208 CHAPTER 12.

CONTINGENT ASSURANCES

Solution

(a) Value = 100, 000Ā 1

m f
50:60:15
Z 15
= 100, 000 v t t p50:60 µ60+t dt
0

Evaluate integral by (for example) the three-eighths rule:

Z 15
15
f (t) dt ' [f (0) + 3f (5) + 3f (10) + f (15)]
0 8
= 0.12657.
Hence value = £12, 657

(b) No: premiums must also cease on death of (50), otherwise they may still be payable with no
prospect of claim: negative prospective reserve. Restrict premium-paying period so that premiums
cease on first death or after 15 years, if earlier.

We may also encounter contingent assurances payable on the second death.

Define

Ā 2 =m.p.v. of £1 payable immediately on death

xy

of (x) if this occurs after the death of (y).

By a similar argument to that for Ā1xy ,
Z ∞
2
Āxy = v t t px µx+t (1 − t py ) dt
0

Hence

Āx = Ā1xy + Ā2xy (12.2.5)

as expected.

We may also encounter temporary contingent assurances payable on the second death, e.g. the
m.p.v. of £1 payable immediately on death of (x) within n years, provided that (x) dies after (y),
equals
Z n
v t t px µx+t (1 − t py ) dt
0
= A1 − A1
x:n xy:n

Note also that

1
Ā2xx =
Āxx (12.2.6)
2
since there is a fifty per cent chance that the first “x” will be the last survivor.

Example 12.2.3. Using the fact that Ā1 + Ā 1 = Āxy , find on A1967 − 70 ultimate at 4% interest
xy xy
the values of (i) Ā 1 , (ii) Ā 2 and (iii) Ā 1 .
60:60 60:60 60:60:10
12.2. CONTINGENT ASSURANCES 209

Solution.

(i) Ā 1 = 0.5Ā60:60
60:60
1
' 0.5(1.04) 2 [1 − dä60:60 ]
' 0.31491

(ii) Use A 2 = A60 − A 1 to obtain

60:60 60:60

Ā 2 = 0.21259
60:60

1 1
(iii) Ā 1 = Āz }| {
60:60:10 2 60 : 60:10
· ¸
1 1 D70:70
' (1.04) A60:60 −
2 A70:70
2 D60:60
= 0.15513

The symbols A1 , etc.

xy

These are the same as Ā1 , etc., but with the benefit payable at the end of the year of death.
xy
An exact expression is
∞
X
A1 = v t+1 t pxy q 1 (12.2.7)
xy x+t:y+t
t=0

In practice, we may use the approximations

1
A1 ' (1 + i)− 2 Ā1 , etc. (12.2.8)
xy xy

Note the following results, similar to those given above for A 1 , etc.:
xy

Axy = A 1 + A 1
xy xy
Ax = A1 + A2
xy xy
1
A1 = Axx
xx 2
1
A2 = Axx
xx 2

The variance of the present value of a contingent assurance

Let

Z = present value of £1 payable on death of (x), if this occurs before the death of (y)
(
1
v T1 if T1 ≤ T2 where v = 1+i
=
0 if T1 > T2

As we have shown above, this has mean

E(Z) = Ā1
xy
210 CHAPTER 12. CONTINGENT ASSURANCES

The variance of Z is
E(Z 2 ) − [E(Z)]2
where
· 2 T ¸
(v ) 1 if T1 ≤ T2
E(Z 2 ) = E
0 if T1 > T2
· ∗ T ¸
(v ) 1 if T1 ≤ T2 1
=E where v ∗ = with i∗ = i2 + 2i
0 if T1 > T2 1 + i∗
= Ā∗1 at rate of interest i2 + 2i (or force of interest 2δ)
xy

Hence
Var(Z) = Ā∗1 − (Ā1 )2 (12.2.9)
xy xy

12.3 Premiums and Reserves for Contingent Assurances

Premiums are calculated by the usual equation of value (including expenses if necessary). Reserves
are usually calculated prospectively, making allowance for any deaths which have already occurred.

Example 12.3.1. Two lives (A and B) are both aged 30. Calculate, on the basis of A1967 − 70
ultimate mortality and 4% p.a. interest, the annual premium, payable during the lifetime of A, to
provide an insurance of £1000 payable at the end of the year of death of A, provided A dies after
B.
Find the policy value (on the premium basis) after 10 years (before the premium then due is
paid) if

(i) only A is then alive;

(ii) both lives are then alive.

Solution

A2 = A30 − A 1
30:30 30:30
1 1
= A30 − A30:30 = (1 − dä30 ) − (1 − dä30:30 )
2 2
1 1
= − d(ä30 − ä30:30 )
2 2
Hence
A2 · µ ¶¸
30:30 1 1 ä30:30
premium = · 1000 = 1000 −d 1−
ä30 2ä30 2 ä30
= 1000.(0.00327) = 3.27 = P, say.

Hence the reserves are as follows:

(i) 10 V = 1000A40 − P ä40 if only A is alive = 211.56

(ii) 10 V = 1000A 2 − P ä40 if both are alive = 39.49
40:40