The distribution of T

AS305 Statistical Methods For Insurance

REVIEW OF SURVIVAL MODELS

CDF of T

The CDF gives the probability that the random

variable will assume a value less than or equal
to t.
F(t) = Pr(T t).
probability that failure (death) will occur not later
than time t.
F(t) = 1-S(t)
F(0) = 0 and F() = 1.

A survival model is defined in terms of the function S(t),

S(t) = Pr(T> t), T is the failure time random variable.

This function of the random variable T is called the Survival

Distribution Function (SDF).

It gives the probability that failure (death) will occur after

time t, which is the same as the probability that the entity,
known to exist at time 0, will survive to at least time t.

S(0)=1 and S() = 0

The Probability Density Function

For the case of a continuous random variable, the Probability
Density Function (PDF), f(t), is defined as the derivative of F(t).
Consequently,
and
It is important to recognize that f(t) is the unconditional density
of failure at time t.
By this we mean that it is the density of failure at time t given
only that the entity existed at t=0.

The Hazard Rate Function

We now define a conditional density of failure at time t, such
density to be conditional on survival to time t.
This conditional instantaneous measure of failure at time t,
given survival to time t, will be called the hazard rate at time t,
or the Hazard Rate Function (HRF) when viewed as a function
of t. It will be denoted by (t).
If a conditional measure is multiplied by the probability of
obtaining the condition, then the corresponding unconditional
measure will result,
or

Some important mathematical consequences

As

it follows that

(t) and f(t) compares

They are both instantaneous measures of the

density of failure at time t;
they differ from each other in that (t) is
conditional on survival to time t, whereas f(t) is
unconditional (i.e., given only existence at time
t=0).
In the actuarial context of human survival
models, failure means death, or mortality, and
the hazard rate is normally called the force of
mortality.

Cumulative Hazard Function

Moment of T

Median of T

For 1st moment, T 0

Using Integration by part

For 2nd moment, T 0

Complete Expectation of life

Curtate expectation of life

Actuarial Survival Model

In actuarial context, the hazard rate is called force of mortality, x

The 1st moment of X,

It is the complete expectation of life at birth.
For the select model S(t;x), t is a value of the random variable, T and
x is the age at which the person selected.
The expected value of T, E[T;x] gives the expected future lifetime for
a person selected at age x is denoted by

e[ x ]

And HRF is given by

Examples of Parametric Survival Models

Uniform

Exponential

Gompertz

Makeham

Weibull

Others

Gompertz
Hazard Rate is defined as
x 0, B > 0, c > 1
SDF is given by

PDF is given by

Clearly not convenient

Makeham Distribution

Weibull
(x) = k xn, x 0, k > 0, n > 0

x 0, B > 0, c > 1, A > - B

PDF is not tractable that make calculation of probability,

moment difficult

Distinction between npx, a conditional probability with

the unconditional probability represented by S(n; x).

seek the probability that a person age x will survive to age x+

n.
When we determine this probability in accordance with the
model S(x) it is conditional, it is
If it is S(n; x). It is unconditional, denoted as
the PDF for death at age y, given alive at age x (y>x).
the conditional HRF (or force of mortality) for death at age y,
given alive at age x (y>x). (There is no such thing as an
unconditional HRF.)
y is conditional on survival to y,

Lower Truncation of the Distribution of X

When we speak of probabilities (or densities) conditional on

survival to age x, we are dealing with the distribution of a subset of
the sample space of the random variable X, namely those values of
X which fall in excess of x. This distribution is called the
distribution of X truncated below at x.

the probability that the age at death will exceed x+n, given that it
does exceed x.

Upper and Lower Truncation of the Distribution of X

the probability that death will occur after age x, given that it does
occur between y and z.

Moments of Truncated Distributions

truncation only from below did not affect the HRF, truncation
from above does (since the truncated HRF is a function of z).

Example:If X has an exponential distribution, show that

this implies mx = - ln Px

The Central Rate

A type of conditional measure over the interval from age x to age

x+1 is called the central rate of death, and is denoted by mx.
It is defined as the weighted average value of the HRF (x) over
the interval, using, as the weight for (y), the probability of
survival to age y.
More generally, nmx is the average hazard, or central rate of death,
over the interval from x to x+ n, and is given by

Use of Conditional Probabilities in Estimation

Suppose we wish to estimate, say, S(10), the probability of survival

from t=0 to t=10.
The study (and the data) will suggest that we consider only the
time interval from t=i to t=i+l, and estimate the conditional
probability of survival over that interval.
i.e. we estimate

p i

S (i 1)
S(i)

And S(10) = p 0 p 1 . p 9

In general S(t) = p 0 p 1 . p t 1

Transformation of Random Variables

Given X as a random variable and y = g(x) with inverse x = h(y)

where h(y) = g -1(y) exist.
If g(.) is a strictly increasing
function then

Example: let X have a standard exponential distribution, so that

Fx(x) = 1 - e-x, let y = g(x) =1/x. Find the SDF, PDF and HRF
of Y.

Two special Transformation

Linear Transformation

Probability Integral Transformations

Show that if X has a Gompertz distribution, then the transformed

variable y = (x-)/ also has a Gompertz distribution when =0

the hazard at a given value of the new variable is times the

hazard
For certain kinds of distributions, a linear transformation of that
random variable produces a new random variable with the same
kind of distribution as the original random variable
special case of a transformation is y = g(x) = Fx(x), where FX(X) is
a strictly increasing CDF of X. y has standard uniform distribution.

Let y = g(x) = - lnSx(x). Find the distribution of Y.

Since Sx(x) decreases from 1 to 0, then ln Sx(x) decreases from 0 to , and the transformed variable y = g(x) = -lnSx(x) increases from 0
to .
if z = Sx(x), then Z has a standard uniform distribution.

y = ln z, inverse function z = h(y) = e -y, so that dz/dy= - e-y

Therefore Y has a standard exponential distribution with =1.

MEAN AND VARIANCE OF TRANSFORMED

RANDOM VARIABLES

A rough approximation

THE LIFE TABLE

The life table is a table of numerical values of S(x) for certain values of x.

Typically a complete life table shows values of S(x) for all integral
values of x, x = 0, I ,.. .. Since S(x) is represented by these values, it is
clear that a practical upper limit on x must be adopted beyond which
values of S(x) are taken to be zero.

Bivariate

THE TRADITIONAL FORM OF THE

LIFE TABLE

Use as the smallest value such that S(x)=0 and

S(

Can calculate

for integer x, n

Can not be determined without additional assumptions on

S(x) between adjacent values

the tabular survival model differs from Table in

two respects.
Rather than presenting decimal values of S(x), it
is usual to multiply these values by, say,
100,000, and thereby present the S(x) values as
integers.
As these integers are not probabilities (which
S(x) values are), the column heading is changed
from S(x) to lx, where l stands for number living,
or number of lives. known as the life table.

As S(0) = 1, then clearly lo is the same as the constant multiple

which transforms all S(x) into lx
This constant is called the radix of the table. Formally,

With radix of 100,000 the above table

becomes
lx is the expected number of survivors to age
x out of an original group of l0 new-borns
has both a probabilistic and a deterministic
interpretation.

Force of Mortality - relative instantaneous rate of

death

Moment of T

Conditional Probability

Central Rate

The concept of exposure

Integrating by part

is the total number of years lived by

those deaths after attaining age x.

=
, the limit of the Riemann sum
gives the aggregate number of years lived between ages x
and x+ I by the lx persons who comprised the group at age x.
This quantity is measured in units of life-years, and is called
exposure, since it is a measure of the extent to which the
group is exposed to the risk of dying

Method for non-integral ages

Method for non-integral ages

Uniform distribution

Balducci assumption

Select and Ultimate life table

Hyperbolic form

Constant force of death

A life table is essentially a table of one-year death probabilities qx, which

completely defines the distribution. of If.
Life tables are constructed for certain population groups, differentiated by
factors such as sex, race, generation and insurance type. The initial age x
can have a significant influence in such tables. For instance, let x denote
the age when the person bought life insurance.
Since insurance is only offered to individuals of good health (sometimes
only after a medical test), it is reasonable to expect that a person who has
just bought insurance, will be of better health than a person who bought
insurance several years ago, other factors (particularly age) being equal.
This phenomenon is taken into account by select life tables. In a select
life table, the probabilities of death are graded according to the age at
entry.
The selection effect has usually worn off after some years, say r years
after entry
The period r is called the select period, and the table used after the select
period has expired, is called an ultimate life table. '