Math 423-1 Final Exam Keys (Spring 2024)

(There are six problems for 10 points each, the total is 60 points)

Instructor: Dongming Wei Last Name: First Name:

1. Using the Standard Ultimate Life Table (D4), with interest at 5% per year effective, calculate the standard
deviation of the present value of the following benefits:
(a) $100 000 payable at the end of the year of death of (60), and
(b) $100 000 payable at the end of the year of death of (60), provided death occurs before age 70.

(a) (b)

2. For a benefit of $10000 and 3-year term life insurance on life (x), assuming that no other expenses,
𝑞𝑥 = 0.1, 𝑞𝑥+1 = 0.2, 𝑞𝑥+2 = 0.3, 𝑎𝑛𝑑 𝑖 = 0.05, calculate the following
(a) The level annual premium-due P determined by the equivalence principle: E[ Ln0 ]  0 .
(b) The expected present value of the net loss random variable 𝐿𝑛2 by using the premium P from part (a).
(c) The variance 𝑉𝑎𝑟(𝐿𝑛2 ) and then the standard deviation 𝜎(𝐿𝑛2 ).

1
𝑎)𝐿𝑛0 = 𝑆𝑣 𝐾𝑥 +1 − 𝑃𝑎̈ ̅̅̅̅̅̅̅̅̅
𝐾𝑥 +1| , 𝑆 = 10000, 𝑣 = = 0.9524
1.05
0 = 𝐸[𝐿𝑛0 ] = 𝑆 ⋅ 𝐴1𝑥:3|
̅ − 𝑃𝑎̈ 𝑥:3|
̅ = 1000𝐴1𝑥:3|
̅ − 𝑃𝑎̈ 𝑥:3|
̅

10000𝐴1𝑥:3|
̅
→𝑃=
𝑎̈ 𝑥:3|
̅

𝐴1𝑥:2|
̅ =𝑣⋅ 𝑞𝑥 + 𝑣 2 ⋅ 𝑝𝑥 ⋅ 𝑞𝑥+1 + 𝑣 3 ⋅ 𝑝𝑥+1 ⋅ 𝑞𝑥+2
= 0.9524 ⋅ 0.1 + 0.9524 ⋅ − 0.1) ⋅ 0.2 + 0.95243 (1 − 0.1) ⋅ (1 − 0.2) ⋅ 0.3 = 0.4451
2 (1
2 2
̅ = 1 + 𝑣 ⋅ 𝑝𝑥 + 𝑣 ⋅ 𝑝𝑥+1 = 1 + 0.9524 ⋅ (1 − 0.1) + 0.9524 ⋅ (1 − 0.2) = 2.5828
𝑎̈ 𝑥:2|
10000𝐴1𝑥:2|
̅ 10000 ⋅ 0.4451
→𝑃= = = 1723.3
𝑎̈ 𝑥:2|
̅ 2.5828
1
𝑏)𝑎̈ 𝑥+2:1|
̅ = 1, 𝐴𝑥+1:1|̅ = 𝑣𝑞𝑥+2 = 𝑣𝑞𝑥+2 = 0.9524 ⋅ 0.3 = 0.2857
2 1 2 2
𝐴 𝑥+2:1|
̅ = 𝑣 𝑞𝑥+2 = 0.9524 ⋅ 0.3 = 0.0857

𝐸[𝐿𝑛2 ] = 𝑆𝐴1𝑥+1:1|
̅ − 𝑃 ⋅ 𝑎̈ 𝑥+2:1|
̅ = 10000 ⋅ 0.2857 − 1723.3 ⋅ 1 = 1133.70
P 2 1723.3
𝑐)𝑉𝑎𝑟[𝐿𝑛2 ] = (S + ) [ 2𝐴 1𝑥+2:1| 1
̅ − (𝐴𝑥+1:1| ̅ ) ] = (10000 + ) [0.0857 − (0.2857)2 ] = 110.9884
d 0.1
3. For a special fully discrete 20 years term life insurance on life (50). The benefit for the first 10 years is set to
be equal to $10000, and the benefit for the second 10 years is $40000, paid at the end of the year of death. Solve
for the level annual premium-due P by using the equivalence principle and the Standard Select Survival Model
with 5 % per year interest (Table D 4).
0 = 𝐸[𝐿𝑛0 ] = 10000𝐴150:20| 1
̅̅̅̅̅ + 30000 ⋅10 𝐸50 ⋅ 𝐴60:10|
̅̅̅̅̅ − 𝑃 ⋅ 𝑎̈ 50:20|
̅̅̅̅̅

1000𝐴150:20| 1
̅̅̅̅̅ + 3000 ⋅10 𝐸50 ⋅ 𝐴60:10|
̅̅̅̅̅
→𝑃=
𝑎̈ 50:20|
̅̅̅̅̅

20 𝐸50 = 0.34824, ⋅ 10 𝐸60 = 0.57864,⋅ 10 𝐸50 = 0.60182

𝑎̈ 50:20|
̅̅̅̅̅ = 𝑎̈ 50 − 20 𝐸50 ⋅ 𝑎̈ 70 = 17.0245 − 0.34824 ⋅ 12.0083 = 12.8427

𝐴150:20|
̅̅̅̅̅ = 𝐴50 − 20 𝐸50 𝐴60 = 0.18931 − 0.34824 ⋅ 0.29028 = 0.014614

𝐴160:10|
̅̅̅̅̅ = 𝐴60 −⋅ 10 𝐸60 ⋅ 𝐴70 = 0.29028 − 0.57864 ⋅ 0.42818 = 0.042518

10000 ⋅ 0.014614 + 30000 ⋅ 0.60182 ⋅ 0.042518

→𝑃= = 17.36
12.8427
4. An insurer issues a 15-year annual premium-due endowment insurance of $100,000 benefit to life (50). The
insurer charges an initial expenses of $ 1000 plus renewal expenses of 5% of each subsequent premium after the
first premium payment. The premiums are made at the beginning of each year when (50) remains alive before
reaching 65 and the benefit is paid at the end of 𝐾50 + 1 years or when the person reaches the age 65 whichever
occurs earlier.
(a) Write down the gross future loss random variable Lg in terms of actuarial notations.
(b) Calculate the gross premium-due G by using the Standard Select Survival Model with 5 % per year interest
(Table D4) and the equivalence premium principle.
(c) Calculate the gross premium policy value 10V g by using the equivalence premium G found in (b).

𝑔
𝑎)𝐿0 = 100,000𝑣 min(𝐾50 +1,15) + 1000 + 0.05𝐺 ⋅ 𝑎̈ ̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
min(𝐾50 +1,15)| − 0.05𝐺 − 𝐺 ⋅ 𝑎̈ ̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
min(𝐾50 +1,15)|
= 100,000𝑣 min(𝐾50 +1,15) + 1000 − (0.05 + 0.95 ⋅ 𝑎̈ ̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
min(𝐾50 +1,15)| )𝐺

𝑔 100,000𝐸[𝑣 min(𝐾50 +1,15) ] + 1000 100,000𝐴5015| ̅̅̅̅̅ + 1000

𝑏) 𝐸[𝐿0 ] = 0 → 𝐺 = =
0.05 + 0.95 ⋅ 𝐸[𝑎̈ ̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
min(𝐾50 +1,15)| ] 0.05 + 0.95𝑎̈ 50:15|
̅̅̅̅̅
𝑎̈ 50:15|
̅̅̅̅̅ = 𝑎̈ 50 − 10 𝐸50 5 𝐸60 ⋅ 𝑎̈ 65 = 17.0245 − 0.60182 ⋅ 0.76687 ⋅ 13.5498 = 10.77112
1
𝐴50:15|
̅̅̅̅̅ = 𝐴50:15| = 𝐴50 − 15 𝐸50 𝐴65 + 15 𝐸50 = 𝐴50 + 15 𝐸50 (1 − 𝐴65 )
̅̅̅̅̅ + 15 𝐸50
𝐴50 − 10 𝐸50 ∙5 𝐸60 (1 − 𝐴65 ) = 0.18931 + 0.60182 ⋅ 0.76687 ⋅ (1 − 0.35477)
= 0.4871
100,000 ⋅ 0.4871 + 1000
→𝐺= = 4834.40
0.05 + 0.95 ⋅ 10.77112
𝑔
𝑐) 10𝑉 = 10,000𝐴60:5| ̅ = 10,000(𝐴60 + 5 𝐸60 (1 − 𝐴65 )) − 0.95𝐺 ⋅ 𝑎̈ 60:5|
̅ − 0.95𝐺 ⋅ 𝑎̈ 60:5| ̅
= 10,000(𝐴60 + 5 𝐸60 (1 − 𝐴65 )) − 0.95𝐺 ⋅ (𝑎̈ 60 − 5 𝐸60 ⋅ 𝑎̈ 65 )
= 10000(0.29028 + 0.76687(1 − 0.35477)) − 0.95 ⋅ 4834.40 ⋅ (14.9041 − 0.76687 ⋅ 13.5498)
= −12877 .00
→ 10𝑉 𝑔 = −12877 .00
5. Consider the permanent disability model illustrated in the figure below. An insurer uses this model to price an
insurance policy with term two years issued to a life aged 58. The policy provides a benefit of $100 000 if death
occurs from the healthy state, $75 000 if the policyholder becomes permanently disabled, and $25 000 if death
occurs after permanent disability. Benefits are payable at the end of the year in which a transition takes place,
and premiums are payable at the start of each policy year. Annual transition probabilities are as follows:

Calculate the annual premium-due, P, assuming an effective rate of interest of 5% per year.

6. An insurer issues a 10-year disability income insurance policy to a healthy life aged (50). Premiums of $2 000
per year are payable monthly in advance if the life is healthy. Benefits of $30 000 per year are payable at the end
of each month if the life is sick at that time. A death benefit of $100 000 is payable at the end of the month of
death. The policy value basis is the Standard Sickness–Death Model at 5% per year interest. You are given: