00134 97370 130 97306 5.128259 5267 24-25 0.00133 97240 130 97175 5030953 5174 25-26 0.00132 97110 128 97046 4.93378 5081 26-27 0.00131 96982 126 96919 4836732 99.87 27-28 0.00130 96 856 126 96793 «4739813. «48.94 23-29 0.00130 96730 126 96667 4643020 48.00 29-30 0.00131 96 604 7 96541 4546 4706 “Stationary population Is @ demographic concept vested in Chapter 19. 60 ‘Section 3.3 Life Tablespes ‘Continued [i Life Table for the Total Population: United States, 1979-81 @ ® @ @ © a Average Remaining Proportion of a Fereons Average ‘alive . Stationary Population” __ Number of at Beginning __OFf 100,000 Born Alive Years Lived Years of Age Interval “of age ‘Number ‘in This Remai Period of Interval _Living at_ _ Number Years Lived _and All Life between Dying during Beginning of Dying during in the Age Subsequent Two Ages Interval Age Interval Age Interval Interval Age Intervals xtoxit ra 1 a, Pa tr, a 0.00133 96477 wz 96 414 4449 812 46.12 0.00134 96 350 130 96 284 4353 398, 45.18 0.00137 96 220 132 96 155 4257 114 44.24 0.00142 96 088 137 96.019 41160959 43.30 0.00150 95951 43 95 880 4064 940 12.36 0.00159 153 3.969 060 41.43 0.00170 163 3.873.329. 4049 0.00183 175 3777 755 39.56 0.00197 188 3.682.351 38.63 0.00213 203 3587 127 3771 0.00232 20 3.492.100 36.79 0.00254 241 3397 283, 35.87 0.00279 264 3 302.698, 34.96 0.00306 288 3208 364 34.06 0.00335 314 3.114307 33.16 0.00366 93.599 343 3020551 32.27 0.00401 93.256 374 2927 124 31:39 0.00442 92 882 410 2.834 055 3051 0.00488 92472 451 2741378 29.65 0.00538 92.021 495 2649 132 28.79 0.00589 91526 540 91256 2557359 27.94 0.00642 90 986 584 90695 2.466 103 27.10 0.00699 90 402 631 goss 2375408 26.28 0.00761 8971 684 99430 2285322 25.46 0.00830 89.087 739 88717 2195892 24.65 0.00902 88.348 707 87950 2107175 23.85 0.00978 87551 856 87122 2.019 205 23.06 0.01059 36 695 919 36 236 41932 103 22.29 0.01151 8576 987 85283, 1.845 867 21.52 amass 84759 1063 BADR, 17601584 2076 60-61 0.01368 83.726 1145 83.153 1676 326 20.02 61-62 0.01493 82581 1233 81.965 1.593.173 19.29 62-63 0.01628 81348, 1324 80 686 1511 208 18.58 63-64 0.01767 80024 1415 79316 1430 522 1788 64-65 0.01911 78.609 1502 77859 1.351 206 17:19 “Stationary population is @ demographic concept treated in Chapter 19. Chapter 3 Survival Distributions and Life Tables 61Life Table for the Total Population: United States, 1979-81 wo Q) (3) @) 5) 6) Mm Proportion Average ane Remaining Proportion of —— Persons : Average Stationary Population Number of OF 100,000 Born Alive Years Lived Years of Life Age Interval Number in This Kemaining Period of Interval —_Livingat_ Number Years Lived _ and All Life between Dying during Beginning of Dying during inthe Age Subsequent Two Ages Interval Age Interval Age Interval Interval Age Intervals Interval xtox tt Me 1 a i T é Years 65-66 0.02059 7107 1587 763141273347 66-67 0x16 75.520 1674 74683 1197033 67-68 0.02389 73846 1764 72968 1122350 68-69 0.02585 72082 1864 71150 1049386 69-70 0.02806 70218 1970 69.233 978236 70-71 0.03052 68.248 2083 67206 909 003 oo3315 6 165 2193 65.069 841797 0.0359, 63.972 2299 62823 7716728 0.03882 61673 2304 60476 713.905 oats 39.279 2480 58.039 653.429 0.04507 36.799 2.560 35.500 5953901048 (104867 34239 2640 52919 539.870 995, 0.05274 51599 2721 50 23 486951 mm 005742 38878 2807 47 436 713, 893 0.06277 46071 2891 44626 339 238 845 0.06882 43180 2072 41694 sas 612 798 0.07552 40208 3.036 38 689 302918 753 0.08278 37172 3077 35 634 264 229 7 0.09041 34.095 3088 32553 228 595 670 0.09812 31012 3052 29 486 196 042 632 85-86 0.10725 27 960 2.999 26 461 166.556 86-87 ou 24961 2923 23.500 140 095 87-8 o1z717 22038 2503 20636 116595 88-89 0113708 19235 2637 7917 95 959 89-90 014728 16.598 2444 15376 78.042 90-91 0.15868, 14154 2046 13031 62.666 4s 91-92 017169 11908 2045 10.886 196. 47 92-93 0.18570 9.863 1831 8948 387 393 93-94 020023, 8032 1608 728 29 801 371 91 95 021495 624 1381 5733 22573 351 95-96 0.22976 5043 1159 4463 16 840 334 96-97 3884 915 3412 1237 319 97-98 2939 734 2562 8965 305 98-99 2185 387 1592 6.403, 295 99-100 1598 438 1374 4511 282 Stationary population is @ demographic concept treated in Chapter 19 a Section 3.3 Life TablesLife Table for the Total Population: United States, 1979-81 M a @) aw 6) ) ” Proportion Average ‘Dying Remaining Proportion of = Persons a Average fai ; Stationary Population? Number of at Beginning __Of 100,000 Born Alive Years Lived Years of Life Age Interval Ofage © Number in This ning Period of Interval Living at_ Number Years Lived _ and All Life between Dying during Beginning of Dying during inthe Age Subsequent of Age Two Ages Interval Age Interval Age Interval. Interval Age Intervals Interval xtox+t ae I dy he T, & Years 100-101 20120 1150 335 983 3137 273 101-102 030139 815 245 2 2154 dot 102-108 031089 570 7 $81 1462 257 109-108 o3197 393 126 330 381 250 104-105 032786 267 88 223 si a 105-106 033599 179 6 150 228 106-107 oaa0s 19 n % 28 407-108, 034870 78 ” & 178 106-108 osiss 31 18 2 109-110 035988 x B u ‘Stationary population is a demographic concopt treated in Chapter 18, Several observations about the 1979-81 U.S. Life Table are instructive. Observations: 1. Approximately 1% of a survivorship group of newborns would be expected to die in the first year of life 2. It would be expected that about 77% of a group of newborns would survive to age 65. The maximum number of deaths within a group would be expected to occur between ages 83 and 84 4. For human lives, there have been few observations of age-at-death beyond 110. Consequently, it is often assumed that there is an age « such that s(x) > 0 for x < ©, and s(x) = 0 for x = w. The age a, if assumed, is called the limiting age. ‘The limiting age for this table is not defined. It is clear that there is a positive probability of survival to age 110, but the table does not indicate the age w. 5. Local minimums in the expected number of deaths occur around ages 11 and 27 and a local maximum around age 24. 6. Although the values of I, have been rounded to integers, there is no compelling reason, according to (3.3.1), to do so. A display such as Table 3.3.1 is the conventional method for describing the dis- tribution of age-at-death. Alternatively, an s.f. can be described in analytic form such as s(x) = e-*, ¢ > 0, x = 0. However, most studies of human mortality for Chapter 3_ Survival Distributions and Life Tables @insurance purposes use the representation s(x) = I, /l, as illustrated in Table 3.3.1. Since 100,000 s(x) is displayed for only integer values of x, there is a need to inter- polate in evaluating s(x) for noninteger values. This is the subject of Section 3.6. kz ~LDZ = = (On the basis of Table 3.3.1, evaluate the probability that (20) will a. Live to 100 b. Die before 70 c. Die in the tenth decade of life. Solution: (100) _ op _ 1,150 _ 520) ~ Iny 97,741 ~ O18 {s(20) = s(70)1 68,248 _ ‘s(20) : 97,741 tute {80) = s(100)] _ (lo = hoo) _ (14,154 — 1,150) _ 3@0) 97,741 ae Insight into life table functions can be obtained by studying Figures 3.3.1, 33.2, and 3.3.3. These are drawn to be representative of current human mortality and are not taken directly from Table 3.3.1 Graph of p(x) oot 0.03 0.02 ao oO 10 40 Age ‘Section 3.3_Life TablesIn Figure 3.3.1 note two features: + The force of mortality is positive and the requirement f n(x) dx = 2 appears satisfied. (See Table 3.2.1.) + The force of mortality starts out rather large and then drops to a minimum around age 10. == Graph of J, w(x) a, 20 1500 1000 soo er «0 3% Age Graph of /, i 100 0 3 5 wo Z a ~ 40 Age ow 70 0 Chapter 3 Survival Distributions and Life Tables 65In Figures 3.3.2 and 3.3.3 note the following: + The function |, (x) is proportional to the p.df. of the age-at-death of a new- born. Since 1, (x) is the expected density of deaths at age x, under the random survivorship group idea, the graph of I, (x) is called the curve of deaths. ‘There is a local minimum of I, x(x) at about age 10. The mode of the distribution of deaths—the age at which the maximum of the curve of deaths occurs—is, around age 80. + The function I, is proportional to the survival function s(x). It can also be in- terpreted as the expected number living at age x out of an initial group of size ly + Local extreme points of 1, 4(2) correspond to points of inflection of I, since d d d eh mo) i(- 4u)=- 3.4 The Deterministic Survivorship Group ‘We proceed now to a second, and nonprobabilisti, interpretation of the life table. This is ronted mathematically in the concept of decrement (negative growth) rates. As such, it is related to growth-rate applications in biology and economics. It is deterministic in nature and leads to the concept of a deterministic survivorship group or cohort. A deterministic survivorship group, as represented by a life table, has the fol- lowing characteristics: + The group initially consists of J, lives age 0. + The members of the group are subject, at each age of their lives, to effective annual rates of mortality (decrement) specified by the values of q, in the life table. + The group is closed. No further entrants are allowed beyond the initial [,. The only decreases come as a result of the effective annual rates of mortality (dectement), From these characteristics it follows that the progress of the group is determined by 4 = WL = 9a) = Io ~ doy h=hd-4)=h hea da th- Sd, 24, =h\i-=—} = ha - 9) G41) 66 Section 3.4 The Deterministic Survivorship Groupwhere /, is the number of lives attaining age x in the survivorship group. This chain of equalities, generated by a value I, called the radix and a set of q, values, can be rewritten as 1 = by Por b= hp = (ly Po) Par (3.4.2) ‘There is an analogy between the deterministic survivorship group and the model for compound interest. Table 3.4.1 is designed to summarize some of this parallelism. Related Concepts of the Mathematics of Compound Interest and of Deterministic Survivorship Groups ee oe Al) = Size of fund at time f, time ize of group at age x, age {increment) (decrement) 7 A(t) 2 Effective n-year rate of interest, Effective n-year rate of mortality, 4. Alt + n) = AW) Lt Hi eeara nimi a Force of interest at time f Force of mortality at age x ‘A(t + At) — A(t) = besa os tm [ADA wt) — tm (ee Pan A(t) dt “There iso universally aocepied symbol for an effective r-yoar rate of interest, ‘The headings of the 7, and ,d, columns in Table 33.1 refer to the deterministic survivorship group interpretation. Although the mathematical foundations of the random survivorship group and the deterministic survivorship group are different, the resulting functions q,, ,, and d, have the same mathematical properties and subsequent analysis. The random survivorship group concept has the advantage of allowing for the full use of probability theory. The deterministic survivorship group Chapter 3_ Survival Distributions and Life Tables ais conceptually simple and easy to apply but does not take account of random variation in the number of survivors. 3.5 Other Life Table Characteristics In this section we derive expressions for some commonly used characteristics of the distributions of T(x) and K(x) and introduce a general method for computing several of these characteristics. 3.5.1 Characteristics The expected value of T(x), denoted by é,, is called the complete-expectation- of-life. By definition and an integration by parts, we have a= eireo= [tp mee +e at faces = tools + [Fede 651) The existence of E[T(x)] implies the lim t(—p,) = 0. Thus é, Coa 50 The complete-expectation-of life at various ages is often used to compare levels of public health among different populations. A similar integration by parts yields equivalent expressions for E[T(x)"} rire = [p,m +) at =2[ baat (53) This result is useful in the calculation of Var [T(x)] by Var[T(x)] = E[Tey"] — E[Te)P =2[tpa—@ 5.4) In these developments, we assume that E[7(x)] and E[T(x)?] exist. One can construct s.f/s such as s(x) = (1 + x)? where this would not be true. Other characteristics of the distribution of T(x) can be determined. The median future lifetime of (x), to be denoted by m(x), can be found by solving cy ‘Section 3.5. Other Life Table CharacteristicsPr[T(x) > m(x)] or sty + m(x)] 1 a) 2 (3.5.5) for m(x). In particular, m(0) is given by solving s[m(0)] = 1/2. We can also find the mode of the distribution of T(x) by locating the value of t that yields a maximum value of ,p, w(x + ) ‘The expected value of K(x) is denoted by e, and is called the curtate-expectation- of-life. By definition and use of summation by parts as described in Appendix 5, we have 6 = BLK] = 3 bapa dost = & kA.) = Kwa + & aks 5.6) Again, the existence of E[K(x)] implies the lim k(—,p,) = 0. Thus, with a change of the summation variable, ~ = > tp (57) Following the outline used for the continuous model and using summation by parts, we have EIK@y] = 3 Paps doe BF Ace) = ECs + D AMP. (58) ‘The existence of E[K(x)'] implies lim }°(—,p,) = 0. With a change of the summation variable, a (I= Fk + Dips = Dk Yip, 59) a Now, Var(K) = E[K?] E[KP = > (2k -1)p, - 2 (3.5.10) Chapter 3_ Survival Distributions and Life Tables ooTo complete the discussion of some of the entries in Table 3.3.1, we must define additional functions. The symbol L, denotes the total expected number of years lived between ages x and x + 1 by survivors of the initial group of Jy lives. We have -[ thar we + t) dt + hay (3.5.11) where the integral counts the years lived of those who die between ages x and x + 1, and the term I,., counts the years lived between ages x and x + 1 by those who survive to age x + 1. Integration by parts yields Ly -[ tdless + leat the + [eed + fa -f esy dt (35:12) f The function L, is also used in defining the central-death-rate over the interval from x to x + 1, denoted by mt, where fgeecoe Piaae ‘An application of this function is found in Chapter 10. (35.13) The definitions for m, and L, can be extended to age intervals of length other than one: = frame + de + ny (3.5.14) (3.5.15) For the random survivorship group, ,L, is the total expected number of years lived between ages x and x +» hy the survivors of the initial group of ly lives and ,m, is the average death rate experienced by this group over the interval (x, x + n). The symbol T, denotes the total number of years lived beyond age x by the survivorship group with ly initial members. We have 70 ‘Section 3.5 Other Life Table Characteristics[letate roa (3.5.16) The final expression can be interpreted as the integral of the total time lived be- tween ages x + t and x + + dt by the /,,, lives who survive to that age interval. We also recognize T, as the limit of ,L., as n goes to infinity. ‘The average number of years of future lifetime of the /, survivors of the group, at age x is given by tr. f eg dt Ie -f peat = 8 as determined in (3.5.1) and (3.5.2). We can express the average number of years lived between x and x + 1 by the |, survivors at age x as Lael ht = f Pot 5.17) This function is the n-year temporary complete life expectancy of (x) and is denoted by @,q. (See Exercise 3.16.) A final function, related to the interpretation of the life table developed in this section, is the average number of years lived between ages x and x + 1 by those of the survivorship group who die between those ages. This function is denoted by a(x) and is defined by Chapter 3 Survival Distributions and Life Tables vi1 i tls, we +) dt Sa ae (3.5.18) nQr + #) dt For the probabilistic view of the life table, we would have Jeane +o ae a(x) = E(T|T < 1]. f Pewee + Ot If we assume that Lame t thdt=ddt Ostet, that is, if deaths are uniformly distributed in the year of age, we have ; 1 alae This is the usual approximation for a(x), except for young and old years of age where Figure 3.3.2 shows that the assumption may be inappropriate. k= = ~~ Show that (x) Le + TL a be and Solution: From (3.5.11), (3.5.12), and (3.5.18), we have or The formula can be justified by using the trapezoidal rule for approximate integration on (35.12). v Key life table terminology, defined in Sections 3.3-3.5, is summarized as part of Table 3.9.1 in Section 3.9. R ‘Section 3.5 Other Life Table Characteristics3.5.2 Recursion Formulas Example 3.5.1 illustrates the use of a numerical analysis technique to evaluate a life table characteristic. The trapezoidal rule for approximate integration is used. The calculation of complete and curtate expectations-of-life can be used to illustrate another computational tool called recursion formulas. The application of recursion formulas in this book typically involves one of two forms: Backward Recursion Formula u(x) = e(x) + d(x) u(x + 1) 3.5.19) or Forward Recursion Formula -- 5 Met = =F + ay ue (3.5.20) The variable x is usually a non-negative integer. To evaluate a function u(x), for a domain of non-negative integer values of x, we need to have available values of c(x) and d(x) and a starting value of u(x). This procedure is used in subsequent chapters and is illustrated in Table 3.5.1 where backward recursion formulas are developed to compute e, and Ee Backward Recursion Formulas for e, and 2, 1. Basie equation a= San a= [pas 2 Separate te + Su, _ ds + _ ids *Gewabem = etm Sin ke Late Lama eee Pot Paes a f Peds + py Bess ry BTR woy=tea = fant 5. Starting value? u(o) (a "The integral 6) = J} ,p,ds ean be evaluated using the trapezoidal rule as tx) = (1 + p,)/2. From Secton 3.3.1 we have sx) = 0, x = w, and s(x) > 0, x Oc>1x=0 (1825) Makeham = A+BO —expl-Ax— mic!) B>0,A=-Be> 1x20 (1860), Weibull ke" exp(—ur"™) k>0,n>0,x20 (1939) Note + The special symbols are defined as B k ye 20) * Gompertz’s law is a special case of Makeham’s law with A = 0. + Ifc = 1 in Gompertz’s and Makeham’s laws. the exponential (constant force) distribution results. + In connection with Makeham’s law, the constant A has been interpreted as capturing the accident hazard, and the term Bc" as capturing the hazard of aging. ‘The entries in the s(x) column of Table 3.7.1 were obtained by substituting into (3.2.16). For example, for Makeham’s law, we have expl-Si(A + Beds] exp [=a -B «| s(x) exp[-Ax — m (= 1)] where m = B/log c ‘Two objectives governed the development of a mortality table for computational purposes in the examples and exercises of this book. One objective was to have mortality rates in the middle of the range of variation for groups, such variation caused by factors such as residence, gender, insured status, annuity status, marital status, and occupation. The second objective was to have a Makeham law at most ages to illustrate how calculations for multiple lives can be performed. The Ilustrative Life Table in Appendix 2A is based on the Makeham law for ages 13 and greater, 1,000 (x) = 0.7 + 0.05 (10° 7.1) The calculations of the basic functions q,, |,, and d, from (3.7.1) were all done directly from (3.7.1) instead of calculating 1, and d, from the truncated values of q,. 7 ‘Section 3.7 Some Analytical Laws of MortalityIt was found that the latter choice would make little difference in the applications. It should be kept in mind that the Illustrative Life Table, as its name implies, is for illustrative purposes only. ——————— 3.8 Select and Ultimate Tables In Section 3.2 we discussed how ,p, [the probability that (x) will survive to age x + #] might be interpreted in two ways. The first interpretation was that the probability can be evaluated by a survival function appropriate for newborns, un- der the single hypothesis that the newborn has survived to age x. This interpreta- tion has been the basis of the notation and development of the formulas. The second interpretation was that additional knowledge available about the life at age x might make the original survival function inappropriate for evaluating probability state- ments about the future lifetime of (x). For example, the life might have been un- derwritten and accepted for life insurance at age x. This information would lead us to believe that (2)'s future-lifetime distribution is different from what we might otherwise assume for lives age x. As a second example, the life might have become disabled at age x. This information would lead us to believe that the future-lifetime distribution for (2) is different from that of those not disabled at age x. In these two illustrations, a special force of mortality that incorporates the particular infor- mation available at age x would be preferred. Without this particular information for (x), the form of mortality at duration f would be a function of only the attained age x + f, denoted in the previous sections by u(x + #). Given the additional formation at x, the force of mortality at x + t is a function of this information at x and duration f. Its notation will be 1,(t), showing separately the age, x, at which the additional information was available, and the duration, f. The additional infor- mation is usually not explicit in the notation but is conveyed by the context. In other words, the complete model for such lives is a set of survival functions in- cluding one for each age at which information is available on issue of insurance, disability, and so on. This set of survival functions can be thought of as a function of two variables. One variable is the age at selection (e.g., at policy issue or the onset of disability), [x], and the second variable is the duration since policy issue or duration since selection, t. Then each of the usual life table functions associated with this bivariate survival function is a two-dimensional array on [x] and . Note the bracket notation to indicate which variable identifies the age of selection. When the select status can be inferred from the force of mortality, the bracket notation will be suppressed to reduce the clutter of the symbols. The schematic diagram in Figure 3.8.1 illustrates these ideas. For instance, sup- pose some special information is available about a group of lives age 30. Perhaps they have been accepted for life insurance or pethaps they have become disabled. A special life table can be built for these lives. The conditional probability of death in each year of duration would be denoted by qr). i = 0, 1, 2,-.., and would be entered on the first row of Figure 3.8.1. The subscript reflects the bivariate nature of this function with the bracketed thirty, [30], denoting that the survival function in the first row is conditional on special information available at age 30. The second row of Figure 3.8.1 would contain the probabilities of death for lives on which the Chapter 3 Survival Distributions and Life Tables 73Select, Ultimate, and Aggregate Mortality, 15-Year Select Period Year Following Selection ky) Ist 2nd 15th 16th 17th 40 Cie Tpo+14 Fya0j+ 15) F304 + (30) oe eee oe or 44s ‘or 446 ¢ ou, init pauper Fouts Gin I ee cere Age fr 7 a Selection + A321 Fisaier Fister Fzj+15. Fr32}+10 [sq] |} -- -+|-----o-- -—t --¢-4 ore | Ate ; Apa F341 As3je18 yx} 15° Apois te [33] 7 F341 Fae Tsai14 ah 5 Apap 6: [34] ~-—-4-----4-- 0) -- 4 Time in Years since apecion, oo 1 2 4 1b 16 7 Path followed by a survivorship group selected at (x Links (age at selection and duration) cells after a 15-year select period into attained age groups. soeKK Alternative path followed by survivorship groups after 15-year select period. These probabilities constitute an ultimate mortality table. Notes: 1 In biostatistics the select table Indox [] may not be age. For example, in cancer research, [x] could be @ Classification index that depends on the size an location of the tumor, and time folowing selection would be ‘measured trom the time of diagnos, 2, Unimate moray, rouowing a TD-year select period, tor age [x] + 15, would be estimated by using observations ftom all cos identified by fe~ 1+ 15 + /, for] — 0, 1, 2... . Therefore, dyes = de.as 8 estimated by a Weighted average of mortality estimates from several diferent selection groupe lf the effect of selection is not smal, the resulting estimate wil be influenced by the amount of data from the various eels, 80 ‘Section 3.8 Select and Ultimate Tablesspecial information became available at age 31. In actuarial science such a two- dimensional life table is called a select life table. The impact of selection on the distribution of time-until-death, T, may diminish following selection. Beyond this time period the q's at equal attained ages would be essentially equal regardless of the ages at selection. More precisely, if there is a smallest integer r such that |fj.)., — 9je irs i8 less than some small positive con- stant for all ages of selection [x] and for all j > 0, it would be economical to construct a set of select-and-ultimate tables by truncation of the two-dimensional array after the (r + 1) column, For durations beyond r we would use Yo-fierri = Fare 7 > 0. The first r years of duration comprise the select period. The resulting array remains a set of life tables, one for each age at selection. For a single age at selection, the life table entries are horizontal during the select period and then vertical during the ultimate period. This is shown in Figure 3.8.1 by the arrows. The Society of Actuaries mortality studies of lives who were issued individual life insurance on a standard basis use a 15-year select period as illustrated in Figure 3.8.1; that is, it is accepted that Fe-nvrsey = Iurvs jf > 0. Beyond the select period, the probabilities of death are subscripted by attained age only; that is, qjy-yyy+1) is written as q,,,. For instance, with r= 15, qjoj.is ANd qsjsa0 would both be written as qys A life table in which the functions are given only for attained ages is called an aggregate table, Table 3.3.1, for instance. The last column in a select-and-ultimate lable is a special aggregate lable that is usually referred to as an ultimate table, to reflect the select table setting. Table 3.8.1 contains mortality probabilities and corresponding values of the I.)4. function, as given in the Permanent Assurances, Females, 1979-82, Table, published by the Institute of Actuaries and the Faculty of Actuaries; it is denoted as the Excerpt from the AF80 Select-and-Ultimate Table @ @ @ @ o 6 a fax] 1000 gy 1,000 gysy 1,000 gegen lg x42 3002220330 0422 9:906.7380 9 904.5387 9.901.2702 32 310234 = 0352 0459 9.902.8941 9 900.5769 9 8970019 33 3 0250 «0377 0500 9.898.757 9 896.2800 9 892549134 330269 = 0407 0545 9 89429039 891.6287 9 887.6028 35 340291 441 01596 9 889.4519 9 886.5741 9 8822141 36 Chapter 3 Survival Distributions and Life Tables 81AF80 Table. This table has a 2-year select period and is easier to use for illustrative purposes than tables with a 15-year select period such as the Basic Tables, pub- lished by the Society of Actuaries. In Table 3.8.1 we observe three mortality probabilities for age 32, namely, joa) = 0.000250 < qynysr = 0.000852 < qyy = 0.000422. The order among these probabilities is plausible since mortality should be lower for lives immediately after acceptance for life insurance. Column (3) can be viewed as providing ultimate mortality probabilities. Given the 1-year mortality rates of a select-and-ultimate table, the construction of the corresponding select-and-ultimate life table (survival functions) is started with the ultimate portion. Formulas such as (3.4.1) can be used, which would yield a set of values of I,,, = yj. Where ris the length of the select period. We would then complete the select segments by using the relation | Ngee = TERE k wr Plater working from duration r — 1 down to 0 _—L = =——ti‘_‘OSC;COT.. Use Table 3.8.1 to evaluate a Prob. Pray © disney Solution: Formulas developed earlier in this chapter can be adapted to select-and-ultimate tables yielding a Pow) = a T= Sere — 0.99045 DB. sProo = : SaReSe — 0.99807 © a= k= = SSO = 9857009 ayo stir = Tore a 2200S = oer ins = 0.00131. vy Section 3.8 Select and Ultimate TablesEe Chapter 3 Concepts Symbol ‘Name or Description of the Concept @ Notation for a life age x te] Age, or other status, at selection x ‘Age at death, a random variable Te) Future lifetime of (x), equals X ~ x Kay CCurtate-future-lifetime of (x), equals the integer part of T(x) 5G) Future lifetime of (x) within the year of death, equals T(x) ~ K(x) st) Survival function, equal to the probability that a newborn will live to at least x na Force of mortality at age x in an aggregate life table nO Force of mortality at attained age x + f given selection at age x a Probability that (x) dies within t years Pe Probability that (x) survives at least t years ads Probability that (x) dies between t and t + w years z Complete expectation of life for (x), equals E[T(2)] 6 Curtate expectation of life for (x), equals E[K(x)] Fe) Cohort’s number of survivors to age x, a random variable 2 Colrt’s number of deaths between ages x ad x + 1 Expected number of survivors at age x, equals E£(x)] Expectedl number of deaths between ages x and x +n, equals E],2,] Expected number of years lived between ages x and x +n by survi- vvors to age x of the initial group of fy lives T, Expected number of years lived beyond age x by the survivors to age x of the initial group of fy lives Central death rate over the interval (x, x + 1) ® Omega, the limiting age of a life table 3.9 Notes and References Table 3.9.1 summarizes this chapter's new concepts with their names, symbols, and descriptions. Life tables are a cornerstone of actuarial science. Consequently they are extensively discussed in several English-language textbooks on life contingencies: + King (1902) + Spurgeon (1932) + Jordan (1967) + Hooker and Longley-Cook (1953) + Neill (1977). These have been used in actuarial education. In addition, life tables are used by biostatisticians. An exposition of this latter approach is given by Chiang (1968) and Elandt-Johnson and Johnson (1980). The deterministic rate function interpretation is discussed by Allen (1907). London (1988) summarizes several methods for es mating life tables from data. Chapter 3 Survival Distributions and Life TablesThe historically important analytic forms for survival functions are referred to in Table 3.6. Brillinger (1961) provides an argument for certain analytic forms from the viewpoint of statistical life testing. Tenenbein and Vanderhoof (1980) restate the case for analytic laws of mortality and develop formulas for select mortality Balducci’s (1921) contribution was preceded by a remarkable set of papers by Witt- stein (1873). Wittstein’s papers were published first in German and translated into English by T. B. Sprague. Some of the methods for evaluating probabilities for fractional ages are reviewed by Mereu (1961) and in Batten’s textbook on mortality estimation (1978) (see alsu Seal’s 1977 historical review). Discussions of the length of the select period for various types of insurance selection procedures have a long history, for example, Williamson (1942), Thompson (1934), and Jenkins (1943). The Society of Actuaries 1975-80 Basic Tables use a 15-year select period and are pub- lished in TSA Reports 1982. International Actuarial Notation is outlined in TASA 48 (0947). We planned to use the 1989-91 USS. Life Table for illustrative purposes in Table 3.2.1, but this plan was not realized because the life tables based on the 1990 US. Census were not completed when this chapter was revised. Exercises Section 3.2 3.1. Using the ideas summarized in Table 3.2.1, complete the entries below. s@) _ =) fel) rr) tan x, 0 1 Lox=0 3.2. Confirm that each of the following functions can serve as a force of mortality. Show the corresponding survival function. In each case x = 0. a Be B>0 — c>1 (Gompertz) b. kx n>0 — k>0 (Weibull) cabtay! a>0 — b>0 (Pareto) 3.3. Confirm that the following can serve as a survival function. Show the corre- sponding 44(x), fi(), and F(x). sa)se® x20. 3.4. State why each of the following functions cannot serve in the role indicated by the symbol: aua)=( +x? x20 84 Exercises:35. — x/100, 0 = x = 100, calculate a. w(x) b. F(x) © fe) d. Pr (10 < X < 40). 3.6. Given the survival function of Exercise 3.5, determine the survival function, force of mortality, and p.d.f. of the future lifetime of (40). 37. If s(x) = [1 — (/100)}"?, 0 = x = 100, evaluate a Ps be iste © ssa6 4. n@6) —e. E[T(36)] 3.8. Confirm that qo = ~As(k), and that > yiqo 39, If w(x) = 0.001 for 20 = x = 25, evaluate a243y Sections 3.3, 3.4 3.10. If the survival times of 10 lives in a survivorship group are independent with survival defined in Table 3.3.1, exhibit the pf. of £(65) and the mean and variance of £(65). 3.1, If s(x) = 1 — x/12,0 4 x = 12, ly = 9, and the survival times are independent, then (ys 32 39) is known to have a multinomial distribution. Calculate a. The expected value of each random variable b. The variance of each random variable c. The coefficient of correlation between each pair of random variables. 3.12. On the basis of Table 3.3.1, a. Compare the values of 4g and b. Evaluate the probability that (25) will die between ages 80 and 85. 3.13. Given that [,,, is strictly decreasing in the interval 0 = f = 1, show that a. If I,,, is concave down, then 4, > u(x) b. If L,., is concave up, then q, < w(x). 3.14. Show that a da a. Fle ws) <0 when w(a) < uA) d d bo Fhe mee) = 0 when 7 w(a) = w7(9) a d 7 ©. Fk m@) > 0 when 5 w(x) > w7(0), Chapter 3 Survival Distributions and Life Tables 353.15. Consider a random survivorship group consisting of two subgroups: (1) the survivors of 1,600 persons joining at birth; (2) the survivors of 540 persons joining at age 10. An excerpt from the appropriate mortality table for both subgroups follows: x 1 0 40 10 39 70 26 If Y, and Y; are the numbers of survivors to age 70 out of subgroups (1) and 2), respectively, estimate a number ¢ such that Pr(Y, + Y, > c) = 0.05. As- sume the lives are independent and ignore half-unit corrections. Section 3.5 3.16. Let the random variable T(x) @) 0 0, calculate a. 8 = EIT] b. Var(T) c. median (T) d. The mode of the distribution of T. If w(x + th = a. peux +8) bv &. [Hint: Recall, from the study of probability, that (1 /-V2m) e~®/? is the p.df. for the standard normal distribution.| f= 0, calculate If the random variable T(x) has df. given by t o0. Calculate ane) b8 Section 3.8 3.36. Using Table 3.8.1, calculate a aMfsayea Be Posuyst 3.37. The quantity 1 ~ feet = Kx, has been called the index of selection. When it is close to 0, the indication that selection has worn off. From Table 3.8.1, calculate the index for x = 32, k=0,1 3.38. The force of mortality for a life selected at age (2) is given by wx(t) = YOR), 1 > 0. In this formula (2) is the standard force of mortality. The symbol x denotes a vector of numerical information about the life at the time of selec- tion. This information would include the age and other classification infor- mation. It is required that (x) > 0 and ¥(x,) = 1, where x) denotes standard information. Show that the select survival function is Poa = (raid and the p.df. of T(x), the random variable time-until-death given the infor- mation x, is —¥(x) ,Pfay(Ptq)""” |, where ;pgy is the derivative with respect to £ of Pig): This is called a proportional hazard model. Miscellaneous 3.39. A life at age 50 is subject to an extra hazard during the year of age 50 to 51. If the standard probability of death from age 50 to 51 is 0.006, and if the extra risk may be expressed by an addition to the standard force of mortality that uniformly from 0.03 at the beginning of year to 0 at the end of the year, calculate the probability that the life will survive to age 51 decreas 3.40. If the force of mortality y(t), 0 = t = 1, changes to H(t) ~ ¢ where ¢ is a positive constant, find the value of c for which the probability that (x) will die within a year will be halved. Express the answer in terms of jy 341. From a standard mortality table, a second table is prepared by doubling the force of mortality of the standard table. Is the rate of mortality, qi, at any Chapter 3 Survival Distributions and Life Tablesgiven age under the new table, more than double, exactly double, or less than. double the mortality rate, q,, of the standard table? 3.42. If w(x) = Bc’, ¢ > 1, show that the function J, (x) has its maximum at age Xy where u(x.) = log c. [Hint: This exercise makes use of Exercise 3.14.] 3.43. Assume p(x) 4. Calculate the survival fanction, s() b. Verify that the mode of the distribution of X, the age-at-death, is given by 1, ~ Walog.o) = log A a loge 344. If w(x) = 9 10 for 40 < x < 100, calculate 00-x 20-zx 3 auP a0 b. The mode of the distribution of X, the age-at-death 3.45. a. Show that, under the uniform distribution of deaths assumption, Ie My ™ Tray, 4 TEC /Dm, b. Calculate m, in terms of q, under the constant force assumption. c. Calculate m, in terms of q, under the hyperbolic assumption d. If l, = 100 — x for 0 = x = 100, calculate yey) where i heey wo + 1) dt I 3.46, Show that K and S are independent if and only if the expression a = at fine Teor does not depend on k for 0 = 5 =1 Computing Exercises: These are the first in a series of exercises that involve sufficient computation to make it worthwhile to use a computer. The series will continue in the following chapters, and in each exercise it is assumed that the results of previous exercises are available. For example, in Exercise 3.47, you are asked to set up a life table that will then be used in risk analysis in Chapters 4 and 5. 3.47. Using spreadsheet or other mathematical software, set up an object that will accept input values for the Makeham law parameters and then calculate 90 Brercses3.48, 3.49, 3.50. 351, 3.52. 3.53. 354, and display the values of p, and q, for ages 0 to 140. As a check on your output, input the parameter values given in (3.7.1) and compare your 4, values with those for x = 13, 14, . . . in the Illustrative Life Table in Ap- pendix 2A. We will refer to this computing object as your Illustrative Life Table. When the Makeham parameter values are not stated, those of (3.7.1) are implied. [Remark: With a Makeham Table, s(x) > 0 for all x > 0, 50 o does not exist as defined in Section 3.3.1. For the parameter values of the Illustrative Life Table, q,.) is zero to eight decimal places; thus we choose © ~ 140 for our Illustrative Life Table, that is, Table 2A.] In your Illustrative Life Table use the forward recursion formula I... = (p,)(0,) and initial value /,, = 96,807.88 to calculate the /, values of Table 2A. [Remark: ‘The Makeham law was not realistic for ages less than 13, so the Illustrative Life Table is a blend of some ad hoc values from 0 through 12 and the Makeham law table from age 13 up.] Illustrate the result of Exercise 3.41 by doubling the A and B parameter values in your Illustrative Life Table. Use the backward recursion formula of Table 3.5.1 to calculate values of en your Illustrative Life Table for ages 13 to 140. Compare the values of e, at x = 20, 40, 60, 80, and 100 in your Illustrative Life Table with those found when the force of mortality is doubled. Use the backward recursion formula of Table 3.5.1 and the trapezoidal rule to calculate values of @, in your Illustrative Life Table for ages 13 to 110. Verify the following backward recursion formula for the temporary curtate life expectancy to age y: Cxgm=a = Px t Px rigmaoy forx=0,1,..-,y— 1 Determine an appropriate starting value for use with this formula. For your Illustrative Life Table calculate the curtate temporary life expectancy up to age 45 for ages 13 to 44. Verify the following backward recursion formula for the 1-year temporary curtate life expectancy: cA = Px (1 ~ yPasa) + Pr @rvray forx =0,1,...,0— 1. Determine an appropriate starting value for use with this formula. For your Illustrative Life Table calculate the 10-year temporary curtate life expectancy for ages 13 to 139. . “Look up” eys5 in your Illustrative Life Table. [Hint: Since the c(x) term in the relation in Exercise 3.53 does not depend on 1, it may be more efficient to view e;s3 as a curtate temporary life expectancy to age 40 for (15).] Chapter 3 Survival Distributions and Life TablesLIFE INSURANCE 4.1 Introduction We have stated that insurance systems are established to reduce the adverse financial impact of some types of random events. Within these systems individuals and organizations adopt utility models to represent preferences, stochastic models to represent uncertain financial impact, and economic principles to guide pricing Agreements are reached after analyses of these models. In Chapter 2 we developed an elementary model for the financial impact of random events in which the occurrence and the size of impact are both uncertain. In that model, the policy term is assumed to be sufficiently short so the uncertainty of investment income from a random payment time could be ignored. In this chapter we develop models for life insurances designed to reduce the financial impact of the random event of untimely death. Due to the long-term nature of these insurances, the amount of investment earnings, up to the time of payment, provides a significant element of uncertainty. This uncertainty lias (wo causes: the unknown rate of earnings over, and the unknown length of, the in- vestment period. A probability distribution is used to model the uncertainty in regards to the investment period throughout this book. In this chapter a determin- istic model is used for the unknown investment earnings, and in Chapter 21 sto- chastic models for this uncertainty are discussed. In other words, our model will be built in terms of functions of T, the insured’s future-lifetime random variable. While everything in this chapter will be stated as insurances on human lives, the ideas would be the same for other objects such as equipment, machines, loans, and business ventures. In fact, the general model is useful in any situation where the size and time of a financial impact can be expressed solely in terms of the time of the random event. Chapter 4 Life Insurance4.2 Insurances Payable at the Moment of Death In this chapter, the amount and the time of payment of a life insurance benefit depend only on the length of the interval from the issue of the insurance to the death of the insured, Our model will be developed with a benefit function, b,, and a discount function, v,. In our model, v, is the interest discount factor from the time of payment back to the time of policy issue, and t is the length of the interval from issue to death. In the case of endowments, covered in this section, f can be greater than or equal to the length of the interval trom issue to payment For the discount function we assume that the underlying force of interest is deterministic; that is, the model does not include a probability distribution for the force of interest. Moreover, we usually show the simple formulas resulting from the assumption of a constant, as well as a deterministic, force of interest. We define the present-value function, z,, by 2 = by, (4.2.1) Thus, 2, is the present value, at policy issue, of the benefit payment. The elapsed time from policy issue to the death of the insured is the insured’s future-lifetime random variable, T = T(x), defined in Section 3.2.2. Thus, the present value, at policy issue, of the benefit payment is the random variable zy. Unless the context requires a more elaborate symbol, we denote this random variable by Z and base the model for the insurance on the equation Z = byw, (4.2.2) The random variable Z is an example of a claim random variable and, as such, of an X, term in the sum of the individual risk model, as defined by (2.1.1). This model is used in later sections when we consider applications involving portfolios. We now tum to the development of the probability model for 7. The first step in our analysis of a life insurance will be to define b, and v,. The next step is to determine some characteristics of the probability distribution of Z that are consequences of an assumed distribution for T, and we work through these steps for several conventional insurances. A summary is provided in Table 4.2.1 on page 109. —— 4.2.1 Level Benefit Insurance An t-year term life insurance provides for a payment only if the insured dies within the 1-year term of an insurance commencing at issue. If a unit is payable at the moment of death of (x), then oa ‘Section 4.2 Tnsurances Payable at the Moment of DeathT=n T>n. These definitions use three conventions. First, since the future lifetime is a non- negative variable, we define b,, v,, and Z only on non-negative values, Second, for a value where b; is 0, the value of v; is irrelevant. At these values of f, we adopt definitions of v, by convenience. Third, unless stated otherwise, the force of interest is assumed to be constant, The expectation of the present-value random variable, Z, is called the actuarial present value of the insurance. The reader will find that the expectation of the present value of a set of payments contingent on the occurrence of a set of events is referred to by different terms in different actuarial contexts. In Chapter 1, the expected loss was called the pure premium. This vocabulary is commonly used in property-liability insurance. A more exact term, but more cumbersome, would be expectation of the present value of the payments, We denote actuarial present val- ues by their symbols according to the International Actuarial Notation (see Appen- dix 4). The principal symbol for the actuarial present value of an insurance paying a unit benefit is A. The subscript includes the age of the insured life at the time of the calculation. How this age is displayed depends upon the form of the mortality assumption. For the actuarial present value of an insurance on (40), the age might be displayed as [40], 40, or [20] + 20, for example. As in Section 3.8, the bracket indicates selection at that age and hence the use of a select table commencing at that age. The unbracketed age indicates the use of an aggregate or ultimate table. Thus [20] + 20 indicates the calculation for a 40 year old on the basis of a select table commencing at age 20. The actuarial present value for the 1-year term insurance with a unit payable at the moment of death of (x), E{ZJ, is denoted by Al;. This can be calculated by recognizing Z as a function of T so that E[Z] = Elz;]. Then we use the pdf. of T to obtain E[Z] = Elz,] = f 2% frld) dt = f vt pe mt) dt (423) The j-th moment of the distribution of Z can be found by Bz = [ey nna = fey, mato at Chapter 4 Life insurance 5The second integral shows that the j-th moment of Z is equal to the actuarial present value for an 1-year term insurance for a unit amount payable at the moment of death of (x), calculated at a force of interest equal to j times the given force of interest, or j6, This property, which we call the rule of moments, holds generally for insurances paying only a unit amount when the force of interest is deterministic, constant or not. More precisely, FZ In addition to the existence of the moments, the sufficient condition for the rule of moments is b/ = b, for all t = 0, that is, for each f the benefit amount is 0 or 1. Demonstration that this is sufficient is left to Exercise 4.30. @&, = F[Z] @j8, (4.2.4) It follows from the rule of moments that Var(Z) = *Alg — (Aba? (4.2.5) where *Al3 is the actuarial present value for an 1-year term insurance for a unit amount calculated at force of interest 28. Whole life insurance provides for a payment following the death of the insured at any time in the future. If the payment is to be a unit amount at the moment of death of (x), then 120, +=0, T=0. The actuarial present value i I. ezi= | For a life selected at x and now age x + hh, the expression would be Ps walt) dt (4.2.6) Aus = [0 aaa mea Whole life insurance is the limiting case of n-year term insurance as n + “, Example 4.2.1 The p.d.f. of the future lifetime, T, for (x) is assumed to be 1/80 0 =1 =80 i {i elsewhere. ‘Section 4.2 Insurances Payable at the Moment of DeathAt a force of interest, 8, calculate for Z, the present-value random variable for a whole life insurance of unit amount issued to (x): a. The actuarial present value b. The variance . The 90th percentile, &°. Solution: A “yt ey Ly = a. A, = EIZ] = i vt fxlt) dt i et eat b. By the rule of moments, Tae fy pal? vara) = 15" _ (Loe) 840 c. For the continuous random variable, Z, we have Pr(Z = &°) = 0.9. 840, 808 Since we have the p.d.f. for T and not for Z, we proceed by finding the event for T which corresponds to Z = &. From Figure 4.2.1, which shows the general relationship between the sample space of T (on the horizontal axis) and the sample space of Z (on the vertical axis), we see that &° = v'', Because Z is a strictly decreasing function of T for whole life insurance, the percentile from T's distribu tion that is related to 90th percentile of Z’s distribution is at the complementary probability level, 0.1. In this example T is uniformly distributed over the interval (0, 80), so & = 8.0 and thus &° = v®°. v The graph in Figure 4.2.1 can be used to establish relationships between the df. and p.d.f. of Z and those of T: Relationship of Z to T for Whole Life Insurance Chapter 4_Life Insurance 7For z = 0, {Z =z) is the null event For 0<2<1,(Z52)={ log z/log v}, and For z= 1, (Z is the certain event. Therefore, 0 z=0 F,(2) 1-F,(logz/logv) O 80} = 0.0, so Pr{0 < Z < v™ = 0.0. Therefore, from (4.2.7) 0 z< 0% Faz) = [ — [log 2)/(log v)|/80 uo <2 <1 1 221 ion of the df in part (a), fete) = \siaseu wo n, T=n T>n. It follows that (42.11) and by taking expectations of both sides Ara = Ala + A. (4.2.12) We can also find the Var(Z,) by using (4.2.11), Var(Z;) = Var(Z,) + Var(Z;) + 2 Cov(Zy, Z,) (4213) By use of the formula Cov(Z,, Z:) = E[Z,Z:] — EIZ,1EIZ,1 (42.14) and the observation that Z,Z,=0 for all T, we have Cov(Z,, Z;) = -EIZJEIZ:] = ~Al aA. (42.15) ‘Substituting (4.2.5), (4.2.9), and (4.2.15) into (4.2.13) produces a formula for Var(Z;) in terms of actuarial present values for an s-year term insurance and a pure endowment. 02 ‘Section 4.2 Insurances Payable at the Moment of DeathSince the actuarial present values are positive, the Cov(Z,, Z,) is negative. This is to be anticipated since, of the pair Z, and Z,, one is always zero and the other positive. On the other hand, the correlation coefficient of Z, and Z, is not ~1 since they are not linear functions of each other; recall Exercise 1.23(0). 4.2.3 Deferred Insurance ‘An m-year deferred insurance provides for a benefit following the death of the insured only if the insured dies at least m years following policy issue. The benefit payable and the term of the insurance may be any of those discussed above. For example, an m-year deferred whole life insurance with a unit amount payable at the moment of death has aft t>m v=o #>0, ut T>m The actuarial present value is denoted by ,jA, and is equal to f U' Pe walt) dt. (4.2.16) —— = Ul : Consider a 5-year deferred whole life insurance payable at the moment of the death of (x). The individual is subject to a constant force of mortality jt = 0.04. For the distribution of the present value of the benefit payment, at 8 = 0.10: a. Calculate the expectation b, Calculate the variance . Display the distribution function 4d. Calculate the median &°. Soluti a. For arbitrary forces 1 and 8, f ete pdt thus for » = 0.04 and 8 = 0.10, aint), een, aA, pts A 2 = See? = 0.1419, 5e b. By the rule of moments, Var(Z) 0.0301. Chapter 4 Life Insurance 103c. As for the case of whole life insurance, a graph of the relation between Z and T provides an outline for the solution. For the general m-year deferred whole life insurance, the graph is given in Figure 4.2.3. {FIGURE 423 | Relationship of Z to T for Deferred Whole Life Insurance Tog z log 0 Although T is a continuous random variable, Z is mixed with a probability mass at 0 because Z = 0 corresponds to T = m. For general mortality assumptions and a constant force of interest, we have for Z = 0, F,(0) = Pr(T = mi) = F,(m); (42:17) for 0<2 <0" Fz) = PZ = 2) = PZ = 0) + PO Be) Jogo = Fm) + 1 - Fy (282); (4.2.18) for z > 0", Fz) = (4.2.19) In this example of 5-year deferred whole life insurance where w= 0.04 and 8 = 0.10, we have from (4.2.17), F{0) = Fr(5) em from (4.2.18) for 0 < z < v', = 0.1813; 104 Section 4.2 Insurances Payable at the Moment of Deathlog z 04 = 1-82 + howe = 0.1813 + 24, (4220) F,{z) = FS) + 1 — Fy from (4.2.19) for 2 > v8, FQ) The graph of this df. is shown in Figure 4.2.4. Distribution Function of Z F(z) 0s 06 04 02 0 05 1 d. From Figure 4.2.4 or (4.2.20), we see that the median is the solution of 05 = 0.1813 + 2". Thus, £3° = 0.0573. v Observations: 1. The largest value of Z with nonzero probability density in this example is € 1) = 0,6065, corresponding to T = 5. 2. The distribution of Z in this example is highly skewed to the right. While its total mass is in the interval [0, 0.6065] and its mean is 0.1419, its median is only 0.0573. This skewness in the direction of large positive values is characteristic of many claim distributions in all fields of insurance. 4.2.4 Varying Benefi Insurance The general model given by (4.2.1) can be used for analysis in most applications. We have used it with level benefit life insurances. It can also be applied to insur- ances where the level of the death benefit either increases or decreases in arithmetic Chapter 4 Life Insurance 105progression over all or a part of the term of the insurance. Such insurances are often sold as an additional benefit when a basic insurance provides for the return. of periodic premiums at death or when an annuity contract contains a guarantee of sufficient payments to match its initial premium. ‘An annually increasing whole life insurance providing 1 at the moment of death during the first year, 2 at the moment of death in the second year, and so on, is characterized by the following functions: y-les =o, vo, =o t=0, Z=[T+1l" T=0, where the | | denote the greatest integer function. ‘The actuarial present value for such an insurance is (IA), = EZ] = j Le + 1! p, w(O dt ‘The higher order moments are not equal to the actuarial present value at an ad- justed force of interest as was the case for insurances with benefit payments equal to 0 or 1. These moments can be calculated directly from their definitions, The increases in the benefit of the insurance can occur more, or less, frequently than once per year. For an m-thly increasing whole life insurance the benefit would be 1/m at the moment of death during the first m-th of a year of the term of the insurance, 2/m at the moment of death during the second m-th of a year during the term of the insurance, and so on, increasing by 1/m at m-thly intervals through: out the term of the insurance. For such a whole life insurance the functions are _ lim +1) on in yao 10, gavltm+i poy ‘The actuarial present value is (1 A), = BIZ] ‘The limiting case, as m — ® in the m-thly increasing whole life insurance, is an insurance paying t at the time of death, f. Its functions are b=t £20, wae £20, 2 Toe Its actuarial present-value symbol is (IA),. 106 ‘Section 4.2 Insurances Payable at the Moment of DeathThis continuously increasing whole life insurance is equivalent to a set of de- ferred level whole life insurances. This equivalence is shown graphically in Figure 4.2.5 where the region between the line b, = t and the f-axis represents the insurance over the future lifetime. If the infinitesimal regions are joined in the vertical direc- tion for a fixed f, the total benefit payable at t is obtained. If they are joined in the horizontal direction for a fixed s, an s-year deferred whole life insurance for the level amount ds is obtained. Continuously Increasing Insurance This equivalence implies that the actuarial present values for the coverages are equal. The equality can be established as follows. By definition, f to! ip, walt) dt, and interpreting in the integrand as the integral from zero to t in Figure 4.2.5 we have w,-[, (f 4s) of pe wll) dt If we interchange the order of integration and, for each s value, integrate on # from 5 to x, we have a), = [Fo a mo ats = [fara ; by (4.2.16), Chapter 4 Life Insurance 107If, for any of these m-thly increasing life insurances, the benefit is payable only if death occurs within a term of m years, the insurance is an m-thly increasing n- year term life insurance. Complementary to the anually increasing n-year term life insurance is the an- nually decreasing n-year term life insurance providing n at the moment of death during the first year, n ~ 1 at the moment of death during the second year, and so on, with coverage terminating at the end of the n-th year. Such an insurance has the following functions: 3) fen t>n, t>0, z-{em-lth Ten 0 Ton. The actuarial present value for this insurance is (DA)ia = fi vf (a — Le) spy wat) at. This insurance is complementary to the anually increasing n-year term insurance in the sense that the sum of their benefit functions is the constant n + 1 for the nn-year term. Table 4.2.1 is a summary of the models in this section. The insurance plan name appears in the first column followed by the benefit and discount functions that define it in terms of the future lifetime of the insured at policy issue. The pres- ent-value function, which is always derived as the product of the previous two functions, is shown next. In the fifth column the International Actuarial Notation for the actuarial present value is shown. In the last column, a reference is given to a footnote stating whether or not the rule of moments can be used in the calculation of higher order moments. 4.3 Insurances Payable at the End of the Year of Death In the previous section we developed models for life insurances with death ben- efits payable at the moment of death. In practice, most benefits are considered payable at the moment of death and then earn interest until the payment is actually made. The models were built in terms of T, the future lifetime of the insured at policy issue. In most life insurance applications, the best information available on the probability distribution of T is in the form of a discrete life table. This is the probability distribution of K, the curtate-future-lifetime of the insured at policy issue, a function of T. In this and the following section we bridge this gap by building models for life insurances in which the size and time of payment of the death benefits depend only on the number of complete years lived by the insured from policy issue up to the time of death. We refer to these insurances simply as payable at the end of the year of death. 108 “Section 43 Insurances Payable at the End of the Year of Death{izia ‘vomuyep aug woy Avoesp pareinoweo ‘yeauoquis zy ~ Ye 81 S0UBUEA = LOU “| < /20}¥; Aa PeIOUEP "Isa; 8010} LaNO OW SoU /YB enyen yuEsaId fUETIDe BY 0} feTDS s!WUSLIOW LT OU, {0 = 40 Avo paujan axe pu “aq 210 Aqy-ui Surseasur + m/TL + mry,a cy m/TT + mar] ne Ean uct 7 uct 0 Aqrenuue Surseanap : ust .agy- 0) ‘ ust [you ‘Wa} 402,18 wed 0 A uct 0 Ajjenuue Surseassut : usa tea uy usd [ita] waa} Je k-t weucrwss 0 e we wcimsi 0 wir 094-1 : weusy>um ya ‘ Weusy>m fT pauiayop 19 X-1u es wei wer wa | . Vv rei wey L juawumopua sea x1 u doses (43.7) the expected amount in the fund after r insurance years. A comparison of expres- sion (4.3.7) with (4.3.5) shows it to be I,., A,.,. The difference between this amount and an actual fund is due to deviations of the actual deaths from the expected deaths (according to the life table adopted), and deviations of the actual interest income from the interest income at the assumed rate. _=zx—~_£ ° A group of 100 lives age 30 set up a fund to pay 1,000 at the end of the year of death of each member to a designated survivor. Their mutual agreement is to pay into the fund an amount equal to the whole life insurance actuarial present value calculated on the basis of the Illustrative Life Table at 6% interest. The members, not selected by an insurance company, decided to use this population table as the basis of their plan. The actual experience of the fund is one death in each of the second and fifth years; interest income is at 6% in the first year, 6-1/2% in the second and third years, 7% in the fourth and fifth years. What is the difference, at the end of the first 5 years, between the expected size of the fund as determined at the inception of the plan and the actual fund? Solution: On the agreed bases, 1,000 Ay = 102.4835, so, for the 100 lives, the fund starts at 10,248.35. Also, Ags = 0.1287194 and Iy5/Iyp = 0.9915040. For 100 lives age 30, the expected size of the fund after 5 years will be (1,000)(100) 4 a, : 12,762.58. The development of the actual fund would be as follows, where F, denotes its size at the end of insurance year k: 12 “Section 43 insurances Payable at the End of the Year of DeathFy = 10,248.35 F, = (10,248.35)(1.06) = 10,863.25 F, = (10,863.25)(1.065) ~ 1,000 = 10,569.36 F, = (10,569.36)(1.065) = 11,256.37 F, = (11,256.37)(1.07) = 12,044.32 Fe = (12,084.32)(1.07) — 1,000 = 11,887.42, Thus the required difference is 12,762.58 ~ 11,887.42 = 875.16. This result combines the investment experience and the mortality experience for the 5-year period. There ‘were gains from the investment earnings in excess of the assumed rate of 6%. On the other hand, there were losses on the mortality experience of two deaths as compared to the expected number of 0.8496. The interpretation of such results in terms of the various sources such as investment earnings and mortality is an ac- tuarial responsibi v We derived the recursion relations for n-year term insurance actuarial present values (4.3.3) algebraically. Whereas the relationship will hold for whole life in- surance actuarial present values as the limiting case of n-year term insurance, as 1 goes to 2, we will establish the whole life insurance relationship independently to illustrate a probabilistic derivation. Consider A, from its definition E|Z] = Elv*"]. For emphasis we now write this A.= BIZ] = Elot\K(a) = 01, which is redundant since all of K(x)'s probability is on the non-negative integers. E[Z] can be calculated by considering the event that (x) dies in the first year, that is, K(x) = 0, and its complement, that (x) survives the first year, that is, K(x) = 1 We can write E[Z] = Elv"|K(x) = 0] Pr[K(x) = 0] + Elo |K (a) = 1] PefK¢x) = 1. 438) In this expression we can readily substitute E[vX|K(x) = 0] = v, PriK(x) = 0] = 9, and PrfK(a) = 11 = py To find an expression for the remaining factor, we rewrite it as ElM-|K(x) = 1] = vee |Kex) — 1 = 0) Chapter 4 Life InsuranceSince Kix) is the curtate-future-lifetime of (x), given Ka) = 1, K(x) — 1 must be the curtate-future-lifetime of (x + 1). If we are willing to use the same probabilities for the conditional distribution of K(x) ~ 1 given K(x) = 1, as we would for a newly considered life age x + 1, then we may write Ef®-OKx) - 1 = 0) = Ana (439) and substitute it into (4.3.8) to obtain vg, + VAs Py. (4.3.10) The assumed equality, (the distribution of the future lifetime of a newly insured life aged x + 1) = (the distribution of the future lifetime of a life now age x + 1 who was insured 1 year ago), was discussed in Section 3.8. In terms of select tables, the right-hand side of (4.3.9) would be A,;,;. In (4.3.10) every x would be [x]. Note that (4.3.10) is the same backward recursion formula as (4.3.3). That is, u(x) = vg, + vp, ux +1). It is the starting value that makes the solution the actuarial present value of whole life insurance or of 1-year term insurance. We see this same recursion formula for the actuarial present values of n-year endowment insurance where the starting values are the endowment maturity value. Analysis of relationship (4.3.10) can give more insight into the nature of A,. After replacement of p, by 1 — q, and multiplication of both sides by (1 + i, (4.3.10) can be rearranged as 1 (1+ DA, = LA + dl ~ Aya). (43.11) For the random survivorship group, this equation has the following interpretation. ‘Together with 1 year’s interest, A, will provide A,,, for all 1, lives and an ad- ditional 1 — A,,, for those expected to die within the year. This latter amount for each expected death, that is, 4,(1 ~ A,,,), i8 considered the annual cost of insurance. ‘The A,,; is set aside for survivors and deaths, the 1 — A,,, is required only for a death. Dividing by J, and then subtracting A, + 9,(1 — A,,,) from both sides of (4.3.11), we have Aga ~ Ay = 1A, — 4,1 = Agua) (4.3.12) In words, the difference between the actuarial present values at age x and one later at age x + 1 is equal to the interest on the actuarial present value at x less the annual cost of insurance for the year. 114 Section 4.3 Insurances Payable at the End of the Year of DeathAnother expression for A, can be obtained from (4.3.10) by replacing p, by 1 ~ q, multiplying both sides by v', and rearranging the terms to get M Asa — UA, = —U gL — Ave Av’ —w gL — Ass) Summing from x = y to » (see Appendix 5), we obtain WA, = —Z vg. — Arad and thus (L = Ays:): This expression shows that the actuarial present value at y is the present value at y of the annual costs of insurance over the remaining lifetime of the insured. The #-year endowment insurance with a unit amount payable at the end of the year of death is a combination of the n-year term insurance of this section and the n-year pure endowment for a unit amount that was discussed in the previous section, Thus the functions for it are bea = 1 ta 0 eee w= {Ut R=GLe nad ma Yor kent hin, vt K=0,L...,0-1 z={n K=nn4+1, ‘The actuarial present value is Aggy = DU Pe quae + 0" Pos (4.3.13) The annually increasing whole life insurance, paying k + 1 units at the end of insurance year k + 1 provided the insured dies in that insurance year, has the benefit and discount functions and present-value random variable as follows: k+l 0, 1,2, , Onan = k=0,1,2.0, Z=(K+ De! K=0,1,2 The actuarial present value is denoted by (IA),.. The annually decreasing n-year term insurance, during the n-year period, pro- vides a benefit at the end of the year of death in an amount equal to n — k where Chapter 4_Life insurance 115kis the number of complete years lived by the insured since issue. Its functions are afn-k k=0,1,...,0-1 bu = {5 k=nnt+L..., Vga = ve k=OL.0., za fr- Kw! K=0,1,...,.0-1 0 Konnt1,. The actuarial present-value symbol for this insurance is (DA)!q As illustrated by Figure 4.2.5 for insurances payable at the moment of death, annually increasing insurances payable at the end of the year of death are equi alent to a combination of deferred level insurances each for a unit amount. Simi- larly, annually decreasing term insurances are equivalent to a combination of level term insurances of various term lengths. Figure 4.3.1 illustrates this for an annually decreasing 8-year term insurance. Figure 4.3.1 shows the graph of the benefit function b,..;. Each unit square region between the horizontal steps and the k-axis represents a deferred I-year term in- surance. When these are summed vertically, the deferred 1-year term insurances ‘-year deferred, 1-year term ft 7 insurance for 7 units ° 2-year deferred, 1-year term insurance for a unit amount 5 2 A 4 6-year term insurance fora unit amount J4 116 ‘Section 4.3 Insurances Payable at the End of the Vear of Deathfor the decreasing amounts are obtained. When the squares are summed horizon- tally, the level amount term insurances of varying duration are obtained. These vertical and horizontal sums are also indicated in Figure 4.3.1 The equality of the actuarial present values for the combination of level term insurances and the combination of deferred term insurances can be demonstrated analytically. Thus, by definition (DAN =D (1 — WOE Dds = Sr Hp (O49) = 3 Bale (43.14) the total of the column sums. In (4.3.14) we can substitute wit n-k= to obtain (Aye = BS DV Pe deve By interchanging the order of summation we obtain DD Oe pede and then by comparing the inner summation to (4.3.2), we can write (DA): = S Aa Table 4.3.1 provides a summary of functions and symbols for the elementary insurances payable at the end of the year of death. We close this section with a summary of the recursion relations for the actuarial present values of the insurances payable at the end of the year of death. Consider the list on page 119 arranged in the order of the entries of Table 43.1. Each entry is arranged across its line as the recursion relation, the domain for the relation, and the initial condition, Values for the actuarial present value would be generated from the lowest age of the mortality table to age y or w. Chapter 4 Life insurance 17‘you ou seop uous jo art serge gy ~ ye ~ (Zen sr eb eueueU Je OF, 2 sore ea ani us Ro potlop aio" pue ag ‘Zyenuue Buyseanour + call +9) tet 0=¥ 144 eB) if 0 a “Tew u= 4 9 dqqenuse Suseanep rent =) Tout T ony you ‘wiiay 189-11 ()) + o “MUS y 0 Ajjenuue Surseasout +” wt Tee Tosy 14y UWH9} eax (2) ue way * 0 us we onyo sry 1006-1 vy T+ w ‘w= ¥ | panayap 289,10 (p) * ao Tw tuey a ret DHT ORT a 1 quawmopus s09x-u (9) * ev “T+uN=y 0 ‘T+uuM=¥x oO TW TORY sot eo 1 uo} 39,1 (Q) . v coy sat 1 ayn 21M (©) uswon —aayea TE WoRung anye A wUSTDIT Tia woman Tuoi. i woRpuNT WSU aEN Sues seuSHL yuasang reuemy o © o © @ o ypeoq Jo 1eay 30 pug qe ajqekeg saoueinsuy jo Areurumg, Eis Section 43 Insurances Payable at the End of the Year of Death 18(@) og, + opp Arey X= 0,L...,0-1, and A, = 0. (b) Alga = 04, + op, Adiga 01,...,¥-% and Aja = 0. © Aga= nt Pp Anmay = O1-.-.¥- 1 and A,q = 1 2) ahs = (©) (ANig=a = [ogy + ops Adigmarml + ops (Alege x=0,1,...,y Land (Aig = 0. ) (DA)g=a = Y ~ oq. + UP, DA) ge x=0,1, +y > Land (DA) =0. AY = Loy, + ope Areal + UP TA oy EOD w= and (IA), = 0. Observation: 1, Only (a) and (b) have been justified in this section. Arguments for (c) through (g) are similar to those for (a) and (b) 2. All seven equations are of the form u(x) = (x) + vp, ux + 1), where r(x) is a given function defined for the domain of the relation. In the language of difference equations, all seven equations have the same correspond- ing homogeneous equation, u(x) = up, u(x + 1), It is linear but does not have constant coefficients. 3, Since (x) = vg, for (a), (b), and (¢), those actuarial present values are all solutions of the same recursion formula and are distinguished only by their starting values. 44 Relationships between Insurances Payable at the Moment of Death and the End of the Year of Death ‘We begin the study of these relationships with an analysis of the actuarial present value for whole life insurance paying a unit benefit at the moment of death. From (4.2.6) we have Chapter 4 Life Insurance 119= fo p.minae= fora. mira [op nina The change of variables s =f — 1 in the second integral gives Ac= foe nin at + » fo apc wds + 0 a (44a) On an aggregate mortality basis sos HalS + 1) = Py Pro wee +s + 1) so the second term of (4.4.1) would be up,A,,;. On a select mortality basis the second term would be up,,;Ay,..- Returning to (4.4.1) and using aggregate notation, we have = fot m0 dt + op Asan = Als + op, Ay (442) The integral in (4.4.2) can be expressed in discrete life table functions by adopting one of the assumptions about the form of the mortality function between integers as discussed in Section 3.6. Under the assumption of a uniform distribution of deaths over each year of age, Pew) =q OStS1,andy=0,1, which can be placed in (4.4.2) to obtain * vp, Aces (443) The domain for this relationship is x = 0, 1,..., © — 1, and the starting value is A, - 0. If we multiply both sides of recursion formula (a) by i/8, we have i i i gt = 5 de t+ Pe (5401) Since (a) and (4.4.3) embody the same recursion formula and have the same domain and the same initial value of 0 at w, (i/6)A, is the solution for (4.4.3), and A= 2A. (444) 3 Formula (4.44) might have been anticipated under the assumption of a uniform distribution of deaths between integral ages. The effect of the assumption is to make the unit payable at the moment of death equivalent to a unit payable continuously throughout the year of death. With respect to interest, a unit payable continuously over the year is equivalent to i/8 at the end of the year. 120 Section 4.4 Relationships between Insurances PayableThe identity in (4.4.4) can be reached using the properties of the future-lifetime random variable under the assumption of a uniform distribution of deaths in each year of age as developed in Section 3.6. From (3.6.1) we write T = K + S. We observed there that, under the assumption of a uniform distribution of deaths in cach year of age, K and $ are independent and $ has a uniform distribution over the unit interval. As corollaries to these observations, K + 1 and 1 ~ $ are also independent, and 1 ~ $ has a uniform distribution over the unit interval. In the identity A, = Efe" = Blo 1-5], we can use the independence of K + 1 and 1 — § to calculate the expectation of the product as the product of the expectations, Efe + DPS] = Blo TELA + DY (44s) The first factor on the right-hand side is A,. Since 1 — $ has the uniform distribution over the unit interval, the second factor is aa+oi= farmed Hence, again we have A, = (i/8)A, under the assumption of uniform distribution of deaths in each year of age. A similar argument, again based on the assumption of a uniform distribution of deaths in each year of age, can be used to show that the actuarial present value of a whole life insurance which pays a unit at the end of the m-th of a year of death is equal to (446) This argument is outlined in Exercise 4.19. In Section 3.6 we also discussed the assumption that the force of mortality is constant between integral ages. The relationship between the actuarial present val- ues for whole life insurances payable at the moment of death and at the end of the year of death under this assumption is developed in Exercise 4.19. Since the hy- perbolic assumption implies that the force of mortality decreases over the year of age (see Exercise 3.27), it is seldom realistic for human lives. Moreover, it leads to more complicated relationships that we will not develop here. Next we turn to an analysis of the annually increasing 1-year term insurance payable at the moment of death. For this insurance, the present-value random vari- able is Urtabl ot5 is a function of only k, the integral part of f, and hence we may write it as Chapter 4_Life Insurance a3: a k=01,234 Yo ko, ‘The discount function is v', so we have (PA)og = 5 PAVing 5 = (1.0297087) (5 = 8) Ups devs J 6-H dose = (1.0297087) = = 0.088307. Then, 1,000 (DA)},, = 88.307. v For an insurance providing a death benefit at the moment of death that is not a function of K, further analysis is required to express its values in terms of those for an insurance payable at the end of the year of death. Consider the continuously increasing whole life insurance payable at the moment of death. This insurance is discussed extensively in Section 4.2, and its benefit function analyzed in Figure 4.25. Its functions are 1>0, wav $>0, =w E>0. To find (IA), we rewrite Z = (K + Syoks = (K + Dek? = (1 = spk + gms =(K + Dea + ah = vA — sya + DS, Now taking expectations, under the assumption of a uniform distribution of deaths over each year of age, we have [Z] = EUK + Do] ELL + AS] — Eek) EG — sy + NYS) = (IA), 5 ~ A, BIG ~ S)0 + iP) We can simplify the last factor directly since 1 — § has a uniform distribution, _iti EG - sya +9 f MQ + if du = (Ds)q = = Thus, we can write (A), = 5 [ur : 124 ‘Section 44 Relationships between Insurances Payable4.5 Differential Equations for Insurances Payable at the Moment of Death Recursive-type expressions can be established for insurances payable at the mo- ment of death. These are developed using calculus and lead to differential equations. For a whole life insurance on (2), a dx —p@x) + Ald + wOd] = 8A, — wo ~ AQ, (4.5.1) which are the continuous analogues of (4.3.12). The notation used here is for an aggregate mortality basis. Verification of these expressions has been left to Exercise 421 On the other hand, (4.5.1) can be developed from the definition of A, by using. conditional expectation as we did for A,: A, = Ev] = Efv"| = h] PT = h) + Efv"|P > h] Pe(T > hy. (452) Now, Pr(T = hi) = qj, and Pe(T > h) = py, (453) and the conditional p.d.f. of T given T = h is LAO ewes 9 fairs iy =O oe ° elsewhere. thus, Elv"|P = h] = f oe a (454) o Me ‘As we did in the expression for A, we will write ElvT > h] = v'E[o™ (7 — h) > 0} = 0A, yy (4.5.5) Substitution of (45.3), (45.4), and (4.5.5) into (4.5.2) yields =f ee AE yy + 0 Assn Pe (456) and divide by h to Then, on both sides of (4.5.6), we multiply by ~1, add Ay, obtain Chapter 4_Life Insurance 725of py wGr +t) dt + A, Los, h Next, eu af, Tim 7 J, Ope mer + Dat = | op wer + 8) dthog = wee) and Seer dee ee tim a Pobao = wa) + 6 Using these two limits as h — 0 in (4.5.7) we obtain (4.5.1), d ; © A, = -pa) + Alu) + 8). im w(x) + Ala(x) + 8) Solutions of this differential equation are outlined in Exercise 4.22. (45.7) $$$ __ 4.6 Notes and References ‘The life contingencies textbooks listed in Appendix 6 give other developments of formulas for life insurance actuarial present values. Commutation functions, which were fundamental to actuarial calculations until this quarter century, are employed extensively in Jordan (1967). There is little material in these textbooks on the concept of the time-until-death of an insured as a random variable. Until recently, research and exposition on this concept has been called individual risk theory. Cramér (1930) gives a detailed ex- position of the ideas up to that time. Kahn (1962) and Seal (1969) give concise bibliographical information on both research and expository papers over a 100-year span. Since 1970 there has been interest in actuarial models that consider both the time- until-death and the investment-rate-of-return as random variables. This combina tion is discussed in Chapter 21 _——— Exercises Assume, unless otherwise stated, that insurances are payable at the moment of death, and that the force of interest is a constant 6 with i and d as the equivalent rates of interest and discount. Section 4.2 41. If w(x) = p, a positive constant, for all x > 0, show that A, B/(u + 8). 4.2. Let w(x) = 1/(1 + 2), for alll x > 0. 126 ‘Section 4.6 Notes and Referencesa. Integrate by parts to show that ” ey te A 1-sfe Tee b. Use the expression in (a) to show that dA,/dx <0 for all x > 0. 43. Show that dA,/di = —v(IA), 4.4. Show that the expressions for the variance of the present value of an 1-year endowment insurance paying a unit benefit, as given by (4.2.10) and (4.2.13), are identical. 45. Let Z, and Z, be as defined for equation (4.2.11). a. Show that lim, Cov(Z,, Zs) = lim... Cov(Z,, Z2) = 0. b. Develop an implicit equation for the term of the endowment for which Cov(Z,, Z,) is minimized. . Develop a formula for the minimum in (b), d. Simplify the formulas in (b) and (c) for the case when the force of mortality is a constant p. 4.6. Assume mortality is described by I, = 100 — x for 0 = x = 100 and that the force of interest is 8 = 0.05. a, Calculate Alyy b. Determine the actuarial present value for a 25-year term insurance with benefit amount for death at time f, b, = &", for a person age 40 at policy survival function with o =. 100 and i = 0.10, 47. Assuming De Moivre's calculate a. Alama b. The variance of the present value, at policy issue, of the benefit of the insurance in (a). 48. If 8, = 02/(1 + 0.05t) and I, = 100 ~ x for 0 = x = 100, calculate a. For a whole life insurance issued at age 1, the actuarial present value and the variance of the present value of the benefits b. (A), 4.9. a. Show that A, is the moment generating function of T, the future lifetime of (x), evaluated at ~8. b. Show that if T has a gamma distribution with parameters a and B, then A, = (1 + 8/B)* 4.10. Given b, = t, u(t) =p, and 8, = 6 for all f > 0, derive expressions for a. (JA), = Elbjv"]b. Var(be"), Chapter 4 Life Insurance 1274.11. The random variable Z is the present-value random variable for a whole life insurance of unit amount payable at the moment of death and issued to (x). If 5 = 0.05 and p,(#) = 0.01: a. Display the formula for the p.d.f. of Z. b. Graph the pdf. of Z. ¢. Caleulate A, = E[Z] and Var(Z). 4.12. The random variable Z is the present-value random variable for an 1-year ‘endowment insurance as defined in Section 4.2.2. Exhibit the d.f, of Z in terms of the df. of T 4.13, The random variable Z is defined as in Exercise 4.12. If 5 = 0.05, p,(t) = 0.01, and n = 20: a. Display the df. of Z. b. Graph the df. of Z. ¢. Calculate A,q = E[Z| using the distribution of Z. [Hint: Consider using the complement of the df] Section 4.3 4.14. If l, = 100 — x tor 0 = x = 100 and 1 = 005, evaluate a. Aas b. (IA),o. 4.15. Show that A.g = Alg + 0" »Ps Arsmima for m 0, then {Hint: Use Jensen’s Inequality in Section 1.3 when u"(x) > 0.] For a whole life insurance the benefit amount, b, is 0 or 1 for each ¢ = 0. For calculations at force of interest 8, a. Express the discount function in terms of 8, b. Express the present-value random variable, Z, in terms of T. c. Show that Z’@force of interest 6, equals Z@force of interest j8, Computing Exercises 431 4.33. 4131. ‘Augment your Illustrative Life Table to include input of a constant interest rate, i, and a payment frequency, m. It will be helpful for the equivalent rates 8, d™, #!, d, and v to be shown in your Illustrative Life Table output. Develop a set of values of dig, 1 = 1, 2, . , 100 at i = 0.06 by using the forward recursion formula (3.5.20). [Hint: Review Exercise 3.25 or use digey = 1+ vig] a. Using the backward recursion formula of (4.3.10) in your Illustrative Life Table and the appropriate starting value, calculate 1,000A, for x = 13 to 140 for an interest rate of 0.06, b. Compare your values to those in Appendix 2A, 1a. Use (4.3.3) and your Ilustrative Life to determine Agisy and 7Aghay at i= 000 b, What is the variance for the present-value random variable for 2 20-year term insurance with benefit amount 100,000 issued to (20)? Chapter 4 Life Insurance 1314.36. 437, 4.38. a. By an algebraic or probabilistic argument, verify the following backward recursion formula of an i-year term insurance with a unit benefit Ang = Ue — VPs avn + UPs Acta b. Determine an appropriate starting value for use with this formula. Use your Illustrative Life Table with i = 0.06 to calculate the actuarial present value of a 10-year term insurance issued at ages x = 13,... , 130. a. Use recursion relation (g) at the end of Section 43 and your Illustrative Life Table to calculate (IA)p, at i = 0.06. b. Modify the recursion relation of part (a) to obtain one for (IA), and deter- mine a starting value for it ©. Modify the recursion relation of part (b) to obtain one for (IA), and deter- mine a starting value for it. d. Make the recursion relations of parts (b) and (¢) specific to the assumption of a uniform distribution of deaths over each year of age. Use your Illustrative Life Table to verify the numerical solutions to parts (a) and (b) of Example 4.2.4. [Hint: Set B = 0.00 and A = 0.04 in your Makeham law parameters, i = ¢™"" — 1, and use recursion formula (d) at the end of Section 4.3. Remember that the insurance in Example 4.24 is payable at the moment of death.] a. By an algebraic or probabilistic argument, verify the following backward recursion formula for the actuarial present value of a unit benefit endow- ‘ment insurance to age y with the death benefit payable at the moment of death: Aga Alt op Ammen %-01..,y-1 b. Determine an appropriate starting value for use with this formula. ¢. Use your Illustrative Life Table with the assumption of uniform distribu- tion of deaths over each year of age and i = 0.06 to calculate the actuarial present value of a unit benefit endowment insurance to age 65 with the death benefit payable at the moment of death for issue ages x = 13,..., 64 d. By an algebraic or probabilistic argument, verify the following backward recursion formula for the actuarial present value of a unit benefit 1-year endowment insurance with the death benefit payable at the moment of death: Aga = Ag + 0" iPr 1 0Pcon — Aghia) + OP Assia x=01,...,0-1 Let Z be the present-value random variable for a 100,000 unit 20-year endo ‘ment insurance with the death benefit payable at the moment of death. Use your Illustrative Life Table to calculate the mean and the variance of Z on the basis of a Makeham law with A = 0.001, B = 0.00001, ¢ = 1.10, and 8 = 0.05, 132 BeercisesLIFE ANNUITIES 5.1 Introduction In the preceding chapter we studied payments contingent on death, as provided by various forms of life insurances. In this chapter we study payments contingent on survival, as provided by various forms of life annuities. A life annuity is a series of payments made continuously or at equal intervals (such as months, quarters, years) while a given life survives. It may be temporary, that is, limited to a given term of years, or it may be payable for the whole of life. The payment intervals may commence immediately or, alternatively, the annuity may be deferred. Pay- ments may be due at the beginnings of the payment intervals (annuities-due) or at the ends of such intervals (annuities-immediate). Through the study of annuities-certain in the theory of interest, the reader al- ready has a knowledge of annuity terminology, notation, and theory. Life annuity theory is analogous but brings in survival as a condition for payment. This con- dition has been encountered in Chapter 4 in connection with pure endowments and the maturity payments under endowment insurances, Life annuities play a major role in life insurance operations. As we see in the next chapter, life insurances are usually purchased by a life annuity of premiums rather than by a single premium. The amount payable at the time of claim may be converted through a settlement option into some form of life annuity for the ben- eficiary. Some types of life insurance carry this concept even further and, instead of featuring a lump sum payable on death, provide stated forms of income benefits. Thus, for example, there may be a monthly income payable to a surviving spouse or to a retired insured. Annuities are even more central in pension systems. In fact, a retirement plan can be regarded as a system for purchasing deferred life annuities (payable during, retirement) by some form of temporary annuity of contributions during active ser vice. The temporary annuity may consist of varying contributions, and valuation of it may take into account not only interest and mortality, but other factors such as salary increases and the termination of participation for reasons other than death. Chapter 5 Life Annuities 133Life annuities also have a role in disability and workers’ compensation insur- ances. In the case of disability insurance, termination of the annuity benefit by reason of recovery of the disabled insured may need to be considered. For surviving, spouse benefits under workers’ compensation, remarriage may terminate the annuity. We proceed in this chapter as we did in Chapter 4 and express the present value of benefits to be received by the annuitant as a function of T, the annuitant’s future- lifetime random variable. it then will be possible to study properties of the distri- bution of this financial value random variable. The expectation, still called the ac- tuarial present value, can be evaluated in an alternative way using either integration by parts or summation by parts depending, respectively, on whether a continuous or discrete set of payments is being evaluated. The results of this pro- cess have a useful interpretation and lead to an alternative method of obtaining actuarial present values called the current payment technique. As in the preceding chapter on life insurance, unless otherwise stated we assume a constant effective annual rate of interest i (or the equivalent constant force of interest 8). We also assume aggregate mortality for most of the development in this chapter and indicate those situations where a select mortality assumption makes a major difference. In most applications of the theory developed in this chapter, annuity payments continue while a human life remains in a particular status. However, the possible applications of the theory are much wider. It may be applied to any set of periodic payments where the payments are not made with certainty. Examples of some of these applications are seen in later chapters dealing with multiple lives or multiple causes of decrement. 5.2 Continuous Life Annuities We start with annuities payable continuously at the rate of 1 per year. This is of course an abstraction but makes use of familiar mathematical tools and as a prac- tical matter closely approximates annuities payable on a monthly basis. A whole life annuity provides for payments until death. Hence, the present value of pay- ments to be made is Y = ay for all T = 0 where T is the future lifetime of (x). The distribution function of Y can be obtained from that for T as follows F\(y) = PY $y) = Pr(tq < y) = Pr(l - 0" = 8y) = Pro? = 1 - dy) = Pr [r eat 2x! = ford

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