FAM-S

Updated 07/24/24

Short-Term
SHORT-TERM
SHORT-TERM Insurance
INSURANCE
INSURANCE ANDand
AND Reinsurance
Reinsurance Conditional
Conditional Distributions
Distributions
Reinsurance Coverages
REINSURANCE
REINSURANCE
COVERAGES
COVERAGES • •Facultative:
Facultative:Used
Used forfor
ceding
ceding
Pr(A
Pr(A∣ B)
∣ B)
==
Pr(A
Pr(A ∩ B)
∩ B)
individual
individualrisks.
risks. Pr(B)
Pr(B)
Coverage
Coverage Modification
Modificationandand Reinsurance
Reinsurance • •Treaty: Used
Treaty: Usedforfor
ceding
ceding allall
risks in in
risks a specific
a specific f f f0 (x)
f0 (x)
0∣2303* (x)(x)
0∣2303* == , ,
Deductibles,
Deductibles,dd line oror
line class of of
class business.
business. Pr(j
Pr(j << X< X<k)k)
Fixed
Fixed dollar
dollar deductible:
deductible: • •Quota
Quotashare: Both
share: Bothparties
partiesshare
sharea a where
where j <j <
x<x< kk
a.k.a.
a.k.a. ordinary
ordinary deductible
deductible oror deductible
deductible percentage
percentage of of
thethe
total risk.
total risk.
0, 0, X ≤ X≤dd • •Surplus
Surplusshare:
share:Both parties
Both partiesshare
share a a Law
Law of of Total
Total Probability
Probability
Y=Y= max(0, X−
max(0, X−d)d)
==- -
X− X− d, d, X >
X>dd Pr(X
Pr(X
== x)x)
==E4E[Pr(X
4 [Pr(X
==x ∣xY)]
∣ Y)]
percentage
percentage of of
thethe
total risk
total above
risk above thethe
Fixed
Fixed
percentage
percentage deductible:
deductible: retention
retention limit.
limit. Law
Law of of
Total
Total
Expectation
Expectation
dd • •Excess
Excessof of
loss:
loss:The reinsurer
The reinsurer is is
responsible
responsible E0E[X][X]
d, d, X ≤
X≤ 0 = =E4 4 0 0 [X
E
_E [X
_E ∣ Y]`
∣ Y]`
DD== max(d, δX)
max(d, ==
δX) 22 δδ forfor
thethe
claim
claim amounts
amounts exceeding
exceeding thethe
dd Law
Law
of of
Total
Total
Variance
Variance
δX,δX, X >
X> retention
retention limit.
limit.
δδ [X][X]
Var
Var
0 0 = =
E E 0 [ 0X[ ∣XY∣ ]`
4 4 _Var
_Var Y ]`
++Var
Var
4 _E 0 [X
4 _E 0 [X ∣ Y]`
∣ Y]`
0, 0, X≤X≤ dd
⎧⎧ dd
⎪ ⎪X −X−d, d, d <d<X≤ X≤ Independence
Independence
Y=Y= δδ SEVERITY, FREQUENCY,
SEVERITY,
Severity, &&
FREQUENCY,
Frequency, and
⎨⎨ dd For independent
For independent X and
X and
Y, Y,
⎪(1
⎪(1 AGGREGATE
AGGREGATE MODELS
MODELS
Aggregate Models
⎩⎩ − −
δ)X,
δ)X, X >
X > • •Pr(X
Pr(X
== x, Y
x, =
Y=y)y)
δδ
== Pr(X
Pr(X == x)x) ⋅ Pr(Y
⋅ Pr(Y == y)y)
Disappearing
Disappearingdeductible:
deductible: Basics
Basics
• •E[g(X)
E[g(X) ⋅ h(Y)]
⋅ h(Y)] == E[g(X)]
E[g(X)] ⋅ E[h(Y)]
⋅ E[h(Y)]
d, d, X≤X≤a a CDFs, Survival
CDFs, Functions,
Survival and
Functions, and
b−b−XX Hazard
Hazard Functions
Functions Empirical
EmpiricalDistributions
Distributions
DD==2d29d 9 ; , ; , a <
a<X≤X≤bb ! !
b−b−a a , ,
0, 0, X>X>bb F(x)
F(x)
==Pr(X
Pr(X
≤≤x)x)
==P Pf(t)
f(t)
dtdt Each
Each data
data point
point has
has a probability
a probability of of
5
. .
5
"#"#
## Empirical
EmpiricalCDF:
CDF:
0, 0, X<
X<dd S(x) ==
S(x) Pr(X >>
Pr(X x)x)
==P Pf(t)
f(t)
dtdt # of# of observations≤ ≤x x
observations
⎧⎧ X− X− d, d, d≤d≤
X≤X≤a a ! ! F5F(x)
5 (x)
==
⎪⎪ nn
Y=
Y= b− b− XX f(x)
f(x) () ()
X− d 9d 9 ; , ; , a <
X− a< X≤
X≤ bb h(x) ==
h(x) Empirical
Empirical100p
100p percentile:
percentile: π6π= 6 = x(⌈56⌉)
x(⌈56⌉)
⎨⎨ b− b− a a S(x)
S(x)
⎪⎪ ! !
5 5
∑ ∑ x9 x9
⎩⎩ X, X, X>X>bb Sample
Sample mean:
mean: xp =xp = 9:,9:,
H(x) ==
H(x) P Ph(t)
h(t)
dtdt
== −−
ln ln
S(x)
S(x) nn
"#"#
Franchise
Franchise deductible:
deductible: Biased sample
Biased sample variance:
variance:
⇒⇒
S(x) ==
S(x) e"$(!)
e"$(!)
0, 0, X ≤
X≤dd ∑5∑5(x(x 9 −9 − xp)-xp)-
Y=Y=- - Var[X]
Var[X] = = 9:,9:,
X, X, X >
X>dd nn
Moments
Moments
## ∑59:,
∑59:, x9-x9- - -
Policy
Policy
Limits,
Limits,
uu == −− xp xp
E[g(X)]
E[g(X)]
==P Pg(x)
g(x)
⋅ f(x)
⋅ f(x)
dxdx nn
X, X, X ≤
X≤uu "#"#
Y=
Y=min(X,
min(X,u)u)
==@ @ Unbiased
Unbiasedsample
sample variance:
variance:
u, u, X >
X>uu ##
E[g(X)]
E[g(X)] == g′(x)
P Pg′(x) ⋅ S(x)
⋅ S(x) dxdx ∑ 5 5
∑ (x(x9 −9 −xp)-xp)-
= 9:,
9:,
Coinsurance,
Coinsurance,
αα ' ' s-s= -
n− n− 11
Y=Y=αXαX k ()k () moment:µ+*µ=
moment: +
* =
E_X * * + +
E_X` ; `µ;,µ=
, =
µµ nn
== ⋅ Var[X]
⋅ Var[X]
k ()k ()
central
central
moment:
moment:
µ*µ=
* =
E_(X −−
E_(X * *
µ)µ)
` ` n− n−11
Deductible,
Deductible, Policy
PolicyLimit,
Limit,and andCoinsurance
Coinsurance
Var[X]
Var[X] ==σ-σ=-
=µ-µ-
0, 0, X≤X≤ dd -] -] - -
Var[g(X)]
Var[g(X)]==E[g(X)
E[g(X) −− E[g(X)]
E[g(X)]
Y= Y= Bα(X
Bα(X−− d),d), d <d<X≤ X≤ mm
u, u, X>X> mm Covariance:
Covariance:Cov(X, Y)Y)
Cov(X, ==E[XY] −−
E[XY] E[X]E[Y]
E[X]E[Y]
σσ
where
where Coefficient of of
Coefficient variation: CVCV
variation: ==
µµ
d: d:
ordinary
ordinary deductible
deductible (set toto
(set 0 if0 not
if not
µ.µ. µ/µ/
applicable)
applicable) Skewness
Skewness = =. ;. Kurtosis
; Kurtosis= =/ /
σσ σσ
u: u:
policy limit
policy (set
limit toto
(set ∞∞ if not
if notapplicable)
applicable)
α: α:
coinsurance
coinsurance (set toto
(set 1 if1 not
if not applicable)
applicable)
uu
m:m:maximum
maximum covered
covered loss,
loss,i. e.i. m ==++
e. m dd
αα

© 2024 Coaching Actuaries. All Rights Reserved www.coachingactuaries.com FAM Formula Sheet 1
 Severity Models Discrete Mixtures Special Shortcuts for e(d)
Incomplete Gamma Function f0 (x) = ∑59:, w9 ⋅ f0! (x) where ∑59:, w9 = 1
Γ(α; x) = 1 − Pr(N < α) 𝐞𝐞(𝐝𝐝)
Bernoulli Shortcut
where N~Poisson(λ = x) 𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄 (𝛉𝛉) θ
𝑎𝑎, Probability = 𝑞𝑞
If 𝑋𝑋 = - ,
Uniform (a, b) 𝑏𝑏, Probability = 1 − 𝑞𝑞 b−d
𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔𝐔 (𝐚𝐚, 𝐛𝐛)
a+b (a − b) - then Var[𝑋𝑋] = (𝑎𝑎 − 𝑏𝑏)- 𝑞𝑞(1 − 𝑞𝑞) 2
E[X] = Var[X] =
2 12 θ+d
Severity Models w/ Coverage 𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏 (𝛂𝛂, 𝛉𝛉)
Special Distribution Shortcuts α−1
Modifications
d
Y > : Payment per loss S-P 𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏 (𝛂𝛂, 𝛉𝛉)
𝐗𝐗 𝐗𝐗 − 𝐝𝐝 ∣ 𝐗𝐗 > 𝐝𝐝 α−1
Pareto (α, θ) Pareto (α, θ + d) Policy Limits, u
The Ultimate Formula
X, X < u
Exponential (θ) Exponential (θ) Y> = X ∧ u = @ E[Y > ]
u, X ≥ u
E_(Y > )* ` = E_(X ∧ u)* ` m d
Uniform (a, b) Uniform (0, b − d) = α(1 + r) 9E õX ∧ ú − E ùX ∧ û;
? 1+r 1+r
E_(Y > )* ` = P x * f(x) dx + u* ⋅ S(u) where
Distributions Relationship '
? d: deductible (set to 0 if not applicable)
Is equivalent to E_(Y > )* ` = P kx *", S(x) dx u: policy limit (set to ∞ if not applicable)
'
Gamma (1, θ) Exponential (θ) α: coinsurance (set to 1 if not applicable)
E[X ∧ u]
Increased Limit Factor, ILF = r: inflation rate (set to 0 if not applicable)
Beta (1, 1, θ) Uniform (0, θ) E[X ∧ b]
u
• 𝑏𝑏: original limit m: maximum covered loss, i. e. m = + d
α
Sum of Independent Random Variables • 𝑢𝑢: increased limit Frequency Models
𝐗𝐗 𝐢𝐢 ∑𝐧𝐧𝐢𝐢:𝟏𝟏 𝐗𝐗 𝐢𝐢 Distributions Relationship
Deductibles, d
Gamma (α9 , θ) Gamma (∑59:, α9 , θ) Is equivalent to
Ordinary deductible:
Normal 0, X<d Binomial (1, q) Bernoulli (q)
Normal |µ9 , σ-9 } Y > = (X − d)@ = -
|∑59:, µ9 , ∑59:, σ-9 } X − d, X ≥ d
Neg. Bin. (1, β) Geometric (β)
E[Y > ] = E[(X − d)@ ] = E[X] − E[X ∧ d]
Roles of Parameters
E_(Y > )* ` = E_(X − d)*@ ` Sum of Independent Random Variables
Shape parameter: affects the general #
shape of the distribution = P (x − d)* f(x) dx 𝐗𝐗 𝐢𝐢 ∑𝐧𝐧𝐢𝐢:𝟏𝟏 𝐗𝐗 𝐢𝐢
A
Scale parameter: parameter that is # Poisson (λ9 ) Poisson (∑59:, λ9)
multiplied by a positive constant when = P k(x − d)*", S(x) dx
A Binomial (m9 , q) Binomial (∑59:, m9 , q)
a random variable is multiplied by that
E[X ∧ d]
same constant, while all other parameters Loss elimination ratio: LER = Neg. Bin. (r9 , β) Neg. Bin. (∑59:, r9 , β)
E[X]
are unchanged
• To scale any continuous distribution on Franchise deductible: (a, b, 0) Class Property
the exam table except lognormal, inverse 0, X ≤ d p5 b
Y> = - = a + , for n = 1, 2, ⋯
X, X > d p5", n
Gaussian, and log-t, scale the parameter θ
E[Y > ] = E[(X − d)@ ] + d ⋅ S(d)
• To scale a normal distribution, Note: Included in exam table Appendix B.2.
X~Normal (µ, σ- ) Payment per Payment
⇓ Y B : Payment per payment Choosing from (a, b, 0) Class
cX~Normal (cµ, (cσ)- ) E[Y >] Two methods to fit data to an (a, b, 0)
E[Y B ] = ; E[Y > ] = E[Y B ] ⋅ S(d) class distribution:
• To scale a lognormal distribution, S(d)
X~Lognormal (µ, σ- ) • Method 1: Compare xp and s-
*5"
⇓ With ordinary deductible d, • Method 2: Observe the slope of 5"#$
cX~Lognormal (µ + ln c, σ- ) E[Y B ] = e(d) = E[ X − d ∣ X > d ]
E[(X − d)@ ] Distribution Method 1 Method 2
=
S(d)
Poisson xp = s- 0

Binomial xp > s- Negative

Neg. Binomial xp < s- Positive

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 Zero-Truncated Distributions • Positive homogeneity: ρ(cX) = c ⋅ ρ(X) INTRODUCTION TO CREDIBILITY
Introduction to Credibility
1 • Subadditivity: ρ(X + Y) ≤ ρ(X) + ρ(Y)
pC5 = p , for n = 1, 2, ⋯
1 − p' 5 • Monotonicity: ρ(X) ≤ ρ(Y), Classical Credibility
1 if Pr(X ≤ Y) = 1 a.k.a. Limited Fluctuation Credibility
E_(NC )* ` = E_N*`
1 − p'
VaR is not coherent because it Full Credibility
Zero-Modified Distributions fails subadditivity. # of exposures needed for full credibility,
pD D C TVaR is coherent. nH :
5 = |1 − p' }p5 , for n = 1, 2, ⋯
1 − pD
' Tail Weight Full credibility of aggregate claims:
pD
5 = p z(,@6)⁄- -
1 − p' 5 Fewer positive raw moments ⟹ nH = õ ú |CVJ- }
k
heavier tail
E_(ND )* ` = |1 − pD C *
' }E_(N ) `
# of claims needed for full credibility, nK :
1 − pD
'
E_(ND )* ` = E_N* ` Full credibility of aggregate claims:
1 − p'
PARAMETRIC ESTIMATION z(,@6)⁄- - σ-E
Parametric Estimation nK = õ ú µ + CV0- ∂
k µE
Aggregate Models
Maximum Likelihood Estimators • Full credibility of claim frequency: set
Collective Risk Model
Steps to Calculating MLE CV0- = 0
If S = ∑E
9:, X 9 for independent N
1. L(θ) = ∏ f(x) A
3. l+ (θ) = l(θ) • Full credibility of claim severity:
and X, then: AG
2. l(θ) = ln L(θ) σ-E
• E[S] = E[N]E[X] 4. Set l+ (θ) = 0
set =0
µE
• Var[S] = E[N]Var[X] + Var[N]E[X]-
nK
Normal Approximation Incomplete Data nK = nH ⋅ µE ⟺ nH =
µE
Approximate S as Normal (E[S], Var[S]) Partial Credibility
Left-truncated at d f(x)⁄S(d)
Lognormal Approximation Credibility premium: PL = Zxp + (1 − Z)M
Right-censored at u S(u) = M + Z(xp − M)
Approximate S as lognormal with
parameters found by equating E[S] and Grouped data on where
Pr(a < X ≤ b)
Var[S] to lognormal mean and variance interval (a, b] • M: manual premium
• Z: credibility factor/credibility
Aggregate Payments Special Cases
E% n n′
S= ∑E
9:, Y
>
= ∑9:, YB : Square Root Rule: Z = π = π
Distribution Shortcuts nH nK
• E[S] = E[N]E[Y = E[N+ ]E[Y B ]
>]

• Var[S] = E[N]Var[Y > ] + Var[N]E[Y > ]- Gamma, xp where

θ± =
= E[N+ ]Var[Y B ] + Var[N+ ]E[Y B ]- fixed α α • n: actual # of exposures
• n′: actual # of claims
µ≤ = xp
Risk Measures
Normal
Value-at-Risk (VaR) ∑59:,(x9 − µ≤)-
≥- =
σ
VaR 6 (X) = π6 = F0", (p) n

Tail-Value-at-Risk (TVaR) ∑59:, ln x9

TVaR6 (X) = E_X ∣ X > VaR 6 (X)` µ≤ =
n
Lognormal
= VaR 6 (X) + e_VaR 6 (X)`
∑59:,(ln x9 − µ≤)-
≥- =
σ
n
𝐓𝐓𝐓𝐓𝐓𝐓𝐓𝐓𝐩𝐩 (𝐗𝐗)
Poisson λ± = xp
ϕ|z6 }
Normal µ + σ® ´
1−p Binomial, xp
q≤ =
fixed m m
Φ|σ − z6 }
Lognormal E[X] ⋅ ® ´ Neg. Binomial, xp
1−p β± =
fixed r r

Coherence Uniform Distribution on (0, θ):

ρ(X) is coherent if it satisfies the • θ± = max(x, , x- , … , x5 )
properties below:
• Translation invariance: ρ(X + c) =
ρ(X) + c

© 2024 Coaching Actuaries. All Rights Reserved www.coachingactuaries.com FAM Formula Sheet 3
 PRICING AND RESERVING
Pricing FOR
and Reserving Premium OPTION
OptionPRICING
PricingFUNDAMENTALS
Fundamentals
SHORT-TERM INSURANCE
for Short-Term
COVERAGES Introduction to Options
Insurance Coverages
Call Option
Loss Reserving • A long call is the right (but not obligation)
Expected Loss Ratio Method to buy at the strike price.
1. L±?M(. = PO ⋅ ELR • Payoff = max [0, SC − K]
2. R = L±?M(. − LB • Insurance against a stock price increase

Chain-Ladder Method
a.k.a. Loss Development/Triangle Method
1. f9?M(. = ∏#
*:(@, f* Unearned premium for CY i:
±
2. L9 = L9,( ⋅ f9?M(.
?M(.
P9U = P9V − P9O + P9",
U

3. R = L±?M(. − LB
Extension of Exposures Method
Bornhuetter-Ferguson Method Recalculates the premiums of historical
1 policies under the current rate level
R = PO ⋅ ELR ⋅ 91 − ?M(. ;
f
where f ?M(. is calculated based on the
chain-ladder method Put Option
• A long put is the right (but not obligation)
Alternatively, Parallelogram Method to sell at the strike price.
1 Calculates average factors to be applied to the • Payoff = max [0, K − SC ]
R = w ⋅ R L> + (1 − w) ⋅ R>Q where w =
f ?M(. aggregate historical premiums to make them • Insurance against a stock price decrease
on-level
Data Preparation for Ratemaking
Losses
Ratemaking
Loss Ratio Method
LR + F
Indicated Avg. Rate Change = −1
1 − V − QC

Pure Premium Method

a.k.a. Loss Cost Method
Lp + E
ªT
Indicated Avg. Rate =
1 − V − QC

Option Moneyness
Incurred losses for CY i: LR9 = LB9 + R 9 − R 9", • In-the-money: If exercised, option payoff
where R 9 is the reserves at the end of CY i is positive.
Incurred losses for AY or PY i: LR9 = LB9 + R 9 • At-the-money: If exercised, option payoff
where R 9 is the reserves as of the is zero.
valuation date • Out-of-the-money: If exercised, option
Expenses and Profit payoff is negative.
ES
Variable Expense Ratio: V =
P Put-Call Parity
ET
Fixed Expense Ratio: F = c(t) − p(t) = S( − Ke"W(C"()
P
Permissible Loss Ratio: PLR = 1 − V − QC ,
where QC is the target profit and
contingencies ratio

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 Binomial Option Pricing Model Black-Scholes Option Pricing Model
Option Pricing: Replicating Portfolio Lognormal Model for Stock Prices
An option can be replicated by Assume the current time is time t, the log-
buying Δ shares of the underlying stock return on the stock is normally distributed:
and lending 𝐵𝐵 at the risk-free rate. S(@Y
ln ù û ~N[m, v - ]
S? SA S(
u= d= • m = µτ
S' S'
V? − VA uVA − dV? • v - = σ- τ
Δ= B = e"W) 9 ; J&'(
S(u − d) u−d • ~LogN(m, v - )
J&
V = ΔS + B
The real-world probability of a stock price
Call Put being less than some value K at time t + τ is:
"
M5Z ["\Y
)&
Δ + − Pr[S(@Y < K] = Pr µZ < ∂
]√Y

B − + where Z~N(0,1).

Black-Scholes-Merton Formula
• To replicate a call, buy shares
For a stock that pays no
and borrow money.
dividends, the BSM formula is:
• To replicate a put, sell shares
c(t) = S( ⋅ Φ|d, (t)} − Ke"W(C"() ⋅ Φ|d- (t)}
and lend money.
Option Pricing: Risk-Neutral Valuation p(t) = Ke"W(C"() ⋅ Φ|−d- (t)} − S(
eW) − d ⋅ Φ|−d, (t)}
1−q= S 1
u−d ln æ ( ø + ær + σ- ø (T − t)
K 2
V' = e"W) ⋅ EX [Value of Option) ] d, (t) =
σ√T − t
= e"W) [(1 − q)V? + (q)VA ]
d- (t) = d, (t) − σ√T − t
No-Arbitrage Condition
The BSM formula for call options can be
Arbitrage is possible if the following
continuously replicated by:
inequality is not satisfied:
• Buying Δ = Φ|d, (t)} shares of stock
0 < q < 1 ⟺ d < eW) < u
• Borrowing B( = Ke"W(C"() ⋅ Φ|d- (t)}
Probability
For n periods, let k be the number of The BSM formula for put options can be
"down" jumps needed to reach an ending continuously replicated by:
node. Then, the risk-neutral probability of • Shorting Δ = Φ|−d, (t)} shares of stock
reaching that node is given by: • Lending B( = Ke"W(C"() ⋅ Φ|−d- (t)}
n
æ ø (q)* (1 − q)5"* , k = 0,1, … , n
k

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 FAM-L
Updated 07/24/24

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

© 2024 Coaching Actuaries. All Rights Reserved www.coachingactuaries.com FAM Formula Sheet 6
 Universal
UniversalLife LifeInsurance
Insurance Underwriting
Underwriting Long-Term
Long-TermCoverages
CoveragesininHealth
HealthInsurance
Insurance
•• ItItisisgenerally
generallyissued
issuedasasaawhole
wholelife
life Theprocess
The processbybywhich
whichinsurance
insurancecompanies
companies Waiting/elimination
Waiting/eliminationperiod:
period:Amount
Amountofoftime
time
contract,but
contract, butwith
withtransparent
transparentcash
cashvalues.
values. collectand
collect andevaluate
evaluateinformation
informationon
on the
theinsured
insuredmust
mustwait
waittotoreceive
receivebenefit
benefit
•• ItItcan
canbe
beviewed
viewedasasaaform
formofofsavings
savings applicantsofoflife
applicants lifeinsurance
insurancecontracts
contracts payments
payments
account
accountwithwithbuilt-in
built-inlife
lifeinsurance.
insurance. Benefit
Benefitterm:
term:Maximum
Maximumlength
lengthofoftime
timeover
over
Level
Levelofofunderwriting
underwritingdepends
dependson:
on:
•• The
Thedeath
deathbenefit
benefitunder
underthese
thesecontracts
contracts which
whichbenefits
benefitswill
willbe
bepaid
paid
•• Type
Typeofofinsurance
insurancebeing
beingpurchased
purchased
maybe
may befixed
fixedororincrease
increaseasasthe theinvested
invested Off
Offperiod:
period:Minimum
Minimumlength
lengthofoftime
timethat
thatmust
must
•• Amount
Amountofofbenefit
benefit
premiumsearn
premiums earninterest.
interest. pass
passbetween
betweentwotwoperiods
periodsofofdisability
disabilityfor
for
•• Distribution
Distributionmethod
method
•• Profits
Profitsfrom
fromthetheinsurer
insurerareareshared
shared them
themtotobe
beconsidered
consideredseparate
separate
throughthe
through thecredited
creditedinterest
interestrate.rate. Classification
Classificationofofapplicants
applicants
Disability
DisabilityIncome
IncomeInsurance
Insurance
•• Premiums
Premiumsand andcredited
creditedinterest
interestare
are •• Preferred
Preferredlives
lives
•• Level
Levelpremiums
premiumsare
arepaid
paidwhile
whilehealthy
healthy
deposited
depositedinto intoaanotional
notionalaccount,
account,which
whichisis •• Normal
Normallives
lives
•• Benefits
Benefitsare
arepaid
paidwhile
whiledisabled
disableduntil
untilthe
the
subject
subjecttotomonthly
monthlydeductions
deductionstotocover
cover •• Rated
Ratedlives
lives
earliest
earliestof:
of:
cost
costofoflife
lifeinsurance
insuranceandandexpenses.
expenses. •• Uninsurable
Uninsurablelives
lives
ooRecovery
Recoverytotofull
fullhealth
health
•• Policyholders
Policyholdersmay mayreduce
reduceororskip
skippaying
paying
Adverse
Adverseselection:
selection:Individuals
Individualswith
withvery
veryhigh
high ooEnd
Endofofbenefit
benefitterm
term
premiums
premiumsasaslong longasasthe
theaccount
accountbalance
balanceinin
risk
riskbuy
buydisproportionately
disproportionatelyhigh
highamounts
amountsofof ooDeath
Death
thenotional
the notionalaccount
accountisissufficient
sufficienttotocover
cover
insurance,
insurance,leading
leadingtotoexcessive
excessivelosses
lossestotothe
the
costs.
costs. Factors
Factorsaffecting
affectingthe
thelevel
leveland/or
and/ortiming
timingofof
insurer
insurer
the
thedisability
disabilitybenefits:
benefits:
Unitized
UnitizedWith-Profit
With-ProfitInsurance
Insurance
Premiums
Premiums •• Extent
Extenttotowhich
whichthe
theinsured
insuredcancanwork
workafter
after
Premiumsare
Premiums areused
usedtotopurchase
purchaseunits,
units,which
which
Premiumscan
Premiums canbebepaid
paidasasaasingle
singlepremium
premiumoror the
thedisability
disability
increaseininvalue
increase valueincreases
increasesthe
thebenefits
benefitsininthe
the
aaregular
regularseries
seriesofofpremiums.
premiums. ooTotal
Totaldisability:
disability:Unable
Unabletotoperform
performanyany
formofofbonuses
form bonuses
job
job
Assessmentism:
Assessmentism:The
Thepractice
practiceofofmatching
matching
Equity-Linked
Equity-LinkedInsurance
Insurance ooPartial
Partialdisability:
disability:Able
Abletotowork
workbut but
annual
annualincome
incomeand
andexpenses
expenses
•• Benefits
Benefitsare
arelinked
linkedtotothe
theperformance
performanceofof cannot
cannotearnearnfull
fullsalary
salary
an
aninvestment
investmentfund fundand
andmay
mayincrease
increaseoror •• Other
Othersources
sourcesofofincome
income
Life
LifeAnnuities
Annuities
decrease
decreaseover
overtime
time •• Types
Typesofofcoverage
coverage
•• Whole
Wholelife lifeannuity
annuity
•• Often
Oftencomes
comeswithwithaaGuaranteed
GuaranteedMinimum
Minimum ooOwn
Ownjob:job:Pay
Paybenefits
benefitswhen
wheninsured
insured
•• Temporary
Temporarylife lifeannuity
annuity
Death
DeathBenefit
Benefit(GMDB)
(GMDB)and andaaGuaranteed
Guaranteed cannot
cannotperform
performhis/her
his/herownownjob job
•• Single
Singlepremium
premiumdeferred
deferredannuity
annuity(SPDA)
(SPDA)
Minimum
MinimumMaturity
MaturityBenefit
Benefit(GMMB)
(GMMB) ooAny
Anyjob:
job:Pay
Paybenefits
benefitswhen
wheninsured
insured
•• Single
Singlepremium
premiumimmediate
immediateannuity
annuity(SPIA)
(SPIA)
•• Known
Knownasasvariable
variableannuities
annuitiesororsegregated
segregated cannot
cannotperform
performanyanyjob
jobatatall
all
•• Regular
Regularpremium
premiumdeferred
deferredannuity
annuity(RPDA)
(RPDA)
funds
fundsininNorth
NorthAmerica
Americaand
andunit-linked
unit-linked •• Inflation
Inflation
•• Joint
Jointlife
lifeannuity:
annuity:Makes
Makespayments
paymentsuntiluntil
insurance
insuranceoutside
outsideofofNorth
NorthAmerica
America
the
thefirst
firstdeath
death Long
LongTerm
TermCare
CareInsurance
Insurance
•• Last
Lastsurvivor
survivorannuity:
annuity:Makes
Makespayments
payments •• Level
Levelpremiums
premiumsare
arepaid
paidwhile
whilehealthy
healthy
Distribution
DistributionMethods,
Methods,Underwriting,
Underwriting,and and
until
untilthe
thelast
lastdeath
death •• Payments
Paymentsofofbenefit
benefitcommence
commencewhen
whenthe
the
Premiums
Premiums
•• Reversionary
Reversionaryannuity: annuity:Makes
Makespayments
payments policyholder
policyholdercannot
cannotperform
perform≥≥22ADLs
ADLs
Distribution
Distributionmethods:
methods:
totothe
theannuitant
annuitantafterafterthe
thedeath
deathofofthe
the
1.1.Commission
Commissionsystem:
system:Insurers
Insurershire
hirebrokers
brokers Activities
Activitiesofofdaily
dailyliving
living(ADLs):
(ADLs):
insured,
insured,for forasaslong
longasasthe
theannuitant
annuitant
ororother
otherfinancial
financialadvisors
advisorstotosell
selltheir
their •• Bathing
Bathing •• Toileting
Toileting
survives
survives
products
products •• Dressing
Dressing •• Continence
Continence
•• Guaranteed
Guaranteedannuity: annuity:MakesMakespayments
paymentsforfor
2.2.Direct
Directmarketing:
marketing:Insurers
Insurerssell
selldirectly
directlytoto •• Eating
Eating •• Transferring
Transferring
aaminimum
minimumperiod, period,regardless
regardlessofofwhether
whether
thepublic
the publicthrough
throughtelevision
televisionadvertising
advertisingoror
the
theannuitant
annuitantisisalivealiveorordead,
dead,then
then Form
FormofofLTC
LTCbenefits:
benefits:
othertelemarketing
other telemarketingmethods
methods
payments
paymentscontinue
continueasaslonglongasasthe
the •• Reimbursement
Reimbursement
annuitant
annuitantsurvives
survives •• Fixed
Fixedannuity
annuitypayments
payments

Hybrid
HybridLTC
LTCandandlife
lifeinsurance
insurancepolicies
policiespay
pay
benefit
benefitusing
usingone
oneofofthe
theapproaches
approachesbelow:
below:
•• Return
Returnofofpremium
premium
•• Accelerated
Acceleratedbenefit
benefit

© 2024 Coaching Actuaries. All Rights Reserved www.coachingactuaries.com FAM Formula Sheet 7
 Critical
CriticalIllness
IllnessInsurance
Insurance Pensions
Pensions Curtate
CurtateFuture
FutureLifetime
Lifetime
Payaalump
Pay lumpsum sumbenefit
benefitwhen
whenthetheinsured
insuredisis An
Anemployer-sponsored
employer-sponsoredplan
plandesigned
designedtoto KK! :! :number
numberofofcompleted
completedfuture
futureyears by(x)
yearsby (x)
diagnosedwith
diagnosed withaacovered
coveredillness
illnessororcondition
condition provide
provideemployees
employeeswith
withretirement
retirementincome
income prior
priortotodeath
death
•• May
Maybe beoffered
offeredasasananaccelerated
acceleratedbenefit
benefit KK! !==⌊T ⌊T⌋⌋
!!
Defined
DefinedContribution
Contribution(DC)
(DC)Pension
PensionPlan
Plan
rideron
rider onaalife
lifeinsurance
insurancepolicy
policy Pr[K! !==k]k]==++pp! !∙ ∙qq!'+
Pr[K !'+==+|+|
qq! !
Specifiesthe
Specifies theamount,
amount,usually
usuallyasasaapercentage
percentage
qq! !==)q
(( )q! !++)p
)p
! !⋅ ⋅)q
)q !')++,p
!') ,p
! !⋅ ⋅)q
)q !',++⋯
!', ⋯
Chronic
ChronicIllness
IllnessInsurance
Insurance ofofsalary,
salary,the
theemployer
employerandandthe
theemployee
employeewill
will
++(*)
(*)pp! !⋅ ⋅)q
)q!'(*)
!'(*)
Payaalump
Pay lumpsumsumbenefit
benefitororannuity
annuitywhen
whenthe the contributeinto
contribute intothe
thepension
pensionfund
fund
=="|"|qq! !++)|)|qq! !++⋯⋯++(*)| qq
(*)| ! !
insuredisisdiagnosed
insured diagnosedwith
withaachronic
chronicillness
illness
Defined
DefinedBenefit
Benefit(DB)
(DB)Pension
PensionPlan
Plan Pr[K! !>>k]k]==Pr[K
Pr[K Pr[K! !≥≥kk++1]1]==+')
+')pp! !
Specifiesthe
Specifies theamount
amountofofannual
annualpension
pensionthe
the Pr[K
Pr[K! !≤≤k]k]==+') qq
Mutualand
Mutual andProprietary
ProprietaryInsurers
Insurers +') ! !
employeewill
employee willreceive
receive
MutualInsurance
Mutual InsuranceCompany
Company Life
LifeTable
Table
•• Owned
Ownedby
bywith-profit
with-profitpolicyholders
policyholders Annual
Annualretirement
retirementbenefit
benefit==nn∙ ∙SS∙ ∙αα l!'#
l!'#
•• Distributes
Distributesall
allprofits
profitstotowith-profit
with-profit #p
#p! !==
Plan
Plantype:
type: l!l!
policyholders
policyholders •• Final
Finalsalary
salarypension
pensionplan
plan #d#d!! l!l!−−l!'#
l!'#
#q
#q! !== ==
•• Career
Careeraverage
averageearnings
earningspension
pensionplan
plan l!l! l!l!
Proprietary
ProprietaryInsurance
InsuranceCompany
Company
•• Career
Careeraverage
averagerevalued
revaluedearnings
earningspension
pension #d#d
!'%
!'% l!'%−−l!'%'#
l!'% l!'%'#
•• Owned
Ownedby byshareholders
shareholders %|#
%|#qq! !== ==
plan
plan l!l! l!l!
•• Profits
Profitsare
areshared
sharedbetween
betweenshareholders
shareholders
and
andwith-profit
with-profitpolicyholders
policyholders Force
ForceofofMortality
Mortality
dd dd
Other
OtherLifeLifeContingent
ContingentContracts
Contracts
Mortality
MORTALITY
MORTALITYMODELS
MODELS Models µµ!'#
f!f(t)
! (t) dt
dt#p
#p!!
==−− dt dt
l!'#
l!'#
!'#== ==−−
SS! (t)
! (t) #p#p
!! l!'#
l!'#
Continuing
ContinuingCare CareRetirement
RetirementCommunities
Communities
Probability
ProbabilityFunctions Functions (t)
(t) = S (t)
(t)
f!f! = S! ! ⋅ µ!'# ⋅ µ!'#== #p#p! !⋅ ⋅µµ
!'#
!'#
Levelsofofresidence:
Levels residence:
Survival
SurvivalFunction Function
1.1.Independent
Independentliving
livingunits
units(ILU)
(ILU) Finding
Finding((pp! !Using
UsingForce
ForceofofMortality
Mortality
TT! :! :future
futurelifetime time-to-deathofof(x)
lifetimeorortime-to-death (x) ((
2.2.Assisted
Assistedliving
livingunits
units(ALU)
(ALU)
SS! (t):
! (t): Probability
Probability that
that(x)
(x)survives
survivest years
t years pp! !==exp
(( expS−
S−TTµµ!'#
!'#dt
dtUU
3.3.Skilled
Skillednursing
nursingfacility
facility(SNF)
(SNF) ""
==Pr[T Pr[T ! !>>t]t] !'(
!'(
Types
TypesofofCCRC CCRCcontracts:
contracts: ==Pr[T Pr[T " ">>xx++t|T t|T
" ">>x]
x] ==exp
expS−
S−TT µµ--dy
dyUU
1.1.Full
Fulllife
lifecare/life
care/lifecare
care SS""(x(x++t)t) !!
==
2.2.Modified
Modifiedlifelifecare
care SS""(x)
(x) Properties
PropertiesofofForce
ForceofofMortality
Mortality
3.3.Fee-for-service
Fee-for-service SS! (t)(t) must
must satisfy:
satisfy: • • µµ!'#≥≥00
!
!'#
• • SS ! (0)
! (0)==11 ..
• • ∫"∫" µµ!'#dt
!'# dt==∞∞
Structured
StructuredSettlements
Settlements • • SS ! ! (∞)==00
(∞)
AApayment
paymentschedule
schedulewhere
wherethetheresponsible
responsible • • SS ! (t)
! (t)isisaanon-increasing
non-increasingfunction
functionofoft t Adding/Multiplying
Adding/MultiplyingaaConstant
Constant
partycompensates
party compensatesthe theinjured
injuredparty
party(IP)
(IP) ∗∗
• • µµ!'#==µµ
!'# !'#++kk⇒
!'# ⇒((pp∗! ∗!==((pp! !∙ ∙ee*+(
*+(
•• Often
Oftenused
usedforforpayments
paymentsunder
underWorkers
Workers Actuarial
ActuarialNotations
Notations
∗∗
• • µµ!'#==kk∙ ∙µµ
!'# !'#⇒
!'# ⇒((pp∗! ∗!==((((pp! !)+)+
Compensationinsurance
Compensation insurance #p
#p! :! :Probability that(x)
Probabilitythat (x)survives
survivest tyears
years
•• Typically
Typicallyincludes
includesananimmediate
immediatelump
lumpsum
sum ==Pr(TPr(T !!> >t)
t) Extra
ExtraMortality
MortalityRisk
Risk
andan
and anannuity
annuity ==SS! (t)! (t) •• Age
Agerating:
rating:Adding
Addingadditional
additionalyears
yearstotoaa
•• IfIfthe
theIPIPisisseverely
severelyinjured,
injured,interim
interim #q
#q! :! :Probability that(x)
Probabilitythat (x)dies
dieswithin
withint tyears
years person’s
person’sage,
age,effectively
effectivelytreating
treatingthethe
benefitsare
benefits aremade
madeuntil
untilthe
thetime
timeofof ==Pr(TPr(T !!≤ ≤t)
t) person
personasasaadifferent
differentaged
agedrisk,
risk,e.g.,
e.g.,5-year
5-year
maximummedical
maximum medicalimprovement,
improvement,whichwhichisis ==FF! (t)! (t) age
agerating
ratingtoto(50)
(50)means
meanstreating
treating(50)
(50)asasifif
whenthe
when thefinal
finalstructured
structuredsettlement
settlementwill
will qq! !isisalso
alsoknown
knownasasthe
the‘mortality
‘mortalityrate’ for(x).
rate’for (x). he/she
he/sheisis55
55years
yearsold.
old.
bebedetermined
determined #p
#p! !++#q #q
! !==11 •• Adjusting
Adjustingforce
forceofofmortality:
mortality:Adding
Addingaa
%|#
%|#qq! :! :Probability that(x)
Probabilitythat (x)survives
survivesuuyears
years constant
constanttotothe
theforce
forceofofmortality.
mortality.
Approaches
Approachestotodetermine
determineannuity
annuitypayments:
payments: andanddies dieswithin
withinthe
thefollowing
followingt tyears
years •• Adjusting
Adjustingmortality
mortalityrates:
rates:Multiplying
Multiplying
1.1.Top-down
Top-down ==%%pp! !⋅ ⋅# q# q!'%
!'% the
themortality
mortalityrateratefor
forstandard
standardlives
livesbybyaa
2.2.Bottom-up
Bottom-up ==%%pp! −
! −%'# %'# pp! ! constant.
constant.
==%'#
%'#qq! −! −%% qq! !
pp
(( ! !== p p!! p⋅ ⋅
p !')⋅ ⋅……⋅ ⋅pp
!') !'(*)
!'(*)

© 2024 Coaching Actuaries. All Rights Reserved www.coachingactuaries.com FAM Formula Sheet 8
 Express
Expressp’s
p’sor
orq’s
q’sin
interms
termsof
ofµµ E[(min(K n)),,]]
E[(min(K!!,,n)) Beta
BetaDistribution
Distribution(Generalized
(GeneralizedUniform)
Uniform)
.
. (*)
(*) αα
##pp!! =
=T T 0.0p.p!! ⋅⋅µµ!'0
!'0 ds
ds µµ!! =
= 00 ≤
≤ xx <
<ω ω
##
=\
= \kk,, ⋅⋅+|+|qq!! +
+nn,, ⋅⋅ ((pp!! ωω− −xx
;;
## +2"
+2"
%(789:4 ;;
%(789:4
ω −(x
ω− (x+
+t)
t)
T 0.0p.p!! ⋅⋅µµ!'0 (( pp =
= hh pp i
i =
= jj kk
##qq!! =
=T !'0 ds
ds ## !! ## !!
ωω−
−xx
"" =
= \(2k
\(2k−−1)
1)++pp!!
%'#
%'# ll!! =
= k(ω
k(ω− x);;
−x)
+2)
+2)
%|#qq!! =
%|# =T T 0.0p.p!! ⋅⋅µµ!'0!'0 ds
ds ∘∘ ωω−
−xx
%% •• Variance
Variance ee!! ==
αα+
+11
Var[min(T
Var[min(T!!,,n)]
n)]
Moments
Moments ∘∘ ,, Gompertz’s
Gompertz’sLaw Law
= E[(min(T
= n)),,]]−
E[(min(T!!,,n)) −Ze
Ze!:(|
!:(|[[
Complete
CompleteExpectation
Expectation µµ!! = Bc!!
= Bc cc >
> 1,
1,BB >
> 00
Var[min(K
Var[min(K!!,,n)]
n)] BB !! ##
•• First
FirstMoment
Moment cc (c
(c −
,, ##pp!! =
= exp
expn−
n− −1)o
1)o
.. = E[(min(K
= n)),,]]−
E[(min(K!!,,n)) −Ze
Ze!:(| ln
lncc
∘∘ !:(|[[
ee!! = E[T!!]] =
= E[T =TT tt⋅⋅ ##pp!!µµ!'#
!'#dt
dt
"" Makeham’s
Makeham’sLaw Law
.. ∘∘
=
=TT ##pp!!dt
dt Relationship
Relationshipbetween
betweenee!! and
andee!! µµ!! == AA+ Bc!! cc >
+Bc > 1,1,BB >> 0,
0,AA ≥
≥ −B
−B
"" ∘∘
ee!! ≈
≈ ee!! +
+0.5
0.5 BB !! ##
##pp!! =
= exp
expn−At
n−At−− cc (c
(c −−1)o
1)o
•• Second
SecondMoment
Moment ln
lncc
.
.
Recursive
RecursiveFormulas
Formulas •• Available
Availableononthe
thelast
lastpage
pageof ofexam
examtable
table
E[T!,!,]] =
E[T =TT tt,, ⋅⋅ ##pp!!µµ!'#
!'#dt
dt ∘∘ ∘∘ ∘∘
"" ee!! =
= ee!:(|
!:(| +
+ ((pp!! ⋅⋅ee!'(
!'(
•• For
ForGompertz,
Gompertz,set
setAA==0. 0.
.
.
=
=TT 2t
2t⋅⋅ ##pp!!dt
dt ee!! =
= ee!:(|
!:(| +
+ ((pp!! ⋅⋅ee!'(
!'(
"" ∘∘ ∘∘ ∘∘ Fractional
FractionalAges Ages
•• Variance
Variance ee!:4'(|
!:4'(| =
= ee!:4|
!:4| +
+ 44pp!! ⋅⋅ee!'4:(|
!'4:(| UDD(0
UDD (0 ≤ ≤ tt ≤≤ 1)1)
,, ee!:4'(|
!:4'(| =
= ee!:4|
!:4| +
+ 44pp!! ⋅⋅ee!'4:(|
∘∘
Var[T!!]] =
Var[T E[T!,!,]]−
= E[T −Ze
Ze!![[ !'4:(| Use
Uselinear
linearinterpolation:
interpolation:
= pp!!(1
ee!! = (1+ !')))
+ee!') ll!'#
!'# == (1
(1− −t) t)⋅⋅ll!! +
+tt⋅⋅ll!')
!')

##qq!! =
= tt⋅⋅qq!!
Curtate
CurtateExpectation
Expectation Special
SpecialMortality
MortalityLaws Laws tq!!
tq
Constant
ConstantForceForceofofMortality
Mortality ##qq!'0
!'0 == for
for00 ≤≤ ss+
+tt ≤
≤ 11
•• First
FirstMoment
Moment 11− −ss⋅⋅qq!!
.
. .
. Key
KeyIdea:
Idea:µµ!! =
= µµfor
forall
allages
ages qq!!
µµ!'#
!'# ==
ee!! = E[K!!]] =
= E[K =\\kk⋅⋅+|+|qq!! =
=\\++pp!! ##pp!! =
= ee*5#
*5#
= (p!!))
= (p ## 11− −tt⋅⋅qq!!
+2"
+2" +2)
+2) 11 ff!!(t)
(t) =
= ##pp!! ∙∙µµ!'#
!'# = = qq!!(aconstant)
(aconstant)
ff!!(t)
(t) == ee*5#
*5#
µµ ⇒
⇒ TT!! ~~exp.
exp.dist.
dist.dmean
dmean =
= ee ∘∘
•• Second
SecondMoment
Moment µµ ee!! =
= ee!! +
+0.5
0.5
.
. .
.
∘∘ 11 ∘∘ ∘∘
E[K,!,!]] =
E[K =\\kk,, ⋅⋅+|+|qq!! =
= \(2k
\(2k−−1)
1)++pp!! ee!! == ee!! =
= 0.5q
0.5q!! +
+pp!!Z1
Z1++ee!')
!')[[
µµ
+2"
+2" +2)
+2)
11
•• Variance
Variance Var[T!!]] =
Var[T = ,, Constant
ConstantForce Forceof Mortality(0
ofMortality (0 ≤≤ tt ≤
≤ 1)
1)
µµ
Var[K!!]] =
Var[K E[K,!,!]]−
= E[K (e!!)),,
−(e Use
Useexponential
exponentialinterpolation:
interpolation:
∘∘ 11
ee!:(| = (1
!:(| =
(1− −ee*5⋅(
*5⋅())
ll!'#
!'# == (l(l!!)))*#
)*# (l
!')))
⋅⋅ (l!') ##

Temporary
TemporaryExpectation
Expectation µµ ##
= (p
##pp!! = (p!!))
•• First
FirstMoment
Moment Uniform
UniformDistribution
Distribution = (p (p!!))## for
∘∘ ##pp!'0
!'0 = for00 ≤≤ ss++tt ≤ ≤ 11
ee!:(|
!:(| =
= E[min(T
E[min(T!!,,n)]
n)] KeyIdea:
Key Idea:TT!!~uniform(0,
~uniform(0,ω ω−−x) x) µµ!'#
!'# ==− −ln(p
ln(p!!))
(( ll!! == k(ω
k(ω− −x) x) ff!!(t)
(t) =
= ##pp!! ∙∙µµ!'#
!'# = = ee*5⋅#
*5⋅#
⋅⋅µµ
=
=TT tt⋅⋅ ##pp!!µµ!'#
!'#dt
dt++nn((pp!! 11 11
"" µµ!! = = ⇒⇒ µµ!'# !'# ==
(( ωω− −xx ω−
ω −(x(x+ +t)
t) Select
Select&&Ultimate
UltimateMortality
Mortality
=
=TT ##pp!! dt
dt ω
ω− (x+
−(x +t)t) The
Theage
ageat
atwhich
whichaaperson
personisisselected
selectedisis
##pp!! ==
""
ee!:(| ω−
ω −xx denoted as[x].
denotedas [x].
!:(| =
= E[min(K
E[min(K!!,,n)]
n)]
tt
(*)
(*) ##qq!! ==
ω−
ω −xx Select
Selectmortality
mortalityisiswritten
writtenas
asqq[!]'#
[!]'# where
wherexxisis
=
=\\kk⋅⋅+|+|qq!! +
+nn⋅⋅ ((pp!! tt
+2"
+2" %|#qq!! =
%|# = the
theselected
selectedage andttisisthe
ageand thenumber
numberof
ofyears
years
((
ωω− −xx
∘∘ ω
ω− −xx after
afterselection.
selection.
=
=\\++pp!! ee!! = =
22
+2)
+2) The
Themortality
mortalityafter
afterthe
theselect
selectperiod
periodisiscalled
called
(ω
(ω− −x) x),,
•• Second
SecondMoment
Moment Var[T!!]] =
Var[T = the
theultimate
ultimatemortality,
mortality,where:
where:
12
12
E[(min(T!!,,n))
E[(min(T n)),,]] ∘∘ nn qq[!]'#
[!]'# =
= qq!'#
!'#
(( ee!:(|
!:(| == ((pp!!(n)
(n)+ + ((qq!!ZZ [[
22
=T
= T tt,, ⋅⋅ ##pp!!µµ!'#
!'#dt
dt++nn,,((pp!!
""
((
=
=TT 2t
2t##pp!! dt
dt
""

© 2024 Coaching Actuaries. All Rights Reserved www.coachingactuaries.com FAM Formula Sheet 9
 Common Approach Present
PRESENT VALUE Value
RANDOMRandom
VARIABLES Expected Present Value
1. Read from the left to the right and then Variables for Insurance
FOR INSURANCE
Type of EPV / APV / Net Single
continue downwards:
Insurance Premium
x q[!] q[!]') q[!]', q!'> In general, to calculate the EPV of insurance
benefits, sum/integrate the product of the Discrete
30
following three components over all possible .
31 A! = \ v +') ⋅ +|q!
payment times:
32 Whole Life
1. the benefit amount +2"
of $1
33 2. the appropriate discount factor Continuous
2. Read in a diagonal direction until we .
3. the probability that the benefit will be paid
v ! = T v # ⋅ #p! µ!'# dt
A
reach the ultimate column, and then at that time "
proceed downwards: Discrete
x q[!] q[!*)]') q[!*,]', q! Present Value (*)

30 Type of A)!:(| = \ v +') ⋅ +|q!

𝐏𝐏𝐏𝐏
31 Insurance n-year +2"

Term Life = A! − ⬚(E! ⋅ A!'(

32 Discrete of $1 Continuous
33
(
Z = v ?!') , K ! ≥ 0 v ) = T v # #p! µ!'# dt
A
Whole Life !∶(|
"
of $1 Continuous v! − (E! ⋅ A
=A v !'(
Discrete
Z = v @! , T! ≥ 0
n-year (|A! = A! − A)!:(|
Discrete
Deferred = (E! ⋅ A!'(
n-year v ?!') , K ! < n Whole Life
Z=u Continuous
0 , K! ≥ n of $1
Term Life v =A
v! − A
v)
Continuous (|A! !∶(|
of $1
v !'(
= (E! ⋅ A
v @! , T! < n
Z=u
0 , T! ≥ n
n-year
Discrete
Pure )
n-year 0 , K! < n A!:(| = (E! = v ( (p!
Z = u ?!') Endowment
Deferred v , K! ≥ n
of $1
Whole Life Continuous
of $1 0 , T! < n Discrete
Z = u @!
v , T! ≥ n
A!:(| = A)!:(| + (E!
n-year
n-year Endowment = A)!:(*)| + v ⋅ (*)E!
Pure 0 , T! < n Insurance
Z=u
Endowment v ( , T! ≥ n of $1 Continuous
of $1
v
A v ) + (E!
=A
!:(| !:(|

Discrete
v ?!') , K ! < n
Z=u
n-year v( , K! ≥ n
Endowment = v 47((?!'),()
Insurance Continuous
of $1
v @! , T < n
Z=u ( !
v , T! ≥ n
= v 47((@!,()

© 2024 Coaching Actuaries. All Rights Reserved www.coachingactuaries.com FAM Formula Sheet 10
 Varying
VaryingInsurance
Insurance Variances
Variances Recursive
RecursiveFormulas
Formulas
..
AA!!==vq
vq!!++vp
vp!!⋅ ⋅AA!')
(IA)!!==\(k
(IA) 1)v+')
\(k++1)v +')
⋅ ⋅+|+|qq!! Type
Typeof
of !')
Variance
Variance AA)!:(|
)
FF =
= vq
vq!!++vp ))
vp!!⋅ ⋅AA!'):(*)|
+2"
+2" Insurance
Insurance !:(| JJJJJJJ
JJJJJJJ
!'):(*)|
.. (IA)
(IA)!!==vq vp!!(A
vq!!++vp (A!') +(IA)
!')+ !')))
(IA)!')
(I(IA ̅v))!!==TT tv
̅vA tv# #⋅ ⋅#p
#p!!µµ!'#
!'#dt
dt Discrete
Discrete
""
(*)
(*)
,,
1/mthly
1/mthlyInsurance
Insurance
(A!!)),,
AA!!−−(A
(IA) )
(IA))!:(|
FF =
!:(| =\(k 1)v+')
\(k++1)v +')
⋅ ⋅+|+|qq!! Whole
WholeLife
Life (4)
(4) 11
KK!! == ⌊mT⌊mT⌋⌋
+2"
+2"
of
of$1
$1 mm !!
(( Continuous
Continuous (4)
(4)
̅vA
(I(IA ̅v)))!:(|
)
FF = tv# #⋅ ⋅#p
=TT tv PrzK
Pr zK!! ==r{r{==::pp!!⋅ ⋅ ))qq!':
!':=
= ))qq!!
!:(| #p!!µµ!'#
!'#dt
dt ::| |44
"" 44
,,vv vv!!)),,
(*)
(*)
AA!!−−(A
(A Whole
Wholelife
lifeinsurance
insuranceofof$1
$1payable
payableat
atthe
theend
end
(DA) )
(DA))!:(|
FF =
!:(| =\(n k)v+')
\(n−−k)v +')
⋅ ⋅+|+|qq!! of
ofthe
the1/mth
1/mthyearyearof
ofdeath:
death:
Discrete
Discrete ))
+2"
+2" (%)
(%)
(4)
(4)
(( ZZ==vv??!! ''
44, , KK!! ≥≥00
,,
(DvvA
(D vA
v))))FF ==TT (n (n−−t)vt)v# #⋅ ⋅#p
#p!!µµ!'#
!'#dt
dt ,, ))
AA!:(| ZA)!:(|
−−ZA )
[[ ..
!:(|
!:(| n-year
n-year !:(| !:(| (4)
(4)
""
Term
TermLife
Life \vv(+'))/4
AA!! ==\ (+'))/4
⋅ ⋅++ ))qq!!
(IA))!:(|
(IA) )
FF ++(DA) )
(DA))!:(|
FF ==(n(n++1)A 1)A)!:(|
) ||
44 44
!:(| !:(| !:(|
of
of$1
$1 Continuous
Continuous +2"
+2"
̅vA
(I(IA ̅v)))!:(|
)
FF ++ vv
(D
(D v
Av
A))))
FF == nn ⋅ ⋅v
Av
A))
FF
n-year
n-yearterm
termlifelifeinsurance
insuranceofof$1$1payable
payableat
at
!:(| !:(|
!:(| !:(|
!:(| ,,
,,vv
AA)!:(|
) vv)) [[
−−ZA
ZA the
theend
endof ofthe
the1/mth
1/mthyear
yearof
ofdeath:
death:
!:(| !:(|
!:(|
SULT
SULT (%) ))
(%)
(4)
(4) 11
vv??!! ''44, , KK!! ==0,0,……, ,nn−−
Discrete
Discrete ZZ==|| m m
#E
#E!!can
canbebecalculated
calculatedas:as: n-year
n-year (4)
(4) 11
,, ,, 0,0, KK!! ==n,n,nn++ , ,……
## # # G!"#
G
(|(|AA!!−
−hh(|(|AA!!ii mm
•• #E
#E!!=
=vv ⋅ ⋅#p
#p!!=
=vv ⋅ ⋅ G!"#
G
Deferred
Deferred
!! 4(*)
4(*)
•• #'H WholeLife
Whole Life Continuous
Continuous (%)
(%)
#'HEE!!=
=#E
#E!!⋅ ⋅HHEE!'#
!'# AA)!:(|
)
!:(|
\ vv(+'))/4
== \ (+'))/4
⋅ ⋅++ ))qq!!
of$1
of $1 ||
+2"
+2" 44 44
,,vv ,,
,,
#E
#E!!can
canbe
becalculated
calculatedas:
as: (|(|AA!!−
vA
−hh(|(|Av!!ii
where
wheremn
mnrepresents
representsthe
thenumber
numberof
ofperiods
periods
GG
•• ,#,E
#E!!= (v# )# ),,⋅ ⋅#p
=(v #p!!= (v# #)),,⋅ ⋅ !"#
=(v !"#
n-year
n-year
GG !! Recursive
RecursiveFormulas
Formulas
,,
•• ,#,E =vv# #⋅ ⋅vv# ##p
#E!!= =vv# #⋅ ⋅#E
#p!!= #E!!
Pure
Pure ((EE!!−−((((EE!!)),, (4)
(4) (%)
(%) (4)
(4)
,(
,(
AA!! ==AA)!:(|
)
++ EE ⋅ ⋅AA!'(
!:(| (( !! !'(
Endowment
Endowment ==vv ((pp!!((qq!!
AA)!:(|
)
can
canbe
becalculated
calculatedas:
as: of
of$1
$1 (4)
(4)
)) ))
(4)
(4)
!:(| AA!! ==vv44))qq!!++vv44))pp!!⋅ ⋅AA ))
!'
!'
•• AA)!:(|
)
!:(|
==AA!:(| −− EE
!:(| (( !! Discrete
Discrete
44 44 44
UDD
UDDAssumption
Assumption
)) n-year
n-year
•• AA!:(|
!:(|
==AA!!−−((EE!!⋅ ⋅AA!'(
!'( ,, ,, ii ii
Endowment
Endowment AA!:(|
FF −
!:(| −hA
hA!:(|
FFii
!:(| Av!!== AA!!; ; AA(4)
vA (4)
!! = = (4) AA
δδ i i(4) !!
Shortcuts
Shortcuts Insurance
Insurance Continuous
Continuous ii (%)
(%) i i ))
Av)) FF == AA)) FF; ; AA)) ==
vA AA !:(|
FF
Thefollowing
The followingshortcuts
shortcutsfor
forconstant
constantforce
force of$1
of $1 !:(|
!:(| δδ !:(| !:(| !:(|
!:(| i(4) !:(|
i(4)
,,vv ,,
canbe
can beuseful
usefulon
oncurrent
currentexams.
exams.For
Foruniform
uniform AA!:(|
FF −
!:(|
vv!:(|
−hA
hA FFii
!:(| i i i i
distribution,just
distribution, justuse
usebasic
basicprinciples.
principles. vv = (|(|AA!!; ; (|(|AA!!(4)
(|(|AA!!=
(4)
== (4) AA
δδ i i(4)(|(| !!
Calculate,,AAand
Calculate and,,A vsimilarly
vA similarlyto toAAand andAv, ,but
vA but ii )
Av!:(|
vA FF =
!:(| = AA)!:(| FF ++AA!:(| ))
FF; ;
withdouble
with doublethetheforce
forceof ofinterest,
interest,δ.δ. δδ !:(| !:(|
ConstantForce
Constant Force i i ))
withvv,,, ,or
(%)
(%)
Equivalently,
Equivalently,replace
replacevvwith or AA!:(| == (4) AA !:(|
FF ++AA!:(| ))
FF
,,
!:(| i i(4) !:(| !:(|
replacei iwith
replace with2i2i++i i . .
µµ
vA
Av!!== vA
vsimilarly vA
v, ,but
µµ++δδ Calculate,,AAand
Calculate and,,A similarlyto toAAand andA but
with
withdouble
doublethe theforce
forceof ofinterest.
interest.
Equivalently,
Equivalently,replace
replacevvwith withvv,,, ,or
or
µµ replacei iwith
replace with2i 2i++i,i,. . For
Forexample:
example:
vA
Av)) == (1
(1−−((EE!!))
!:(| µµ+
!:(| +δδ
,,vv
i,i,++2i2i,,
AA!!== AA!!
2δ
2δ
=ee*(5'I)(
((EE!!=
*(5'I)(

© 2024 Coaching Actuaries. All Rights Reserved www.coachingactuaries.com FAM Formula Sheet 11
 Claims
ClaimsAcceleration
AccelerationApproach
Approach Present
PRESENT
PRESENT VALUEValue
VALUE RANDOM
RANDOMRandom
VARIABLES
VARIABLES Expected
ExpectedPresent
PresentValue
Value
(4)
(4)
AA!! ≈ (1+
≈ (1
%'(
%'(
+i)i))%
)% ∙∙A
A!! FOR Variables for Annuities
FORANNUITIES
ANNUITIES Type
Typeof
of EPV
EPV//APV
APV//Net
NetSingle
Single
vA
Av!! ≈ (1+
≈ (1
((
+i)i) ∙∙AA!!
))
Annuities
Annuities Premium
Premium
(%)
(%) %'(
%'( In
Ingeneral,
general,totocalculate
calculatethe
theEPV
EPVofofaalife
life Discrete;
Discrete;Due
Due
AA)!:(|
)
≈ (1+
≈ (1 +i)i))% A)!:(|
)% ∙∙A
)
!:(| !:(| annuity,
annuity,sum/integrate
sum/integratethe theproduct
productof ofthe
the .
.
(4)
(4) %'(
%'(
(|A
(| A!! ≈ (1+
≈ (1 +i)i))%
)% ∙∙ A
(|A!!
(| following
followingthree
threecomponents
componentsoveroverall
allpossible
possible ää!! =
=\\vv++ ⋅⋅ ++pp!!
(4)
(4) %'(
%'(
payment
paymenttimes:
times: Whole
WholeLife
Life
AA!:(|
FF ≈ (1+
≈ (1 +i)i))% A)!:(|
)% ∙∙A
)
+
+ EE
!:(| (( !!
+2"
+2"
!:(|
1.
1.the
theamount
amountpaidpaid of
of$1
$1
Continuous
Continuous
2.
2.the
theappropriate
appropriatediscount
discountfactor
factor .
.
Percentiles
Percentiles aÉaÉ!! =
=TT vv## ⋅⋅##pp!! dt
dt
3.
3.the
theprobability
probabilitythat
thatthe
thepayment
paymentisismade
madeatat
The
The100pth
100pthpercentile
percentileof
ofZZisisthe
thevalue
valuezzLL such
such ""
that
thattime
time
that:
that: Discrete;
Discrete;Due
Due
PrZ
PrZ ≤
≤ zzLLÄÄ =
= pp Present
PresentValue
Value (*)
(*)
calculatezzLL::
Tocalculate
To Type
Typeof
of ää!:(|
FF =
=\\vv++ ⋅⋅ ++pp!!
!:(|
1. Draw
Drawaagraph
graphwith
withZZon
ony-axis
y-axisand
andTT!! 𝐏𝐏𝐏𝐏
𝐏𝐏𝐏𝐏
1. Annuities
Annuities n-year
n-year +2"
+2"

on
onx-axis.
x-axis. Temporary
Temporary =
= ää!! −
− ((EE!! ⋅⋅ää!'(
!'(
Discrete;
Discrete;Due
Due
2. Identify
2. Identifythe
theparts
partsof
ofthe
thecurve
curvewhere
where Life
Life
Continuous
Continuous
ZZ ≤
≤ zzLL..Determine
Determinethe
thevalue
valueof
ofTT!! that
that YY =
= ää?JJJJJJJJJ
')|,,K
JJJJJJJJJ
? K!! ≥
≥ 00 of
of$1
$1
!!')|
Whole
WholeLife
Life ((
corresponds
correspondsto tothose
thoseparts.
parts.
of
of$1
$1 Continuous
Continuous
aÉaÉ!:(|
FF =
!:(| =TT vv## ⋅⋅##pp!! dt
dt
3. Use
3. Usethe
thevalue
valueof ofTT!! from
fromStep
Step22 ""
to
tocalculate
calculatezzLL.. =
= aÉaÉ!! −
− ((EE!! ⋅⋅aÉaÉ!'(
!'(
YY =
= aÉaÉJJJJJ
@!!||,,T
@JJJJJ T!! ≥
≥ 00
Discrete;
Discrete;Due
Due
Discrete;
Discrete;Due
Due
.
.
ää?JJJJJJJJJ
')| ,,K
JJJJJJJJJ
? ')| K!! <
< nn (|ää!! =
(| =\ \vv++ ⋅⋅ ++pp!!
= ÑÑ !!
YY =
ää(| F
F(| ,,KK!! ≥
≥ nn +2(
+2(
n-year
n-year n-year
n-year =
= ää!! −
−ää!:(|
FF
=
= ääJJJJJJJJJJJJJJJJJJJ
JJJJJJJJJJJJJJJJJJJ
4M((?
4M((?!!'),()|
'),()|
!:(|
Temporary
Temporary Deferred
Deferred =
= ((EE!! ⋅⋅ää!'(
!'(
Life
Life Continuous
Continuous Whole
WholeLife
Life
of
of$1
$1 Continuous
Continuous
of
of$1
$1
aÉaÉJJJJJ
@ || ,,T
@JJJJJ T!! <
< nn .
.
= ÑÑ !!
YY =
aÉaÉ(|F ,,T
F(| T!! ≥
≥ nn (|a
(| ÉaÉ!! =
=TT vv## ⋅⋅##pp!! dt
dt
((
=
= aÉaÉ4M((@
JJJJJJJJJJJJJJJ
JJJJJJJJJJJJJJJ
4M((@ !!,()|
,()| =
= aÉaÉ!! −
−aÉaÉ!:(|
FF
!:(|

Discrete;
Discrete;Due
Due =
= ((EE!! ⋅⋅aÉaÉ!'(
!'(

n-year
n-year Discrete;
Discrete;Due
Due
00 ,,KK!! <
< nn
YY =
= uuvv((ää Certain-
Certain-
')*(|,,K
?JJJJJJJJJJJJJ
JJJJJJJJJJJJJ
?!!')*(| K!! ≥
≥ nn ääJJJJJ
FF =
JJJJJ = ää(|
F+
F(| + (|(|ää!!
00 ,,KK!! << nn and-Life
and-Life !:(|
!:(|
n-year
n-year =
= uuää
')| −
JJJJJJJJJ
?JJJJJJJJJ
?!!')| −ää(|F ,,K
F(| K!! ≥≥ nn (guaranteed
(guaranteed Continuous
Continuous
Deferred
Deferred
annuity)
annuity)ofof
Whole
WholeLife
Life Continuous
Continuous aÉaÉJJJJJ
FF =
JJJJJ = aÉaÉ(|
F+
F(| + (|(|aÉaÉ!!
$1
$1 !:(|
!:(|
of
of$1
$1
00 ,,TT!! <
< nn
YY =
= uuvv((aÉaÉ ,,TT!! ≥
≥ nn Annuity
AnnuityImmediate
Immediate
@JJJJJJJJJ
JJJJJJJJJ
@!!*(|
*(|
00 ,,TT!! <
< nn aa!! == ää!! −
−11
=
= uuaÉaÉ −
−aÉaÉ(| ,,TT!! ≥
≥ nn
JJJJJ
@JJJJJ
@ !!||
F(|
F aa!:(|
FF =
!:(| = ää!:(|FF −
!:(| −11+
+ ((EE!!

Discrete;
Discrete;Due
Due
n-year
n-year
ää(|F ,,K
F(| K!! << nn
Certain-
Certain- YY =
= ÑÑ
ääJJJJJJJJJ
')|,,K
?JJJJJJJJJ
?!!')| K!! ≥
≥ nn
and-Life
and-Life
(guaranteed
(guaranteed Continuous
Continuous
annuity)of
annuity) of
$1
$1 aÉaÉ(|F ,,T
F(| T!! <
< nn
YY =
= ÑÑ
aÉaÉJJJJJ
@JJJJJ
@!!|| , ,TT!! ≥ nn
≥

© 2024 Coaching Actuaries. All Rights Reserved www.coachingactuaries.com FAM Formula Sheet 12
 Varying
VaryingAnnuities
Annuities Relationship
Relationshipbetween
betweenInsurances
Insurances Woolhouse’s
Woolhouse’sFormula Formula(3(3terms) terms)
.. ,,
andAnnuities
and Annuities (4)(4) m m − − 11 mm −− 11
(Iä)!)!==\(k
(Iä 1)v++⋅ ⋅+p
\(k++1)v ä ä! ! ≈≈ä ä! !−− −− (µ
(µ ++δ)δ)
+p
!! AA! !==11−−dädä! ! 2m 2m 12m12m,, ! !
+2"
+2"
.. Whole
Whole ,,
AA! !==11−−(2d(2d−−dd,,)),ä,ä! ! •• The Theformula
formulaisisprovided providedon onthe
theexam
examtable.
table.
(I(Ia̅Éa̅É)!)!==TT tvtv# #⋅ ⋅#p#p! !dtdt Life
Life vA
Av! !==11−−δaδa
ÉÉ! ! •• IfIfthethequestion
questionasks askstotouseusethe
theWoolhouse’s
Woolhouse’s
""
(*)
(*)
,v
,v
A (2δ),a,ÉaÉ! !
A! !==11−−(2δ) formula
formulawith withtwo twoterms,
terms,just justdrop
dropthe thelast
last
(Iä)!:(|
(Iä )!:(| 1)v++⋅ ⋅+p AA!:(|
F F==11−−dä
dä!:(| term,
term,and andthus:
thus:
F F==\(k
\(k++1)v +p
!! !:(| FF
!:(|
,, (4) (4) mm−−11
+2"
+2"
(( Temp.
Temp. !:(| (2d−−dd,,)),ä,ä!:(|
F F ==11−−(2d
AA!:(| FF
!:(| ä ä! ! ≈≈ä ä! !−−
2m
2m
(I(Ia̅Éa̅É)!:(|
)!:(|
F F==T
##
Ttvtv ⋅ ⋅#p#p! !dtdt Life
Life vA
Av!:(|
FF
!:(|= = 11−−δa
δa
É É FF
!:(|
!:(| •• IfIfµµ! !isisnotnotavailable,
available,approximate
approximateµµ! !as: as:
""
,v
,v (2δ),a,ÉaÉ!:(|
(*)
(*) A F F ==11−−(2δ)
A!:(|
!:(| FF
!:(| 11
µµ! !≈≈−− (ln (lnpp!*) !*)++lnlnpp! !))
(Dä)!:(|
(Dä )!:(|
F F==\(n k)v++⋅ ⋅+p
\(n−−k)v +p
!! 22
(4)
(4)
+2"
+2" 1/mthly
1/mthlyAnnuity
Annuity •• To Tofind
findä ä!:(|
F F, use
!:(|
, usethe
therelationship
relationshipbelow below
((
vvaÉaÉ)) F F==TT(n (4)
(4) (4)
(4)
(D
(D !:(|
!:(| t)v# ##p#p! !dtdt
(n−−t)v aa! !<<aa! ! <<aÉaÉ! !<<ä ä! ! <<ä ä! ! and
andapply
applyWoolhouse’s
Woolhouse’sformula
formulatoto
"" (4)
(4) (4)
(4) (4)
(4)
(4) (4) (4)
approximate
approximateä ä! ! and
andä ä!'( ::
(Iä)!:(|
)!:(| AA! ! ==11−−dd(4) ä ä! !
(Iä (Dä)!:(|
F F++(Dä )!:(| (n++1)ä
F F==(n 1)ä!:(| !'(
FF
!:(|
(4)
(4) (4) (4)
(4) (4) (4)(4) (4) (4) (4)(4)
(I(Ia̅Éa̅É)!:(| vvaÉaÉ)!:(| AA!:(|
F F==11−−dd ä ä!:(| ä ä!:(|
F F==ä ä! ! −−((
EE! ä! ä!'(
)!:(| (D
F F++(D )!:(|
F F==na
na
ÉÉ!:(|
FF
!:(| !:(| FF
!:(| !:(| !'(

(4)(4) (4) 11
(4) For
For2-term
2-termWoolhouse,
Woolhouse,we weget:
get:
aa! ! ==ä ä! ! −−
Shortcuts
Shortcuts mm (4)(4) mm−−11
ä ä!:(|
F F≈≈ä ä!:(|
F F−− (1(1−−((EE! )! )
(4) 11
!:(|
Thefollowing
The followingshortcuts
shortcutsfor
forconstant
constantforce
force (4)(4) (4) !:(| 2m
2m
ä ä!:(|
F F−−aa F F== [1[1−−((EE! ]! ]
canbe
can beuseful
usefulon
oncurrent
currentexams.
exams.For
Foruniform
uniform !:(| !:(|
!:(| mm •• To
Toapproximate
approximateinsurance insurancefactors,
factors,first
firstuse
use
distribution,just
distribution, justuse
usebasic
basicprinciples.
principles. Recursive
RecursiveFormulas
Formulas Woolhouse’s
Woolhouse’sformula formulatotoapproximate
approximate
(4)
(4) (4)
(4) (4)
(4)
ä ä! ! ==ä ä!:(|
F F++((
!:(|
EE! !⋅ ⋅ä ä!'(
!'( annuity
annuityfactor,
factor,and andthen
thenuse
usethe
theinsurance-
insurance-
ConstantForce
Constant Force
(4)(4) 11
))
(4)
(4) annuity
annuityrelationship
relationshipbelow:below:
11 ä ä! ! == ++vv44))pp! !⋅ ⋅ä ä )) (4)
(4) (4)
(4)
aÉaÉ! !== mm 44 !'!'
44 AA! ! ==11−−dd(4)
(4)
ä ä! !
µµ++δδ (4)
(4) (4)
(4) (4)
(4)
UDD
UDDAssumption
Assumption AA!:(|
F F==11−−dd ä ä!:(|
!:(| FF
!:(|
11 (4)
(4)
aÉaÉ!:(|
F F ==
!:(| (1(1−−((EE! )! ) ä ä! ! ==α(m)
α(m)⋅ ⋅ä ä! !−−β(m)
β(m) •• ToToapproximate
approximatethe theEPV EPVofofaacontinuous
continuous
µµ++δδ
(4)(4)
ä ä!:(| β(m)(1−−((EE! !)) life
lifeannuity
annuityusing usingWoolhouse’s
Woolhouse’sformula,
formula,
F F==α(m)
!:(|
α(m)⋅ ⋅ä ä!:(|
F F−−β(m)(1
!:(|
Variances
Variances (4)(4)
let
letmm→→∞: ∞:
ä ä! ! ==α(m)
(|(| α(m)⋅ ⋅(|(|ä ä! !−−β(m)
β(m)⋅ ⋅((EE! ! 11 11
(4) (4)
Discrete
Discrete Var[Y]
Var[Y] limä ä! ! ==aÉaÉ! !≈≈ä ä! !−− −− (µ
lim (µ ++δ)δ)
where:
where: 4→.
4→. 22 12 12 ! !
,, (A! )!,), •• IfIfthe
AA! !−−(A idid i i−−i(4)
i(4) theinterest
interestrate rateisis0,0,wewehave:
have:
Whole
WholeLife
Life α(m)
α(m)== (4) β(m)
β(m)== (4)
,
dd , (4)
i i dd (4)
(4) i i dd(4)
(4) (4) ∘∘ 11 11
ee! !≈≈ee! !++ −− µµ! !
,A
,A ,, 22 1212
F F−−hAhA!:(|
F Fii Note:
Note:
Temporary
TemporaryLife
Life !:(|
!:(| !:(|
dd,, •• The
Theformulas
formulasfor α(m)and
forα(m) andβ(m) only
β(m)only Percentiles
Percentiles
Replace
ReplaceAAwith
withAvand
vA andddwith
withδδfor
for dependon
depend oninterest.
interest. The
The100pth
100pthpercentile
percentileofofYYisisthe
thevalue
valueyyLLsuch
such
continuous
continuouscases.
cases. •• The
Theformulas
formulasfor
forα(m)
α(m)andandβ(m)
β(m)are
are that:
that:
provided
providedononthe
theexam
examtable.
table. PrY≤≤yyLLÄ Ä==pp
PrY
Recursive
RecursiveFormulas
Formulas •• The
Thevalues
valuesfor
forα(m)
α(m)and
andβ(m)β(m)when
when
To calculatezzLL: :
Tocalculate
ä ä! !==11++vpvp! ä! ä!')
!') i i==0.05
0.05are
arealso
alsogiven
givenininthe
theexam
examtable.
table.
ä ä!:(| 1.1.Draw
Drawaagraphgraphwith
withYYon ony-axis andTT
y-axisand !!
F F==11++vp
!:(| vp! ä! ä!'):(*)|
JJJJJJJ
JJJJJJJ
!'):(*)|
Interest
InterestConversion
Conversion on
onx-axis.
x-axis.
(Iä)!)!==11++vp
(Iä ! [(Iä)!')
vp! [(Iä )!')++ä ä!')
!')]]
44 *4
*4 2.2.Identify
Identifythe theparts
partsofofthe
thecurve
curvewhere
where
(Iä)!)!==ä ä! !++vp
(Iä vp! (Iä )
(Iä ) i(4)
i(4) dd(4)
(4)
! !')
!') S1++ UU ==S1
S1 S1−− UU YY≤≤yyLL. Determine
. Determinethe thevalue
valueofofTT
mm mm ! !that
that
(Iä)!:(|
(Iä )!:(|
F F==11++vp z(Iä)!'):(*)|
vp! !z(Iä )!'):(*)|
JJJJJJJ++ä ä!'):(*)|
JJJJJJJ {{
JJJJJJJ
JJJJJJJ
!'):(*)|
(1++i)i)
==(1 corresponds
correspondstotothose
thoseparts.
parts.
(Iä)!:(|
(Iä )!:(|
F F==ä ä!:(|
F F++vp (Iä)!'):(*)|
vp! !(Iä )!'):(*)| 3.3.Use
Usethe
thevalue
valueofofTT
! !from
fromStep
Step22toto
!:(| JJJJJJJ
JJJJJJJ
(1−−d)
==(1 d)*)*)
calculate
calculateyyLL. .

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 Premium
PREMIUM Calculation
CALCULATION FOR for Under the equivalence principle, we have: 3. Termination Expenses (Claim/Settlement
Long-Term
LONG-TERM INSURANCE Fully Discrete Expenses):
Insurance Coverages
COVERAGES
A! 1 dA!
- Arise at policy expiration, typically due
P=b⋅ = b n − do = b n o to the policyholder's death or at the end
ä ! ä ! 1 − A!
Fully continuous: Both benefits and , of a policy term.
A! − (A! ),
premiums are payable continuously. Var[ "L] = b, ⋅ - These include costs for processing and
(1 − A! ),
Fully discrete: Both benefits and premiums settling claims.
Fully Continuous
are payable at discrete time points. Unless - When considered, they are added as a
v!
A 1 v!
δA
stated otherwise, discrete time points are the P=b⋅ = b n − δo = b j minor extra cost on top of benefits paid.
aÉ! aÉ! 1−A v!k
beginning of each year for premiums and the Gross Future Loss
,v v ! ),
A! − (A
end of each year for death benefits. Var[ "L] = b, ⋅ P
v! ),
(1 − A "L = PV" (f. benefits) + PV" (f. expenses)
Semi-continuous: Premiums are paid at − PV" (f. gross premiums)
discrete time points and the death benefits
For an endowment insurance policy of Equivalence Principle
are paid at the moment of death. v
$b on (x) with level premiums P, add n| E["LP ] = 0
Special policy: Either non-level benefits or O O
to A s and a s. ⇒ EPV" (f. gross premiums)
non-level premiums, or both. = EPV" (f. benefits) + EPV" (f. expenses)
The net premium for fully discrete insurance
PV of the Net Future Loss at Issue
will be represented by P with the appropriate Variance
"L = PV" (f. benefits) − PV" (f. premiums)
symbols attached. For a fully discrete whole life policy:
Equivalence Principle G − e: ? ')
P
• E[ "L] = 0 "L = db + E + ev !
The following symbols may be used d
⇒ EPV" (f. premiums) = EPV" (f. benefits) on the exam: G − e:
− + (e7 − e: )
• The premium determined under the A! d
P! = G − e: , ,
equivalence principle and excluding ä ! Var[ "LP ] = db + E + e [ A! − (A! ), ]
expenses is called the net premium. A)!:(| d
) where
P!:(| =
ä !:(|
For a whole life insurance policy of $b on (x) e7 = initial expense in year 1
)
with level premiums P: A!:(| e: =renewal expense in year 2+
P!:(|) =
Fully Discrete ä !:(| b = benefit amount
A!:(| E = settlement expense
"L = bv ?!') − Pä ?JJJJJJJJJ
! ')| P!:(| = G = gross premium
P P ä !:(|
= db + e v ?!') −
d d If P is not expressed as one of the symbols Note:
E["L] = bA! − Pä ! shown above, then P will be defined in the 1. Replace A and d with their continuous
P , text of the question. counterparts for fully continuous policies.
Var[ "L] = db + e [ ,A! − (A! ), ]
d 2. Add n|v to AO s for endowment insurance.
Fully Continuous Gross Premium 3. This shortcut formula can only be used for
@! Gross premiums account for both benefits fully discrete/continuous whole life and
"L = bv − PaÉ@JJJJJ
!|

P @ P and expenses. endowment insurance. For other products,

= db + e v ! − use basic principles.
δ δ
v! − PaÉ!
E["L] = bA Types of Expenses
P , 1. Initial Expenses (Acquisition Expenses): Portfolio Percentile Premium
v ! − (A
Var[ "L] = db + e [ ,A v ! ), ]
δ - Associated with issuing a policy. S = L) + L, + ⋯ + LQ
- Typically incurred at the same time as E[S] = N ⋅ E[L]
the first premium payment. Var[S] = N ⋅ Var[L]
2. Renewal Expenses (Maintenance
Using the portfolio percentile premium
Expenses):
principle, the premium is set such that there
- Incurred with each premium or annuity
is a specified probability (x%) that the total
payment in subsequent years, covering
loss is negative:
agent commissions, premium or
Pr[S < 0] = x%
payment processing, etc.

© 2024 Coaching Actuaries. All Rights Reserved www.coachingactuaries.com FAM Formula Sheet 14
 Percentile of 𝟎𝟎𝐋𝐋 Special Formulas Expense Policy Value
The 100pth percentile of "L is the value πL For a fully discrete whole life insurance If the gross premium is determined using the
such that Pr"L ≤ πL Ä = p. To determine πL : policy of $b, the net premium policy value equivalence principle, then:
1. Graph "L on y-axis and T! on x-axis. can also be calculated as: Expense Premium (a.k.a. Expense Loading)
ä !'# = Gross Premium − Net Premium
2. Identify the parts of the curve where "L ≤
#V = d1 − e⋅b
ä ! S P
#V = #V − #V
(
πL . Determine the value of T! that
A!'# − A! S
#V = EPV# (f. exp.)
corresponds to those parts. #V = d e⋅b
1 − A! − EPV# (f. exp. premium)
3. Use the value of T! from Step 2 to
Note: Expense policy value is usually negative.
calculate πL .
1. Replace A and a with their continuous Renewal Expense < Expense Loading < Initial
counterparts for fully continuous policies. Expense
2. Add n|v to AO s and aO s for If expenses are level, #V S = 0, and #V P = #V( .
RESERVES CALCULATION FOR
Reserves Calculation
LONG-TERM INSURANCE endowment insurance. Recursive Formula
COVERAGES
for Long-Term 3. These special formulas can only be used
• Net premium policy value only considers
Insurance Coverages for fully discrete/continuous whole life
benefits, not expenses:
Net Premium Policy Value and endowment insurance with ordinary
( #V + P)(1 + i) = q!'# ⋅ b + p!'# ⋅ #')V
PV of the Net future Loss at time t level premium and benefits. For all others,
or
use basic principles.
#L = PV# (f. benefits) − PV# (f. premiums) ( #V + P)(1 + i) = q!'# ⋅ (b − #')V) + #')V
Variance of Loss b − #')V is also known as the ‘net amount
Prospective Method For a fully continuous whole life or at risk’.
#V = E[ #L] endowment insurance with premiums P, the • Expense policy value only considers
= EPV# (f. benefits) − EPV# (f. premiums) variance of the net future loss at time t is: expenses, not benefits:
P , ( #V S + PS − e)(1 + i) = q!'# ⋅ E
If #V occurs at the same time as a premium or Var[ #L] = db + e Var[Z]
δ + p!'# ⋅ #')V S
benefit, then be careful about which cash
where • Gross premium policy value considers
flows to include in calculating the future loss.
Var[Z] = ,A v !'# ),
v !'# − (A both benefits and expenses:
Unless stated otherwise, assume:
,
- all death benefits at time t occurred v
Var[Z] = ,A v
− ZA [ ( #V P + G − e)(1 + i) = q!'# ⋅ (b + E)
!'#:(*#| !'#:(*#|
in the past + p!'# ⋅ #')V P
For fully discrete insurance, remove the bars
- all premium payments occur in the future or
and replace δ with d.
- endowment payments occur in the future ( #VP + G − e)(1 + i)
- annuity payments may be treated either as = q!'# ⋅ (b + E − #')V)
Gross Premium Policy Value
future payments or as past payments + #')V P
Prospective Method
P
b + E − #')V is also known as the ‘net
Note: #V = EPV# (f. ben.) + EPV# (f. exp.)
amount at risk’.
− EPV# (f. pre.)
- The time-0 net premium policy value is
0 because the equivalence principle "V
P
= 0 if the following 2 requirements For annuities:
is assumed: are satisfied: • Let B# represent the annuity payment at
#V = E[ "L] = 0 1. The gross premium is determined using time t.
- The time-n net premium policy value for an the equivalence principle. • If there is an annuity benefit at time t, it is
n -year term insurance is 0 because there 2. The assumptions used for calculating the treated as a 'negative premium'.
are no future benefits or premiums due policy value are the same as those used in • The net premium policy value is:
at time n: calculating the premium. ( #V + P# − B# )(1 + i)
(V = 0 = q!'# ⋅ b + p!'# ⋅ #')V
- 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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 Interim Policy Values (𝟎𝟎 ≤ 𝐬𝐬 ≤ 𝟏𝟏)

Exact Method
( #V + P)(1 + i)0 = 0q!'# ⋅ bv)*0
+ 0p!'# ⋅ #'0V
)*0
#'0V(1 + i) = )*0q!'#'0 ⋅ b
+ )*0p!'#'0 ⋅ #')V
Linear Approximation
#'0V ≈ ( #V + P)(1 − s) + s ⋅ #')V

Modified Reserve
A modified reserve is a reserve computed
without expenses but adjusting the
valuation premiums to allow implicitly for
initial expenses.

For any modified reserve method:

EPV" (modified prems)
= EPV" (net level prems)
= EPV" (benefits)

Full Preliminary Term (FPT)

The FPT reserve is a special case of modified
reserves. The policy is treated as if it were
issued one year later, with the first year of
the policy being treated as if it were a one-
year term insurance.

For example, using this method, a fully

discrete whole life insurance of $b issued to
(x) would be treated as if it were a one-year
term insurance on (x), followed by a whole
life insurance on (x + 1):

• 1st year modified net premium, α:

α = bA)!:)|
F = bvq !

• Renewal modified net premium, β:

EPV) (modified prems) = EPV) (benefits)
βä !') = bA!')
bA!')
β=
ä !')
• FPT reserves
TU@
"V =0
TU@
)V =0
TU@ (
# V = #*)V!') for t > 1

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