Universidad Carlos III de Madrid

Licenciatura en Ciencias Actuariales y Financieras

Survival Models and Basic Life Contingencies
PART II. Lecture 3:

Commutation Functions
In this lesson, we will introduce the Commutation Functions (or Symbols).
There is currently an interesting debate about the use of these functions
in the international actuarial community. We will define all the common
commutation function, but the practical use of these functions is mainly
related with increasing forms of benefits: Increasing Annuities and Increasing
Insurance.

Commutation Functions

First, we define the basic functions using V x+1 and either lx+1 or dx , life or
death functions respectively. Later, the advanced functions are the infinite
sums (series) of the basic ones.
In the following presentation, the formulae for the continuous case are
also introduced, the proofs are a very good theoretical exercise not included
in this short review.

1.1

Life Commutation Functions (Annuities)

The basic commutation function is

Dy = V y ly .
1

In practice, this basic function is only used for integer y.

The first use of the comutation is to compute the expected value of pure
endowement
V n+x ln+x
Dn+x
n

=
.
n Ex = V n px =
x
V
lx
Dx
Now, the second generation of Life Commutation Functions is

Nx =

Dx+j

j=0
Z

Nx =

x integer

Dx+z dz.

See the equivalence for the expected value of life perpetuities-due

ax =

j px

j=0

ax =

j lx+j

j=0

Nx
,
Dx

lx

X
V x+j lx+j
x

j=0

V lx

X
Dx+j
j=0

Dx

Nx
Dx

and n-year temporary annuity-due

Dx+n
Nx Dx+n Nx+n
a
x+n =

=
Dx
Dx
Dx Dx+n
Nx Nx+n
=
Dx
N x N x+n
=
.
Dx

a
x:ne = ax

ax:ne

The third generation of commutation functions are most interesting for

us because they are specially deviced for increasing benefits. Observe the
following relationships
Sx =
Sx =

Nx+j =

j=0

X
X
(j + 1)Dx+j =
(j + 1)V x+j lx+j
j=0

N x+z dz =

j=0

z Dx+z dz,

using the Current Payments Technique, the expected value for an increasing
perpetuity-due is
2

X
X
V x+j lx+j
lx+j X
(j + 1)V j j px =
(j + 1)V j
=
(j + 1)
lx
V x lx
j=0
j=0
j=0
P
x+j
lx+j
Sx
j=0 (j + 1)V
=
=
V x lx
Dx
Dx+1 Sx+1
Sx+1
= 1 Ex (I
a)x+1 =
=
Dx Dx+1
Dx
Sx
=
.
Dx

(Ia)x =

(Ia)x
(Ia)x

1.2

Death Commutation Functions (Insurance)

In the case of Death commutation function, the basic function is defined

Cx = V x+1 dx
C y = V y ly (y)
Then, the second generation of Death Commutation Functions is obtained as

X
Mx =
Cx+j
Mx =

j=0

C x+z dz.

See the equivalence for the expected value of a whole of life insurance

X
X
lx+j dx+j X V x+j+1 dx+j X Cx+j
Mx
V j+1 j px qx+j =
V j+1
=
=
=
Ax =
lx lx+j
V x lx
Dx
Dx
j=0
j=0
j=0
j=0

Mx
Dx
and an n-year temporary term insurance
Dx+n
Mx Dx+n Mx+n
Ax:ne
= Ax
Ax+n =

=
1
Dx
Dx
Dx Dx+n
Mx Mx+n
=
Dx
M x M x+n
Ax:ne
=
.
1
Dx
Ax =

The third generation of commutation functions is useful for increasing

insurance. Again we derive some relationships first
Rx =
Rx =

Mx+j =

j=0

X
X
(j + 1)Cx+j =
(j + 1)V x+j+1 dx+j
j=0

M x+z dz =

j=0

z C x+z dz.

The expected value of a whole of life increasing insurance is obtained using

the third generation of Death commutation functions
(IA)x

(IA)x

X
X
X
V x+j+1 dx+j
j+1
j+1 lx+j dx+j
=
(j + 1)V
(j + 1)V
=
(j + 1)
=
j px qx+j =
lx lx+j
V x lx
j=0
j=0
j=0
P
x+j+1
dx+j
Rx
j=0 (j + 1)V
=
=
x
V lx
Dx
Rx
=
.
Dx

Temporary Increasing Benefits

In the previous section we presented a method of obtaining the expected

values of the increasing whole life benefits (insurance and annuity). Now we
will study the expected value of the present value of temporary annuities and
insurance.
The incresing benefits: annuities or term insurance can be studied using
the following picture (triangle):

(IA)x:ne
1

2
2 2
2 2 2

2
2
2
2
(IA)x

2
2
2
2
2

2
2
2
2
2
2

2
2
2
2
2
2
2

2
2
2
2
2 (IA)x+n
2
2
2
2
2 n Ax+n
2
2

The formula for the expected value of an increasing temporary term insurance
is
(IA)x:ne
= (IA)x n
1

n| Ax

n| (IA)x

Dx+n Mx+n Dx+n Rx+n

Rx
n

=
Dx
Dx Dx+n
Dx Dx+n
Rx Rx+n n Mx+n
=
.
Dx
If we consider the case of n-year endowment
=

(IA)x:ne = (IA)x n n| Ax n| (IA)x + n n Ex =

Rx Rx+n n Mx+n + n Dx+n
=
.
Dx
In the continuous case
(IA)x:ne
= (IA)x n
1

n| Ax

n| (IA)x

Rx Rx+n n M x+n
Dx
and remember that assuming U.D.D.
i
(IA)x:ne
= (IA)x:ne
.
1
1

For the increasing annuities-due we observe

=

(Ia)x:ne

2
2
2
2 2
2
2 2 2
2
(Ia)x

2
2
2
2
2

2
2
2
2
2
2

2
2
2
2
2
2
2

2
2
2
2
2 (Ia)x+n
2
2
2
2
2 na
x+n
2
2

and deduce the formua for its expected value

(Ia)x:ne = (Ia)x n n| a
x n| (Ia)x =
Sx
Dx+n Nx+n Dx+n Sx+n
=
n

=
Dx
Dx Dx+n
Dx Dx+n
Sx Sx+n n Nx+n
=
.
Dx
5