PSTAT 172 B

MULTIPLE DECREMENTS

April 20 2016

Ian Duncan, FSA FIA FCIA FCA MAAA

duncan@pstat.ucsb.edu

University of California, Santa Barbara

1
MULTIPLE DECREMENTS

We started Life Contingencies looking at a single decrement - death. In reality,

whether you are operating an insurance fund or a pension plan, participants are
subject to multiple events that you need to capture and model.

Life Insurance

 death
 withdrawal (lapse)
 surrender (termination with refund of accumulated value)
 etc.

Pensions

 termination (quit work)

 termination (cease to contribute)
 retire
 disability retirement
 death
 etc.

Health Insurance

 termination (quit work)

 termination of insurance (cease to contribute, either due to eligibility for
other insurance such as a spouse, or no longer purchasing insurance).
 Unlike other insurance, health insurance allows an increment (addition of
more family members (e.g. birth of a baby) as well as deletion of a family
member (death; divorce etc.);
 disability;
 retirement;

2
 Because health insurance is priced on an annual basis and paid for monthly,
decrements play a lesser role in pricing. However, in health insurance the
reason that someone terminates from a group is very important. Why do you
think that may be?

Terminology

Forces that reduce a population (insured lives; annuitants; etc.) are referred to as
forces of decrement.

You will remember (from 172A) that the probability that a member of a
population subject to a single force of decrement (e.g. mortality) stays in force for
t years is t px . Analogously, the probability that a member of a population
subject to multiple forces of decrement stays in force for t years is t px ( ) .

We denote the probability that (x) survives t years under multiple decrements as
t px ;  (Greek t)  "total."
( )

Recall that, in the case of a single decrement constant force model (e.g.
t
   x s ds
mortality): t px  e 0
(Result 2.19 from 172A)

For example, assuming a single decrement model (mortality) where µx = 0.01

t
  0.01ds
t px  e 0
 e 0.01t

In 172A, µx was the force of mortality or instantaneous probability of death, and

t t
f x (t ) t px  x t and t qx   f x ( s )ds =  t px  x  s ds .
0 0

3
Introducing multiple decrements, for example, let us consider a simple pension
plan model that recognizes only two decrements: death and retirement, with
forces of decrement µx(r) and µx(d) respectively. (r = retirement; d = death)

Forces of decrement when acting together are additive. So, if

µx(r) = 0.05 and µx(d) = 0.01

Then µx() = µx(r) + µx(d) = 0.06.

EXAMPLE 1:

If µx(r) = 0.055 and µx(d) = 0.005 Find t px ( )

SOLUTION

 0.055 0.005 t

t
   ( )ds
t px  e e  e0.06 t
0  

t
   x( s) ds
n

Generalizing: 
( )
x t   ( j)
x t and survival probability, t px  e 0
j 1

Associated Single Decrement

More notation: we want to distinguish between force of decrement when the

forces are acting together and force of decrement (acting alone). An obvious
example is a mortality table constructed for the single decrement case (like the
illustrative life table), vs. a mortality table to be used when other decrements are
operating together. Although we didn’t discuss this at the time, the (somewhat
unrealistic) assumption underlying the ILT is that death is the only decrement.

The following is a key definition:

p
1x
)
(

is the associated single decrement survival function, assuming that

t

!
t
 
-0
e

d
s
μ
s
)
(
1
)
(

decrement 1 acts alone. This is equal to  x

4
 1
)
(
1

And of course, t q
!
x   s p! x (1)  x(1) s ds = 1 t p! x (1)

p
0

1x
)
(
You may also see referred to as the net probability of decrement, the

t
!

independent rate of decrement or the absolute rate of decrement.

Some important conclusions follow from this notation:

Note (1) that: t px ( ) t px! (1) t. px! ( 2)

t
   ( )ds
This follows because: t px  e 0

and since µ x (t )  µ x    µ x   we can re-write as:

r d

 t (d )ds  t (r )ds

t
   ( r )   ( d )ds
t px  e 0 =e 0
e 0

t px ( ) t px! (1) t. px! ( 2)

or said another way, the total survival probability (surviving the combined effect
of death and retirement) is the product of the probability that (x) survives death
only for t years times the probability that he survives retirement only for t years.

Of course, in pension plans, t px! ( 2)  1.0 for t < the first age of retirement
eligibility, frequently 55. So be aware that decrements are not always positive
(for some range) or uniform.

Note (2) that:  qx! (i )  qx (i )

in other words (fairly obviously) the rate of decrement is higher when the
decrement acts alone than when it acts in combination with other decrements.
Since  qx! (i )  qx(i ) ,px! (i )  px(i )
5
Note (3) that: qx ( )  qx (1)  qx ( 2)

The sum of the unprimed qx’s will always equal q x()

VERY IMPORTANT THING TO REMEMBER THAT STUDENTS ALWAYS FORGET:

qx( ) is the SUM of the unprimed qx’s;

t px ( ) is the PRODUCT of the primed px’s

In a moment we will see how to move from unprimed to primed values.

Note (4) generalizes t px ( ) :

j    
n n
( )
t px  exp (  0
t
µ x s ds 
( j)
t px ! ( j)

The use of primed and unprimed probabilities can be confusing. Useful to keep in
mind that the sum of the unprimed values is equal to the total value (). If you
are dealing with unprimed values, you need to convert to primed or use the
relationship:

(Primed) px   . t px   t px ( ) (Unprimed)
! r ! d
t

An example may make this clear:

Assume a population of 100; they are subject to a probability of decrement

(death) of 10% and withdrawal of 40%. Both of these probabilities are
independent decrements acting on their own. Assuming UDD, the number of
lives exposed to the risk of withdrawal is then 95 (100 – ½ qx). The number of
lives exposed to the risk of death is 80 (100 – ½ qw).

6
An example to illustrate primed/un-primed (acting alone/acting together)
probabilities

100

90

x X+1

When the decrements act on their own the number dying is qxd 100  or 10 and the
number withdrawing is qxw 100  or 40. When the two act together, however,
some of the lives who would otherwise die have withdrawn (and vice-versa) so
when the two decrements act together their effect is less than it would be if they
acted alone. The number dying is qx (80) or 8 and withdrawing is qw (95) or 38.
Thus:

Acting alone, 10 die and 40 withdraw = 50

Acting together, 8 die and 38 withdraw = 46

q!d + q!w > qd + qw

It is important to keep these concepts straight particularly when constructing

mortality and other experience tables.

7
For this example we assumed UDD for simplicity; from 172A you know that UDD is
not the only assumption about mortality during year-of-age x; we will see more in
a moment.

EXAMPLE 2

For a double decrement table, you are given:

a. qx!  2  2qx! (1)

b. qx! 1  qx! ( 2)  qx ( )  0.18

Calculate qx!  2

SOLUTION

qx
! 1
 qx! ( 2 )  qx ( )  0.18   1 p  x
( )
 0.18
 1 – 1  qx! (1) 1  qx! ( 2 )   0.18
q 
x
! (1)
 q x
! (2)
 –  q  q
x
! (1)
x
! ( 2)
  0.18

  q  q  
x
! (1)
x
! ( 2)
0.18
 2 q  q   x
! (1)
x
! (1)
0.18
  q   0.3
x
! (1)

And qx! ( 2 )  0.6

8
Joint Distributions

We define a new random variable, Jx that denotes the mode of decrement at age
x. The force of decrement is the instantaneous rate of decrement due to a
specific cause:

Pr (t< Tx ≤ t+dt and Jx = j) = µ x+t (j)

This expression means: the probability that the future lifetime of x lies between t
and t+dt, given that the lifetime of x is terminated by decrement j.
n

And: µ xt ( )  
j
µ x t ( j )

As you would expect: Pr (t< Tx ≤ t+dt and Jx = j) = t px ( ) µ xt ( j )

That is: the probability that the future lifetime of x lies between t and t+dt is
equal to the probability that x survives to time t (from all decrements) and then
terminates from decrement j during the interval t and t+dt.

And t qx   0 px ( ) µ xs ( j ) ds
t
( j)
s (Important result)

Mostly, we will deal with double decrements; Example 3 is an example of triple

decrements.

EXAMPLE 3

For a triple decrement table,

a. µ xt (1)  0.3
b. µ xt    0.5
2

c. µ xt 3  0.7

Calculate qx ( 2)

9
SOLUTION

Total force of decrement = µ x+t (τ) = (0.3) + (0.5) + (0.7)

Survival probability is t px ( )  e 1.5 t

qx ( 2)  1 qx ( 2)    0 s px ( ) µ xs ( j ) ds   0 e 1.5 t  0.5 dt

1 1

= (0.5)/(1.5) (1 - e -1.5 ) = 0.25896

General Multiple Decrements

We have looked at the 2-decrement example. The model may readily be

extended to n decrements.

For example: µ x (t )  µ x 1  .....µ x  n 

t

 e 0
  µ (1)  s   ......
µ x( n )  s  .ds
Survival probability: t px (t )  x 

! j 
and t px (t )  j t px

Similarly if decrement i is the only decrement, etc.

The density function for decrement i is:

f  t , i  t px (t ) .µ x    t 
i

The probability of termination due to decrement i by time t

t
i 
= t qx  0 f  s ,i  . ds

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The total probability of termination (all cause) is:

qx ( ) t qx ( )1 t qx    ......  n
 (1 t px ( ) )
2
t t qx

And the probability of ever terminating due to cause i is:


i 
0 f  s, i  . ds  lim t qx  
i
 qx =
t 

where f(s, i) is the probability of decrementing due to decrement i at time s.

Definitions to remember:

11
More things to remember:

1. t px ( )  i t px
! (i ) ( t px ( ) is the product of the probabilities acting alone)

2. t qx ( )  i q
t x
(i ) (note; sum of the t qx(i ) , acting together)

When no assumption is stated (such as UDD or Constant Force) the question will
probably want you to use an integral such as the first relationship in the box.
When an assumption is stated it will be one of the forms UDD or CFM.

EXAMPLE 4

Note: no mention of CFM or UDD so the question will require integration.

Given µx(r) = 0.05 and µx(d) = 0.01 (r = retirement; d = death);

Find µx() and associated single decrement rates.

SOLUTION

Then µx() = µx(r) + µx(d) = 0.06.

Also, the density function for the remaining lifetime of x is (as we have seen
before) t px µx+t

t qx( d ) = probability of death in the interval 0 to t is the integral of the density

function for mortality:
t t
  f  s ,d  . ds  px( ) µ.x  s ( d )
(d )
t q x s ds (generalization of result 2.20)
0 0

t
  e 0.06 s  0.01
 . ds
0

= (0.01/0.06) e -0.06s |0t

= 1/6 (1- e -0.06t) (similarly retirement)

12
 t t
  f  s ,r  . ds  px( ) µ.x  s ( r )
(r )
t q x s ds
0 0
t
  e 0.06 s  0.05 . ds
0

= 5/6 (1- e -0.06t)

So, substituting t = 1:

q x(d) = 1 (1 - e -0.06) = 0.00971 (note < q x!(d) see below for derivation)
6

q x(r) = 5 (1 - e -0.06) = 0.04853 (note < q x!(r) )

6
And the sum is q(τ) = 0.05824

For t = 1, remembering that p x! (d) = exp { - ʃ01 µx+s(d) . ds}

= exp (- ʃ01 0.01 . ds)

p x! (d) = exp(-0.01t)|01 = e -0.01

p x! (d) = 1 - q x! (d) = e -0.01 = 0.99005 → q x! (d) = 0.00995 (note > q x(d) )

p x! (r) = 1 - q x! (r) = e -0.05 = 0.95123 → q x! (r) = 0.04877

p x () = p x! (d) p x! (r) = e -0.05-0.01 = 0.94176 → q x () = 0.05824 which is what

we derived from q(τ) = ∑ q(i) (unprimed).

(d)
Finally: tq x = 1 (1 - e -0.06t) and t q x(r) = 5 (1 - e -0.06t)
6 6

and the lim t qx ( i ) = 1/6 and 5/6 respectively.

x 

13
 As noted previously,

q x! (d) = 0.00995 > q x (d) = 0.00971 and

q x! (r) = 0.04877 > q x (r) = 0.04853

This is an important example; take a minute to grasp it because we will see how
you can derive the same result assuming Uniform Distribution of Decrements
(UDD) as follows.

We found the relationship between q x (r) and q x!(r) by integration; we could also
have found this by using the formula:

q x (d) = q x!(d) (1 - q x!(r) )

2

= 0.00995 (1 - 0.04877) = 0.00971

2

etc. (assuming UDD - uniform distribution of decrements).

EXAMPLE 5

For a life (10) and double-decrement model, you are given:

a. µ10+t (1) = 1/(30-t) and

b. µ10+t (τ) = 50-2t

600-50t+t2
a. Calculate the probability that (10) will terminate from cause 2 during year 6
b. Calculate the probability that (10) will terminate from cause 1 ultimately.

14
SOLUTION

µ10+t (τ) = 50-2t = 50 -2t = __1__ + __1__

600-50t+t2 (20 –t)(30 –t) (20-t) (30-t)

 µ10+t (2) = 1/(20-t)

1 1
 t p10t ( )  exp [  0t  ds ]
20  t 30  t

= exp - [- ln(20-s) - ln (30-s) ] |0t

= exp [ln(20-t) – ln(20) + ln (30-t) – ln(30)]

= exp [ln (20-t)/20 + ln (30 –t)/30] = (20-t) (30 –t)

(20) (30)

The required probability is 5|1 q 10 (2)

 20  t  30  t  1
q ( 2)
  56 1/ 20  t  dt    30t – t 2 / 2  |56
600 
51
| 10
600

= 49/1200

b. For the second part of the question, we want Pr(J10 = 1), i.e. the probability
that (10) terminates from cause 1.

By definition, ∞ q 10 (1) = ⨜ 020 (20-t)(30-t) _1_ dt

600 30

= 1/600[20t – t2/2]|0 20 = 1/3

In this case, ∞ is replaced by 20 because that is the limiting age for

the individual (based on decrement (2)).

15
EXAMPLE 6

Find similar results for a 3-decrement model with constant force of decrement.
Find ∞ tqx (j) , j = 1,2,3. Forces of decrement are:

µx(1) = 0.01; µx(2) = 0.05 and µx(3) = 0.02

Hint: first calculate survival functions for each decrement acting alone. Then
develop density functions for the decrements.

SOLUTION

Survival functions for all three decrements acting alone:

!(1)
tp x = e-0.01t ; tp x!(2) = e-0.05t; tp x!(3) = e-0.02t

()
tp x = tp x!(1) tp x!(2) tp x!(3) = e-0.08t

Density functions for the three decrements are:

f (t, 1) = tp x() µx(1) (t) = 0.01. e-0.08t

f (t, 2) = 0.05. e-0.08t
f (t, 3) = 0.02. e-0.08t

Probabilities of termination for the three decrements are:

(1)
tqx = ʃ0t 0.01. e-0.08s ds = 1/8(1- e-0.08t)
(2)
tqx = ʃ0t 0.05. e-0.08s ds = 5/8(1- e-0.08t)
(3)
tqx = ʃ0t 0.02. e-0.08s ds = 2/8(1- e-0.08t)

Finally, ∞ tqx (1) = 1/8; ∞ tqx

(2)
= 5/8; ∞ tq x
(3)
= 2/8;

16
 !(1)
RELATIONSHIP BETWEEN tq x and t q x(1)

Until now we have moved between t q x!(1) and t q x(1) using the relationship

 t  n
( )
   µ x s ds    
n
t px  exp   ( j)
p!x ( j )
  t
 0  j

As a result we can form a relationship between primed and unprimed rates using
p ' s and p! ' s.

However, it is also possible to derive t qx ( j ) directly if we make an assumption

about t qx ( j ) and t q!x ( j ) . Typically (you should be used to this by now) we assume
either UDD or constant force of mortality.

Specifically, we assume Uniform Distribution of Deaths or decrements in this case

(UDD), which (handily) implies that t q!x ( j )  tq!x ( j )

This assumption results in the following formula (in the case of a double-
decrement model; we shall generalize this in a moment):

!( 2 ) !(1)
q q
qx (1)
 qx !(1)
(1  x ) and conversely: qx (2)
 qx !(2)
(1  x )
2 2

Take a look back at the graph on page 7; these formulae are a formulaic
equivalent of that graphic.

There is a similar formula for the 3-decrement case.

(qx  qx!(3) )   qx!( 2) .qx!(3)  }

1 !( 2 ) 1
qx (1)  qx!(1){ 1 
2 3

17
EXAMPLE 7

Consider the following double-decrement table:

x dx(1) dx(2) qx ! (1)

20 1655 200 0.1
21 2592 - 0.2

We assume that decrements are uniformly distributed over the year-of-age in the
associated single decrement table. Calculate lx(τ) .

SOLUTION

qx ( 2)   d x ( 2) / lx    qx! ( 2) 1 – ½  qx!(1) 

 1655 / lx       0.1 1 – ½  q20 ( ! )2

 d 20 (1) / l20    q 20(1)  q20!(1) 1– ½  q20!( 2) 
 200 / l20    q20!( 2) 1– ½  0.1   0.95 q20
1655  0.1 (1 – ½  q20 !1
 
200 0.95 q20!( 2 )

78.6 q20!(2) = (1- 0.05) q20!(2)

q20!(2) = 0.01264

l20(τ) = 200/0.95 (79.1125) = 16655.26

l21(τ) = l20(τ) - 1655 – 200 = 14800.26

18
Constant force of mortality

Constant force for multiple decrements:

px ( )   px ( ) 
t
a. t (allows us to calculate survival probability for fractional
ages/durations).

µ x s  
j
b. qx ( j ) for s in the interval [0, 1)
t
 

t qx
µ x s ( )

We use this relationship to get unprimed rates from the aggregate (sum of
primed)

qx( j ) / qx( )
c. t px
! ( j) 
  t px ( ) 

Use to get primed rates from unprimed.

EXAMPLE 8

Assume a constant force of decrement for each of 3 decrements over each year of
age in a triple decrement model. You are given

a. q50(1) = q50(3)
b. q50(2) = 2 q50(1)
c. µ50+t(1) = log (2) for 0< t< 1

Calculate: 0.5 q50(2) and 0.5 q50!(2)

SOLUTION

Some preliminary derivations:

Define the constant forces of decrement as µ50(j) j = 1,2,3

19
We are given µ50(1) = log (2) and can derive µ50(2) as 2 log 2 or log 4. (Applying
µ x s  
j
result b. above qx ( j ) which says that the µ’s are in same ratio as
t
 

t qx
µ x s ( )
the qx’s.)

Further q50(3) = q50(1) which implies that µ50(3) = µ50(1)

Hence we can derive µ50(τ) = ∑ µ50(j) = log 2 + 2 log 2 + log 2 = log16

(τ)
a. 0.5 p50 = (p50 (τ) )0.5 = exp (-µ50(τ) )0.5 = exp (- log 16)0.5 = 1/4
(2)
To find 0.5 q50 , we use the ratio property (b) above:
(2)
0.5 q50 = µ50(2)
(τ)
0.5 q50 µ50(τ)
(2)
0.5 q50 = (1 - 0.5 p50 (τ) ) µ50(2) = ln(4)/ln(16) = 1/2
µ50(τ)

= (1 – ¼) (2/4) = 3/8

To get the primed values we apply result c.

q 50 (2)/ q50(τ)
! (2)
0.5 q50 = (1 - 0.5 p50 !(2) ) = 1 - [ 0.5 p 50 (τ) ]

= 1 – (1/4) 2/4 = 0.5

20
Discrete Decrements

Mortality, withdrawal, etc. occur continuously over time. So do births (although

there is a seasonal pattern to births). But some decrements occur at specific
times. An example is retirement, which tends to occur at specific ages. Another
example is policy surrenders, which tend to take place before a premium is due.
The force of decrement for some decrements is discontinuous.

These decrements tend to be tricky but with a clear head you should be ok. Here
is an example from an SOA exam:

EXAMPLE 9

For a triple decrement table, you are given:

a. Decrement 1 is uniformly distributed over each year-of-age in its associated

single decrement table.
b. Decrement 2 occurs only at the end of the year.
c. Decrement 3 occurs only at the beginning of the year.

x lx(τ) q x!(1) q x!(2) q x!(3)

60 100,000 0.14 0.10 0.10
61 0.10 0.20
62 45,516

Calculate q 61(1)

SOLUTION

First, we fill in the gaps in the table.

l61(τ) = 100,000 (0.86)(0.9)(0.9) = 69,660

l62(τ) = 69,660 (1 - q x!(1) )(0.9)(0.8) = 45,516

 p 61!(1) = 0.9075 and q 61!(1) = 0.0925

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 q61    
1
For later use, !1
p61!(1) µ (1) 61t dt which is just a re-statement of a result
0 t

from 172A:

We can determine p 61!(2) quite simply by realizing that if the decrement takes
place at the end of the year, the probability of surviving to the end of the year
from the single decrement (2) is 1.0.

Similarly for p 61!(3) , we realize that all the decrements take place at the
beginning of the year and that the probability of surviving a year from
decrement 3 is simply 0.8.

We are now in a position to calculate q 61(1)

We recall that the formula for this is

q 61(1) = ∫01 p 61!(2) p 61!(3) p 61!(1) µ 61+t (1)dt

= ∫01 (1)(0.8) (0.0925) dt

= 0.074

Note: this is not an application of the formula for the triple decrement; you are
not given an assumption about the distribution within the year of age and we are
given a force of decrement (µ 61+t) so you should use the integral. Students given
this type of problem in an exam often make the mistake of applying UDD but
there is nothing in the question that implies this.

There is a formula that you can apply in these situations (as we discussed in class).

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CONSTRUCTION OF TABLES

Number alive at x: l x () = l x-1 () . p x-1 ()

Number of deaths due to decrement i at age x

= dx(i) = qx (i) . l x ()

Large clients may have enough data to construct a multiple decrement table from
their own experience. This is rarely the case. More likely a table will be
constructed using associated standard single decrement tables. Either way, the
process will probably involve modifying or scaling an existing table. So in pension
plan valuation (for example) you may have enough mortality experience to
aggregate this over a period of years to evaluate how your actual data compares
with expected mortality from a standard table. This can get quite tricky because
(of course) the observed deaths are qx, not qx! , thus requiring some additional
allowance in comparing with standard (single decrement) mortality tables.

EXAMPLE 10

Assume a radix of 10,000 and a double decrement table beginning at age 65;
q65!(1) = 0.01; q65!(2) = 0.02. Find l 66 () .

SOLUTION

We first need to calculate q65(1) from q65!(1) (ditto for (2)).

q65(1) = q65!(1) (1 - q65!(2)/2) = 0.01 * 0.99 = 0.0099

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 q65(2) = q65!(2) (1 - q65!(1)/2) = 0.02 * 0.995 = 0.0199

l 65 () = 10,000 so d65(1) = 99 and d65(2) = 199

Total decrements d65() = 298

l 65 () = 9,702

Application of Multiple Decrements

For the purpose of this course, you will need to understand the application of
multiple decrements theory to:

1. Calculation of Actuarial Present values (pricing) and reserves.

2. Asset shares.
3. Surrender charges, reduced paid-up and extended term values.

Good news: this will all be a logical extension of what you have already seen in
the single decrement world.


As you know, in the case of a continuous annuity āx   v t t px dt
0

We can generalize this in the multiple-decrement case to: āx   v t t px( ) dt
0

Similarly, for an Insurance policy (single decrement): Ā x   v t t px µx t dt
0

The generalization of this to multiple decrements is slightly more complicated:

If benefits are always the same, irrespective of the cause of death, the formula

generalizes to: Ā x   v t t px( ) µx( dt) dt where d= death.
0

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However, benefits often differ according to the cause of decrement. The primary
example of this is a type of policy called “Double Indemnity” (if you haven’t seen
the famous movie “Double Indemnity” you should rent it (the original 1944
version with Barbara Stanwyck and Fred McMurray). While we are on the topic
of movies, you should also watch the other famous actuarial movie, “Billion Dollar
Bubble” which is the true story of a scam perpetrated by actuaries in an insurance
company in LA. I gave a copy to the club some years ago – ask Sarah. Otherwise
there is an excerpt on Youtube).

Anyway, back to Double Indemnity policies. The idea behind Double Indemnity
policies is that they pay the sum insured if you die from natural causes, but if you
die as a result of an accident they pay an Accidental death benefit. So in the
case of death from an accidental cause the policy pays twice (Double Indemnity).
There are also Accidental death only policies which pay only on death due to
accident. When pricing Accidental Death policies, of course, we have to take
account of all causes of death, not just death by accident, although only in the
case of death by accident is a benefit payable. There are also disability policies
that work like this, called Total and Partial Disability. Total disability entitles you
to a benefit (usually an annuity) while there are specified payments for loss of
function: so much for a finger, so much for a hand, etc. (Yes, rather grisly.)

So how do we value a death benefit in the case of multiple decrements? Let us

denote the benefit payable on decrement by cause j as bt(j).

n 
APV    0
j 1
bt ( j ) vt t px ( ) µ xt ( j ) dt.

We will consider an example of this type of problem.

25
EXAMPLE 11

26
27
EXAMPLE 12

SOLUTION

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EXAMPLE 13

What are the benefit reserves for this policy at the end of year 1 and year 2?

SOLUTION

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Asset Shares

Previously we looked at Asset Shares (the accumulation of the policyholder’s

share of the assets in a policy) assuming a single decrement. However, more
realistically multiple decrements will apply. We generalize the method to
consider multiple decrements. The additional decrement(s) that matter are
withdrawal (ceasing to pay premiums) and surrender (for a cash surrender value;
there are other options. CSV is the surrender option that occurs in these
questions; the others are usually actuarially equivalent. More about this in a
moment).

h CV = Cash value at time h.

We have seen before how to calculate surplus (or gain/loss) on the policy:

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31
 EXAMPLE 14

SOLUTION

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Non-forfeiture Options (more on this under Profit Testing in the next lecture)

“Non-forfeiture option” the general term for all options available to a

policyholder who wants to terminate a policy, and includes:

 Surrender (with cash value);

 Reduced paid-up insurance (the present value of future benefits equals the
cash value amount, or in some cases the reserve less a charge). The
reduced paid up policy usually has the same form as the original policy,
including (for example) cash values. Just the face amount is reduced;
 Extended term insurance (the amount of term insurance that can be
funded by the cash value or the reserve). In this case, there are obviously
no cash values.

Reduced paid-up insurance

Consider an n year Endowment Insurance policy. Assume that the reduced

amount of paid-up insurance is denoted by kW, where k is the duration and W the
revised face amount. The cash value at duration k is denoted kCV, which (for
simplicity) we assume is equal to k Vx:n| .

Then: k CV  k Vx:n|  Axk:nk| – Px:n|äxk: nk|

We define k Wx:n| as the reduced paid up amount at duration k.

( k Wx:n| )(Axk:nk| ) (APV of the RPU amount) = Reserve (or cash value)

( k Wx:n|  )( Axk:nk| )  Axk:nk| – Px:n|äxk: nk|

Axk:nk| – Px:n|äxk: nk|

(k Wx:n| )
( Axk:nk| )

Px:n|
1 (Since Ax+k: n  k | = P x+k:n-k ä x+k: n  k | )
Pxk:nk|

33
Exam questions about Non-forfeiture values frequently involve a surrender
charge. This is generally of the form (α)( kVx: n | ) so the solution is simple as long as
you remember to deduct the surrender charge from the amount available to the
policyholder.

Extended Term Insurance

Using our prior (Endowment Insurance) example with cash value at duration
k = denoted kCV and a reduced paid-up (we usually abbreviate to RPU) face
amount of b:

kCV = b A !x+k: n  k |

It is important to note that the policy has the same duration as before (n-k years
remaining). Any change in underlying policy terms such as duration could give
rise to additional risk and should be priced into the conversion. One situation
that can arise is that the cash value is large enough (and n-k short enough) that
the face amount could exceed the prior sum insured. Clearly this is anti-selective
on the part of the policyholder. One way to address this is to maintain the face
amount at 1 and to pay remaining cash value out as a pure endowment.

EXAMPLE 15

We are given lx = 100 –x and δ = 0.05.

A life aged 40 buys a whole life insurance of 1000 payable at the moment of
death. Premiums are payable continuously until death.

a. Calculate the net level premium for the policy and the benefit reserve at
duration 15.
b. A surrender charge of 10% of reserve is applied. If the life converts at
duration 15 to a Reduced paid-up insurance, calculate the amount of the
RPU.
c. Suppose, instead, that the life elects a 20-year Extended Term insurance.
What is the face amount of the extended term insurance?

34
SOLUTION

There are 2 ways to solve part b.

35
c. We need Ā! 55: 20 | = _1_ (1 – vn) = (1/45)(1- 0.3769)
ω-x δ 0.05

= 0.2769

Cash value (less surrender charge) = 106.512

New Extended Term face amount: 106.512/0.2769 = 384.61

A quick check shows that this is not more than the prior face amount (1000)
so there is no selection involved.

36