Lecture 11 - Revision

Lecturer: Trần Minh Hoàng

Actuarial Mathematics 1

Lecturer: Trần Minh Hoàng Lecture 11 - Revision Actuarial Mathematics 1 1 / 39

Table of Contents

1 Topic 1: Survival Models

2 Topic 2: Life Tables

3 Topic 3: Insurance Benefits

4 Topic 4: Annuities

5 Topic 5: Premium Calculations

6 Topic 6: Policy Values

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 Topic 1: Survival Models

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Questions

What are the three necessary conditions must be satisfied for Sx (t) to be the
survival function of a life aged x ?
What is the assumption that link the different random variables Tx , Tx+t ?
How can we write the survival function Sx (t) in terms of S0 (t) ?
How is the force of mortality µx defined ?
How can we calculate µx from S0 (x) and vice versa ?
Given any one of the following: pdf, cdf, survival function, force of mortality,
how to find the formulae for the others ?
What do the actuarial notations t px , t qx and u|t qx mean ?

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Questions

What are the sufficient conditions that Tx has finite mean and variance ?
How is the curtate lifetime random variable Kx defined ? Write down its
distribution.
What are the temporary complete and curtate lifetime random variables Tx,n
and Kx,n ? Write down their distribution.
What are the formulae for e̊x and ex ? Prove them.
What are the formulae for the second moments of Tx and Kx ? Prove them.
Given an example where Kx,n is used to price an insurance product.

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Problem

A life, age 30, subject to a force of mortality of

µx = 0.02x 0.5 for 20 ≤ x ≤ 50.

Determine the probability that this life will survive 5 years and die during the
following year.

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Problem

Mortality follows Makeham’s law

µx = A + Bc x .

You are given

µ10 = 0.0014, µ20 = 0.0024, µ30 = 0.0042.

a) Find A, B and c.
b) Determine 50 p20 .

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Problem

A life is subject to force of mortality

1 1
µx = + for x < 100.
200 − x 100 − x

a) Find the formula for x p0 .

b) Calculate the complete life expectancy at age 0 for this life.

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Problem

1 Prove that
e̊x:m+n = e̊x:m + m px e̊x+m:n .
2 You are given
I e̊40 = 35,
I e̊40:10 = 9,
I
10 p40 = 0.85,
I
t p50 = 1 − 0.010t for 0 ≤ t ≤ 1.
Questions:
a) Calculate e̊50:1 .
b) Calculate e̊51 .
c) Improvements in mortality at age 50 cause t p50 to change to 1 − 0.009t for
0 ≤ t ≤ 1. Calculate the revised value of e̊40 .

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 Topic 2: Life Tables

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Questions

1 Give an interpretation for the equation

`x+t
t px = ?
`x
2 Give definitions for the following life table functions dx , mx , Lx , and Tx .
3 Why do we need fractional age assumptions ?
4 Describe the UDD and CFM fractional age assumptions ?
5 Give two formulations of the UDD assumption. Why are they equivalent ?
6 Why do we need select life tables ? Give an example where select mortality
rates are higher than ultimate (standard) mortality rates ?
7 What does the select period of a select life table represent ?

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Problem

1 Under the UDD assumption, prove that for integral x and 0 ≤ t ≤ 1

qx
µx+t = .
1 − t qx
2 For a certain mortality table, you are given:
I µ80.5 = 0.0202
I µ81.5 = 0.0408
I µ82.5 = 0.0619
I Deaths are uniformly distributed between integral ages.
Questions
a) Find q80 , q81 and q82 .
b) Calculate the probability that a person age 80.5 will die within two years.

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Problem

1 Suppose Tx is uniformly distributed on (0, ω − x) for all x. Show that

1 ω−x −1
µx+t = , ex = .
ω−x −t 2
2 For a select-and-ultimate mortality table you are given:
I Ultimate mortality is uniformly distributed with limiting age ω = 120.
I During the 2-year select period, µ[x]+t = µx+t (t/2).
Questions:
a) Show that for 0 ≤ t ≤ 2
  ω−x
t 2
t p[x] = 1−
ω−x

b) Use the recursive formula for ex or otherwise, calculate e[80] .

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 Topic 3: Insurance Benefits

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Questions

1 Describe the following insurance contracts whole-life, term, deferred,

insurance (including amount benefits, conditions and timings of payments).
2 What is an endowment insurance/pure endowment contract ?
3 Write down the present values of the benefits of the insurance contracts
listed in 1) and 2).
4 Write down the formulae for the first and second moments of the present
values listed in 3).
1 ,A 11
5 What are the formulae for Ax , Ax:n x: n , u| Ax:n ?
1 , Ā1
What are the formulae for Āx , Āx:n u| x:n ?
6

(m) (m) (m)

7 What are the formulae for Ax , Ax:n u| x:n ?
1 , A1

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Questions

1 What is the relationship between whole-life, term and deferred insurance ?

2 What is the relationship between endowment insurance, term and pure
endowment ?
3 What is the relationship between deferred insurance, pure endowment and
whole-life insurance ?
4 1
What are the formulae for (IA)x , (IA)x:n ?
5 How to find the expected present value of a general insurance contract ?
6 1
State and prove the recursive formulae for Ax , Ax:n ?
(m) (m)
7 What are the similar formulae for Ax , Ax:n
1 ?
8 How can we approximate Āx from Ax using claims acceleration or UDD ?

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Problem

1 Suppose lifetime Tx is uniformly distributed on (0, ω − x). Show that

1
an
Ax:n = .
ω−x
2 For a single premium discrete 15-year term insurance of $100,000 on a person
aged 45, you are given:
I i = 0.05
I Mortality is uniformly distributed with ω = 100.
After 5 years, it is discovered that the insurance should have been calculated
using ω = 120. At this time, a one-time premium adjustment is made only
for the remaining 10 years of this insurance. Calculate the one-time
adjustment.

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Problem

1 For integer x and 0 < s, t < 1, show that under UDD

( 1−(s+t)qx
1−s qx if s + t < 1
t px+s = (1−qx+1 )(1−(s+t−1)qx )
1−s qx if s + t ≥ 1

2 For a 1-year term insurance on (66.2), you are given:

I The insurance pays $10,000 at the end of the half-year of death.
I q66 = 0.06 and q67 = 0.08.
I Mortality is uniformly distributed between integral ages.
I i = 0.07
Calculate the expected present value of the insurance.

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Problem

1 Show that
1 1
Ax:n = v qx + v px Ax+1:n−1 .
2 For a 20-year term insurance of $1000 on a life currently age 40 with benefit
payable at the end of the year of death, you are given:
I µx = 0.001(1.05x )
I i = 0.05
I The expected present value of the insurance is 124.60.
Question
a) Find a formula for t px .
b) Calculate the expected present value of a 21-year term insurance on the same
life with benefit payable at the end of the year of death.

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 Topic 4: Annuities

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Questions

1 Explain what a whole-life/term/deferred/guaranteed annuity is.

2 Write down the present value random variable of the annuity in 1).
3 Give formulae for the first and second moments of the present value random
variable in 1).
4 What is the relationship between whole-life insurance and life annuity ?
5 What is the similar relationship between endowment insurance and term
annuity ?
6 Give formulae for the following äx , äx:n , u| äx:n , äx:n .
7 Give formulae for the following āx , āx:n , u| āx:n , āx:n .
8 What is the relationship between annuity-due and annuity-immediate ?

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Questions

1 Give formulae for arithmetically/geometrically increasing annuity.

2 State and prove the formulae for (Ia)x , (I ä)x .
3 How to find the expected present value of a general annuity ?
4 State and prove the recursive formulae for äx , äx:n .
(m) (m)
5 State and prove the recursive formulae for äx , äx:n .
6 Why are ex and e̊x special cases of ax and āx respectively ?
(m)
7 How to approximate äx and āx from äx using UDD and Woolhouse’s
formula ?
8 How can we approximate µx using the Standard Ultimate Life Table ?

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Problem

1 Show that
äx:n + äx:n = äx + ä n .
2 An annuity of $1, issued at age 35, is payable at the beginning of each year
until age 65. The annuity payments are certain for the first 15 years.
Calculate the present value of this annuity at i = 0.05 based on the Standard
Ultimate Life Table.

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Problem

1 Suppose µx = µ for all x. Show that

1  
āx:n = 1 − e −n(µ+δ) .
µ+δ
2 A retiree is offered the choice of two continuous annuities:
I 1. a life annuity, paying $30,000 per year
I 2. a life annuity with a 5-year certain period, i.e., an annuity paying benefits
for life, but with a minimum payout period of 5 years.
The benefit amount for the second annuity is chosen so that the expected
present value of the two annuities is the same. Let δ = 0.02 and µ = 0.07.
Determine the annual benefit amount on the second annuity.

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Problem

You are given:

Y is the present value random variable for a whole life continuous annuity.
qx = 0.1 for all x.
The force of mortality, µ, is constant.
i = 0.05
a) Find µ.
b) Find the median of Y .

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 Topic 5: Premium Calculations

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Questions

1 How does the gross/net future loss random variable is defined ?

2 What is the difference between gross and net future loss random variable ?
3 State the Equivalence Principle for premium calculation.
4 Explain how the Portfolio Percentile Premium Principle work ?
5 Why do we need to assume the policies are identical and independent in the
Portfolio Percentile Premium Principle ?
6 What does a fully discrete insurance/annuity mean ?
7 Explain how age rating, constant addition to force of mortality and constant
multiple of mortality rate work to indicate extra risk in underwriting ?

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Problem

Jim buys a new car for $20,000. He intends to keep the car for 3 years.
A device called Car-Tracker can be attached to Jim’s car. Car-Tracker will
help police locate the car if stolen.
The probability that the car will be stolen without Car-Tracker is 0.2 in each
year. (qk = 0.2, for k = 0, 1, 2)
The probability that the car will be stolen with Car-Tracker is 0.1 in each
year. (qkCT = 0.1, for k = 0, 1, 2)
Theft is the only decrement.
Insurance against theft is purchased with a single premium.
If the car is stolen in year j, the insurance company will pay 25, 000 − 5000j
at the end of the year, for j = 1, 2, 3. After the third year, no benefit is paid.
i = 0.06.
Using the equivalence principle, calculate the greatest premium reduction that the
insurance company can give if Jim buys Car-Tracker.

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Problem

1 Consider a fully discrete whole life insurance policy with benefit S on (x) and
annual premium P. Show that the expected future loss is

0V = S − (Sd + P) äx .

2 For a fully discrete whole life insurance policy of $1000 on (45) with annual
premium $24, the expected future loss is -$20.
You are given:
I q45 = 0.01
I d = 0.04
Question
a) Find ä45 .
b) Calculate the annual premium for a similar policy on (46) that would result in
an expected future loss of -$20.

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Problem

For a fully discrete whole life insurance of $1000 on (50), you are given:
A50 = 0.35
ä50 = 13
The annual premium is 40.
Expenses are payable at the beginning of the year.
The expenses are:
Percent of Premium Per Policy
First Year 45% 55.00
Renewal 5% 5.75
a) Find the expected future loss of this policy.
b) Determine the gross annual premium according to the equivalence principle.

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Problem

A 1-year term life insurance on (65) pays $1000 at the end of the year of death.
You are given that q65 = 0.01 and v = 0.95. The single premium P is set so that
the probability of a net future loss on a portfolio of 500 policies is 5%.
a) Let L0,1 be the future loss random variable for one such policy. Find the
distribution of L0,1 .
b) Let µ and σ be the mean and standard deviation of L0,1 . Express µ and σ in
terms of P.
c) Use the normal distribution approximation, show that
√
µ 500
≈ 1.645.
σ
d) Hence or otherwise, determine P.

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 Topic 6: Policy Values

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Questions

1 What are the net/gross future loss random variable at time t ?

2 Why is the Equivalence Principle for Premium Calculation the same as
setting 0 V = 0 ?
3 What are the boundary conditions for t V of a term/whole-life/endowment
insurance ?
4 State and prove the recursive formula for policy values of discrete policies.
5 State Thiele’s differential equation for policy values of continuous policies .
Explain each term carefully.

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Problem

For a fully discrete 10-pay whole life insurance of $10,000 on (45), you are given:
A45 = 0.25, A50 = 0.28
ä45:10 = 7, ä50:5 = 4
d = 0.05
Expenses on the policy are as follows:
Percent of Premium Per Policy
First Year 50% 200
Renewal 10% 20
Expenses are paid at the beginning of the year.
The gross premium is calculated using the equivalence principle.
a) Calculate the gross premium of the policy.
b) Calculate the gross premium reserve at the end of year 5.

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Problem

a) State Thiele’s differential equation.

b) Consider a whole life insurance for a new born life with sum insured 0 payable
at the moment of death and premium payable continuously at the rate of $1
per annum. What is the policy value t V for this policy ?
c) Deduce that
d āt
= (µt + δ) āt − 1.
dt

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