PnRT Two

MooBLS FoR
S unvrvar- C oNTTNGENT Rr srs
The second section of the text addresses traditional contingent payment models where pay-
ments are dependent on the continued survival (or failure to survive) of a defined entity. This
entire subject has traditionally been known as life contingencies, since the payment(s) were
contingent on the continued life (or death) of a designated person. In this textbook the sub-
ject is treated in a more general fashion, where "survival" can just as easily mean the contin-
uation of a labor strike, the functioning of a mechanical device (often called reliability
theory), or the regular payment of scheduled coupons under a corporate bond.

Discrete functions numerically evaluated from a discrete survival model (i.e., a life table) are
emphasized, since they represent most of the practical problems encountered by actuaries.
The more abstract continuous functions are also considered, frequently for their interesting
mathematical behavior. A random variable approach is employed along with a deterministic
approach when that view is useful to broaden the reader's understanding.

actuarial models considered in this section can be presented as

In addition, the traditional
multi-state models, which are based on discrete-time or continuous-time Markov Chains.
The background theory of Markov Chains was presented in Chapter 3.

The survival model is presented in Chapters 5 and 6, in both its parametric and tabular con-
texts.

The standard set of single-life, single-decrement actuarial topics is covered in Chapters 7-11:
contingent payment models (with emphasis on their standard insurance applications), con-
tingent annuities (life annuities), annual funding schemes (annual premiums), including their
m'htv andcontinuous variations, and contingent contract reserves, now presented in two chap-
ters. Extensions to the multi-status cases of joint and last-survivor are presented in Chapter
12 andmultiple decrement models are covered in Chapters 13 and 14.

A discussion of using Microsoft Excel to calculate actuarial values from a life table is pre-
sented in Appendix A.

Standard actuarial notation is employed throughout this section.

 CHapTERFTvp
SuRvrver Mooprs
CoNrrNIUous P c CoNrpxr

A survival model is simply a probability distribution

for a particular type of random variable.
Thus the general th"ory ofprolabiliv, * trr::*.a
ever the particular history olttte s.rrviual
ir crt"p[, i,-is fulry applicable here. How_
model random
gy and notation has developed, particularly ""l"tr. it rosuch
in an u"toutiuilont"r,. ai,
that specific terminolo-
chapter (and the next)
the reader will see this speciaiized termiiology-*J;;;"tt,loa-
terminology and notation that is new; the ,"*goir" that it is onry the
plying to any ryg;ta.s
other continuous random variaute *o
n{iliii,
L"o.y"i, td;;
u, ,n* up_
i]tr oirniil;il.
In actuarial science, the survival dishibuJion
which is called a lift table.t Because the life ]s -frequgntly summarized in tabular form,
tuur" ro"i i. ,Jpr"uur"nt in actuarial work, we
will devote a tull chapter to it in this textbook (see
Chuo; o:"

5.1 Tnn Acn-ar-Fau,unn Rlluopr Vanranr,p

we begin our study of survival dishibutions..l{ d"$qg
the generic of faiture.In any
situation involving a surv.ival model, there
survival' and hence of failure, of thai entity.2
willLe;ffi;-.n6 _concept
and an ur.o"iut"j.oncept of
Here are ,o-" of entities and their asso-
ciated random variables. ""uoiples

(1) The operating lifetime of a light bulb. The

bulb is said to survive as long as it keeps
ing, and fails at the instant it Sums out. bum-

@ The duration of labor/management harmony.

The state of harmony continues to survive
as long as regular work schedules are
me! and fails at the time u ,t it" i,
versely' we could model the duration of a "urt"a. lcon-
itrike, where irr. rt it" survives until it is set-
tled and workers return to the job. The settlement
strike status.) the failure of the
".r"rri1orr.titutes

(3) The lifetime of a new-born person. The person

survives until death occurs, which con-
stitutes the failure of the human entity. This
will be the most common example consid-
ered in this text.

Let To denote the continuous random variable

for the age of the entity at the instant it fails.

I
Altematively, the tabular model is also called
a mortality table.
' Another term for failure is- decremenl.lf an
entityl-ras a.particular stafus, such as survival,
that status is often described aiiig'i""ri."ri"i r;i^ then failure to retain
context of multiple decrements,^t *trriit we t{iffi;. ffiiliL#r:norogy is particurarry usetur in the
"n"o"r[i
i" brr"pi;;'il'";ji;:'"'
61
62 T CHAPTERFIVE

We assume that the entity exists at age 0, so the domain of the random variable fs is f0 > 0.
We refer to Zs as the age-at-failure randomvariable. We will consider the terms "failute" and
*death" to be synonymous, so we will also refer to Is as the age-at-deathrandom variable.3

It is easy to see that the numerical value of the age at failure is the same as the length of time
that sgrvival lasts until failure occurs, since the variable begins at age 0, so we can also refer
to 76 as the timeio-failure randomvariable. (If failure occurs at exact age t,then / is also the
time until failure occurs.)

Later (see Section 5.3) we will consider the case where the entity of interest is-known to
have survived to some age x>0. Then the time-to-failure random variable, to be denoted by
{,, will not be identical to the age-at-failure random variable 7e, although they will be re-
lated to each other by 4 = x+7". When dealing with this more general case we will do our
thinking in terms of the time-to-failure random variable.

5.1.1 Tm CUMULATTvE DrsrRrBUTIoN FITNCT'IoN oF 4

For the age-at-failure random variable 4, we denote its CDF by

Fo(r) = Pr(To<t), (5.1)

for r > 0.4 we have already noted, however, that 'To = 0 is not possible' will always
so we
consider that F6(0) = 0. We observe that d(r) gives the probability that failure will occur
prior to (or at) precise age t for our entity known to exist at age 0. In actuarial notation, this
probability is denoted by ,qo, so we have

= 4(t) = Pr(To3t). (s.2)

tQo

5.1.2 Trrn SUNVTVAT, DISTRIBI.NION FT]NCTION OF 4

Tlre survival distribution function (sDF) for the survival random variable Io is denoted by
Ss(t), and is defined by
so(r) = 1-40) = Pr(To>t), (s.3)

for I > 0. since we take f'o(0) = 0, it follows that wq will always take so(0) = 1' The SDF
gives the probability that the age at failure exceeds r, which is the same as the probability
ihat the ttror
to exist at age 0 will survive to age l. Since the notion of infinite sur-
"ntity
vival is unrealistic, we consider that

3
In practice, age-at-failure is often used for inanimate objects, such as light bulbs or labor strikes, and age-at-
death is used for animate entities, such as laboratory animals or human persons under an insufttnce arrangement.
a
In probability theory, it is customary to subscript the CDF symbol with the name of the random variable, which
suggests the notation F6(r) in this case. With the name of the random variable understood to be 7i, in this sec-

tion, we prefer the notation f0(/) to avoid the awkwardness of subscripting a subscript'
 Sunvrv,c,L MoDELs | 63

lim,So(r) g
t-t6
= (s.aa)
and
limff(r) = 1. (5.4b)
t)6

In actuarial notation, the probability represented by ^16(r)

is denoted rp', so we have

rPo= So(/) = Pr(To>t). (5.5)

In probability textbooks in general, the CDF is given greater emphasis than is the SDF. (Some
textbooks do not even define the SDF at all.) But when we are dealing with an age-at-failure
random variable, and its associated distribution, the SDF will receive greater attention.

EXAMPLE 5.I

Use both the CDF and the SDF to express the probability that an entity known to exist at age
0 will fail between the ages of 10 and 20.

Sor,rmoN

We seek the probability that Zo will take on a value between 10 and 20.Interms of the CDF
we have
Pr(t}<4 < 20) = FeQ0\-400).

Since ,So(r) = 1-4(t), then we also have

Pr(10< To<20) = .So(10)-So(20). D

5.1.3 Tnr Pnon.lsrr,rry DENSrry FuNcrroN oF 4

For a continuous random variable in general, the probability density function (PDF) is defined
as the derivative of the CDF. Thus we have here

fo(t) = 4ro@=
dt -!sogy,
dt
(s.6)

for t>0. Consequently,

FoQ) = ['ofo{ila, (5.7)

and
,so(r) = [,* fou)ar. (s.8)

Of course it must be true that

64 . CHAPTERFN'E

li root a, - 1. (5.e)

Although we have given mathematical definitions of foQ), it will be useful to describe

/r(r) more fully in the context of the age-at-failure random variable. Whereasd(r) and
So(r) are probabilities that relate to certain time intervals, foQ) relates to a point of time,
and is not a probability. It is the density of failure at age /, and is therefore an instantaneous
measure, as opposed to an interval measure.

It is important to recognize that /o (r) is the unconditional density of failure at age l. By this
we mean that it is the density of failure at age / given only that the entity existed at t=0.
The significance of this point will become clearer in the next subsection.

5.1.4 TTm IIAZARD RATE FUNCTTON OF ?O

Recall that the PDF of foQ), is the unconditional density of failure at age /. We now de-
To,
frne a conditional density of failure at age l, with such density conditional on survival to age
r. This conditional instantaneous measure of failure at age /, given survival to age r, is called
the hazard rate at age t, or the hazard rate functio,n (HRF) when viewed as a function of r.
(In some textbooks the hazard rate is called thefailure rate.)ltwill be denoted bV h@.

ln general, if a conditional measure is multiplied by the probability of obtaining the condi-

tioning event, then the corresponding unconditional measure will result. Specifically,

(Conditional density of failure atage l, given survival to age t)

x (Probability of suwivalto age t)
= (Unconditional density of failure atage t).
Syrnbolically this states that

A(r).so(r) = .fo!), (s.10)

hQ):# (s.1 1)

Equations (5.11) and (5.6) give formal defuritions of the HRF and the PDF, respectively, of the
age-at-failure random variable. Along with the definitions it is also important to have a clear
understanding of the conceptual meanings of )"(t) and fi(r). They are both instantaneous
measures of the density of failure at age t; they differ from each other in that 4(r) is condi-
tional on survival to age /, whereas /r(l) is unconditional (i.e., given only existence at age 0).

In the actuarial context of survival models for animate objects, including human persons, failure
means death, or mortality, and the hazardrate is normally called theforce of mortality. We will
discuss the actuarial context further in Section 5.1.6 and in Chapter 6.
 Sur.irryarMoDEls r 65

Some important mathematical consequences follow directly from Equation (5.11). Since
fo Q) = - * t oe),it follows that

-frd soro d
hG) =
roft) -
= -
-alnJo(t)'
Ins^(r)- (5'12)

Integrating, we have

['oh{ildy = -tnsol), (s.13)

or

^eo(r) = *p[-l;A( Ddy). (5.r4)

Tbe cumulative hazardfunction (CHF) is defined to be

4(t) = I'rAadv = -lnso(r), (5.15)

so that

so(4 = e-4(). (5.16)

Exauplu 5.2

An age-at-failure random variable has a distribution defined by

FoQ) = I -' 1o(1oo-r)1/2,

for 0<t< 100. Find (a) the PDF and (b) the HRF forthis random variable.

Sor,wroN

(a) The PDF is given by

f;r4 = *Fn(r) = -(.10)(.50X100-0-rrz . (r) = .05(100- t)-rtz.

(b) The HRF is givenby

otlllotl,;'"' .50(100-r)-r.
v\ /
hQ) = [:\,! =
so0) .lo(1oo-r)ti2= ---\-- o
66 r CHAPTERFTvE

5.1.5 TnB Mo1\4NNTS OF TIIE ACN-,q'T-FAILURE RA\DOM VARTABLE ?b

The first moment of a continuous random variable defined on [0,o") is given by

Elrof = t. 7r1t1at, (s.17)

[i
ifthe integral exists, and otherwise the first moment is undefined. Integration by parts yields
the alternative formula

Elril = JJtotrl *, (s.18)

provided
l$t.So(r) = 0, a form which is frequently used to find the first moment of an age-
at-failure random variable.

The second moment of 16 is given by

nlril = Ii,' .foQ) dt, (5.1e)

if the integral exists, so the variance of Zo can be found from

Yar(r) = nlro'l-{rtrrl}'' (s'20)

Specific expressions can be developed for the moments of ?i for specific forms of S(r).
This will be pursued in the following section.

Another property of the age-at-failure random variable that is of interest is its median value.
We recall that the median of a continuous random variable is the value for which there is a
507o chance that the random variable will exceed (and thus also not exceed) that value.
Mathematically,y is the median of 7i, if

I
Pr(To>Y) = Pr(To3Y) (s.21)
2'

so that So0) = fo!)=L.

5.1.6 AcruAnrar, Sunvrvll MODELS

When the age-at-failure random variable is considered in an achrarial context, special sym-
bols are used for some of the concepts defined in this section. The hazard rate, now called
the force of mortality, is denoted by F,, rather than )oQ). Thus we have
 SunvrvelMoosls . 67

,,=-4#=-frnsos1 (s.22)

It is customary to denote the first moment of 7s by 8o . Thus we have

3o = ElroT = IJr . fo1) dt. (s.23)

Since 3o is the unconditional expected value of Zo, given only alive at t =0, it is called the
complete expectation of lfe at birth.s

We recognize that the moments of Zo given above are all unconditional. Conditional mo-
ments, and other conditional measures, are defined in Section 5.3, and the standard actuarial
notation for them is reviewed in Chapter 6.

Exaupr,p 5.3

For the distribution of Example 5.2,find (a) 441 and (b) the median of the distribution.

Sor,urroN

(a) The expected value is given by Equation (5.18) as

ELT'I = Jtoo.toltoo -t1tt2 dt

= -(l), tox100-/)3/'?1;0' = (3),r0x100)3/2 = T

(b) The median is the value of y satisfying So0)=.10(100-y)t/2=.50, which solves for
!:75' tr

5.2 Exarwr,ns oF PARAnmrRrc SuRvwAL Moonr,s

In this section we explore several non-negative continuous probability distributions that are
candidates for serving as survival models. In practice, some distributions fit better than oth-
ers to the empirical evidence of the shape of a survival distribution, so we will comment on
each distribution we present regarding its suitability as a survival model.

5.2.1 Trre UNrronu DISTRIBUTIoN

The continuous uniform distribution, defined in Section 2.3.1, is a simple two-parameter dis-
tribution with a constant PDF. fhe parameters of the distribution are the limits;f the interval

5
The significance of the adjective "complete" will become clearer when we consider an alternative measure of
the expectation of life in Sections 5.3.6 and 6.3.4.
68 . CHAPTERFTVE

on the real number axis over which it is defined, and its PDF is the reciprocal of that interval
length. Thus if a generic random variable X is defined over the interval [a,b], then
fx (x) = *, for a I x 1 b, and fx@)= 0 elsewhere.

For the special case of the age-at-failure random variable, a = 0 so b is the length of the in-
terval, as well as the greatest value of I for which fo!)> 0. When the uniform distribution is
used as a survival model, the Greek ar is frequently used for this parameter, so the distribu-
tion is defined by

fol) = *, (s.24)

for 0<t< ot. Tftrc following properties of the uniform distribution easily follow, and should
be verified by the reader:

Fo(t) =['ofotfidy = * (s.2s)

,so(r) = 1-40) = [,' fo{ia, =

T (s.26)

hQ)=ffi-* (s.27)

o)
Elrof = = (s.28)
lit.7ogat 2

)
or
var (r) = zlro'f - {alrol}' =- (s.2e)
12

The trniform distribution, as a survival model, is not appropriate over a broad range of age, at
least as a model for human survival. It is of historical interes! however, to note that it was the
first continuous probability distribution to be suggested for that puq)ose, n 1724, by Abraham
de Moiwe. As aresulg actuarial literature and exams often refer to the uniform disffibution as
"de Moiwe's law."

The major use of this distribution is over short ranges of time (or age). We will explore this
use of the uniform distribution quite thoroughly in Section 6.5.1.

5.2.2 T HE EXPONENTIAL DISTRIBUTION

This very popular one-parameter distribution (see Section 2.3.3) is defined by its SDF to be

So(t1 = ,
(s.30)
"-At
 Sunvrv,cr MoDELS . 69

for /> 0 and )">0. It then follows that the PDF is

fo1) = -*tr1, = )..e-tu, (s.31)

so that the HRF is

hQ)=ffi=^, (s.32)

a constant. In the actuarial context, where the hazard rate is generally called the force of
mortality, the exponential distribution is referred to as the constantforce distribution.

The exponential distribution, with its properfy of a constant hazardrate, is frequently used in
reliability engineering as a survival model for inanimate objects such as *u"h^io" pu.tr. tit"
the uniform distribution, however, it is not appropriate as a model for human surv'ival over
a
broad range, but might be used over short intervals, such as one year, due to its mathematical
simplicity. This will be explored in Section 6.5.2.

5.2.3 THE Goupnnrz DrsrnrsurroN

This distribution was suggested as a model for human survival by Gompertz

tlO] in 1g25. The
distibution is usually defined by its force of mortality as

llt = Bct
'
(5.33)

for r > 0, B > 0, and c > 1. Then the SDF is given by

,so(/) = *p[-J;B", orf = *o[*0-/)]. (s.34)

The PDF is given by p, 'So(r), and is clearly not a very convenient mathematical form. A
closed-form expression for the mean of the distribution ,
EfToldoes not exist, but the mean
can be approximated by numerical integration with a large hnite upper limii replacing the
actual upper limit of infinity.

5.2.4 THE MaxnHalr DrsrrusurroN

In 1860 Makeham [23] modified the Gompertz distribution by taking the force of mortality
to be

It, = A+ Bct , (5.35)

for I > 0, B > 0, c > l,and A> -8. Makeham was suggesting that part of the hazard at any
age is independent of the age itself, so a constant was added to the Gompertz force of mor-
tality.
70 T CHAPTERFTVE

Ihe SDF for this distribution is given by

so(r) = *o[-1jrr* ac\ ayf= *o[*(1-"') - o,f. (5.36)

Again it is clear that the PDF for this distribution is not mathematically tractable. As with the
Gompertz distribution, there is no closed-form expression for ElTof, although it can also be
approximated by numerical integration.6

5.2.5 SuIIUANY OF PARANGTRIC SURVTVAL MODELS

We have briefly explored four distributions here: two (uniform and exponential) which are
mathematically simple, and two (Gompertz and Makeham) which are not. For many illustra-
tions, where we wish to avoid mathematical complexitf, we will use the uniform or the ex-
ponential for illustrative purposes only, not necessarily suggesting that they are applicable in
practice. The exponential has been applied in many situations not involving healthy human
lives, and has been widely used in those situations-

5.3 Trru Trun-ro-Fl.rr.unn RaNnopr Vlnranr.n

In Section 5.1 we defined a continuous random variable, denoted Zo, which measured the
length of time from age 0 until failure occurs. Now we turn to the case where our entity of in-
terest is known to have survived to age x, where x > 0, and we wish to consider the random
variable for the additional time that the entity might survive beyond age x. We denote this
random variable by T, and note that its domain i. 4 > 0. We define the random variable
{ to be the time-to-failure random variable for an entity known to be alive (i.e., known to
have not yet failed) at age x. We will use the notation (r) to denote the entity known to be
alive at age x.'

If f is the random time-to-failure for an entity alive at age x, it follows that the age-at-
failure will be f more than age x, so we have the relationship Ts= x*7, between our two
basic random variables. This is illustrated in the following figure.

T, +4

x x*7,
FIGURE 5.1

Ratlrer than develop separate distributions for T, for each different value of x, we will simply
calculate probability values fot 4 from the distribution of d. (An exception to this will be
explored in Section 5.4.)

6
A generalization of the Makeham distribution is presented in Exercise 5-10.
7
The time until failure of (x) can also be called the future lifetime of (t), so { is therefore often called the
future lifetime random variable for the entity (.x).
 SuRvrvalMoDELS i 71

5.3.1. TsB Sunvrvar- DrsrnrnuuoN tr'uNcrroN oF 4

For an entity known to be alive at age x, which we denote by (x), the probability of surviv-
ing an additional / time units8 is denoted by , p* in actuarial notation. In probability termin-
ology, we note that this is simply the conditionalprobability of failure beyond age x+t,
given survival to agex (hence failure beyond age x). Thus we have

tPt = Pr(T, > t)

(s.37)
Pr(Tr> x+tlTr> x).

Recall from basic probability theory that the conditional probability Pr(E lF) is defined to be

Pr(E F\ Pr(EfiF)
I = (s.38)
Pr(F) '

where Pr(EfrF) E andF occur. In our example, E

denotes the probability that both events
istheevent Tr)x*t andF istheevent To>x. Butif Tolx*t, then Zo>x necessarily,
so the intersection of these two events is simply the event T, > x+/. Thus we have

tP' = E0)n
= Pr(Tr> t)
= Pr(To > x+t lTo > x)

_ Pr(To > x+t)

Pr(To> x)

(5.3e)
so(x)

5.3.2 Tns Cunnur,.c,TlvE DrsrnrsurloN FuNcrroN or 4

We denote the CDF of the random variable T, by {,(t) in probability notation andby ,q,
in actuarial notation. It gives the conditional probability that failure occurs not later than age
x * /, given survival to age x. Thus we have

E
In the case of human persons under life insurance arrangements, time will normally be measured in years. For
inanimate objects, such as light bulbs or mechanical devices operating under test conditions, time might be meas-
ured in hows.
9
As with the random variable { defined earlier, the notational convention in probability theory would be to
write the SDF symbol as S4(t). To avoid subscripting a subscript, we use the simpler ,Sr(r). This notational prin-
ciple will hold for the CDF, PDF, and HRF as well.
72 I CHAPTERFTVE

te*=Fr(t) =Pr(7,3t)
= Pr(To<x+tlTo>x)
= l- Pr(To > -r+/ | To> x)

So(x+r)
- 1- so(t) ' (5.40)

where we use Equation (5.39) to express Pr(To> x+tlTo >.x) in terms of So(t), the SDF of
the age-at-failure random variable 4. We can easily write Equation (5.40) in terms of
Fo(x). We have
ng(1iO _ rb(.r+r)'-4(r).
"' = r_t,1-4(x)
,e, (s.41)
l-Fo(x)
Since the CDF and SDF are complements of each other, then it follows that tp*=l-,e*
and vice versa.

In the special case of / = 1, the notational convention is to suppress the / part of the symbol.
Thus the probability of (.r) surviving one additional year beyond age x is given by

p, = Pr(Ts> x+l l4 > r)' = Y#9,' (s.42)

so(x)
and the complementary probability that (x) will fail within the year following age x is given
by

Q, = r- P" = Pr(ToS -r+1r To > x) = (5.43)

%a
5.3.3 Tnr Pnon.lrrr,rrv DnNsrrv FuncrroN oF 7:

The PDF of the time-to-failure (or future lifetime) random variable {,

denoted /l(r), gives
the conditional density for failure at time / for an entity known to be alive atage x. Thus we can
say that it gives the conditional density for failure atage x+t, given survival to age x. It is given
by

.f,(t) = 4o,(,)
clt
= -!s,1,1
dt
_ _ d So(o+t)
dt So(r)

- fn$+t) (s.44)
so(") '
since fi (x+ t7 = -SSog+t).
 SURVIVAL MoDELS O 73

5.3.4 Tuo Hlz.{RD Raru FuNcrroN oF 4

Recall that the HRF of )uQ), is itself a conditional measure, conditional on sur-
70, denoted
vival to age /. Therefore the hazardrate at age -r+t for (x), which we might denote by
)'.(tlTo>x), is the same concept as )oQ+t) itself. The condition of survival to age x+t
supercedes the condition ofsurvival to age x.

Considering together Equation (5.44) and Equation (5.10), with x replaced by x+t, we can
express the PDF of { in terms of the distribution of 7o as

r r+\ _ fs(x+t) _ ,S6(x+/).)oQ+t)

Jx\') - s.(") sr(")
(s.4s)

In the actuarial context and notation, where the hazard rate is called the force of mortality
and denoted by lt,, we have

f,(t) = tp,'lt*+t, (s.46)

by using Equation (5.39) to substitute, p, for

+#
5.3.5 MonmNTs oF Tr{E Furunn Lrrurnm Rq.NDoM VARTABLE 4
The expected value of T* given alive at age x, is called the complete expectation of trfe at

age x,lo or the expectedfuture lifetime at age.r, and is denoted by 3,. Recall that the age-at-
failure random variable Zo and the time-to-failure (or future lifetime) random variable {,
arerelatedby 4={,+x, so T*=Ts-x. Thuswehave

2, = EfT*14 >xl = ElTo-xl4 >"1 = EfTolT6> xl-x. (s.47)

Equation (5.47) makes the point that the expected future lifetime of (x) is the excess of the
conditional expected age at failure, E[TolT, > x], over the value of.x itself. It can be calculated
from the conditional PDF of Zo as

o
€x = Il ,. fo@+tlro> x) dt. (s.a8a)

Using Equation (5.44) this can be written as

3" : IJ'*3n,=;(n!it fo@gat (s.48b)

lo
See footnote 5.
74 T CHAPTERFI\E

Next, recall from Equation (5.18) that integration by parts on Equation (5.48b) leads to

o1
Z, = ,fu [l solx+t1dt, (5.48c)

and finally to
r€
[--soE+/)
" = ro
3" dt
srci = Jo 'P'dt'
(5'48d)

by use of Equation (5.39). As we will see in Chapter 6, Equation (5.48d) is a common way

to define, and eventually calculate, 3'.

Finally, since the age at failure, given alive at age.r, is the future lifetime, given alive at age
x, plus x itself, then it follows that

Var(To l4 >;r) = Var(T,lTo> x), (5.49)

since.r is a constant. To calculate Var(Ts | {, > .r) we first calculate

E[rolr,>x] - [it'frllro>x)dy (5.s0)

and
nlr|lqr"] = Iir''foTlro>x)dy, (5.s1)

provided the two expectations exist. Then the variance of the age at failure and also of the
time to failure is given by

var(Tsl4 > x) = I/ar(T*l 4 > x) = nlTo' go > x)-{n[TolrottJ]' . (5.52)

Exrvrpr.r 5.4

ForthedistributionofExample 5.2,findeachof (a) zop36, (b) fsa!), and(c) Ae .

Sor-urroN

(a) From Equation (5.39) we have

zoPi6=ffi=ffi# ='82et6'

(b) From Equation (5.44) we have

 SuRvrvAr M0DELS r 75

.t. ,,\ _ foQ6+t) .05(100-36-0-t/2 .0625

rx\t) =
1,il3q =
lo6oo:36y 164-,r*'
where we use the result of part (a) qf Example 5.2to find /n(36+r).

(c) In general we have

-- -
tY36 :,so(36+t)
- = .125(64_t\t/2.
s.rgot

Then from Equation (5.48d) we find

o
.rzs[f $4-Dtt2 o, = o
e36 =
?
53.6 DIScnnTE Tn,ffi-TG.F.AILTIRE RANDOM VARIABLES

In this section we present two different, but closely related, discrete random variables. The
first, which we denote by K*, isthe curtate duration atfailure random variable. It is defined
to be the integral part of T*o the future lifetime of (x). The second, which we denote by K|,
is the time interval of failure random variable. Both random variables are illustrated in Fig-
ure 5.2.
K'=k-l
KI =k

2 k-t
Frcunr 5.2

Consider the kth time interval, which we denote by (k-1, /rl to suggest that the precise time
point fr is included in the k'h interval and the precise time point /c - I is included in the
(e-l)t interval. If failure occurs in the kth intewal, including the special case of T,=k,
then Kl = & but K, = k-1, the greatest integer in (. Then it follows that, in general,

K* = Kr+|. (s.53)

In particular, if failure occurs in the first time interval following age x, then we have Kl = 1

but K" = 0. The probability function of Kl is

Pr(K| = k) = Pr(k-l <7" 3 k) (5.s4a)

= Pr(x+k-I<To< x+klTo> x), (s.54b)
76 I CHAPTERFI\E

for k =1,2,... , and is denoted by r-rl q, rnactuaial notation. The probability function of K, is

Pr(K"-k) = Pr(kcTx<k+l) (5.55a)

= Pr(x+k<4<x+k+Il4>x), (5.55b)

for k =0,1,2,"', and is denoted by ol q, notation'

^actuarial

The moments of K, and Kl are all conditional on survival to age x, denoted by 4 > x. The
expected value of K, is given by

EIK"lTo> xf = 2k' rlq,. (s.s6a)

&=0

It is denoted by e, rnactuarial notation, and is called the curtate expectation of life at age *."
The expectedvalue of Kj is givenbY

EIK:14 >xl = Lo'o-rln-' (5.56b)

k=l

From Equation (5.53) it is clear that

EIK:14 > rl = WK,lTo> xl+l = ex+l (s.s7a)

and
Var(Kil4 > x) = Var(K*I4 > x), (5.57b)

since K, and ffl differ only by an additive constant. This common variance would be fowrd by
firstfinding either

4K,'14 > xl = Zk'' olq, (s.58a)

fr=0

r;,K:' 14 > = 2k2 -

r,-rlq,. (s.58b)
"1 k=1

Next we define the continuous random variable R, to represent the fractional part of the
time interval lived through in the interval of failure for an entity alive at age x. This is illus-
trated in Figure 5.3.

rrNote
the similarity of e, = g1y,l fo >:rl to 2* = EIT,I Zo > xl, defined by Equation (5,47). Recall that the lat-
ter is called th e complete expectation of life at age x whereas the former is called the curtate expectation.
 SunrrrverMoDEls o 77

x+1 x+k x+k+r x+k+1

FIGURE 5.3

If failure occurs at time r, where 0<r<1, within year k+1, then we have K"=k, Rx=r,
and T, = k+r. In general we have
T, = Kr*Rr.t' (s.sea)

Note that, in the case described in Figure 5.3, the time-interval-of-failure random variable is
Ki = k+1, so the general relationship is
T, = Ki-l+&. (5.seb)

5.4 Snr.rccr Sunvrv.q.L Moonr,s

Recall that ,p,, defined in terms of the survival model So(r) by Equation (5.39), is a con-
ditional probability, where the given condition is simply that survival to age;r has occurred.
No other information beyond the basic fact of survival to age x is presumed.

In the life insurance context, a person being issued life insurance coverage at age x is certainly
known to be alive at age x. But additional information is also available about this person as a
result of the underwriting and selection process (see Chapter 4) that people seeking insurance
would undergo. Therefore the probability of surviving on from age x to age x-t t for such a
person would logically be different (ikely greater) than the comparable probability for a per-
son known only to have survived to age x. The probability of surviving from age x to age x + t
for a person underwritten and selectedfor insurance at age.r is denoted by ,p14, to distin-
guish it from ,p,.
The survival probability t p14 ean be represented in survival distribution form. We consider
that the selection event defines time I = 0, and the age at selection, denoted [x], is merely an
identiffing characteristic of the person whose survival distribution we are considering. We
denote such a survival distribution by Strr(l;.x), and denote the random variable for length of
survival by \"1in this case. The identifuing characteristic [x], the age of the person at selec-
tion, is called a concomitant variable. Note that since age .r coresponds to time / = 0, then
rp1,1 is an unconditional probability whereas ,p, is a conditional probability.

The select survival model Sg,1(/;r), in parametric form, would be a function of the two vari-
ables t and x. In actuarial practice, select models are generally presented in tabular form as a
select life table. This is explored further in Section 6.6.

12
We will further discuss the relationship of the random variables 7,, K,, Ki,andR, in Section 6.5.1.
78 . CHAPTERFTVE

Exlupr,n 5.5

Find, in terms of S1r,(t;x), the probability that an entity selected at age x, and known to be
alive at age .r + 10, will fail before age x + 20.

SolurroN

We seek the probability of failure prior to age x + 20, given survival to age .x + 1 0, which is
denoted by roelrpro in standard actuarial notation. It is equal to

l- Pr(survival to x+20lsurttival to x+t0) = 1-rop1r1+ro.

When the conditional probabihry ro.ft.r1+ro is multiplied by the probability of the conditioning
event, which is ,S1,1(10;x), the result is the unconditional probability of survival to x+20,
which is ,S1,1(20;x). Thus we have

to41'1+to = 1-toP["]+to

. Si,1(20;-r)
D
S1'1(10;x)

5.5 Mur,u-STATE Moonr, INrnnpnrrATroN

The suwival model presented in this chapter can be represented as a simple, two-state, contin-
uous-time Markov model, where State 1 is continued survival and State 2 is failure (or
d"uth).t' It is clear that the process must begin in State 1 and equally clear that State 2 is an
absorbing state. Therefore there can be only one transition, from State 1 to State 2, over the
entire process. The model is represented by the following diagram.

FIGURE 5.4

The arrow in Figure 5.4 reminds us that transition from State 2back to State I is not possible.

Because the process cannot reenter State I once it has left it, it follows that the event of being in
State 1 at time t * r,
given in State 1 at time /, can occur only if the process never leaves State 1
over that time interval. Then it follows tnat , pil') = ,p{\) , as defined in Section 3.2.

13
In Chapter 6 we will represent the survival model as a discrete-time Markov model.
 Sunvrvar,MoDEls | 79

To show the correspondence of the multi-state model notation, defined in Chapter 3, with the
actuarial notation, defined in this chapter, suppose we have a person alive at age x at time r.
The person constitutes the model; since the person is known to be alive, the model is known
to be in State 1. Then the probability of still being in State I at time t * r is given by

,P, = ,pil') = ,pt"). (5.60)

The probability of failure before time / + r, given survival to time r, is given by

,q, = ,p[?. (5.61)

The force of transition from State I to State 2 attime s, denoted by fuz!) in Section 3.2.1,
is also d(s), the total force of hansition out of State I since State 2 is the only state to
which the process can move. Note that Ltb) = 0 for all s. In actuarial notation, the force of
transition 4zG) is called the force of faiiure, or the force of mortality, and is denoted simp-
lyby 2(s) orsometimesby 1".

The Kolmogorov Forward Equation, given by Equation (3.14b), simplifies considerably

when applied to this two-state survival model.

EXAMPLE 5.6

Solve the Kolmogorov differential equation for , p{t) , and translate the result into standard
actuarial notation.

SoLUTIoN

In this case, where j =i =1, the index k in Equation (3.14b) takes on only the value k =2,
since /r * j =1. We have

L rl'll
il) :- o!2
rI'12
. A"r(t+r) -,p{\) . )r(t+r).
O,

But Ltt(t+r) = 0, so this equation reduces to

d
fr ,n[\' = - ,p[',) 'lr(t+r).
--(/)

Dividing both sides Ay ,p[lr) we have

1=
p[\)
,
4^,0[\)
dr
= -,2r(t+r),
or
80 T CHAPTERFTVE

d l",p{\) = - \(t+r) dr.

Integrating both sides from r = 0 to r = n, wehave

Ioo^,0y,, = [i-\tt+ia,

n,o[\,li = ti-4{,*,1a,

'[#) = -[[t {,*i a,

^p[lr)
= o-lit{t+ia' , (5.62a)

since op,(!) =1. State I is the surviving state, so np,(l) represents the probability that a pro-
cess (person) alive at age x at time r will be still alive at time t + n, which we call ,p, in
actuarial notation. Also, in actuarial notation, our process (person) is age x+ r attime t + r,
so we would use the notation px+r in place of the multi-state model symbol ),t(t+r). Then
Equation (5.62a) would be written as

nPx = "-lt\'*'d' '

(s.62b)

an expression we will encounter frequently later in the text. tl

We can similarly solve Kolmogorov's differential equation for ,p[!), the probability of be-
ing failed (i.e., of being in State 2) at time / * r, given alive (i.e., being in State 1) at age x at
time /. (The actuarial symbol for this probability it ,q*.) The details of this are left to the
reader as Exercise 5-22.

Finally, we observe that if the underlying suwival model is exponential, so that the force of
transition function hr!)is a constant, say 2, then we have a homogeneous Markov model,
and the Kolmogorov differential equation is even more easily solved for ,pf!) or , pf) . fn"
details of this are left to the reader as Exercises 5-24 and 5-25.

5.6 Exnncrsns
5.1 The Age-at-Failure Random Variable

5-1 The hazard rate of a survival dishibution is a linear function, h(t)=a+bt, where
a>0 and b>0. Find each of the following:
(a) so(t) (b) ,6(/) (c) The mode of the distribution
 SuRvrv.qlMooem r 81

5-2 Let a survival distribution be defined by So(r) = at2 ib, for 0 < / < fr. If the expected
value of Ie is 60, find the median of 4.

5-3 Explain why the hazard rate 1oQ) = e-rt , where r > 0, is not appropriate for a sur-
vival distribution.

5-4 Which of the following could serve as a survival model, for / > 0? If not, why not?

(a) So(r) - ett-loQt -Dl

(b) So(r) =11+t)a

(c) Solt;=s-'2

5.2 Examples of Parametric Survival Models

5-5 If 7j, is uniformly distributed over (0, 2), frnd Var(T).

5-6 Let Xt and X, be independent generic random variables (i.e., not necessarily age-
at-failure random variables). Define the new random variables f =min(Xr, Xr) and
Z =max(Xr,Xr).

(a) Show that Sr(y) is the product ofthe SDF's of X, and Xr.
(b) Show that Fzk) is the product of the CDF's of X, and Xr.
(c) Show that if X1 and X2 both have exponential dishibutions, then tsalso has an
exponential distribution, but Z does not.

5-7 Let the independent generic random variables X, and X, both have exponential
distributions, with parameters ), and, 4, respectively, where 4> )rr. Let Y and Z
be as defined in Exercise 5-6. Given that
^S"(2) =.24
and SzQ)=.86, find the val-
ue of )"1.

5-8 is the probability that an entity existing atage 0 will fail

^lqo=So(ru)-So(z+1)
between t = m and t = m*t. Determine whether i" an increasing, decreasing,
^lqo
or constant function of m for each of the following distributions:

(a) Uniform
(b) Exponential
(c) "fo0) =.00125t,
for 0< t <40
82 T CHAPTERFTVB

5-9 Given that )r(t) = k ' tn and AaQ2) = I .26, where 22 is the median age of the distri
bution, find the value of n. (A model with this hazard rate is called a Weibull distri-
bution.)

5-10 The generalized Makeham distribution is defined by its force of mortality as

Itt = p{t) I "rz(t)

,

where pt(t) and p2Q) are polynomials in /. Show that the Gomperz distribution,
given by Equation (5.33), and the Makeham distribution, given by Equation (5.35),
are special cases ofthe generalized distribution.

5.3 The Time-to-Failure Random Variable

5-1 1 Given that To has a uniform distribution and that 4e = 42, find Yar(71).

5-12 Giventhat,So(/)=49ffi4, for 0<t<90, findthe value of Qso - ltso.

5-13 Given that pr=H, forall t>0, and roPjs=.8l, findthevalue of zopqo.

5-I4 Given that ,So(r)= (l-t)', for O<t<o and r)0, and that ltr=JO and

2y =8.75 forsome 0<y< @, fnrdthevalueofr.

5-15 Given that )oQ)=(80-t)-ll2, for 0<l<80, find the median of the distribution of
Tzo.

5-16 Giventhat Ss(r) =+, for 0< t<k2 and ft>O, andthat goo
=2.40, findthe
value of 3uo.

5-17 Giventhat So(r) = 1-(.011)2, for 0</<100, findtheexpectedfuturelifetimeatthe

median age of the distribution.

5.4 Select Survival Models

5-18 Aselectsurvivaldistributionisdefinedby .91,1(t;xl = (t-aO1), for 0<.r<40

and 0 < t <40-x. Find each of the following:

(u) +plror &) 3oo, (c) l\zo1n,

 Sunvrver Moosls . 83

5-19 A select survival model is defined by \r,(t;x) = B.rt.c*+'. Show that the select
survival function is of the form

r4r... =
fi,r(r;") .*p[;-4. ("'-r'"'n')]'
^Llnr+lnc. 'J

5.5 Multi-State Model Interpretation

5-20 Consider an entity age 0 at time f = 0, with age-at-failure random variable Z6 as

defined in Section 5.1. Consider also the continuous-time Markov process X(t) as

defined in Section 5.6, with X(0) = 1. Define the random variable {, in terms of the
Markov process X(/).

5-2I Consider an entity age x at time / = 0, with time-to-failure random variable as {,

defined in Section 5.3. Consider also the continuous-time Markov process X(r),
with X(0) = 1. Define the random variable { in terms of the Markov process X(r).

5-22 (a) Solve Kolmogorov's differential equation for ,p{!}.

(b) Translate the result into standard actuarial notation.

5-23 Give a formula in multi-state model notation for the expected time spent in State 1,
given a continuous-time Markov survival process for an entity known to be in State
latagexattime /=0.

5-24 Solve Kolmogorov's differential equation for ,pflr) for a homogeneous Markov sur-
vival model, with constant force of transition function &z$)= &(s)= l.

5-25 Repeat Exercise 5-24to solve for

"pf!).