Exam M Notes F05

Chapter 3: Survival Distributions and Life Tables
Distribution function of X:
Force of mortality (x):

fX (x)
1 FX (x)
s0 (x)
=
s(x)
FX (x) = Pr(X x)
(x) =
Survival function s(x):

s(x) = 1 FX (x)
Relations between survival functions and

force of mortality:
x
Z
s(x) = exp (y)dy
Probability of death between age x and

age y:
Pr(x < X z) = FX (z) FX (x)
= s(x) s(z)
Probability of death between age x and
age y given survival to age x:
Pr(x < X z|X > x) =
=
d
t qx
dt
d
t px
dt
d
Tx
dt
d
Lx
dt
d
ex
dt
= Pr[T (x) t]
= Pr[T (x) > t]

= prob. (x) attains age x + t
t+u qx
t qx
t px
t+u px
t qx
(x + t) = fT (x) (t)
= t px (x + t)
= lx
= dx
= (x)
ex 1
E[K(x)] curtate expectation of life
X
ex =
k px
u qx+t
Relations with survival functions:

t px
t px
E[T (x)] complete expectation of life

Z

ex =
t px dt
= Pr[t < T (x) t + u]
t px
Mean and variance of T and K:
= 1 t qx
(y)dy
Derivatives:
= distribution function of T (x)
t|u qx
FX (z) FX (x)
1 FX (x)
s(x) s(z)
s(x)
= prob. (x) dies within t years

t px
= exp
n px
Notations:
t qx
0
x+n
Z
k=1
s(x + t)
s(x)
s(x + t)
= 1
s(x)
V ar[T (x)] = 2
V ar[K(x)] =
Curtate future lifetime (K(x) greatest

integer in T (x)):
k px
k px qx+k
k| qx
c
Exam M - Life Contingencies - LGD
(2k 1) k px e2x
k=1
Pr[K(x) = k] = Pr[k T (x) < k + 1]

=
t t px dt
e2x
Total lifetime after age x: Tx
k+1 px
Z
Tx =
lx+t dt
0
Total lifetime between age x and x + 1: Lx
Central death rate: mx
Lx = Tx Tx+1
Z1
Z1
=
lx+t dt = lx t px dt
0
n mx
n Lx = Tx Tx+n =
n1
X
Fraction of year lived between age x and

age x + 1 by dx : a(x)
n Lx
Lx+k
R1
k=0
Zn
=
a(x) =
lx+t dt
=
t px
(x + t) dt
Lx lx+1
lx lx+1
E[K] = ex = px (1 + ex+1 )
Tx
lx
E[T ] =
ex = px (1 +
ex+1 ) + qx a(x)
ex = ex: n + n px ex+n
Average lifetime from x to x + 1:

ex: 1
ex =
ex: n + n px
ex+n
Lx
=
lx
E[K (m + n)] = ex: m+n
Median future lifetime of (x): m(x)
c
R1
Recursion formulas:
Average lifetime after x:

ex
P r[T (x) > m(x)] =
t t px (x + t) dt
ex: 1
Total lifetime from age x to x + n:
ex =
lx lx+1
Lx
lx lx+n
n Lx
mx =
= ex: m +
m px ex+m: n
E[T (m + n)] =
ex: m+n
1
s(x + m(x))
=
s(x)
2
=
ex: m +
ex+m: n
m px
Chapter 4: Life Insurance

Whole life insurance: Ax
E[Z] = Ax =
Discrete whole life: Ax
v t t px x (t)dt
E[Z] = Ax =
V ar[Z] =
v k+1 k px qx+k
k=0
Ax (Ax )2
v k+1
k| qx
k=0
V ar[Z] =
n-year term insurance: Ax: n

1
E[Z] = Ax: n =
1
Zn
v t t px x (t)dt
Discrete n-year term: A1x: n
V ar[Z] =
Ax (Ax )2
A1x: n (A1x: n )2
E[Z] = A1x: n =
m-year deferred whole life:
E[Z] = m| Ax =
V ar[Z] =
Discrete n-year endowment: Ax: n
E[Z] = Ax: n =
n-year pure endowment: Ax: n

1
n1
X
v k+1 k px qx+k + v n n px
k=0
V ar[Z] = Ax: n (Ax: n )2

Ax: n = A1x: n + Ax:1n
2
E[Z] = Ax: n = v n px n Ex
V ar[Z] = 2Ax:1n (Ax:1n )2 = v 2n n px n qx
n
n-year endowment insurance: Ax: n

E[Z] = Ax: n =
Ax: n (A1x: n )2
v t t px x (t)dt
Zn
v k+1 k px qx+k
k=0
m| Ax
1
m| Ax = Ax Ax: m
n1
X
Recursion and other relations:
v t t px x (t)dt + v n n px
Ax = A1x: n + n| Ax
2
Ax = 2A1x: n + n|2Ax
n| Ax = n Ex Ax+n
1
Ax = A
+ n Ex Ax+n
V ar[Z] = 2Ax: n (Ax: n )2

Ax: n = A1x: n + Ax:1n
x: n
Ax = vqx + vpx Ax+1

m-yr deferred n-yr term:
m|n Ax
m Ex
Ax = v 2 qx + v 2 px 2Ax
m|n Ax
A1x: n
1
Ax+m:
n
1
= A1x: m+n
= m| Ax
c
m|n Ax
x: m
m+n| Ax
1
= vqx + vpx Ax+1:
n1
= vpx
(m1)|n Ax+1
Ax: 1
= v
Ax: 2
= vqx + v 2 px
Varying benefit insurances:

x
(I A)
Interest theory reminder
Z
=
bt + 1cv t t px x (t)dt
an
a
n
(Ia) n
(Da) n
(Ia)
(n + 1)a n
s 1
1
(I A)
x: n
Zn
=
bt + 1cv t t px x (t)dt
t v t px x (t)dt
(IA)x =
1 vn
i
1 vn
i
= an
1
1
1
, a = , a
=
i
d
a
n nv n
i
na
n
1
2
(Ia) n + (Da) n
i
iv
1
1+i
= 2
id
i
0
1
(IA)x: n
Zn
=
t v t t px x (t)dt
1
(DA)
x: n
Zn
=
(n btc)v t t px x (t)dt
d =
(DA)1x: n
Zn
=
(Ia)
(n t)v t t px x (t)dt
Doubling the constant force of interest
(IA)x = Ax + vpx (IA)x+1
1 + i (1 + i)2
= vqx + vpx [(IA)x+1 + Ax+1 ]

(DA)1x: n
1
= nvqx + vpx (DA)x+1:
n1
(IA)1x: n
1
(I A)
x: n
+ (DA)1x: n = nA1x: n
1 = (n + 1)A1
+ (DA)
x: n
x: n
(IA)1x: n
+ (DA)1x: n = (n + 1)A1x: n
v v2
i 2i + i2
d 2d d2
i
2i + i2
2
Limit of interest rate i = 0:
Accumulated cost of insurance:
i=0
Ax 1
A1x: n
n kx =
n Ex
Share of the survivor:
n| Ax
Ax: n
m|n Ax
1
(1 + i)n
accumulation factor =
=
n Ex
n px
i=0
A1x: n
i=0
n qx
n px
i=0
1
i=0
m|n qx
i=0
(IA)x 1 + ex
i=0
(IA)x
ex
c
Chapter 5: Life Annuities

Whole life annuity: a
x
Recursion relations
Z
x+1
a
x = a
x: 1 + vpx a
a
t t px (x + t)dt
a
x = E[
aT ] =
a
x = a
x: n +
v t px dt =
a
x = 1 + vpx a
x+1
a
x = 1 + v 2 px 2a
x+1
t Ex dt
a
x: n
Ax (Ax )2
2
V ar[
aT ] =
a
x: n
= 1 + vpx a
x+1: n1
(m)
(m)
= a
(m)
n Ex a
x+n
x
a
x: n
ax = vpx + vpx ax+1

ax: n
n-year temporary annuity: a

x: n
Zn
x
n| a
v t t px dt =
= vpx + vpx ax+1: n1
(I
a)x = 1 + vpx [(I
a)x+1 + a
x+1 ]
Zn
= a
x + vpx (I
a)x+1
t Ex dt
0
Whole life annuity due: a

x
Ax: n (Ax: n )2
2
V ar[Y ] =
n-year deferred annuity:

Z
x
n| a
v t t px dt =
a
x = E[
a K+1 ] =
x
n| a
V ar[
a K+1 ] =
k=0
2
)
t Ex dt
n
n-yr temporary annuity due: a

x: n
= v n px a
x+n = n Ex a
x+n
2 2n
V ar[Y ] =
v n px (
ax+n 2a
x+n ) (n| a
x )2
x
n| a
Ax (Ax
d2
a
x: n
= E[Y ] =
n1
X
v k k px
k=0
Ax: n (Ax: n )2
d2
V ar[Y ] =
n-yr certain and life annuity: a
x: n
a
x: n
= a
x + a
n a
x: n
= a
n +
x
n| a
n-yr deferred annuity due:

x
n| a
= E[Y ] =
v k k px
k=n
Most important identity
= a
x a
x: n
1 =
ax + Ax
1 Ax
a
x =
ax: n
Ax: n = 1
2
x: n
Ax: n = 1 (2) 2a
n Ex
a
x+n
n-yr certain and life due: a

x: n
1 Ax
d
1 Ax: n
a
x: n =
d
1 = d
ax: n + Ax: n
a
x: n
a
x =
c
x
n| a
=a
n + n Ex a
x+n
= a
x + a
n a
x: n
X
= a
n +
v k k px
k=n
= a
n +n| a
x
v k k px
Whole life immediate: ax
X
ax = E[
aK ] =
v k k px
Accumulation function:
k=1
ax =
sx: n
1 (1 + i)Ax
i
a(m)
x
(m)
ax: n
1
nt Ex+t
Limit of interest rate i = 0:

1
(m)
Ax
d(m)
(m)
i=0
ax ex
(m)
(Ax )2
(d(m) )2
1
= a
(m)
x
m
1
(m)
= a
x: n (1 n Ex )
m
2
V ar[Y ] =
Zn
0
m-thly annuities
a
(m)
=
x
a
x: n
=
=
n Ex
Ax
c
i=0
a
x 1 + ex
i=0
ex
a
x
i=0
ax: n
ex: n
a
x: n
1 + ex: n1
a
x: n

ex: n
i=0
i=0
Chapter 6: Benefit Premiums

Loss function:
Loss = PV of Benefits PV of Premiums
Fully continuous equivalence premiums
(whole life and endowment only):
P (Ax ) =
P (Ax ) =
P (Ax ) =
V ar[L] =
V ar[L] =
V ar[L] =
h-payment insurance premiums:
h P (Ax )
Ax
a
x
Ax
1 Ax
1
a
x
2

2
P
Ax (Ax )2
1+
2
Ax (Ax )2
(
ax )2
2
Ax (Ax )2
(1 Ax )2
P (Ax ) =
P (Ax ) =
V ar[L] =
V ar[L] =
V ar[L] =
Ax
= Px
a
x
dAx
1 Ax
1
d
a
x

P 22
1+
Ax (Ax )2
d
2
Ax (Ax )2
(d
ax )2
2
Ax (Ax )2
(1 Ax )2
h Px: n
1
( n Px Px:
sx: n
n )
(Px: n n Px )
sx: n
1
(Px: n Px:
sx: n
n )
Ax: n
a
x: n
a
x: n
A#
(m)
a
#
c
(1)
1
Px:
n
Px: n1
Px: n n Px
= 1 Ax+n =
Px: n1
1
Px: n Px:
n
= 1=
Px: n1
= Ax+n =
Miscellaneous identities:
P (Ax: n )
Ax: n =
P (Ax: n ) +
m-thly equivalence premiums:

=
h Px
a
x: h
Ax
a
x: h
Ax: n
a
x: h
P minus P over P problems:

The difference in magnitude of level benefit premiums is solely attributable to the investment
feature of the contract. Hence, comparisons of
the policy values of survivors at age x + n may
be done by analyzing future benefits:
Ax
P (Ax ) =
a
x
(m)
Px: n1 sx: n = 1
Semicontinuous equivalence premiums:
P#
h P (Ax: n )
Ax
a
x: h
Ax: n
Pure endowment annual premium Px: n1 :

it is the reciprocal of the actuarial accumulated
value sx: n because the share of the survivor who
has deposited Px: n1 at the beginning of each year
for n years is the contractual $1 pure endowment, i.e.
Fully discrete equivalence premiums

(whole life and endowment only):
P (Ax ) =
Px: n
Px: n + d
1
P (Ax: n ) +
1
Px: n + d
n Px
Chapter 7: Benefit Reserves
Variance of the loss function

2
2

P
V ar[ t L] =
1+
Ax+t (Ax+t )2
2
Ax+t (Ax+t )2
V ar[ t L] =
assuming EP
(1 Ax )2
2 h

i
P
2
V ar[ t L] =
1+
Ax+t: nt (Ax+t: nt )2
2
Ax+t: nt (Ax+t: nt )2
V ar[ t L] =
assuming EP
(1 Ax: n )2
Benefit reserve t V :
The expected value of the prospective loss at
time t.
Continuous reserve formulas:
Prospective:
Retrospective:
Premium diff.:
Paid-up Ins.:
Annuity res.:
Death ben.:
Premium res.:
(Ax ) = Ax+t P (Ax )

ax+t
A1x: n
V
(
A
)
=
P
(
A
)
s
t
x
x x: t
t Ex

x+t
t V (Ax ) = P (Ax+t ) P (Ax ) a

P (Ax )
Ax+t
t V (Ax ) = 1
P (Ax+t )
a
x+t

t V (Ax ) = 1
a
x
x+t Ax
A

t V (Ax ) =
1 Ax
P (Ax+t ) P (Ax )

t V (Ax ) =
P (Ax+t ) +
tV
Cost of insurance: funding of the accumulated costs of the death claims incurred between
age x and x + t by the living at t, e.g.
4 kx
=
=
Discrete reserve formulas:

k Vx
k Vx: n
k Vx: n
t Vx: n
k Vx
k Vx
k Vx
1 kx
= Ax+k Pk a
x+k
i
h
x+k: nk
= Px+k: nk Px: n a
#
"
Px: n
Ax+k: nk
= 1
Px+k: nk
dx (1 + i)3 + dx+1 (1 + i)2 + dx+2 (1 + i) + dx+

lx+4
A1x: 4
4 Ex
dx
qx
=
lx+1
px
Accumulated differences of premiums:

1
( n Px Px:
sx: n
n )
= Px: n sx: n t kx
a
x+k
= 1
a
x
Px+k Px
=
Px+k + d
Ax+k Ax
=
1 Ax
h
k Vx: n
h
kV
( n Px Px )
sx: n
(Px: n Px )
sx: n
( m Px: n
n
n Vx
n Vx
n Vx: n
n Vx
sx: m
m Px )
m
m Vx: n
m
m Vx
= Ax+m: nm Ax+m
Relation between various terminal reserves (whole life/endowment only):
= Ax+k: nk h Px: n a
x+k: hk
c
= 1 n Vx
= Ax+t: nt h P (Ax: n )
ax+t: ht
= Ax+k: nk
n Vx:1 n )
= Px a
x+n
(Ax: n ) = Ax+k: nk h P (Ax: n )

ax+k: hk
h 1(m)
k Vx: n
n
n Vx
= Ax+n 0 = Ax+n
h-payment reserves:
h
tV
m+n+p Vx
(m) (m)
h Px: n a
x+k: hk
= 1
(1
m Vx )(1
n Vx+m )(1 p Vx+m+n )
Chapter 8: Benefit Reserves

Notations:
bj : death benefit payable at the end of year of death for the j-th policy year
j1 : benefit premium paid at the beginning of the j-th policy year
bt : death benefit payable at the moment of death
t : annual rate of benefit premiums payable continuously at t
Benefit reserve:
hV
tV
bh+j+1 v
j+1
j px+h qx+h+j
j=0
j=0
bt+u v u u px+t x (t + u)du
h+j v j j px+h
t+u v u u px+t du
Recursion relations:
hV
+ h = v qx+h bh+1 + v px+h
(h V + h )(1 + i) = qx+h bh+1 + px+h

(h V + h )(1 + i) =
h+1 V
+ qx+h (bh+1
h+1 V
h+1 V
h+1 V
Terminology:
policy year h+1 the policy year from time t = h to time t = h + 1
h V + h initial benefit reserve for policy year h + 1
h V terminal benefit reserve for policy year h
h+1 V terminal benefit reserve for policy year h + 1
Net amount at Risk for policy year h + 1
Net Amount Risk bh+1
h+1 V
When the death benefit is defined as a function of the reserve:

For each premium P , the cost of providing the ensuing years death benefit , based on the net amount at
risk at age x + h, is : vqx+h (bh+1 h+1 V ). The leftover, P vqx+h (bh+1 h+1 V ) is the source of reserve
creation. Accumulated to age x + n, we have:
nV
n1
X
[P vqx+h (bh+1
h+1 V
)] (1 + i)nh
h=0
= P s n
n1
X
vqx+h (bh+1
h+1 V
)(1 + i)nh
h=0
If the death benefit is equal to the benefit reserve for the first n policy years
nV
= P s n
If the death benefit is equal to $1 plus the benefit reserve for the first n policy years
nV
= P s n
n1
X
vqx+h (1 + i)nh
h=0
c
If the death benefit is equal to $1 plus the benefit reserve for the first n policy years and qx+h q
constant
nV
= P s n vq
s n = (P vq)
sn
Reserves at fractional durations:

( h V + h )(1 + i)s
s px+h
h+s V
+ s qx+h v 1s
UDD ( h V + h )(1 + i)s = (1 s qx+h ) h+s V + s qx+h v 1s

=
h+s V
UDD
i.e.
1s
h+s V
+ s qx+h (v 1s
1s qx+h+s
bh+1 + v
1s
h+s V
1s px+h+s
h+s V
= (1 s)( h V + h ) + s(h+1 V )
h+s V
= (1 s)( h V ) + (s)(h+1 V ) +
h+1 V
(1 s)(h )
{z
}
|
unearned premium
Next year losses:

h
losses incurred from time h to h + 1
E[h ] = 0
V ar[h ] = v 2 (bh+1
h+1 V
)2 px+h qx+h
The Hattendorf theorem

V ar[ h L] = V ar[h ] + v 2 px+h V ar[ h+1 L]
= v 2 (bh+1
h+1 V
)2 px+h qx+h + v 2 px+h V ar[ h+1 L]
V ar[ h L] = v 2 (bh+1
h+1 V
)2 px+h qx+h
+v 4 (bh+2
h+2 V
)2 px+h px+h+1 qx+h+1
+v 6 (bh+3
h+3 V
)2 px+h px+h+1 px+h+2 qx+h+2 +
c
10
Chapter 9: Multiple Life Functions

Joint survival function:
Last survivor status T (xy):

T (xy) + T (xy) = T (x) + T (y)
sT (x)T (y) (s, t) = P r[T (x) > s&T (y) > t]

t pxy
T (xy) T (xy) = T (x) T (y)
= sT (x)T (y) (t, t)
fT (xy) + fT (xy) = fT (x) + fT (y)
= P r[T (x) > t and T (y) > t]
FT (xy) + FT (xy) = FT (x) + FT (y)

t pxy
+ t pxy = t px + t py
Axy + Axy = Ax + Ay
Joint life status:

FT (t) = P r[min(T (x), T (y)) t]
=
a
xy + a
xy = a
x + a
y
t qxy
ex +
ey
exy +
exy =
= 1 t pxy
exy + exy = ex + ey
n| qxy
n| qx
n| qy
n| qxy
Independant lives
t pxy
t px
t qxy
t qx
Complete expectation of the last-survivor

status:
Z
exy =
t pxy dt
t py
+ t qy t qx t qy
Complete expectation of the joint-life status:

exy =
exy =
k pxy
t pxy dt
Variances:
PDF joint-life status:

fT (xy) (t) =
xy (t) =
t pxy
V ar[T (u)] = 2
xy (t)
fT (xy) (t)
fT (xy) (t)
=
1 FT (xy) (t)
t pxy
V ar[T (xy)] = 2
V ar[T (xy)] = 2
xy (t) = (x + t) + (y + t)
Notes:
For joint-life status, work with ps:
Curtate joint-life functions:

k pxy
k qxy =
k px
n pxy
k py [IL]
= n px n py
For last-survivor status, work with qs:
k qx + k qy k qx k qy [IL]
P r[K = k] =
k pxy
k pxy
qx+k:y+k
k pxy
qx+k:y+k =
n qxy
= n qx n qy
k+1 pxy
Exactly one status:

k| qxy
[1]
n pxy
qx+t:y+t = qx+k + qy+k qx+k qy+k [IL]
X
exy = E[K(xy)] =
k pxy
[1]
a
xy
c
exy )2
t t pxy dt (
t py [(x + t) + (y + t)]
t px
t t pxy dt (
exy )2
Independant lives
fT (xy) (t) =
t t pu dt (
eu )2
11
n pxy
n pxy
n px
+ n py 2 n p x n p y
n qx
+ n qy 2 n qx n qy
= a
x + a
y 2
axy
Common shock model:
Insurances:
sT (x) (t) = sT (x) (t) sz (t)
Ax = 1
ax
Axy = 1
axy
Axy = 1
axy
= sT (x) (t) et
sT (y) (t) = sT (y) (t) sz (t)
= sT (y) (t) et
sT (x)T (y) (t) = sT (x) (t) T (y) (t) sz (t)
Premiums:
= sT (x) (t) sT (y) (t) et

xy (t) = (x + t) + (y + t) +
Px =
Pxy =
Insurance functions:
X
Au =
v k+1 k pu qu+k
=
Axy =
Axy =
k=0
X
k=0
X
k=0
Pxy =
v k+1 P r[K = k]
1
d
a
x
1
d
a
xy
1
d
a
xy
Annuity functions:
Z
v k+1 k pxy qx+k:y+k
a
u =
v t t pu dt
k+1
( k px qx+k + k py qy+k
Au (Au )2
2
var[Y ] =
k=0
k pxy qx+k:y+k )
Reversionary annuities:
A reversioanry annuity is payable during the existence of one status u only if another status v
has failed. E.g. an annuity of 1 per year payable
continuously to (y) after the death of (x).
Variance of insurance functions:

V ar[Z] =
Au (Au )2
Axy (Axy )2
Cov[v T (xy) , v T (xy) ] = (Ax Axy )(Ay Axy )
V ar[Z] =
a
x|y = a
y a
xy
Covariance of T (xy) and T (xy):

Cov [T (xy), T (xy)] = Cov [T (x), T (y)] + {E [T (x)] E [T (xy)]} {(E [T (y)] E [T (xy)]}
= Cov [T (x), T (y)] + (
ex
exy ) (
ey
exy )
= (
ex
exy ) (
ey
exy ) [IL]
c
12
Chapter 10 & 11: Multiple Decrement Models

Notations:
(j)
t qx
Probability density functions:
t years due to cause j

( )
t qx
)
(j)
fT,J (t, j) = t p(
x x (t)
Joint PDF:
= probability of decrement in the next
Marginal PDF of J:
fJ (j) =
= probability of decrement in the next
t years due to all causes

m
X
(j)
=
t qx
fT,J (t, j)dt

0
)
( )
fT (t) = t p(
x x (t)
m
X
=
fT,J (t, j)
Marginal PDF of T :
j=1
(j)
x
(j)
qx
Z
= the force of decrement due only
j=1
to decrement j
(j)
Conditional PDF: fJ|T (j|t) =

)
(
x
= the force of decrement due to all

causes simultaneously
m
X
=
(j)
x
( )
x (t)
Survivorship group:
( )
Group of la people at some age a at time t = 0.
Each member of the group has a joint pdf for
time until decrement and cause of decrement.
j=1
( )
t px
x (t)
= probability of surviving t years

despite all decrements
= 1 t qx( )
= e
Rt
(j)
n dx
= la( )
( )
x (s)ds
= la( )
( )
xa pa
xa+n
Z
n qx(j)
( )
t pa
(j)
a (t)dt
xa
( )
n dx
Derivative:
la( ) =
=
Zt
=
0 (j)
t qx
( )
(j)
s px x (s)ds
0 (j)
t px
( )
s px
dx
( )
lx
Associated single decrement:
0
( )
t qx
la(j)
(j)
qx(j)
Integral forms of t qx :
(j)
t qx
j=1
m
X
(j)
n dx
j=1
d ( )
d ( )
) ( )
=
= t p(
t px
t qx
x x
dt
dt
Zt
m
X
)
(
x (s)ds
= 1 t qx(j)
c
= probability of decrement from cause j only
Zt
= exp (j)
x (s)ds
13
Basic relationships:
Zt h
i
( )
(m)
= exp
(1)
t px
x (s) + + x (s) ds
Actuarial present values
Z
m
X
(j) t
) (j)
Bx+t
A =
v t p(
x x (t)dt
( )
t px
0 (j)
t qx
0 (j)
t px
m
Y
j=1
0 (i)
t px
i=1
(j)
t qx
( )
t px
Instead of summing the benefits for each possible cause of death, it is often easier to write
the benefit as one benefit given regardless of the
cause of death and add/subtract other benefits
according to the cause of death.
UDD for multiple decrements:

(j)
t qx
( )
t qx
qx(j)
(j)
x (t)
0 (j)
t px
Premiums:
= t qx(j)
= t qx( )
=
=
( )
t px
(j)
qx
( )
t px
(j)
x (t)
( )
t px
Px( ) =
k=0
(j)
qx
( )
qx(j)
Px(j) =
qxt
Decrements uniformly distributed in the

associated single decrement table:
qx(1)
qx(2)
qx(1)
= t qx(j)

0 (1)
= qx
1

0 (2)
= qx
1

0
= qx(1) 1

1 0 (2)
q
2 x

1 0 (1)
q
2 x

1 0 (2) 1 0 (3) 1 0 (2) 0 (3)
q
qx + qx qx
2 x
2
3
c
( )
( )
v k k px
k=0
( )
1 t qx
k=0
(j)
Bk+1 v k+1
P
k=0
0 (j)
t qx
( )
Bk+1 v k+1 k px qx+k
14
( )
(j)
k px qx+k
( )
v k k px
Chapter 15: Models Including Expenses

Notations:
G expense loaded ( or gross) premium
b face amount of the policy
G/b per unit gross premium
Expense policy fee:

The portion of G that is independent of b.
Asset shares notations:
G level annual contract premium
k AS
asset share assigned to the policy at time t = k
ck fraction of premium paid for expenses at k (i.e. cG is the expenxe premium)

ek
(d)
qx+k
(w)
qx+k
expenses paid per policy at time t = k
k CV
cash amount due to the policy holder as a withdrawal benefit
probability of decrement by death

probability of decrement by withdrawal
bk death benefit due at time t = k

Recursion formula:
(d)
(w)
[ k AS + G(1 ck ) ek ] (1 + i) = qx+k bk+1 + qx+k

=
k+1 AS
(d)
qx+k (bk+1
Direct formula:
n AS =
(d)
(w)
n1
X
G(1 ch ) eh vqx+h bh+1 vqx+h h+1 CV
h=0
( )
nh Ex+h
c
15
k+1 CV
( )
+ px+k
k+1 AS)
k+1 AS
(w)
qx+k ( k+1 CV
k+1 AS)
Constant Force of Mortality
x = Ax a
(I A)
x
(x) = > 0, x
x
s(x) = e
lx = l0 ex
(IA)x = Ax a
x
= en = (px )n
1
ex =
= E[T ] = E[X]
ex: n =
ex (1 n px )
1
V ar[T ] = V ar[x] = 2
mx =
ln2
Median[T ] =
= Median[X]
px
ex =
= E[K]
qx
px
V ar[K] =
(qx )2
n px
ax )2
(Ia)x = (
(I
a)x = (
ax )2
Chapter 6
1
Px = vqx = Px:
n
1
P (Ax ) = = P (Ax: n )
For fully discrete whole life, w/ EP,

V ar[Loss] = p 2Ax
For fully continuous whole life, w/EP,
V ar[Loss] = 2Ax
Chapter 4
Chapter 7
=
+ 2
= Ax (1 n Ex )
Ax =
Ax
A1x: n
n Ex
k Vx
Ax =
=
V ar[ k Loss] = p 2Ax , k = 0, 1, 2, . . .
( + )2
q
q+i
q
q + 2i + i2
Ax (1 n Ex )
For fully continuous whole life, assuming EP,

V ar[ t Loss] = 2Ax , t 0
Chapter 9
For two constant forces, i.e. M acting on (x)
and F acting on (y), we have:
Chapter 5
a
x =
2
a
x =
a
x =
a
x =
Axy =
1
+
1
+ 2
1+i
q+i
(1 + i)2
q + 2i + i2
a
x (1 n Ex )
a
x: n
a
x: n
= a
x (1 n Ex )
c
= 0, k = 0, 1, 2, . . .
For fully discrete whole life, assuming EP,
= e
Ax =
Ax: n
(Ax ) = 0, t 0
tV
n(+)
(IA)x =
( + )2
(1 + i)
=
( + )(q + i)
q(1 + i)
=
(q + i)2
1
=
( + )2

1+i 2
=
q+i
(IA)x = Ax a
x =
Chapter 3
a
xy =
exy =
Axy =
a
xy =
exy =
16
M + F
M + F +
1
M
+ F +
1
M
+ F
qxy
qxy + i
1+i
qxy + i
pxy
qxy
De Moivres Law
Chapter 3
Ax =
x
= l0
( x)
1
= (x) =
x
m
=
x
xn
=
x
= qx = (x) = fT (x), 0 t < x
1
=
(lx + lx+1 )
2
x
=
= E[T ] = Median[T ]
2
x 1
= E[K]
=
2
2
2
( x)
=
12
( x)2 1
=
12
qx
2dx
=
=
1
lx + lx+1
1 2 qx
1
= E[S] =
2
n
= n n px + n q x
2
n
= ex: n + n qx
2
s(x) = 1
lx
qx
n|m qx
n px
t px (x
+ t)
Lx
ex
ex
V ar[T ]
V ar[K]
mx
a(x)
ex: n
ex: n
Ax =
A1x: n
(IA)x =
(IA)x =
A1x: n
(IA)1x: n
(IA)1x: n
2( x)
a x
x
an
x
(Ia) x
x
(Ia) x
x
(Ia) n
x
(Ia) n
x
Chapter 5
No useful formulas: use a
x =
chapter 4 formulas.
exx =
exx =
exy =
x
( MDML with = 2/( x))
3
2( x)
3
eyy + yx qx
ey
yx px
Age 30, = 100 Age 15, = 85
Modified De Moivres Law

Chapter 3
s(x) =
lx =
(x) =
n px
ex =
V ar[T ] =
x c
1
c
x
l0
( x)c
c
x

xn c
x
x
= E[T ]
c+1
c
and the
For two lives with different s, simply translate

one of the age by the difference in s. E.g.
a
x
x
a
n
x
1Ax
d
Chapter 9
Chapter 4
Ax =
a
2(x)
( x)2 c
(c + 1)2 (c + 2)
Chapter 9
exx =
x
2c + 1

ex with =
17
2c
x
Uniform Distribution of Deaths (UDD)

Chapter 3
= t qx , 0 t 1
qx
, 0t1
=
1 tqx
= lx t dx , 0 t 1
sqx
=
, 0s+t1
1 tqx
1
= V ar[K] +
12
1
qx
= (x + ) =
2
1 12 qx
1
= lx dx
2
1
=
2
1
= px + q x
2
= qx , 0 t 1
t qx
(x + t)
lx+t
s qx+t
V ar[T ]
mx
Lx
a(x)
ex: 1
t px (x
Chapter 6
+ t)
P (A1x: n ) =
P (Ax: n ) =
Px(m) =
hP
Ax(m) =
A1x: n
1
(I A)
x: n
Ax: n
n| Ax
Ax =
(m)
Px: n
(m)
(m)
n Px
(A1x: n ) =
Chapter 7
Chapter 4
Ax =
i
Px
i 1
P
x: n
i 1
+ Px: n1
P
x: n
Px
(m) (m)(Px + d)
Px: n
1
(m) (m)(Px:
n + d)
n Px
1
(m) (m)(Px:
n + d)
i
1(m)
hP
x: n
P (Ax ) =
i
Ax
i
Ax
(m)
i
i 1
A
x: n
i
(IA)1x: n
i 1
i
Ax: n + Ax:1n = A1x: n + n Ex
i
Ax
n|
2i + i2 2
Ax
2
h (m)
k Vx: n
h
k Vx: n
(m)
h (m)
(Ax: n )
kV
h
kV
k V( Ax: n )
i h 1
V
+ hk Vx: h1
k x: h
+ (m) h Px: n k Vx:1 h
(Ax: n ) + (m) h P (m) (Ax: n ) k Vx:1 h
Chapter 10
UDDMDT
(j)
t qx
qx(j)
qx( )
0 (j)
t px
= t qx(j)
= (j)
x (0)
)
= (
x (0)

qx(j)
( ) qx( )
=
t px
(j)
(j)
x
qx
( )
1 t qx
( )
Chapter 5
)
(
x
a
(m)
x
'
a
(m)
x
(m)
a
x: n
with:
(m)
a
x: n
m1
a
x
2m
(m)
ax (m)
( )
1 t qx
UDDASDT
0 (j)
t qx
(m)
ax: n (m)(1 n Ex )
id
(m) = (m) (m) 1
i d
i i(m)
m1
and (m) = (m) (m)
2m
i d
(m)
(m)
x+n
= a
x n Ex a
=
c
qx
qx(1)
qx(2)
qx(1)
18
= t qx(j)

0 (1)
= qx
1

0
= qx(2) 1

0 (1)
= qx
1

1 0 (2)
q
2 x

1 0 (1)
q
2 x

1 0 (2) 1 0 (3) 1 0 (2) 0 (3)
q
qx + qx qx
2 x
2
3
Chapter 1: The Poisson Process

Sum of Poisson processes:
If N1 , , Nk are independent Poisson processes
with rates 1 , , k then, N = N1 + + Nk
is a Poisson process with rate = 1 + + k .
Poisson process with rate :

P r[N (s + t) N (s) = k] = et
(t)k
k!
E[N (t)] = t
V ar[N (t)] = t
Special events in a Poisson process:

Let N be a Poisson process with rate .
Some events i are special with a probability
i counts the speP r[event is special] = i and N
i is a Poisson
cial events of kind i. Then, N
i = i and the N
i are indeprocess with rate
pendent of one another.
If the probability i (t) changes with time, then
Interarrival time distribution:

The waiting time between events. Let Tn denote the time since occurence of the event n 1.
Then the Tn are independent random variables
following an exponential distribution with mean
1/.
P r[Ti t] = 1 et
fT (t) = et
1
E[T ] =
1
V ar[T ] =
2
i (t)] =
E[N
Non-homogeneous Poisson process:
Sn GammaRV[ = n, =
P r[Sn t] =
et
j=n
fSn (t) = et
E[Sn ] =
V ar[Sn ] =
(s)ds
0
Waiting time distribution:

Let Sn be the time
Pn of the n-occurence of the
event, i.e. Sn = i=1 Ti .
Sn has a gamma distribution with parameters n
and = 1/
Zt
(t) intensity function

m(t) mean value function
Zt
=
(y)dy
0
1
]
P r[N (t) = k] = em(t)
(t)j
j!
[m(t)]k
k!
Compound Poisson process:
(t)n1
(n i)!
N (t)
X(t) =
n
2
Yi
N (t) PoissonRV w/ rate
i=1
E[X(t)] = t E[Y ]
V ar[X(t)] = t E[Y 2 ]
Two competing Poisson processes:

Probability that n events in the Poisson process (N1 ,1 ) occur before m events in the Poisson process
(N2 ,2 ):
n+m1
X n+m1 1 k 2 n+m1k
2
P r[Sn1 < Sm
] =
k
1 + 2
1 + 2
k=n

n
1
P r[Sn1 < S12 ] =
1 + 2
1
P r[S11 < S12 ] =
1 + 2
c
Exam M - Loss Models - LGD
Chapter 2&3: Random Variables

k-th raw moment:
Left censored and shifted variable:
k = E[X k ]

= (X d)+ =
k-th central moment:

k = E[(X )k ]
0
X<d
X d X d
Moments of the left censored and shifted

variable:
Variance:
V ar[x] = 2 = E[X 2 ] E[X]2
E[(X
= 2 = 2 2
Z
=
(x d)k f (x)dx
d)k+ ]
Standard deviation:
p
= V ar[X]
Coefficient of variation:
= e (d)[1 F (d)]
(x d)k p(x)
x>d
k
Limited loss:
Skewness:

Y = (X u) =
E[(X )3 ]
3
1 =
= 3
3
X X<u
u Xu
Limited expected value:
Kurtosis:
1 =
E[(X )4 ]
4
= 4
4
Z0
E[X u] =
Left truncated and shifted variable (aka

excess loss variable):
Zu
F (x)dx +
S(x)dx
0
Zu
[1 F (x)]dx if X is always positive
Y P = X d|X > d
Mean excess loss function:

Moments of the limited loss variable:
eX (d) e(d) = E[Y P ]

= E[X d|X > d]
R
S(x)dx
= d
1 F (d)
E[X] E[X d]
=
1 F (d)
E[(X u) ] =
xk f (x)dx + uk [1 F (u)]
xk p(x) + uk [1 F (u)]
xu
Higher moments of the excess loss variable:
Moment generating functions mX (t):
ekx (d) = E[(X d)k |X > d]

R
(x d)k f (x)dx
= d
1 F (d)
P
(x d)k p(x)
x>d
=
1 F (d)
c
Zu
mX (t) = E[etX ]
Sum of random variables Sk = X1 + +Xk :
mSk (t) =
k
Y
j=1
mXj (t)
Chapter 4: Classifying and Creating distributions

k-point mixture (
If X is a Normal distribution (, V ) and

follows a Normal distribution (, A),
then the resulting distribution is a Normal
distribution (, A + V )
ai = 1):
FY (y) = a1 FX1 (y) + + ak FXk (y)

fY (y) = a1 fX1 (y) + + ak fXk (y)
E[Y ] = a1 E[X1 ] + + ak E[Xk ]
E[Y 2 ] = a1 E[X12 ] + + ak E[Xk2 ]
Splicing (aj > 0,
aj = 1):
a1 f1 (x)
..
f (x) =
.
ak fk (x)
Tail weight:
existence of moments light tail
hazard rate increases light tail
c0 < x < c1
..
.
ck1 < x < ck
Discrete probability function (pf ):

Multiplication by a constant , y > 0:
pk = P r[N = k]
y
1
y
Y = X FY (y) = FX ( ) and fY (y) = fX ( )
Probability generating function (pgf ):
Raising to a power:
> 0 : FY (y) = FX (y )
1
fY (y) = y 1 fX (y )
Y = X
< 0 : FY (y) = 1 FX (y )
fY (y) = y 1 fX (y )
PN (z) = E[z N ] = p0 + p1 z + p2 z 2 +
P 0 (1) = E[N ]
P 00 (1) = E[N (N 1)]
> 0: transformed distribution

= 1: inverse distribution
< 0: inverse transformed
Poisson distribution:
pk = e
Exponentiation:
Y = eX
P (z) = e(z1)
FY (y) = FX (ln(y))
fY (y) = y1 fX (ln(y))
E[N ] =
V ar[N ] =
Mixing:
The random variable X depends upon a parameter , itself a random variable . For a given
value = , the individual pdf is fX| (x|).
Z
fX (x) = fX| (x|)f ()d
Negative Binomial distribution:

Number of failures before success r with probability of success p = 1/(1 + )

pk =
If X is a Poisson distribution with parameter , and follows a Gamma distribution

with parameters (, ), then the resulting
distribution is a Negative Binomial distribution with parameters (r = , = )
k+r1
k

1+
k
1
1+
r
P (z) = [1 (z 1)]r
E[N ] = r
V ar[N ] = r(1 + )
If X is an Exponential distribution with

mean 1/ and is a Gamma distribution
with parameters (, ), then the resulting
distribution is a 2-parameter Pareto distribution with parameters (0 = , 0 = 1 )
c
k
k!
If N1 and N2 are independent Negative

Binomial distributions with parameters
(r1 , ) and (r2 , ), then N1 + N2 is a Negative Binomial distribution with parameters (r = r1 + r2 , )
3
If N is a Negative Binomial distribution

with parameters (r, ) and some events j
j ,
are special with probability j , then N
the count of special events j, is a Negative Binomial distribution with parameters (
rj = r, j = j )
Compound frequency and (a, b, 0) class:

Let S be a compound distribution of primary
and secondary distributions N and M with pn =
P r[N = n] and fn = P r[M = n]. If N is a member of the (a, b, 0) class
gk =
j=1
Geometric distribution:
Special case of the negative binomial distribution with r = 1
pk =
g0 = Pprim (f0 )
k
gk =
k
(1 + )k+1
P (z) = [1 (z 1)]1 =

k
X
1
jb
fj gkj
a+
1 af0
k
X
j fj gkj
k
j=1
1
1 (z 1)
Mixed Poisson models:

If P (z) id the pgf of a Poisson distribution with
rate drawn from a discrete random variable ,
then
E[N ] =
V ar[N ] = (1 + )
P (z|) = e(z1)
P (z) = p (1 )e1 (z1) + + p (n )en (z1)
Binomial distribution:
Counting number of successes in m trials given
a probability of sucess q

m
q k (1 q)mk
pk =
k
P (z) = [1 + q(z 1)]m
Exposure modifications on frequency:

n policies in force. Nj claims produced by the
j-th policy. N = N1 + + Nn . If the Nj are independent and identcally distributed, then the
probability generating function for N is
E[N ] = mq
PN (z) = [PN1 (z)]n
V ar[N ] = mq(1 q)
If the company exposure grows to n , let N

represent the new total number of claims,
The (a, b, 0) class:

pk
b
=a+
pk1
k
PN (z) = [PN1 (z)]n = [PN (z)]

Conditional expectations:
Z
E[X| = ] =
xfX| (x|)dx
a > 0 negative binomial or geometric

distribution
E[X] = E [E[X|]]
a = 0 Poisson distribution
V ar[X] = E [V ar[X|]] + V ar[E[X|]]
a < 0 Binomial distribution
The variance of the random variable X is the

sum of two parts: the mean of the conditional
variance plus the variance of the conditional
mean.
Compound frequency models:

P (z) = Pprim (Psec (z))
Exposure modifications on frequency for common distributions:

N
Parameters for N
Parameters for N
Poisson
= nn
Negative Binomial
r,
r = nn r, =
c
n
n
Chapter 5: Frequency and Severity with Coverage Modifications

Notations:
Effect of deductible for various distributions:
X amount of loss
X : exp[mean ] Y P : exp[mean ]
Y L amount paid per loss

YP
X : uniform[0, ] Y P : uniform[0, d]
amount paid per payment
X : 2Pareto[, ] Y P : 2Pareto[0 = , 0 = + ]
Per loss variable:

Loss elimination ratio:
fY L (0) = FX (d)
LERX (d) =
fY L (y) = fx (y + d)
FY L (y) = FX (y + d)
relations:
Per payment variable:

fY P (y) =
FY L (y) =
c(X d) = (cX) (cd)
fx (y + d)
1 FX (d)
FX (y + d) FX (d)
1 FX (d)
c(X d)+ = (cX cd)+

A = (A b) + (A b)+
Inflation on expected cost per loss:

d
L
E[Y ] = (1 + r) E(X) E X
1+r
Relations per loss / per payment variable:

YP
= Y L |Y L > 0
E[Y L ]
E[Y P ] =
P r[Y L > 0]
E[(Y L )k ]
E[(Y P )k ] =
P r[Y L > 0]
Inflation on expected cost per payment:

h

i
d
(1 + r) E(X) E X 1+r

E[Y P ] =
d
1 FX 1+r
Simple (or ordinary) deductible d:
u-coverage limit:
YL = X u
X = X
Y
YP
= (X d)+
= X d|X > d
E[Y ] = E[X u]
Zu
=
[1 Fx (x)]dx
E[Y ] = E[(X d)+ ]

= E[X] E[X d]
P
E[Y ] = E[X d|X > d]

E[X] E[X d]
=
1 FX (d)
u-coverage limit with inflation:

u
E[X u] (1 + r)E X
1+r
Franchise deductible d:
u-coverage limit and d ordinary deductible:
X = X
Y
= 0 if X < d, X if X > d
= X|X > d,
Y L = (X u) (X d)
P
P
Yfranchise
= Yordinary
+d
YP
E[Y ] = E[X] E[X d] + d[1 FX (d)]
= (X u) (X d)|X > 0
= (X u) d|X > d
E[Y ] = E[X u] E[X d]

E[X u] E[X d]
E[Y P ] =
1 FX (d)
E[Y ] = E[X|X > d]

E[X] E[X d]
=
+d
1 FX (d)
c
= X u|X > 0
E[X d]
E[X]
u-coverage limit and d ordinary deductible

with inflation:

d
u
L
E X
E[Y ] = (1 + r) E X
1+r
1+r
h
i
h
i
u
d
E X 1+r
E X 1+r
P

E[Y ] = (1 + r)
d
1 FX 1+r
Probability of payment for a loss with deductible d:

v = 1 FX (d)
Unmodified frequency:
The number of claims N (frequency) does not
change, only the probabilities associated with
the severity are modified to include the possibility of zero payment.
Coinsurance factor :
First calculate Y L and Y P with deductible and
limits. Then apply
Bernoulli random variable:

0 @ 1p
N =
1 @
p
E[N ] = p
Y L = Y L
Y P = Y P
V ar[N ] = (1 p)p
Deductible, limit, inflation and coinsurance:

d
1+r
u
u =
1+r
E[Y L ] = (1 + r) {E[X u ] E[X d ]}
E[X u ] E[X d ]
E[Y P ] = (1 + r)
1 FX (d )

2
E[Y L ] = 2 (1 + r)2 E (X u )2 E (X d )2 2d E[X u ] + 2d E[X d ]
d =
Modified frequency:
N (the modified frequency) has a compound distribution: The primary distribution is N , and the secondary
distribution is the Bernoulli random variable I. The probability generating function is
PN (z) = PN [1 + v(z 1)]
The frequency distribution is modified to include only non-zero claim amounts. Each claim amount probability is modified by dividing it by th eprobability of a non-zero claim. For common distributions, the
frequency distribution changes as follows (the number of positive payments is nothing else than a special
event with probability = v)
N
Parameters for N
Parameters for N
Poisson
= v
Binomial
m, q
m = m, q = vq
Negative Binomial
r,
r = r, = v
c
Chapter 6: Aggregate Loss Models

n-fold convolution of the cdf of X:
The aggregate loss compound random

variable:
S =
N
X
(n)
FX
Xj
V ar[S] = E[N ] V ar[X] + V ar[N ] E[X]2

S ' (E[S], V ar[S])
(0)
FX (k)
E[S] = E[N ] E[X]
fS (k) =
0 , k<0
1 , k0
(n)
pn fX (k)
n=0
PS (z) = PN [PX (z)]
Cdf of the compound distribution:
Notations:
fk = P r[X = k]
FS (k) =
gk = P r[S = k]
(n)
p n FX
(k)
Mean of the compound distribution:
Compound probabilities:
E[S] =
if P r[X = 0] = f0 6= 0
g0 = PN (f0 )
X
n=0
pk = P r[N = k]
k fS (k) =
k=0
p0 P r[sum of Xs = k]
Z
E [(S d)+ ] =
(x d)fS (x)dx
+ p2 P r[sum of two Xs = k]
+
If N is in the (a, b, 0) class, then
E [(S d)+ ] =
g0 = PN (f0 )
(x d)fS (x)
d+1

k
X
jb
1
fj gkj
a+
1 af0
k
E [(S d)+ ] = E[S] d
j=1
(n)
E [(S d)+ ] =
(n1)
fX
[1 FS (d)]
= E[S]
(k j)fX (j)
d1
X
[1 FS (d)]
x=0
j=0
(1)
Linear interpolation a < d < b:
fX (k) = fX (k) = fk

1 , k=0
(0)
fX (k) =
0 , otherwise
E [(S d)+ ] =
Recursion relations for stop-loss insurance:

E [(S d 1)+ ] = E [(S d)+ ] [1 FS (d)]
E [(S sj )] = E [(S sj+1 )] + (sj+1 sj )P r[S sj+1 ]
where the sj s are the possible values of S, S : s0 = 0 < s1 < s2 < and
P r[S sj+1 ] = 1 P r[S = s0 or S = s1 or or S = sj ]
c
(x d)fS (x)
= P r[sum of n Xs = k]
k
X
d1
X
x=0
n-fold convolution of the pdf of X:
fX (k) =
[1 FS (k)]
k=0
Net stop-loss premium:
+ p1 P r[sum of one X = k]
(n)
fX (k)
(k j)fX (j)
Pdf of the compound distribution:
if E[N ] is large
Probability generating function:
gk =
(n1)
FX
j=0
j=1
gk =
k
X
(k) =
da
bd
E [(S a)+ ]+
E [(S b)+ ]
ba
ba
Last Chapter: Multi-State Transition Models

Notations:
Q(i,j)
= P r[Mn+1 = j|Mn = i]
n
(i,j)
k Qn
Pn(i)
(i)
k Pn
= P r[Mn+k = j|Mn = i]
= Q(i,i)
n
= P r[Mn+1 = = Mn+k = i|Mn = i]
Theorem:
k Qn
= Qn Qn+1 Qn+k1
k Qn
= Qk
for a homogeneous Markov chain
Inequality:
(i)
k Pn
(i)
(i)
= Pn(i) Pn+1 Pn+k1 k Q(i,i)

n
Cash flows while in states:

lC
(i)
= cash flow at time l if subject in state i at time l
k vn
(i)
= present value of 1 paid k years after time t = n
AP Vs@n (C ) = actuarial present value at time t = n of all future payments to be

made while in state i, given that the subject is in state s at t = n
AP Vs@n (C (i) ) =
h
X
i h
i
(s,i)
(i)
Q
k vn
C
k n
n+k
k=0
Cash flows upon transitions:

l+1 C
(s,i)
l Qn
(i,j)
(i,j)
Qn+l
(i,j)
AP Vs@n (C
= cash flow at time l + 1 if subject in state i at time l and state j at time l + 1

= probability of being in state i at time l and in state j at time l + 1
) = actuarial present value at time t = n of a cash flow to be paid upon

transition from state i to state j
AP Vs@n (C (i,j) ) =
h
X
i h
i
(i,j)
(s,i)
(i,j)
Q
k n
n+k+1
n+k
k=0
c
k+1 vn

Exam M Notes F05

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Exam M Notes F05

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Chapter 3: Survival Distributions and Life Tables

Force of mortality (x):

Survival function s(x):

Relations between survival functions and

Probability of death between age x and

= Pr[T (x) > t]

E[K(x)] curtate expectation of life

Relations with survival functions:

E[T (x)] complete expectation of life

= Pr[t < T (x) t + u]

Mean and variance of T and K:

= distribution function of T (x)

= prob. (x) dies within t years

Curtate future lifetime (K(x) greatest

Pr[K(x) = k] = Pr[k T (x) < k + 1]

Total lifetime after age x: Tx

Total lifetime between age x and x + 1: Lx

Central death rate: mx

Fraction of year lived between age x and

Average lifetime from x to x + 1:

E[K (m + n)] = ex: m+n

Median future lifetime of (x): m(x)

Average lifetime after x:

P r[T (x) > m(x)] =

Total lifetime from age x to x + n:

Chapter 4: Life Insurance

Discrete whole life: Ax

n-year term insurance: Ax: n

Discrete n-year term: A1x: n

m-year deferred whole life:

Discrete n-year endowment: Ax: n

n-year pure endowment: Ax: n

V ar[Z] = Ax: n (Ax: n )2

n-year endowment insurance: Ax: n

Recursion and other relations:

V ar[Z] = 2Ax: n (Ax: n )2

Ax = vqx + vpx Ax+1

Varying benefit insurances:

Interest theory reminder

Doubling the constant force of interest

(IA)x = Ax + vpx (IA)x+1

= vqx + vpx [(IA)x+1 + Ax+1 ]

Accumulated cost of insurance:

Chapter 5: Life Annuities

ax = vpx + vpx ax+1

n-year temporary annuity: a

= vpx + vpx ax+1: n1

Whole life annuity due: a

n-year deferred annuity:

n-yr temporary annuity due: a

n-yr deferred annuity due:

Most important identity

n-yr certain and life due: a

Whole life immediate: ax

Limit of interest rate i = 0:

Chapter 6: Benefit Premiums

h-payment insurance premiums:

m-thly equivalence premiums:

P minus P over P problems:

Semicontinuous equivalence premiums:

Pure endowment annual premium Px: n1 :

Fully discrete equivalence premiums

Chapter 7: Benefit Reserves

Variance of the loss function