FAM-S

Updated 08/08/23

Insurance
INSURANCE and
AND REINSURANCE Fire Related products:
Reinsurance Coverages
COVERAGES Standard fire policy (SFP) covers direct • Comprehensive major medical: covers
loss from fire and lightning, and at least one small frequent and large infrequent
Short-Term Insurance Coverages of the following: costs; small deductibles
What Makes a Risk Insurable? • Personal coverage • Catastrophic major medical: covers
1. Economically feasible. • Commercial coverage expenses higher than regular major
2. Economic value of insurance • Increased covered perils medical expenses; very high deductibles
is calculable. • Increased covered loss • Short-term medical: single limited term;
3. Loss is definite. simpler underwriting; lower insurer cost
4. Loss is random in nature. Marine
• High risk pool plan: insures people with
5. Exposures in any rate class Inland marine insurance covers:
no insurance due to pre-existing condition
are homogeneous. • Domestic shipments
• Consumer directed plan: high-deductible
6. Exposure units are spatially and • Instrumentalities of transportation and
plan + personal spending account
temporally independent. communication (bridges, tunnels, etc.)
o HSA can only be opened with a HDHP
• Personal property floater risks
o Tax-free contributions, earnings, and
Automobile
Liability withdrawals (for medical purposes)
• Third-party bodily injury and
property damage Low frequency, high severity claims with
Affordable Care Act (ACA):
• Medical payments (tort); Personal injury potentially high litigation costs:
• Individual mandate
protection (no-fault) • Claims-made basis: losses covered only if
(must have insurance)
• Unidentified, underinsured, uninsured reported during policy period; insurer
• Partially standardized insurance
motorists protection may offer tail coverage
• Plans must cover 10 EHBs
• Collision and other than collision • Occurrence: losses covered even if
• No cost sharing for preventive services
reported after policy period
Homeowners • Plans must meet AV metal level
Doctrine of proximate cause Major Medical • Plans must set out-of-pocket limit below
• A loss is only covered if a covered peril Provider networks: government limit
is the proximate cause of • Build own: common for carriers with • Plans sold on public exchanges must
a covered consequence. geographically concentrated insureds satisfy certain tests/standards
• Contract with networks for hire: common
Coinsurance Provision: Dental
for carriers with geographically
I Usually group policies because:
min /I, ⋅ L5 , I < cF diverse insureds
Claim Payment, P = . cF • High frequency, low severity
min(I, L) , I ≥ cF Main types of health insurance plans: • Tax subsidy
• Health Maintenance Organization (HMO)
Workers Compensation Product design drivers:
Prior to the passage of workers comp laws, • Preferred Provider Organization (PPO)
• Induced utilization: over-utilize benefits
it was difficult for workers to get Insurance benefit calculations: because insurance coverage is present
compensation for injury/illness. Reasons: • Provider • Out-of-pocket limits • Accumulated untreated conditions: ability
• Doctrine of contributory negligence discounts • Maximum limits to postpone treatment until insurance
• Fellow-servant doctrine • Deductibles • Internal limits is present
• Assumption-of-risk doctrine • Coinsurance • Copays • Anti-selection: Individuals choose dental
coverage that benefits them the most
Workers can expect:
• ACA: pediatric dental coverage required
• Medical care benefits
• Disability income benefits
• Death benefits
• Rehabilitation services and benefits

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 Other Topics Reinsurance Law of Total Probability
Deductibles, d • Facultative: Used for ceding Pr(X = x) = E4 [Pr(X = x ∣ Y)]
Fixed dollar deductible: individual risks.
Law of Total Expectation
a.k.a. ordinary deductible or deductible • Treaty: Used for ceding all risks in a
0, X≤d E0 [X] = E4 dE0[X ∣ Y]e
Y = max(0, X − d) = @ specific line or class of business.
X − d, X > d
• Quota share: Both parties share a Law of Total Variance
Fixed percentage deductible: percentage of the total risk. Var0 [X] = E4 dVar0 [ X ∣ Y ]e
d • Surplus share: Both parties share a + Var4 dE0 [X ∣ Y]e
d, X ≤
D = max(d, δX) = E δ percentage of the total risk above the
d retention limit. Independence
δX, X >
δ For independent X and Y,
• Excess of loss: The reinsurer is responsible
0, X≤d
⎧ d for the claim amounts exceeding the • Pr(X = x, Y = y)
⎪ X − d, d<X≤
Y= δ retention limit. = Pr(X = x) ⋅ Pr(Y = y)
⎨ d • E[g(X) ⋅ h(Y)] = E[g(X)] ⋅ E[h(Y)]
⎪
⎩(1 − δ)X, X>
δ
Empirical Distributions
Disappearing deductible: SEVERITY, FREQUENCY, &
Severity, Frequency, Each data point has a probability of .
,
d, X≤a AGGREGATE MODELS 5
b−X and Aggregate Models Empirical CDF:
D = Ed / 5, a < X ≤ b
b−a Basics # of observations ≤ x
F5 (x) =
0, X>b n
CDFs, Survival Functions, and
Empirical 100p() percentile: π6 = x(⌈56⌉)
Hazard Functions
0, X<d ! ∑5 x9
⎧ X − d, d≤X≤a Sample mean: xs = 9:,
⎪ F(x) = Pr(X ≤ x) = W f(t) dt n
Y= b−X "#
⎨ X − d /b − a 5 , a < X ≤ b # Biased sample variance:
⎪ S(x) = Pr(X > x) = W f(t) dt ∑59:,(x9 − xs)-
⎩ X, X>b ! Var[X] =
n
f(x)
Franchise deductible: h(x) = ∑59:, x9-
0, X ≤ d
S(x) = − xs -
Y=@ ! n
X, X > d H(x) = W h(t) dt = − ln S(x) Unbiased sample variance:
"#
Policy Limits, u ∑59:,(x9 − xs)-
⇒ S(x) = e "$(!) s- =
X, X ≤ u n−1
Y = min(X, u) = M n
u, X > u Moments = ⋅ Var[X]
#
n−1
Coinsurance, α E[g(X)] = W g(x) ⋅ f(x) dx
Y = αX "# Severity Models
#
E[g(X)] = W g′(x) ⋅ S(x) dx Incomplete Gamma Function
Deductible, Policy Limit, and Coinsurance ' Γ(α; x) = 1 − Pr(N < α)
0, X≤d k () moment: µ+* = EdX * e ; µ,+ = µ where N~Poisson(λ = x)
Y = .α(X − d), d < X ≤ m
u, X>m k () central moment: µ* = Ed(X − µ)* e
Uniform (a, b)
where Var[X] = σ- = µ-
a+b (a − b)-
d: ordinary deductible (set to 0 if not Var[g(X)] = E[g(X)- ] − E[g(X)]- E[X] = Var[X] =
2 12
applicable) Covariance: Cov(X, Y) = E[XY] − E[X]E[Y]
u: policy limit (set to ∞ if not applicable) σ Special Distribution Shortcuts
Coefficient of variation: CV =
µ
α: coinsurance (set to 1 if not applicable)
µ. µ/ 𝐗𝐗 𝐗𝐗 − 𝐝𝐝 ∣ 𝐗𝐗 > 𝐝𝐝
u Skewness = . ; Kurtosis = /
m: maximum covered loss, i. e. m = + d σ σ
α Pareto (α, θ) Pareto (α, θ + d)
Conditional Distributions
Pr(A ∩ B) Exponential (θ) Exponential (θ)
Pr(A ∣ B) =
Pr(B) Uniform (a, b) Uniform (0, b − d)
f0 (x)
f0∣2303* (x) = ,
Pr(j < X < k) Distributions Relationship
where j < x < k Is equivalent to

Gamma (1, θ) Exponential (θ)

Beta (1, 1, θ) Uniform (0, θ)

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 Sum of Independent Random Variables Deductibles, d Frequency Models
𝐗𝐗 𝐢𝐢 ∑𝐧𝐧𝐢𝐢:𝟏𝟏 𝐗𝐗 𝐢𝐢 Ordinary deductible: Distributions Relationship
0, X<d Is equivalent to
Gamma (α9 , θ) Gamma (∑59:, α9 , θ) Y > = (X − d)@ = @
X − d, X ≥ d
Normal E[Y > ] = E[(X − d)@ ] = E[X] − E[X ∧ d] Binomial (1, q) Bernoulli (q)
Normal µ9 , σ-9 Ä Ed(Y > )* e = Ed(X − d)*@ e
∑59:, µ9 , ∑59:, σ-9 Ä Neg. Bin. (1, β) Geometric (β)
#

Roles of Parameters = W (x − d)* f(x) dx

A Sum of Independent Random Variables
Shape parameter: affects the general #
= W k(x − d)*", S(x) dx 𝐗𝐗 𝐢𝐢 ∑𝐧𝐧𝐢𝐢:𝟏𝟏 𝐗𝐗 𝐢𝐢
shape of the distribution A
Scale parameter: parameter that is E[X ∧ d] Poisson (λ9 ) Poisson (∑59:, λ9)
multiplied by a positive constant when Loss elimination ratio: LER =
E[X] Binomial (m9 , q) Binomial (∑59:, m9 , q)
a random variable is multiplied by that
same constant, while all other parameters Franchise deductible: Neg. Bin. (r9 , β) Neg. Bin. (∑59:, r9 , β)
0, X ≤ d
are unchanged Y> = @
X, X > d (a, b, 0) Class Property
• To scale any continuous distribution on E[Y > ] = E[(X − d)@ ] + d ⋅ S(d) p5 b
the exam table except lognormal, inverse = a + , for n = 1, 2, ⋯
p5", n
Gaussian, and log-t, scale the parameter θ Payment per Payment
• To scale a normal distribution, Y B : Payment per payment Note: Included in exam table Appendix B.2.
X~Normal (µ, σ- ) E[Y >]
E[Y B ] = ; E[Y > ] = E[Y B ] ⋅ S(d) Choosing from (a, b, 0) Class
⇓ S(d)
Two methods to fit data to an (a, b, 0)
cX~Normal (cµ, (cσ)- ) class distribution:
• To scale a lognormal distribution, With ordinary deductible d,
• Method 1: Compare xs and s-
X~Lognormal (µ, σ- ) E[Y B ] = e(d) = E[ X − d ∣ X > d ]
*5"
E[(X − d)@ ] • Method 2: Observe the slope of
⇓ =
5"#$

cX~Lognormal (µ + ln c, σ- ) S(d)
Distribution Method 1 Method 2
Discrete Mixtures Special Shortcuts for e(d)
Poisson xs = s- 0
f0 (x) = ∑59:, w9 ⋅ f0! (x) where ∑59:, w9 = 1
𝐞𝐞(𝐝𝐝)
Binomial xs > s- Negative
Bernoulli Shortcut 𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄 (𝛉𝛉) θ
Neg. Binomial xs < s- Positive
𝑎𝑎, Probability = 𝑞𝑞
If 𝑋𝑋 = @ , b−d
𝑏𝑏, Probability = 1 − 𝑞𝑞 𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔 (𝐚𝐚, 𝐛𝐛)
- 2 Zero-Truncated Distributions
then Var[𝑋𝑋] = (𝑎𝑎 − 𝑏𝑏) 𝑞𝑞(1 − 𝑞𝑞)
1
θ+d pC5 = p , for n = 1, 2, ⋯
𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏 (𝛂𝛂, 𝛉𝛉) 1 − p' 5
Severity Models w/ Coverage α−1
1
Modifications d Ed(NC )* e = EdN*e
S-P 𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏 (𝛂𝛂, 𝛉𝛉) 1 − p'
Y > : Payment per loss α−1
Zero-Modified Distributions
Policy Limits, u The Ultimate Formula pD D C
5 = 1 − p' Äp5 , for n = 1, 2, ⋯
X, X < u E[Y > ]
Y> = X ∧ u = M 1 − pD
u, X ≥ u pD
'
m d 5 = p
Ed(Y e = Ed(X ∧ u)* e
> )* = α(1 + r) /E õX ∧ ú − E ùX ∧ û5 1 − p' 5
1+r 1+r
?
Ed(Y > )* e = W x * f(x) dx + u* ⋅ S(u) where Ed(ND )* e = 1 − pD C *
' ÄEd(N ) e
' d: deductible (set to 0 if not applicable) 1 − pD
'
?
u: policy limit (set to ∞ if not applicable) Ed(ND )* e = EdN* e
Ed(Y > )*
e = W kx *",
S(x) dx 1 − p'
' α: coinsurance (set to 1 if not applicable)
E[X ∧ u] r: inflation rate (set to 0 if not applicable)
Increased Limit Factor, ILF = Aggregate Models
E[X ∧ b] u
m: maximum covered loss, i. e. m = + d Collective Risk Model
• 𝑏𝑏: original limit α
If S = ∑E
9:, X 9 for independent N
• 𝑢𝑢: increased limit
and X, then:
• E[S] = E[N]E[X]
• Var[S] = E[N]Var[X] + Var[N]E[X]-

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 Normal Approximation Incomplete Data Partial Credibility
Approximate S as Normal (E[S], Var[S]) Credibility premium: PL = Zxs + (1 − Z)M
Left-truncated at d f(x)⁄S(d) = M + Z(xs − M)
Lognormal Approximation
Right-censored at u S(u) where
Approximate S as lognormal with
• M: manual premium
parameters found by equating E[S] and Grouped data on
Pr(a < X ≤ b) • Z: credibility factor/credibility
Var[S] to lognormal mean and variance interval (a, b]
n n′
Aggregate Payments Special Cases Square Root Rule: Z = π = π
nH nK
%
S = ∑E > E
9:, Y = ∑9:, Y :
B
Distribution Shortcuts where
• E[S] = E[N]E[Y > ] = E[N+ ]E[Y B ]
• n: actual # of exposures
• Var[S] = E[N]Var[Y > ] + Var[N]E[Y > ]- Gamma, xs
θ± = • n′: actual # of claims
= E[N+ ]Var[Y B ] + Var[N+ ]E[Y B ]- fixed α α

µ≤ = xs
Risk Measures
PRICING AND RESERVING FOR
Value-at-Risk (VaR) Normal
∑5 (x9 − µ≤)- Pricing and Reserving
≥- = 9:, SHORT-TERM INSURANCE
VaR 6 (X) = π6 = F0", (p)
σ
n for Short-Term
COVERAGES
Insurance Coverages
Tail-Value-at-Risk (TVaR) ∑59:, ln x9
TVaR6 (X) = EdX ∣ X > VaR 6 (X)e µ≤ = Loss Reserving
n
Lognormal Expected Loss Ratio Method
= VaR 6 (X) + edVaR 6 (X)e
∑59:,(ln x9 − µ≤)- 1. L±?M(. = PO ⋅ ELR
≥- =
σ
n 2. R = L±?M(. − LB
𝐓𝐓𝐓𝐓𝐓𝐓𝐓𝐓𝐩𝐩 (𝐗𝐗)
Poisson λ± = xs Chain-Ladder Method
ϕz6 Ä
Normal µ + σ® ´
1−p Binomial, xs a.k.a. Loss Development/Triangle Method
q≤ =
fixed m m 1. f9?M(. = ∏#*:(@, f*
Φσ − z6 Ä 2. L±?M(. = L9,( ⋅ f9
?M(.
Lognormal E[X] ⋅ ® ´ Neg. Binomial, xs 9
1−p β± = 3. R = L±?M(. − LB
fixed r r

Coherence Bornhuetter-Ferguson Method

Uniform Distribution on (0, θ):
1
ρ(X) is coherent if it satisfies the • θ± = max(x, , x- , … , x5 ) R = PO ⋅ ELR ⋅ /1 − ?M(. 5
f
properties below:
where f ?M(. is calculated based on the
• Translation invariance: ρ(X + c) =
chain-ladder method
INTRODUCTION TO CREDIBILITY
ρ(X) + c Introduction to Credibility
• Positive homogeneity: ρ(cX) = c ⋅ ρ(X) Alternatively,
Classical Credibility 1
• Subadditivity: ρ(X + Y) ≤ ρ(X) + ρ(Y)
a.k.a. Limited Fluctuation Credibility R = w ⋅ R L> + (1 − w) ⋅ R>Q where w =
• Monotonicity: ρ(X) ≤ ρ(Y), f ?M(.
if Pr(X ≤ Y) = 1 Full Credibility
VaR is not coherent because it Data Preparation for Ratemaking
# of exposures needed for full credibility,
fails subadditivity. Losses
nH :
TVaR is coherent. Full credibility of aggregate claims:
z(,@6)⁄- -
Tail Weight nH = õ ú CVJ- Ä
k
Fewer positive raw moments ⟹
heavier tail # of claims needed for full credibility, nK :
Full credibility of aggregate claims:
z(,@6)⁄- - σ-E
nK = õ ú µ + CV0- ∂
PARAMETRIC ESTIMATION k µE
Parametric Estimation
• Full credibility of claim frequency: set
Maximum Likelihood Estimators CV0- = 0
Incurred losses for CY i: LR9 = LB9 + R 9 − R 9",
Steps to Calculating MLE • Full credibility of claim severity:
where R 9 is the reserves at the end of CY i
1. L(θ) = ∏ f(x) A
3. l+ (θ) = l(θ) σ-E
AG set =0 Incurred losses for AY or PY i: LR9 = LB9 + R 9
2. l(θ) = ln L(θ) µE
4. Set l+ (θ) = 0 where R 9 is the reserves as of the
nK
nK = nH ⋅ µE ⟺ nH = valuation date
µE

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 Expenses and Profit • To replicate a put, sell shares
ES and lend money.
Variable Expense Ratio: V =
P Option Pricing: Risk-Neutral Valuation
ET
Fixed Expense Ratio: F = eW) − d
P 1−q=
u−d
Permissible Loss Ratio: PLR = 1 − V − QC ,
V' = e"W) ⋅ EX [Value of Option) ]
where QC is the target profit and
= e"W) [(1 − q)V? + (q)VA ]
contingencies ratio
No-Arbitrage Condition
Premium
Arbitrage is possible if the following
Put Option inequality is not satisfied:
• A long put is the right (but not obligation) 0 < q < 1 ⟺ d < eW) < u
to sell at the strike price. Probability
• Payoff = max [0, K − SC ] For n periods, let k be the number of
• Insurance against a stock price decrease "down" jumps needed to reach an ending
node. Then, the risk-neutral probability of
reaching that node is given by:
n
æ ø (q)* (1 − q)5"* , k = 0,1, … , n
k
Unearned premium for CY i:
P9U = P9V − P9O + P9",
U Black-Scholes Option Pricing Model
Lognormal Model for Stock Prices
Extension of Exposures Method Assume the current time is time t, the log-
Recalculates the premiums of historical return on the stock is normally distributed:
policies under the current rate level S(@Y
ln ù û ~N[m, v - ]
S(
Parallelogram Method
Option Moneyness • m = µτ
Calculates average factors to be applied to the
aggregate historical premiums to make them • In-the-money: If exercised, option payoff • v - = σ- τ
J&'(
on-level is positive. • ~LogN(m, v - )
J&
• At-the-money: If exercised, option payoff The real-world probability of a stock price
Ratemaking is zero. being less than some value K at time t + τ is:
Loss Ratio Method • Out-of-the-money: If exercised, option "
M5Z ["\Y
)&
LR + F payoff is negative. Pr[S(@Y < K] = Pr µZ < ∂
]√Y
Indicated Avg. Rate Change = −1
1 − V − QC
where Z~N(0,1).
Put-Call Parity
Pure Premium Method
c(t) − p(t) = S( − Ke"W(C"() Black-Scholes-Merton Formula
a.k.a. Loss Cost Method
For a stock that pays no
Ls + E
ªT
Indicated Avg. Rate = Binomial Option Pricing Model dividends, the BSM formula is:
1 − V − QC
Option Pricing: Replicating Portfolio c(t) = S( ⋅ Φd, (t)Ä − Ke"W(C"() ⋅ Φd- (t)Ä
An option can be replicated by p(t) = Ke"W(C"() ⋅ Φ−d- (t)Ä − S(
buying Δ shares of the underlying stock ⋅ Φ−d, (t)Ä
OPTION PRICING FUNDAMENTALS
Option Pricing Fundamentals and lending 𝐵𝐵 at the risk-free rate. S 1
S? SA ln æ ( ø + ær + σ- ø (T − t)
d, (t) = K 2
Introduction to Options u= d=
S' S' σ√T − t
Call Option V? − VA uVA − dV? d- (t) = d, (t) − σ√T − t
• A long call is the right (but not obligation) Δ= B = e"W) / 5
S(u − d) u−d
to buy at the strike price. V = ΔS + B The BSM formula for call options can be
• Payoff = max [0, SC − K] continuously replicated by:
• Insurance against a stock price increase Call Put • Buying Δ = Φd, (t)Ä shares of stock

Δ + − • Borrowing B( = Ke"W(C"() ⋅ Φd- (t)Ä

B − + The BSM formula for put options can be

continuously replicated by:
• To replicate a call, buy shares • Shorting Δ = Φ−d, (t)Ä shares of stock
and borrow money. • Lending B( = Ke"W(C"() ⋅ Φ−d- (t)Ä

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 FAM-L
Updated 03/28/23

Long-Term
LONG-TERM Insurance
INSURANCE Lapse-Supported Insurance: Key differences between cash dividends and
COVERAGES Coverages Cash values may not be available for some bonuses:
policies, particularly those intended for Cash Dividends Bonuses
Introduction older policyholders, if the policy is Easy to More complex
Insurable Interest terminated or lapses. The excess funds from understand
• An insurable interest exists if the death of these lapsed policies can be used to support Flexible Not flexible
the insured would cause the policyholder the remaining policies, resulting in lower Not tax-efficient Tax efficient
to suffer a financial loss. premiums. Policyholders lose Policyholders who
• An insurance payoff should not leave the at most one-year's surrender may
Stranger Owned Life Insurance (STOLI):
beneficiary financially better off than if profit share on only receive a
An arrangement in which an investment
the insured life had not died. surrender small portion of
firm holds a life insurance policy without
insurable interest on the insured. the profits
Traditional Insurance Contracts Require the Provides more
• Viatical settlement: A special type of
Term Insurance insurer to liquidate potential for future
STOLI where the policyholder diagnosed
Pays a lump sum benefit on death if death assets profit
with a terminal illness sells their policy to
occurs within a fixed term Expensive to Easier to be
a third party
Purposes of term insurance: operate smoothed
Participating Insurance (with-profit):
• Family protection
Shares profits on invested premiums with
• Key Person Insurance/COLI (Company Endowment Insurance
policyholders in the form of cash dividends
Owned Life Insurance): Protect business Pays a lump sum benefit on the earlier of
or reduced premiums in North America,
against deaths of key employees death and the end of a specified term
while in the UK and Australia profits are
Types of term insurance policies: used to increase the death benefit through Options and Variations on Traditional
• Level term insurance bonuses: Insurance
• Decreasing term insurance • Reversionary bonuses: Applied to the • Joint life insurance
• Renewable term insurance contracts in force, increasing the benefits • Multiple life insurance
• Convertible term insurance by a specified percentage. • Guaranteed cash values
o Simple reversionary bonus • Policy loans
Whole Life Insurance o Compound reversionary bonus • Accelerated death benefit
Pays a lump sum benefit on death whenever o Super-compound reversionary bonus • Accidental death benefit
it occurs
• Terminal bonuses: Awarded and paid • Premium waiver on disability
• May pay a cash value/surrender value on death or end of the term • Family income benefit (FIB)
upon lapse or surrender after an initial
• Critical illness insurance
period.
• In the early years of the policy, the cash
Modern Insurance Contracts
values tend to be low. In later years, the
Modern insurance products are more
cash values may be substantial, but
flexible and usually combine insurance
typically less than the sum insured.
coverage with a significant investment
• Non-forfeiture laws require insurers to element. The reasons for the changes
pay specified cash values, or equivalent, include:
for traditional whole life insurance.
• Competition with mutual funds and banks
for policyholders' savings
• Changing demographics and lifecycles
impact insurance design
• Developments in science and technology
• Better informed customers

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 Universal Life Insurance Underwriting Long-Term Coverages in Health Insurance
• It is generally issued as a whole life The process by which insurance companies Waiting/elimination period: Amount of time
contract, but with transparent cash values. collect and evaluate information on the insured must wait to receive benefit
• It can be viewed as a form of savings applicants of life insurance contracts payments
account with built-in life insurance. Benefit term: Maximum length of time over
Level of underwriting depends on:
• The death benefit under these contracts which benefits will be paid
• Type of insurance being purchased
may be fixed or increase as the invested Off period: Minimum length of time that must
• Amount of benefit
premiums earn interest. pass between two periods of disability for
• Distribution method
• Profits from the insurer are shared them to be considered separate
through the credited interest rate. Classification of applicants
Disability Income Insurance
• Premiums and credited interest are • Preferred lives
• Level premiums are paid while healthy
deposited into a notional account, which is • Normal lives
• Benefits are paid while disabled until the
subject to monthly deductions to cover • Rated lives
earliest of:
cost of life insurance and expenses. • Uninsurable lives
o Recovery to full health
• Policyholders may reduce or skip paying
Adverse selection: Individuals with very high o End of benefit term
premiums as long as the account balance in
risk buy disproportionately high amounts of o Death
the notional account is sufficient to cover
insurance, leading to excessive losses to the
costs. Factors affecting the level and/or timing of
insurer
the disability benefits:
Unitized With-Profit Insurance
Premiums • Extent to which the insured can work after
Premiums are used to purchase units, which
Premiums can be paid as a single premium or the disability
increase in value increases the benefits in the
a regular series of premiums. o Total disability: Unable to perform any
form of bonuses
job
Assessmentism: The practice of matching
Equity-Linked Insurance o Partial disability: Able to work but
annual income and expenses
• Benefits are linked to the performance of cannot earn full salary
an investment fund and may increase or • Other sources of income
Life Annuities
decrease over time • Types of coverage
• Whole life annuity
• Often comes with a Guaranteed Minimum o Own job: Pay benefits when insured
• Temporary life annuity
Death Benefit (GMDB) and a Guaranteed cannot perform his/her own job
• Single premium deferred annuity (SPDA)
Minimum Maturity Benefit (GMMB) o Any job: Pay benefits when insured
• Single premium immediate annuity (SPIA)
• Known as variable annuities or segregated cannot perform any job at all
• Regular premium deferred annuity (RPDA)
funds in North America and unit-linked o Inflation
• Joint life annuity: Makes payments until
insurance outside of North America
the first death Long Term Care Insurance
• Last survivor annuity: Makes payments • Level premiums are paid while healthy
Distribution Methods, Underwriting, and
until the last death • Payments of benefit commence when the
Premiums
• Reversionary annuity: Makes payments policyholder cannot perform ≥ 2 ADLs
Distribution methods:
to the annuitant after the death of the
1. Commission system: Insurers hire brokers Activities of daily living (ADLs):
insured, for as long as the annuitant
or other financial advisors to sell their • Bathing • Toileting
survives
products • Dressing • Continence
• Guaranteed annuity: Makes payments for
2. Direct marketing: Insurers sell directly to • Eating • Transferring
a minimum period, regardless of whether
the public through television advertising or
the annuitant is alive or dead, then Form of LTC benefits:
other telemarketing methods
payments continue as long as the • Reimbursement
annuitant survives • Fixed annuity payments

Hybrid LTC and life insurance policies pay

benefit using one of the approaches below:
• Return of premium
• Accelerated benefit

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 Critical Illness Insurance Pensions Curtate Future Lifetime
Pay a lump sum benefit when the insured is An employer-sponsored plan designed to K ! : number of completed future years by (x)
diagnosed with a covered illness or condition provide employees with retirement income prior to death
• May be offered as an accelerated benefit K! = ⌊T! ⌋
Defined Contribution (DC) Pension Plan
rider on a life insurance policy Pr[K ! = k] = ' p! ∙ q!&' = '|q!
Specifies the amount, usually as a percentage
Chronic Illness Insurance of salary, the employer and the employee will (q ! = )q! + )p! ⋅ )q!&) + *p! ⋅ )q!&* + ⋯
Pay a lump sum benefit or annuity when the contribute into the pension fund + (+)p! ⋅ )q!&(+)
insured is diagnosed with a chronic illness = "|q! + )|q! + ⋯ + (+)|q!
Defined Benefit (DB) Pension Plan
Specifies the amount of annual pension the Life Table
Mutual and Proprietary Insurers
employee will receive l!&#
Mutual Insurance Company #p! =
l!
• Owned by with-profit policyholders Annual retirement benefit = n ∙ S ∙ α
#d! l! − l!&#
• Distributes all profits to with-profit Plan type: #q ! = =
l! l!
policyholders • Final salary pension plan
#d!&$ l!&$ − l!&$&#
• Career average earnings pension plan $|#q ! = =
Proprietary Insurance Company l! l!
• Career average revalued earnings pension
• Owned by shareholders
plan
• Profits are shared between shareholders Force of Mortality
and with-profit policyholders d d
f! (t) #p! l!&#
µ!&# = = − dt = − dt
Other Life Contingent Contracts
Mortality
MORTALITY MODELS Models S! (t) #p!
l!&#
f! (t) = S! (t) ⋅ µ!&# = #p! ⋅ µ!&#
Continuing Care Retirement Communities
Probability Functions
Levels of residence: Finding (p! Using Force of Mortality
Survival Function
1. Independent living units (ILU) (
T! : future lifetime or time-to-death of (x)
2. Assisted living units (ALU) (p! = exp R− S µ!&# dtT
S! (t): Probability that (x) survives t years "
3. Skilled nursing facility (SNF) !&(
= Pr[T! > t] = exp R− S µ, dyT
Types of CCRC contracts: = Pr[T" > x + t|T" > x] !

1. Full life care/life care S" (x + t)

= Properties of Force of Mortality
2. Modified life care S" (x)
• µ!&# ≥ 0
3. Fee-for-service (t)
S! must satisfy: -
• ∫" µ!&# dt = ∞
• S! (0) = 1
Structured Settlements • S! (∞) = 0 Adding/Multiplying a Constant
A payment schedule where the responsible • S! (t) is a non-increasing function of t
• µ∗!&# = µ!&# + k ⇒ (p∗! = (p! ∙ e+'(
party compensates the injured party (IP)
'
• Often used for payments under Workers Actuarial Notations • µ∗!&# = k ∙ µ!&# ⇒ (p∗! = W (p! X
Compensation insurance #p! : Probability that (x) survives t years
Extra Mortality Risk
• Typically includes an immediate lump sum = Pr(T! > t)
• Age rating: Adding additional years to a
and an annuity = S! (t)
person’s age, effectively treating the person
• If the IP is severely injured, interim #q! : Probability that (x) dies within t years
as a different aged risk, e.g., 5-year age
benefits are made until the time of = Pr(T! ≤ t)
rating to (50) means treating (50) as if
maximum medical improvement, which is = F! (t)
he/she is 55 years old.
when the final structured settlement will #p! + #q ! = 1
• Adjusting force of mortality: Adding a
be determined $|#q ! : Probability that (x) survives u years constant to the force of mortality.
and dies within the following t years • Adjusting mortality rates: Multiplying the
Approaches to determine annuity payments:
= $ p! ⋅ # q!&$ mortality rate for standard lives by a
1. Top-down
= $ p! − $&# p! constant.
2. Bottom-up
= $&# q! − $ q!

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 Express p’s or q’s in terms of µ Recursive Formulas Fractional Ages
- ∘ ∘ ∘
. e! = e!:(| + (p! ⋅ e!&( UDD (0 ≤ t ≤ 1)
#p! =S /p! ⋅ µ!&/ ds
# Use linear interpolation:
#
e! = e!:(| + (p! ⋅ e!&(
. ∘ ∘ ∘
l!&# = (1 − t) ⋅ l! + t ⋅ l!&)
#q ! = S /p! ⋅ µ!&/ ds e!:3&(| = e!:3| + 3p! ⋅ e!&3:(|
" #q ! = t ⋅ q!
$&# tq!
e!:3&(| = e!:3| + 3p! ⋅ e!&3:(|
#q !&/ = for 0 ≤ s + t ≤ 1
.
$|#q ! =S /p! ⋅ µ!&/ ds
1 − s ⋅ q!
$ e! = p! (1 + e!&) )
q!
µ!&# =
1 − t ⋅ q!
Moments Special Mortality Laws
Complete Expectation Constant Force of Mortality f! (t) = #p! ∙ µ!&# = q! (a constant)
∘
• First Moment µ! = µ e! = e! + 0.5
- ∘ ∘
∘ = e+4#
#p! e! = 0.5q! + p! [1 + e!&) \
e! = E[T! ] = S t ⋅ #p! µ!&# dt
" ∘ 1
e! =
- µ Constant Force of Mortality (0 ≤ t ≤ 1)
=S #p! dt 1
∘ Use exponential interpolation:
" e!:(| = (1 − e+4⋅( )
• Second Moment µ l!&# = (l! ))+# ⋅ (l!&) )#
-
Uniform Distribution = (p! )#
#p!
E[T!* ] = S t * ⋅ #p! µ!&# dt
" The following formulas are good to know but µ!&# = − ln(p! )
-
= S 2t ⋅ #p! dt are rarely tested on current exams. f! (t) = #p! ∙ µ!&# = e+4⋅# ⋅ µ
" l! = k(ω − x)
• Variance 1 1 Select & Ultimate Mortality
∘ * µ! = ⇒ µ!&# =
Var[T! ] = E[T!* ] − [e! \ ω−x ω − (x + t) The age at which a person is selected is
l!&# ω − (x + t) denoted as [x].
#p! = =
Curtate Expectation l! ω−x
Select mortality is written as q[!]&# where x is
• First Moment
- - l! − l!&# t the selected age and t is the number of years
#q ! = =
e! = E[K ! ] = ] k ⋅ '|q! = ] 'p! l! ω−x after selection.
'1" '1) l!&$ − l!&$&# t
$|#q ! = =
The mortality after the select period is called
• Second Moment l! ω−x
- - ∘ ω−x the ultimate mortality, where:
e! =
E[K *! ] = ] k * ⋅ '|q! = ](2k − 1) 'p! 2 q[!]&# = q!&#
∘ n
'1" '1) e!:(| = (p! (n) + (q! [ \
• Variance 2 Common Approach
Var[K ! ] = E[K *! ] − (e! )* Beta Distribution 1. Read from the left to the right and then
The following formulas are good to know but continue downwards:
Temporary Expectation
∘ are rarely tested on current exams. x q[!] q[!]&) q[!]&* q!&9
e!:(| = E[min(T! , n)]
l! = k(ω − x)6 30
(
α α
= S t ⋅ #p! µ!&# dt + n (p! µ! = ⇒ µ!&# = 31
" ω−x ω − (x + t)
(
l!&# ω − (x + t)
6 32
=S #p! dt p = = d e
"
# !
l! ω−x 33
e!:(| = E[min(K ! , n)] ∘ ω−x 2. Read in a diagonal direction until we
e! =
(+) α+1 reach the ultimate column, and then
= ] k ⋅ '|q! + n ⋅ (p! proceed downwards:
Gompertz’s Law
'1"
( µ! = Bc ! c > 1, B > 0 x q[!] q[!+)]&) q[!+*]&* q!
= ] 'p! Bc ! # 30
#p! = exp h− (c − 1)i
'1) ln c
∘ 31
Relationship between e! and e!
∘
Makeham’s Law 32
e! ≈ e! + 0.5 µ! = A + Bc ! c > 1, B > 0, A ≥ −B 33
Bc ! #
#p! = exp h− (c − 1)i ⋅ exp(−At)
ln c

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 Present
PRESENT VALUEValue Random
RANDOM VARIABLES Expected Present Value Varying Insurance
Variables for Insurance
FOR INSURANCE
Type of EPV / APV / Net Single
-

(IA)! = ](k + 1)v '&) ⋅ '|q!

Insurance Premium '1"
In general, to calculate the EPV of insurance -
benefits, sum/integrate the product of the Discrete ̅q)! = S tv # ⋅ #p! µ!&# dt
(IA
"
following three components over all possible -
(+)
'&)
payment times: A! = ] v ⋅ '|q! (IA) )!:(| '&)
Whole Life B = ](k + 1)v ⋅ '|q!
1. the benefit amount '1"
'1"
of $1 (
2. the appropriate discount factor Continuous
̅ q) ) B
(IA = S tv # ⋅ #p! µ!&# dt
- !:(|
3. the probability that the benefit will be paid "
q ! = S v ⋅ #p! µ!&# dt
A #
(+)
at that time "
(DA) )!:(|
B = ](n − k)v
'&)
⋅ '|q!
Discrete '1"
Present Value (+) (
qA
(D q ) )!:(| = S (n − t)v # ⋅ #p! µ!&# dt
Type of A)!:(| = ] v '&) ⋅ '|q! B
"
𝐏𝐏𝐏𝐏
Insurance n-year '1" (IA) )!:(| )
B + (DA) !:(|
)
B = (n + 1)A!:(|
Term Life = A! − (E! ⋅ A!&(
̅q) ) B + (D
(IA qAq) )!:(| q )!:(|
B =n⋅A
Discrete of $1 Continuous
!:(| B

( SULT
Z = v :!&) , K ! ≥ 0 q ) = S v # #p! µ!&# dt
A
Whole Life !∶(|
"
of $1 q ! − (E! ⋅ A
q !&( #E! can be calculated as:
Continuous =A C!"#
• #E! = v # ⋅ #p! = v # ⋅
Discrete C!
Z = v ;! , T! ≥ 0
• #&DE! = #E! ⋅ DE!&#
(|A! = A! − A)!:(|
n-year
Discrete *
Deferred = (E! ⋅ A!&( #E! can be calculated as:
v :!&) , K ! < n * C!"#
n-year Z=o Whole Life Continuous • #E! = (v # )* ⋅ #p! = (v # )* ⋅
0 , K! ≥ n C!
Term Life of $1
Continuous q q q)
(|A! = A! − A!∶(|
• *#E! = v # ⋅ v # #p! = v # ⋅ #E!
of $1
v ;! , T! < n q !&(
= (E! ⋅ A A)!:(| can be calculated as:
Z=o
0 , T! ≥ n
• A)!:(| = A!:(| − (E!
Discrete n-year
Pure ) • A)!:(| = A! − (E! ⋅ A!&(
n-year 0 , K! < n A!:(| = (E! = v ( (p!
Z = o :!&) Endowment
Deferred v , K! ≥ n
of $1 Shortcuts
Whole Life Continuous
of $1 0 , T! < n
Z=o Discrete Uniform
v ;! , T! ≥ n n-year Constant Force
A!:(| = A)!:(| + (E! Distribution
Endowment
n-year Insurance Continuous µ avE+!|
Pure 0 , T! < n q! =
A q! =
A
Z=o of $1 µ+δ ω−x
v ( , T! ≥ n q
A = q)
A + (E!
Endowment !:(| !:(|
of $1 q)
A !:(| av(|
µ q) =
A
Discrete = W1 − (E! X !:(| ω−x
µ+δ
:! &)
v , K! < n
Z=o
n-year v( , K! ≥ n (E!
Endowment = v 3<((:!&),() (E! = e+(4&F)( ω − (x + n)
= v( ⋅
Insurance Continuous ω−x
of $1
v ;! , T < n
Z=o ( !
v , T! ≥ n
= v 3<((;!,()

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 Variances Recursive Formulas Claims Acceleration Approach
(3) %'(
A! = vq! + vp! ⋅ A!&) A! ≈ (1 + i) )% ∙ A!
Type of
Variance A)!:(| )
B = vq ! + vp! ⋅ A!&):(+)|
(
q ! ≈ (1 + i)) ∙ A!
Insurance GGGGGGG A
(IA)! = vq! + vp! (A!&) + (IA)!&) ) (%) %'(
A )!:(| ≈ (1 + i) )% ∙ A )!:(|
Discrete
(3) %'(
1/mthly Insurance (|A! ≈ (1 + i) )% ∙ (|A!
*
A! − (A! )* (3) %'(
)
Whole Life (3) 1 B ≈ (1 + i) )% ∙ A !:(| + (E!
A!:(|
K ! = ⌊mT! ⌋
of $1 m
Continuous (3)
Pr wK ! = rx = Hp! ⋅ ) q !&H = ) q! Percentiles
3 H|3
*q q ! )*
A! − (A Whole life insurance of $1 payable at the end The 100pth percentile of Z is the value zJ such
of the 1/mth year of death: that:
Discrete )
(%)
:! & (3) Pr|Z ≤ zJ } = p
Z=v 3, K! ≥0
*
n-year * )
A!:(| − [A)!:(| \ - To calculate zJ :
(3)
Term Life A! = ] v ('&))/3 ⋅ ' ) q! 1. Draw a graph with Z on y-axis and T!
|
3 3
of $1 Continuous '1" on x-axis.
n-year term life insurance of $1 payable at 2. Identify the parts of the curve where
*
* q)
A!:(| q) \
− [A the end of the 1/mth year of death: Z ≤ zJ . Determine the value of T! that
!:(|
(%) )
(3) 1
v :! &3 , K ! = 0, … , n − corresponds to those parts.
Discrete Z=y m
1 3. Use the value of T! from Step 2
n-year * 0,
(3)
K ! = n, n + , …
*
(|A! − W (|A! X m to calculate zJ .
Deferred 3(+)
Whole Life Continuous (%)
A )!:(| = ] v('&))/3 ⋅ ' ) q!
of $1 |
'1" 3 3
*q *
(|A!
q!X
− W (|A where mn represents the number of periods
n-year UDD Assumption
* *
Pure (E! − W (E! X i
q ! = A!
A
Endowment = v *( (p! (q! δ
of $1 i )
q )!:(|
A B = A !:(| B
δ
Discrete i
n-year q
(|A! = (|A!
*
A!:(|
* δ
Endowment B − WA!:(|
BX
i )
q !:(|
A B = A !:(|
)
B + A !:(|
B
Insurance Continuous δ
of $1 (3) i
*q q !:(| * A! = (3) A!
A!:(|
B − WA BX i
Calculate *A and *A q similarly to A and A
q, but
q similarly to A and A
Calculate *A and *A q, but with double the force of interest, δ.
with double the force of interest, δ. Equivalently, replace v with v * , or
Equivalently, replace v with v * , or replace i with 2i + i* . For example:
replace i with 2i + i* . *q i* + 2i *
A! = A!
2δ

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 Present
PRESENT VALUEValue Random
RANDOM VARIABLES Expected Present Value Varying Annuities
Variables for Annuities
FOR ANNUITIES Type of EPV / APV / Net Single -

(Iä )! = ](k + 1)v ' ⋅ 'p!

Annuities Premium
'1"
In general, to calculate the EPV of a life Discrete; Due -
annuity, sum/integrate the product of the -
(Ia̅v)! = S tv # ⋅ #p! dt
"
following three components over all possible ä ! = ] v ' ⋅ 'p! (+)
payment times: Whole Life '
'1" (Iä )!:(|
B = ](k + 1)v ⋅ 'p!
1. the amount paid of $1
Continuous '1"
(
2. the appropriate discount factor -
(Ia̅v)!:(| #
B = S tv ⋅ #p! dt
3. the probability that the payment is made at av! = S v # ⋅ #p! dt "
" (+)
that time
Discrete; Due (Dä )!:(| '
B = ](n − k)v ⋅ 'p!
'1"
Present Value (+) (
Type of ä !:(| '
B = ] v ⋅ 'p!
q av)!:(|
(D #
B = S (n − t)v #p! dt
𝐏𝐏𝐏𝐏 "
Annuities n-year '1"
B + (Dä )!:(|
(Iä )!:(| B = (n + 1)ä !:(|
B
Temporary = ä ! − (E! ⋅ ä !&(
Discrete; Due (Ia̅v)!:(| q av)!:(|
B + (D B = na
v !:(|
B
Life
Continuous
Y = ä :GGGGGGGGG , K! ≥ 0 of $1
Whole Life ! &)| Shortcuts
(
of $1 av!:(|
B = S v ⋅ #p! dt
# The following shortcuts for constant force
Continuous " can be useful on current exams. For uniform
= av! − (E! ⋅ av!&( distribution, just use basic principles.
Y = avGGGGG
;! | , T! ≥ 0

Discrete; Due Constant Force

Discrete; Due
-
1
ä :GGGGGGGGG
&)| , K ! < n = ] v ' ⋅ 'p! av! =
(|ä ! µ+δ
Y=Ä !
ä (|B , K! ≥ n '1(
n-year n-year = ä ! − ä !:(|
B
1
= ä GGGGGGGGGGGGGGGGGGG
3K((:! &),()| av!:(|
B = W1 − (E! X
Temporary Deferred µ+δ
= (E! ⋅ ä !&(
Life Continuous Whole Life
of $1 Continuous Variances
of $1
avGGGGG
; | , T! < n - Discrete Var[Y]
Y=Ä ! = S v # ⋅ #p! dt
av(|
B , T! ≥ n (|a
v!
*
( A! − (A! )*
= avGGGGGGGGGGGGGGG
3K((;! ,()| = av! − av!:(| Whole Life
B d*
Discrete; Due = (E! ⋅ av!&( * *
Temporary Life A!:(|
B − WA!:(|
BX

0 , K! < n Discrete; Due d*

Y = ov ( ä n-year
:! &)+(| , K ! ≥ n
GGGGGGGGGGGGG
ä GGGGG q and d with δ for
B = ä (|
B + (|ä ! Replace A with A
0 , K! < n Certain- !:(|
n-year = oä continuous cases.
GGGGGGGGG
:! &)| − ä (| , K ! ≥ n
B and-Life of Continuous
Deferred
$1 Recursive Formula
Whole Life Continuous avGGGGG
B =a
!:(|
v (|
B + (|a
v!
of $1 ä ! = 1 + vp! ⋅ ä !&)
0 , T! < n
Y = ov ( av , T! ≥ n Annuity Immediate
GGGGGGGGG
;! +(|
0 , T! < n a! = ä ! − 1
= oav − av(| , T! ≥ n
GGGGG
; !|
B B = ä !:(|
a!:(| B − 1 + (E!

Discrete; Due

ä (|B , K! < n
n-year Y=Ä
ä :GGGGGGGGG
&)| , K! ≥ n
Certain- !

and-Life of Continuous
$1
av(|
B , T! < n
Y=Ä
avGGGGG
;! | , T! ≥ n

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 Relationship between Insurances Woolhouse’s Formula (3 terms) Premium
PREMIUM Calculation
CALCULATION FOR for
and Annuities (3) m − 1 m* − 1 Long-Term
LONG-TERM INSURANCE
ä ! ≈ ä ! − − (µ + δ)
A! = 1 − dä ! 2m 12m* ! Insurance Coverages
COVERAGES
Whole
*
A! = 1 − (2d − d* ) *ä ! • If the question asks to use the Woolhouse’s
Life Aq ! = 1 − δav! formula with two terms, just drop the last Fully continuous: Both benefits and
*q *
A! = 1 − (2δ) av! term. premiums are payable continuously.
• If µ! is not available, approximate µ! as: Fully discrete: Both benefits and premiums
A!:(|
B = 1 − dä !:(|
B
1
* * *
B = 1 − (2d − d ) ä !:(|
A!:(| µ! ≈ − (ln p!+) + ln p! ) are payable at discrete time points. Unless
Temp. B
2
q !:(| stated otherwise, discrete time points are the
Life A B = 1 − δa
v !:(| (3)
• To find ä !:(|
B , use the relationship below
B
*q *
beginning of each year for premiums and the
B = 1 − (2δ) a
A!:(| v !:(|
B and apply Woolhouse’s formula to end of each year for death benefits.
(3) (3)
approximate ä ! and ä !&( : Semi-continuous: Premiums are paid at
1/mthly Annuity (3) (3) (3)
ä !:(|
B = ä ! − (E! ä !&( discrete time points and the death benefits
(3) (3)
A! = 1 − d(3) ä ! are paid at the moment of death.
• To approximate the EPV of a continuous
(3) (3) 1
a! = ä ! − life annuity using Woolhouse’s formula, Special policy: Either non-level benefits or
m
(3) (3) 1 let m → ∞: non-level premiums, or both.
ä !:(|
B − a!:(|
B = |1 − (E!} 1 1
m av! ≈ ä ! − − (µ! + δ) PV of the Net Future Loss at Issue
2 12
UDD Assumption "L = PV" (f. benefits) − PV" (f. premiums)
• If the interest rate is 0, we have:
(3)
ä ! = α(m) ⋅ ä ! − β(m) ∘ 1 1 Equivalence Principle
(3) e! ≈ e! + − µ!
ä !:(|
B = α(m) ⋅ ä !:(|
B − β(m)(1 − (E! ) 2 12 • E| "L} = 0
(3) ⇒ EPV" (f. premiums) = EPV" (f. benefits)
(|ä ! = α(m) ⋅ (|ä ! − β(m) ⋅ (E!
Percentiles • The premium determined under the
where: The 100pth percentile of Y is the value yJ such equivalence principle and excluding
id i − i(3) that:
α(m) = β(m) = expenses is called the net premium.
i(3) d(3) i(3) d(3) Pr|Y ≤ yJ } = p
For a whole life insurance policy of $b on (x)
Note: To calculate zJ :
with level premiums P:
• The formulas for α(m) and β(m) are 1. Draw a graph with Y on y-axis and T!
provided on the exam table. on x-axis. Fully Discrete
• The values for α(m) and β(m) when 2. Identify the parts of the curve where "L = bv :!&) − Pä :GGGGGGGGG
! &)|
i = 0.05 are also given in the exam table. Y ≤ yJ . Determine the value of T! that P : &) P
= Öb + Ü v ! −
corresponds to those parts. d d
Interest Conversion
3 +3 3. Use the value of T! from Step 2 to E| "L} = bA! − Pä !
i(3) d(3)
R1 + T = R1 − T calculate yJ . P *
m m Var| "L} = Öb + Ü | *A! − (A! )* }
d
= (1 + i)
Fully Continuous
= (1 − d)+)
"L = bv ;! − PavGGGGG
;! |
P ; P
= Öb + Ü v ! −
δ δ
q ! − Pav!
E| "L} = bA
P *
q ! − (A
Var| "L} = Öb + Ü | *A q ! )* }
δ

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 Under the equivalence principle, we have: Gross Premium Percentile of 𝟎𝟎𝐋𝐋
Fully Discrete Gross premiums account for both benefits The 100pth percentile of "L is the value πJ
and expenses.
A! 1 dA! such that Pr| "L ≤ πJ } = p. To determine πJ :
P=b⋅ = b h − di = b h i
ä ! ä ! 1 − A! Gross Future Loss 1. Graph "L on y-axis and T! on x-axis.
*
*
A! − (A! )* "L
L
= PV" (f. benefits) + PV" (f. expenses) 2. Identify the parts of the curve where "L ≤
Var| "L} = b ⋅
(1 − A! )* − PV" (f. gross premiums) πJ . Determine the value of T! that
Fully Continuous corresponds to those parts.
Equivalence Principle
q!
A 1 q!
δA 3. Use the value of T! from Step 2 to
P=b⋅ = b h − δi = b d E| "LL } = 0
av! av! 1−A q!e calculate πJ .
⇒ EPV" (f. gross premiums)
*q q ! )*
A! − (A = EPV" (f. benefits) + EPV" (f. expenses)
Var| "L} = b* ⋅
q
(1 − A! )*
Variance RESERVES CALCULATION FOR
Reserves Calculation
For an endowment insurance policy of For a fully discrete whole life policy: LONG-TERM INSURANCE
G − eH : &) for Long-Term
q
$b on (x) with level premiums P, add n| L COVERAGES
"L = Öb + E +
d
Üv ! Insurance Coverages
to A′s and a′s.
G − eH
− + (e< − eH ) Net Premium Policy Value
The net premium for fully discrete insurance d
PV of the Net future Loss at time t
will be represented by P with the appropriate G − eH * *
Var| "LL } = Öb + E + Ü | A! − (A! )* } #L = PV# (f. benefits) − PV# (f. premiums)
symbols attached. d
where
e< = initial expense in year 1 Prospective Method
The following symbols may be used
on the exam: eH =renewal expense in year 2+ #V = E| #L}
A! b = benefit amount = EPV# (f. benefits) − EPV# (f. premiums)
P! = E = settlement expense
ä !
G = gross premium If #V occurs at the same time as a premium
A)!:(|
)
P!:(| = or benefit, then be careful about which cash
ä !:(| Note: flows to include in calculating the future loss.
)
A!:(| 1. Replace A and d with their continuous Unless stated otherwise, assume:
P!:(|) = counterparts for fully continuous policies. - all death benefits at time t occurred
ä !:(|
2. Add n|q to A′s for endowment insurance. in the past
A!:(|
P!:(| = 3. This shortcut formula can only be used for - all premium payments occur in the future
ä !:(|
fully discrete/continuous whole life and - endowment payments occur in the future
If P is not expressed as one of the symbols endowment insurance. For other products, - annuity payments may be treated either as
shown above, then P will be defined in the use basic principles. future payments or as past payments
text of the question.
Portfolio Percentile Premium Note:
S = L) + L* + ⋯ + LM - The time-0 net premium policy value is
E[S] = N ⋅ E[L] 0 because the equivalence principle
Var[S] = N ⋅ Var[L] is assumed:
#V = E| "L} = 0
Using the portfolio percentile premium - The time-n net premium policy value for an
principle, the premium is set such that there n -year term insurance is 0 because there
is a specified probability (x%) that the total are no future benefits or premiums due
loss is negative: at time n:
Pr[S < 0] = x%
(V
=0
- The time-n net premium policy value for an
n-year endowment insurance right before
the endowment benefit is paid is equal to
the endowment benefit, because there are
no future premiums due at time n, and the
only future benefit due at time n is the
endowment benefit.
(V = endowment benefit

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 Special Formulas Expense Policy Value Modified Reserve
For a fully discrete whole life insurance Expense Premium (a.k.a. Expense Loading) A modified reserve is a reserve computed
policy of $b, the net premium policy value = Gross Premium − Net Premium without expenses but adjusting the
O L
can also be calculated as: #V = # V − #V ( valuation premiums to allow implicitly for
ä !&# O initial expenses.
#V = Ö1 − Ü⋅b #V = EPV# (f. exp.)
ä !
− EPV# (f. exp. premium) For any modified reserve method:
A!&# − A!
#V = Ö Ü⋅b Expense policy value is usually negative. EPV(modified prems) = EPV(net prems)
1 − A!
Recursive Formula = EPV(benefits)
Note:
1. Replace A and a with their continuous • Net premium policy value only considers Full Preliminary Term (FPT)
counterparts for fully continuous policies. benefits, not expenses: FPT reserve is a modified reserve. The policy
2. Add n|q to A′s and a′s for W #V + PX(1 + i) = q!&# ⋅ b + p!&# ⋅ #&)V is treated as if it were issued one year later,
endowment insurance. • Expense policy value only considers with the first year of the policy being treated
3. These special formulas can only be used expenses, not benefits: as if it were a one-year term insurance.
for fully discrete/continuous whole life W #V O + PO − eX(1 + i) = q!&# ⋅ E
For example, using this method, a fully
and endowment insurance with ordinary + p!&# ⋅ #&)V O discrete whole life insurance issued to (x)
level premium and benefits. For all others, • Gross premium policy value considers would be treated as if it were a one-year term
use basic principles. both benefits and expenses: insurance on (x), followed by a whole life
L
Variance of Loss W #V + G − eX(1 + i) = q!&# ⋅ (b + E) insurance on (x + 1):
L
For a fully continuous whole life or + p!&# ⋅ #&)V
• 1st year modified net premium, α:
endowment insurance with premiums P, the
EPV" (modified prems) = EPV" (benefits)
variance of the net future loss at time t is: Interim Policy Values (𝟎𝟎 ≤ 𝐬𝐬 ≤ 𝟏𝟏)
α = A)!:)|
B = vq !
P *
Var| #L} = Öb + Ü Var[Z] • Renewal modified net premium, β:
δ
where EPV) (modified prems) = EPV) (benefits)
Var[Z] = *Aq !&# − (A
q !&# )* βä !&) = A!&)
* A!&)
q
Var[Z] = *A q
− [A \ β=
!&#:(+#| !&#:(+#| Exact Method ä !&)
For fully discrete insurance, remove the bars W #V + PX(1 + i)/ = /q!&# ⋅ bv)+/ • FPT reserves
and replace δ with d. PQ;
+ /p!&# ⋅ #&/V "V =0
PQ;
#&/V(1 + i)
)+/
= )+/q!&#&/ ⋅b )V =0
Gross Premium Policy Value
+ )+/p!&#&/ ⋅ #&)V
Prospective Method
L
Linear Approximation
#V = EPV# (f. ben.) + EPV# (f. exp.)
#&/V ≈ W #V + PX(1 − s) + s ⋅ #&)V
− EPV# (f. pre.)
L
"V = 0 if the following 2 requirements
are satisfied:
1. The gross premium is determined using
the equivalence principle.
2. The assumptions used for calculating the
policy value are the same as those used in
calculating the premium.

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 Survival
SURVIVAL Estimation
ESTIMATION Variance of Estimators Log-transformed Confidence Interval:
• Kaplan-Meier Estimator (Greenwood’s • For S(t):
Kaplan-Meier and Nelson-Aalen Approximation): WSì(t))/Z. , Sì(t)Z. X where
Estimators dR
*
Var|Sì(t)} ≈ |Sì(t)} ] z()&J)/* ôVar|Sì(t)}
Empirical Distribution
r Wr − dR X
St R R
U[ = exp ⎛ ⎞
# of data points = x R:#(j) Sì(t) ⋅ ln Sì(t)
Pr(X = x) =
n ⎝ ⎠
# of data points > x • Nelson-Aalen Estimator: • For H(t):
S(x) = Pr(X > x) =
n d Wr − d X Hó (t)
# of lives survive past time t ó (t)} ≈ ] R R 9 R
Var|H R ó (t) ⋅ UX T where
,H
Sì! (t) = rR UX
R:#(j) St
n
Sì(𝑡𝑡) ∙ |1 − Sì(𝑡𝑡)} dR WrR − dR X ó (t)}
z()&J)/* ôVar|H
*
Var|Sì(t)} ≈ Var|Sì(t)} ≈ |Sì(t)} ] UX = exp ⎛ ⎞
n rR9 ó (t)
H
R:#(j) St
Var|Fì(t)} = Var|Sì(t)} ⎝ ⎠
In general, 1
Kaplan-Meier Estimator
* U[ =
Var|Sì(t)} ≈ |Sì(t)} ⋅ Var|H
ó (t)} UX
dR
Sì(t) = ï R1 − T
rR Confidence Interval
R:#(j)St Alive-Dead Model
Exponential Extrapolation Linear Confidence Interval for S(t): d!
µüx = c
Sì(t) = Sì(t max )t/tmax for t > t max Sì(t) ± z()&J)/* ôVar|Sì(t)} Ex
qü! = 1 − e+4]x
Nelson-Aalen Estimator
d!
d Var(qü! ) ≈ (1 − qü! )* ⋅
ó (t) = ] R (Exc )*
H
rR
R:#(j) St Actuarial Estimate of qx
Sì(t) = e+XY(#) dx
q†! = c
Ex + 0.5dx

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