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Actuarial Mathematics For Life Contingent Risks

This is a class note created for a Professor as an extra credit assignment The topics covered here are 1) Relating  A'x, Ax, …; Using the claims acceleration approach and 2) Extra risks. Both are topics excerpted from Actuarial Mathematics for Life Contingent Risks By David C. M. Dickson, Mary R. Hardy and Howard R. Water. This note have both a summary of the Section and problems using the material indicated. The problems are provided with solutions.

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Ida Khairina Kamaruddin
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1K views7 pages

Actuarial Mathematics For Life Contingent Risks

This is a class note created for a Professor as an extra credit assignment The topics covered here are 1) Relating  A'x, Ax, …; Using the claims acceleration approach and 2) Extra risks. Both are topics excerpted from Actuarial Mathematics for Life Contingent Risks By David C. M. Dickson, Mary R. Hardy and Howard R. Water. This note have both a summary of the Section and problems using the material indicated. The problems are provided with solutions.

Uploaded by

Ida Khairina Kamaruddin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 7

4.5.

2 - Using the claim acceleration approach


The time of payment during the year of death for the benefit for an
(m )

m -thly period,

Ax

, is 1/m, 2/m, 3/m, , (m-1)/m, or 1. Thus,

assuming UDD, the average time of payment of the death is


(1+m)( m)
1 2
m1 m
+ + +
+
1+2++
(
m1
)
+
m
m m
m
m
2
1+m
=
=
=
2
2
m
2m
m
m
Thereby, when compared to
1

Ax

on average it is paid

1+ m m1
=
yearsearlier .
2m
2m

Example 1
x+ K x +

x+ K x

x
50

Suppose

x+ K x +

60

1
4

60.25

x+ K x +

2
4

5
8

x+ K x +

3
4

x+ K x +1

60.5
60.75
60.625

x+ K x

dies between age

and

61

x+ K x +1 .

A x , the death benefit at the end of year is paid at time


K x +1 .
( 4)

Ax

, the death benefit at the end of quarter-year will be paid

depending on the quarter year in which the death occurred


either at

Kx +

1
,
4

Kx+

2
,
4

Kx +

3
4

or

K x +1 .

If the death occur evenly over the year, then, on average the
benefit is paid at time 5/8 as computed below
1 2 3 4
+ + +
4 4 4 4 1+ 4 5
=
= =0.625
4
2(4 ) 8
which is 3/8 years earlier than the death benefit at the end of
year
1

1+ 4 41 3
=
=
2 (4 ) 2 (4 ) 8

Accordingly, the resulting approximation is


A (xm ) q x v

m+1
2m

+ 1q x v

k q x v

k+

1+

m +1
2m

+ 2q x v

2+

m +1
2m

m +1
2m

k=0

m1

(1+i ) 2 m

k q x v k +1
k=0

That is,
m1

A (xm ) (1+i) 2m A x
1

A x (1+i) 2 A x
If the benefit is paid immediately on death and lives die uniformly
through the year, then, on average the benefit is paid half-way through
the year of death, which is half a year earlier than the benefit valued
by

Ax .
Example 2
Let

m=2

and

be the time of payment during the year of

death.
(2 )

For

Ax ,t

will be 0.5 or 1. The average is

For

Ax,t

will be 1.
(2 )

Thus, on average, the payment for

Ax

occurs

0.5+ 1
=0.75 .
2

10.75=0.25

years earlier. So, its present value is larger by a factor of


0.25

(1+i)

. Alternatively, as we let
(2 )
x

A (1+ i)

m=2 , then we have


21
2(2)

Ax

A (x2 ) (1+ i)0.25 A x

Example 3
Let

Ax

be the present value of $10 paid at time 5.


A x =10(1+i)5

Let

(m )

Ax

be the present value of $10 paid at time 4.75 (or

0.25 earlier).
A (xm )=10(1+i)4.75=10(1+i)0.25 (1+i)5=(1+i)0.25 A x
For UDD approach, these approximations apply ONLY to death benefits.
Hence, the claims of acceleration approach give the formula for an
endowment insurance as,

Problem
Find the value below by using the claims of acceleration
approach and referring to the Illustrative Life Table with interest
at 6%.

6.9 Extra Risks


An underwriter may choose to reflect the extra mortality risks in
several premium calculations to individuals who are ineligible for
standard rates insurance.
1) Age Rating
An impaired life individual are those who suffer from a medical

condition
This individual will be treated as being older in order to

compensate for this extra risk


For example, an impaired life aged 40 might be asked to pay the

same premium paid by a non-impaired life aged 45


The change is only on the policyholders age

2) Constant Addition to x
Imposed to individuals who actively participate in hazardous

pursuits
The extra risk is independent of age
We could model this extra risk by adding a constant to the force

of mortality
Functions
o with superscript i denote the impaired life
o without this i denote a standard survival model
o
= constant added to the force of mortality
Formula to compute the EPV of a survival benefit is

Therefore,

With

j=e

1 , in which rate of interest

is used to compute

the standard survival model

For impaired life who has curtate lifetime

An interest adjustment also applied on the discount function for

K [ x] ,

the extra risk computation


i
i
n E x =v j n p x
3) Constant Multiple of Mortality Rates
Treated to individuals who are subject to higher mortality rates
For example, we can compute the probability of surviving an
integer number of years by setting

q [ x ] +t=1.1 q [ x ] +t , where

denotes extra mortality risk.

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