1

Lesson 1 - Probability Review Lesson 2 – Survival Distributions: Probability Functions

1.1 � = �′ − � 2.1 =
+
+
1.2 � = �′ − �′ � − � +
1.3 = [ ]− [ ] 2.2 =
1.4 + = + , + + −
2.3 =
1.5 ∑= = −

̅ = ∑= � � 2.4 | = − +
1.6 = =
2.5 | = + −
1.7 Bayes Theorem
Pr( | )Pr⁡
Pr | = Life Table Functions
Pr⁡
( | ) +
1.8 | = =
1.9 Law of Total Probability (Discrete)
− +
Pr = ∑ Pr ∩ = ∑ Pr Pr⁡ | = =
1.10 Law of Total Probability (Continuous)
Pr = ∫ Pr | + + − + +
| = =
1.11 Conditional Mean Formula
[ ] = [ [ | ]]
1.12 Double Expectation Formula + = +
[ ]= [ [ | ]]
1.13 Conditional Variance Formula

= [ | ]+ [ | ]

Distribution Mean Variance

Bernoulli −
Binomial −
+ −
Uniform
Exponential � �

Bernoulli Shortcut: If a random variable can only assume two values and
with prob and − , then = − −

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EXAM MLC – Models for Life Contingencies
 2

Lesson 3 – Survival Distributions: Force of Mortality Lesson 4 – Survival Distribution: Mortality

3.1 � = . Go pe tz’ La
+
�
� =
⁡
3.2 � =� >
+
−
n( ) 4.2 = exp⁡ −
3.3 � =− n⁡
+
. Makeha ’s La
n
3.4 � + =− � = +
>
3.5 = exp⁡ − ∫ � + A is constant part of force of mortality
3.6 = exp⁡ − ∫ � + *Adding A to � multiplies by e−μt
+ −
3.7 = exp⁡ − ∫ � 4.4 = exp⁡ − −
n⁡
3.8 = � + = � +
+
3.9 < < + = | =∫ � + Weibull Distribution
3.10 =∫ � + � =
+
′ ′ −
If � + = � + + for then = . = exp⁡ −
If � + = �̂ + + �̅ + for then = ̂ ̅ +
Constant Force of Mortality
If � ′ + = � + for then ′
=( ) 4.5 � = �
4.6 = e−μt
4.7 (BLANK)

Uniform Distribution
4.8 � = ⁡⁡⁡⁡ �
−
− −
4.9 = �−
−
4.10 = �−
−
4.11 | = + �−
−
4.12 (BLANK)

Beta Distribution
�
4.13 � = �
−
− − �
4.14 = �−
−

*The force of mortality is the sum of two uniform forces.

is the product of uniform probabilities

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EXAM MLC – Models for Life Contingencies
 3

Lesson 5 – Survival Distributions: Moments e−μ

5.20 = ∑∞= e−μ = ⁡⁡ (CFM)
−e−μ
Complete Future Lifetime
∞ 5.21 = + .5 (UDD)
5.1 =∫ � +
∞
5.22 :̅̅̅| = :̅̅̅| + .5 (UDD)
5.2 =∫
∞
5.3 [ ]= ∫ *For those surviving n years, min , =
∞
5.4 = ∫ − *For those not surviving n years, average future lifetime is , since future
5.5 :̅̅̅| = [min , ] lifetime is uniform.
* = [min , ]
:̅̅̅| = ∫ � + +
* = [ ]
5.6 :̅̅̅| = ∫
+ | , < , < , �Ƶ is the same as
*If curtate,⁡ + :̅̅̅̅̅̅̅ + :̅̅̅|
5.7 [min , ]= ∫

Special Mortality Laws

−
5.8 = [ ]= (Beta)
�+
−
= [ ]= (UDD)
= [ ]= (CFM)
�
� −
5.9 = (Beta)
�+ �+
−
= (UDD)
= (CFM)
�

5.10 :̅̅̅| = + (UDD)

− −
:̅̅̅| = + (UDD)
− −
5.11 : ̅| = + .5 (UDD)

Curtate Future Lifetime

5.12 = ∑∞= |
−
5.13 ̅̅̅
: | = ∑ = | +
∞
5.14 [ ] = ∑ = |
5.15 [min , ] = ∑ =− | +
5.16 = ∑∞=
5.17 :̅̅̅| = ∑ =
5.18 [ ] = ∑∞= −
5.19 [min , ]=∑ = −

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EXAM MLC – Models for Life Contingencies
 4

Lesson 6 – Survival Distributions: Percentiles and Recursions Lesson 7 – Survival Distributions: Fractional Ages
6.1 = :̅̅̅| + + Uniform Distribution of Deaths
6.2 = :̅̅̅| + 7.1 + = − + + = −
+
6.3 = :̅̅̅̅̅̅̅ + + + 7.2 =
− |
+ +
6.4 = + + = + + ⁡⁡⁡ = 7.3 + = = = − , +
− − +
6.5 ̅̅̅
: | = ̅̅̅̅
: | + + : − | ⁡⁡⁡⁡
̅̅̅̅̅̅̅̅ < 7.4 � + =
6.6 :̅̅̅| = − |+
:̅̅̅̅̅̅̅̅ ( + + :̅̅̅̅̅̅̅̅− | )⁡⁡⁡⁡ < 7.5 � + = =
−
6.7 :̅̅̅| = + − | =
+ :̅̅̅̅̅̅̅ + + :̅̅̅̅̅̅̅
− |
7.6 = + (UDD)
Recall: 5.11 ( : ̅| = + .5 )
7.7 :̅̅̅| = :̅̅̅| + .5

Constant Force of Mortality

7.8 = −�
7.9 � = −ln⁡
7.10 = −� =
7.11 + = ⁡⁡⁡ −

Table 7.1: Summary of Formulas for Fractional Ages

Function UDD CFM
+ −
−
−
+ −
−
� + − ln
−
� + − ln
+ .5
:̅̅̅| :̅̅̅| + .5
: ̅| + .5

 : ̅| = :̅̅̅| + + :̅̅̅̅̅̅̅
− |

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EXAM MLC – Models for Life Contingencies
 5

Lesson 8 – Survival Distributions: Select Mortality Lesson 10 – Insurance: Annual and 1/mthly – Moments
 A man whose health was established 5 years ago will have better 10.1 [ ] = ∑∞= +
| = ∑∞= +
+

 A life selected at age can never become a life selected at any

mortality than a randomly selected man. 10.2 [ ] = ∑∞= +
= ∑ ∞ +
| = +

higher age. [ ] will never become [ + ]. Table 10.1: Actuarial notation for standard types of insurance
Name Present Value of RV Symbol
+
Whole life
+
Term life ⁡⁡⁡⁡ < ́ :̅̅̅|
{
⁡⁡⁡⁡⁡⁡ ⁡⁡⁡⁡⁡⁡
Deferred life ⁡⁡⁡⁡⁡⁡ ⁡⁡⁡⁡⁡⁡ <
{ +
|
⁡⁡⁡
Deferred term ⁡⁡⁡⁡⁡⁡⁡⁡ ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ | ́ :̅̅̅̅|
{ + ⁡⁡⁡ < < +
|
⁡⁡⁡⁡⁡⁡⁡ + ⁡⁡⁡
Pure Endowment ⁡ ⁡⁡⁡⁡⁡⁡ < ́|
:̅̅̅
{
⁡⁡⁡
+
Endowment ⁡ ⁡⁡⁡⁡⁡⁡ < :̅̅̅|
{
⁡⁡⁡
10.3 = :̅̅̅| ⁡ − ( :̅̅̅| )
10.4 = +
= −
=
10.5 ⁡ | = +
10.6 ́ :̅̅̅| = −⁡ | = − +
10.7 ̅̅̅
: | = ́: | +
̅̅̅ = − + +
10.8 = ⁡⁡⁡⁡
+

= − (CFM)
+ + +

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EXAM MLC – Models for Life Contingencies
 6

Table 10.2: EPV for insurance payable at EOY of death Lesson 11 – Insurance: Continuous – Moments – Part I
∞
Type of Insurance CFM UDD 11.1 = ̅ =∫
̅̅̅̅̅̅̅̅ ∞
Whole Life − |
11.2 ̅ = ∫ −� � +
+
n-year term ̅̅̅| 11.3 = −( ) = ̅ − ̅
− ̅ = − �+� �
+ �− 11.4 | ⁡⁡
�+�
n-year deferred life ̅̅̅̅̅̅̅̅̅̅̅̅̅̅
− + | ̅ = � ⁡⁡⁡⁡
+ �− �+�
̅ + = ̅ ⁡⁡⁡
n-year pure endowment (� − + ) �
11.5 ̅ ́ :̅̅̅| = ̅ ( − )= − − �+�
�− �+�
� − �+�
11.6 |
̅ ́ :̅̅̅̅| = ̅ ( − + )= − − �+�
�+�

�
11.7 ̅ :̅̅̅| = ( − − �+�
)+ − �+�
�+�

11.8 |
̅ = ̅+
− �+�
́| =
:̅̅̅

Monica E. Revadulla Formula Summary of ASM 2014

EXAM MLC – Models for Life Contingencies
 7

Lesson 12 – Continuous – Moments – Part II Lesson 13 – Insurance: Probabilities and Percentiles

Table 12.1 EPV for insurance payable at moment of death To calculate Pr⁡ for continuous , draw a graph of as a function of
Type of Insurance CFM UDD . Identify the parts of the graph that are below the horizontal line = ,
Whole Life � ̅̅̅̅̅̅̅̅̅
− | and the corresponding ’s. The al ulate the p o a ilit of being in the
�+ �− range of those ’s.
n-year term � ̅̅̅̅|
− − �+�
�+ �−
�

� −�
For CFM, Pr = �
n-year deferred life − �+� ̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
− + |
�+ �− For discrete , identify and then identify + corresponding to that
− �+� −�
n-year pure endowment (� − + ) .
�−
To calculate percentiles of continuous , draw a graph of as a function of
∞ − !
12.1 Gamma =∫ = . Identify where the lower parts of the graph are, and how they vary as a
+
∞ − function of . For example, for whole life, higher leads to lower . For -
12.2 If n=1, =∫ =
∞ year deferred whole life, both < and higher lead to lower . Write
−
12.3 If n=2, =∫ = an equation for the probability is less than in terms of mortality
− −
12.4 ∫ = − + probabilities expressed in terms of . Set it equal to the desired percentile,
̅̅̅̅| − and solve for or for for any . Then solve for (which is often )
12.5 �̅̅ ̅̅̅| = ⁡⁡
�

Variance
If = + , &⁡ are mutually exclusive,
= + −

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EXAM MLC – Models for Life Contingencies
 8

Lesson 14 – Insurance: Recursive Formulas, Varying Insurance Lesson 15 – Insurance: Relationships ( , , ̅

Uniform Distribution of Deaths
Recursive Formulas 15.1 ̅ =
�
14.1 = + +
15.2 ̅ =
14.2 ̅̅̅
: | = + + :̅̅̅̅̅̅̅
− | ́ :̅̅̅| � ́ :̅̅̅|

14.3 ́ :̅̅̅| = + +́ :̅̅̅̅̅̅̅

− | 15.3 |
̅ = |
�
14.4 | = − | + 15.4 ̅ = +
:̅̅̅| � ́ :̅̅̅| ́|
:̅̅̅

Applying whole life recursive equation twice:

15.5 =
= + + + +
�
14.5 � ̅ ̅ = +
�+� 15.6 ̅ = ⁡
�
14.6 Continuously whole life insurance (CFM)
�
=
�+ Claims Acceleration Approach
14.7 � ̅ ̅ ́ :̅̅̅| + ̅ ̅ ́ :̅̅̅| = ̅ ́ :̅̅̅|
̅
14.8 � ́ :̅̅̅| + ̅ ́ :̅̅̅| = + ̅ ́ :̅̅̅| ̅ = + .

14.9 � ́ :̅̅̅| + ́ :̅̅̅| = + ́ :̅̅̅|

̅ ́ :̅̅̅| = + .
́ :̅̅̅|
� ́ :̅̅̅| = ∑ = − |
̅ ́ : ̅| |
̅ = + .
|
̅ :̅̅̅| = + . ́ :̅̅̅| + ́|
:̅̅̅
Recursive Formulas for Increasing and Decreasing Insurance −
14.10 � ́ :̅̅̅| = ́ :̅̅̅| + � = +
+́ :̅̅̅̅̅̅̅
− |
̅ = + ⁡
14.11 � ́ :̅̅̅| = ́ : ̅| + � +́ :̅̅̅̅̅̅̅
− |
14.12 ́ :̅̅̅| = ́ : ̅| + +́ :̅̅̅̅̅̅̅
− |
14.13 ̅̅̅
́: | = ̅̅̅
́: | + ̅̅̅̅̅̅̅
́: − |

Monica E. Revadulla Formula Summary of ASM 2014

EXAM MLC – Models for Life Contingencies
 9

Lesson 17 – Annuities: Discrete, Expectation 17.12 =

:̅̅̅| − +
−
17.13 :̅̅̅| = ∑ = ̅̅̅| − + − + ̅̅̅| −
Annuities-Due −
17.14 :̅̅̅| = ∑ =
Whole Life Annuities ∞
− | = ∑ =
17.1 =
17.15 Constant Force of Mortality
17.2 = − +
=
+
Temporary Life Annuities | =
− :̅̅̅|
17.3 :̅̅̅| =
Annuities-immediate
17.4 :̅̅̅| = − :̅̅̅|

Whole life annuities

n-year Deferred Whole Life Annuity −
17.5 ⁡⁡⁡ − =
− � +
+
17.6 ̅̅̅̅̅̅̅̅̅
+ | − ̅̅̅| = ⁡⁡⁡
Temporary life annuities
n-year certain-and-life annuity-due = :̅̅̅| + :̅̅̅| + ́ :̅̅̅|

17.7 =
−
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ − 17.16 ̅̅̅
́: | = ̅̅̅
: | − :̅̅̅|
̅̅̅|
− � +
17.8 ̅̅̅̅̅̅̅̅̅
+ | = ⁡⁡⁡⁡ Certain-and-life annuities
17.17 = +
Table 17.2: Actuarial notation for standard types of annuity-due 17.18 :̅̅̅| = − |+
:̅̅̅̅̅̅̅
Name Annual pmt at k PV Symbol 17.19 ̅̅̅
: | = : |+ −
̅̅̅
Whole Life ⁡⁡⁡⁡⁡ ̅̅̅̅̅̅̅̅̅
+ |
17.20 | = | +
Temporary ⁡⁡⁡ min , − + | ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡
̅̅̅̅̅̅̅̅̅ < :̅̅̅|
Life ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ > min , − ⁡⁡⁡⁡⁡⁡⁡⁡ ⁡ ̅̅̅| ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡
Deferred ⁡⁡⁡ < n⁡or⁡k > K x ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ < 1/mthly annuities
|
Life ⁡⁡⁡ K x ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ + | − ̅̅̅| ⁡⁡⁡⁡
̅̅̅̅̅̅̅̅̅

(17.1) 
Deferred ⁡⁡⁡ <n ⁡⁡⁡ < −
=
⁡⁡⁡ < min⁡ + , K x + + | − ̅̅̅| ⁡⁡⁡⁡ +
(17.2) 
Temporary ̅̅̅̅̅̅̅̅̅ | :̅̅̅|
Life ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ min⁡ + , K x + + | − ̅̅̅| ⁡⁡⁡⁡
̅̅̅̅̅̅̅̅ + = −
Certain- ⁡⁡⁡ < max⁡ K x + , ̅̅̅| ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ < ̅̅̅̅̅̅̅
:̅̅̅||
and-life ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ max⁡ K x + , + | ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡
̅̅̅̅̅̅̅̅̅ :̅̅̅|
17.21 :̅̅̅| =

17.9 ̅̅̅̅̅̅̅ = ̅̅̅| + Official Definition:

:̅̅̅|| |
= ∑∞= −
17.10 | = +
Alternative
17.11 = :̅̅̅| + | = ∑∞=

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EXAM MLC – Models for Life Contingencies
 10

Lesson 18 – Annuities: Continuous, Expectation Lesson 19 – Variance

− �
18.1 ̅ ̅̅̅̅| =
� Whole Life and Temporary Life
Name Annual pmt at k PV Symbol ∞
Whole Life ⁡⁡⁡⁡ ̅ ̅̅̅| ̅ 19.1 [ ̅ ̅̅̅̅| ] = ∫ ̅ ̅̅̅| µ +
Temporary ⁡⁡⁡⁡ min⁡ , ̅ ̅̅̅| ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ ̅ :̅̅̅| ∞ −
Life ⁡⁡⁡⁡ > min⁡ , ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ ⁡ ̅̅̅̅| ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ > 19.2 [ ̅ ̅̅̅̅| ] = ∫ µ +
�
⁡⁡⁡⁡ n⁡or⁡t > T ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ ̅ − ̅
|̅
Deferred
19.3 ( ̅ ̅̅̅| ) =
Life ⁡⁡⁡⁡ < ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ ̅ ̅̅̅| − ̅̅̅̅| ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ > �
Deferred ⁡⁡⁡⁡ n⁡or⁡t > T ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ ̅ ̅̅̅ − ̅ ̅̅̅
: | : |
⁡⁡⁡⁡ < + ⁡ ⁡ ̅ ̅̅̅| − ̅̅̅̅| ⁡⁡⁡⁡⁡⁡⁡⁡⁡ < + 19.4 =
| ̅ :̅̅̅|
Temporary �
Life ⁡⁡⁡⁡ > + ̅̅̅̅̅̅̅̅̅
+ | − ̅̅̅̅| ⁡⁡⁡⁡ > + 19.5 ̅ = − ̅
Certain- ⁡⁡⁡⁡ max⁡ , ̅̅̅̅| ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ < ̅̅̅̅̅̅̅̅
:̅̅̅|| (̅ − ̅ )
⁡⁡⁡⁡ > max⁡ T, ̅̅̅̅̅̅̅̅̅̅
19.6 = − ̅
and-life + | ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ �
19.7 ̅ :̅̅̅| = − ̅ :̅̅̅|
− ̅ ̅ :̅̅̅| − ̅ :̅̅̅|
18.2 ̅ = 19.8 = − (̅ :̅̅̅| )
� �
18.3 ̅ = − ̅ Note: ̅ is 1 moment at twice FOI
st
∞
18.4 ̅ = ∫ ̅ ̅| � + −
∞ 19.9 ( + |)
̅̅̅̅̅̅̅̅ =
18.5 ̅ = ∫
� � :̅̅̅| − :̅̅̅|
−
�+� �+� 19.10 =
18.6 ̅ = = = ⁡⁡⁡
� � �+� 19.11 ̅ = − = − −
− ̅ :̅̅̅|
18.7 ̅ :̅̅̅| = 19.12 =
( − )
+ −
�
18.8 ̅ :̅̅̅| = − ̅ :̅̅̅|
− ̅ − ̅ :̅̅̅| ̅ ̅̅̅ − ̅
: | Other Annuities
18.9 |̅ =
�
−
�
=
�
− �+� 19.13 [ ] = ∑∞= ̅̅̅| − |
18.10 |̅ = ̅ =
�+�⁡
⁡⁡⁡ −
19.14 [ :̅̅̅| ] =∑ = ̅̅̅| − | + ̅̅̅| =∑ = ̅̅̅| − | + − ̅̅̅|
− − �+�
18.11 ̅ :̅̅̅| = ̅ ( − )= ⁡⁡⁡
�+�

CFM: ̅ = ̅ +
Relationships:
̅ = ̅ :̅̅̅| + ̅ +

:̅̅̅|| = ̅̅̅| + |
̅̅̅̅̅̅̅̅ ̅ ̅

Monica E. Revadulla Formula Summary of ASM 2014

EXAM MLC – Models for Life Contingencies
 11

Lesson 20 – Annuities: Probabilities and Percentiles Lesson 21 – Annuities: Varying, Recursive Formulas
Whole Life
For the continuous whole life annuity PVRV Y, the relationship of to 21.1 = + +
as follows: 21.2 = +
= Pr⁡ +

− = + +
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡= Pr⁡ ̅ = ̅ +̅
+ : ̅|
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡= Pr⁡ −
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡= Pr⁡ ln ln − Temporary
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡= Pr⁡ − ln − :̅̅̅| = + :̅̅̅̅̅̅̅
− | +
ln − :̅̅̅| = − |+
:̅̅̅̅̅̅̅
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡= Pr +
̅ :̅̅̅| = ̅ + − |+ ̅
:̅̅̅̅̅̅̅ : ̅|
ln −
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡= (− ) Deferred life
| = − | +
To calculate a probability for an annuity, calculate the for which ̅ has | = − | +

|̅ = − |̅ +
the desired property. Then calculate the probability is in that range.

To calculate a percentile of an annuity, calculate the percentile of , then n-year certain and life
calculate ̅ ̅̅̅|
:̅̅̅| =
̅̅̅̅̅̅ + − |+
̅̅̅̅̅̅̅ ̅̅̅̅̅̅̅̅̅̅̅̅̅̅
+ :̅̅̅̅̅̅̅
− |

:̅̅̅| =
̅̅̅̅̅̅ + − |+
̅̅̅̅̅̅̅ ̅̅̅̅̅̅̅̅̅̅̅̅̅̅
+ :̅̅̅̅̅̅̅
− |
Some adjustments may be needed for discrete annuities or non-whole-life
̅̅̅̅̅̅̅
:̅̅̅| = ̅ ̅| + ̅ − |+
̅̅̅̅̅̅̅ ̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
+ :̅̅̅̅̅̅̅
− |
annuities, as discussed in the lesson.

If forces of mortality and interest are constant, then the probability that the Increasing/decreasing annuities
present value of payments on a continuous whole life annuity will be � = + � +
greater than its expected present value is ̅� ̅ = ⁡⁡⁡⁡
�+μ
̅� ̅ :̅̅̅| + ⁡ ̅ ̅ :̅̅̅| = ̅ :̅̅̅|
�
� � � :̅̅̅| +⁡ :̅̅̅| = + :̅̅̅|
Pr( ̅ ̅̅̅| > ̅ )=( )
�+

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EXAM MLC – Models for Life Contingencies
 12

Lesson 22 – Annuities: 1/m-thly Payments Lesson 24 – Premiums: Net Premiums for Discrete Insurances – Part I
−
22.1 ≈ − Future Loss = PV(Benefits) – PV(Gross Premiums)
Equivalence Principle:
EPV(Premiums) = EPV(Payments)  E[FutureLoss]=0
−
≈ −
Net Premium  E[PVFB] = E[PVFP]
Uniform Distribution of Deaths (UDD)
= ⁡ If P = net premium
− A = EPV of Benefits
=
a = EPV of Annuity
22.2 = − Equivalence Principle: = → =
22.3 :̅̅̅|
= :̅̅̅| − −
22.4 | = | − P
Whole Life
Woolhouse’ Fo ula
− − n-year term ́ :̅̅̅|
22.5 ≈ − − µ +
:̅̅̅|
22.6 µ ≈ − ln − + ln
n-year deferred |
− − P payable during deferral
22.7 :̅̅̅|
≈ :̅̅̅| − ( − )− µ + − µ + + :̅̅̅|
− − |
22.8 | ≈ | − − µ + + P payable for life
22.9 ̅ ≈ − − µ +
22.10 ≈ + − µ

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EXAM MLC – Models for Life Contingencies
 13

Lesson 25: Premiums: Net Premiums for Discrete Insurances – Part II Lesson 27 – Premiums: Net Premiums for Fully Continuous Insurances
Whole life
Fully discrete whole life −� ̅
27.1 = ̅
= ̅
−
−
25.1 = = = − ̅ � ̅
27.2 = =
− ̅ � − ̅
25.2 = = −� =
−
�
n-year endowment
Fully discrete endowment 27.3 = ̅ − ⁡
:̅̅̅|
25.3 :̅̅̅| = − � ̅ :̅̅̅|
:̅̅̅| 27.4 ⁡ = ⁡
:̅̅̅|
− ̅ ̅̅̅ : |
25.4 :̅̅̅| =
− :̅̅̅|
Continuous Whole Life
� �
Net Premiums 27.5 = + −
Whole Life and n-year term: (constant ⁡ � �
27.6 [ ]= ̅ + −
25.5 = :̅̅̅| =
Future Loss at issue
Fully discrete whole life
+ + �( − � + )
25.6 = − �( + |)
̅̅̅̅̅̅̅̅ = −
+ � �
= + −
� �
25.7 [ ]= −� = + −

n-year term insurance:

�( − i ⁡� + , )
= −
+
⁡⁡⁡ <
={
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ ⁡

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EXAM MLC – Models for Life Contingencies
 14

Lesson 28 – Premiums: Gross Reserves Lesson 29 – Premiums: Variance of Future Loss, Discrete
To calculate gross premium G by equivalence principle, equate G times an
annuity-due for the premium payment period with the sum of Net Future Loss
1. An insurance for the face amount plus settlement expenses Whole Life – � is gross premium
2. G times an annuity-due for the premium payment period of �
29.1 ( )=( − ) +
renewal percent of premium expense, plus the excess of the first
−
year percentage over the renewal percentage 29.2 ( )=
−
3. An annuity-due for the coverage period of the renewal per-policy
and per-1000 expenses, plus the excess of first year over renewal Endowment - � is gross premium
expenses �
29.3 ( )=( :̅̅̅| − :̅̅̅| ) +

:̅̅̅| − :̅̅̅|
29.4 ( )= ( )⁡⁡
− :̅̅̅|
Whole Life – constant
−
29.5 ( )=
+

Gross Future Loss – Whole Life

+
= + +( − )− − ⁡ +
−
29.6 ( ) =( − + + ⁡
Where
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡b = Face⁡Amount
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡E = Settlement⁡Expenses⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡
⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡e = level⁡renewal⁡expenses

For two fully discrete whole life or endowment insurance, one with ’ u its
and premium �′, and the other with units and premium �, the relative
variance of net future loss of the first to the second is
′
+ ⁡ �′
+�

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EXAM MLC – Models for Life Contingencies
 15

Lesson 30 – Premiums: Variance of Future Loss, Continuous Lesson 31 – Premiums: Probabilities & Percentiles of Future Loss
Let be net future loss. The following are for fully continuous whole life
and endowment insurance with premium � and face amount . For whole For level benefit or decreasing benefit insurance, the loss at issue decreases
life, drop ̅|. with time for whole life, endowment, and term insurances. To calculate the
̅ −( ̅ ) � probability that the loss at issue is less than something, calculate the
30.1 ( )= +
probability that survival time is greater than something.
̅ − ̅
30.2 ( )= ⁡⁡� is net premium
− ̅ For level benefit or decreasing benefit deferred insurance, the loss at issue
� decreases during the deferral period, then jumps at the end of the deferral
30.3 ( )=( ̅ :̅̅̅| − ̅ :̅̅̅| ) + period and declines thereafter.
̅ ̅̅̅ − ̅ ̅̅̅
: | : |
30.4 ( )= ( )⁡ To calculate the probability that the loss at issue is greater than a
− ̅ :̅̅̅|
� positive number, calculate the probability that survival time is less than
30.5 ( )= ⁡⁡⁡ ⁡ ℎ ⁡ something minus the probability that survival time is less than the deferral
�+�
period.
Let be gross future loss. The following is for fully continuous whole life To calculate the probability that the loss at issue is greater than a
and endowment insurance with premium � and face amount , and excess negative number, calculate the probability that survival time is less than
first year expenses payable at issue. For whole life, drop ̅|. something that is less than the deferral period, and add that to the
− probability that survival time is less than something that is greater than the
30.6 ( )=( ̅ :̅̅̅| − ̅ :̅̅̅| ) + +
� deferral period minus the probability that survival time is less than the
deferral period.
For two whole life or endowment insurance, one with ’ u its a d g oss
premium �′, and the other with units and premium �, the relative For a deferred annuity with a single premium, the loss at issue is a negative
variance of future loss of the first to the second is constant during the deferral period. If regular premiums are payable during
the deferral period, the loss at issue decreases until the end of the deferral
′
+ ⁡ �′ period increases thereafter.
+�

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EXAM MLC – Models for Life Contingencies
 16

Lesson 32 – Premium: Special Topics Lesson 34 – Reserves: Prospective Net Premium Reserve

Monica E. Revadulla Formula Summary of ASM 2014

EXAM MLC – Models for Life Contingencies
 17

Lesson 35 – Reserves: Gross Premium Reserve & Expense Reserve Lesson 36 – Reserves: Retrospective Formula

The gross premium reserve at time t is calculated as expected Retrospective Formula – net premium reserve equals the accumulated
present value of future benefits and expenses minus future gross premiums value of net premiums minus the accumulated cost of insurance.
at time t, given that the policy is in force.
Whole Life
The gross premium used in the calculation does not have to be
determined by the equivalence principle. Even if it is, it may use different : ̅| − ́ : ̅|
=
assumptions than used in calculating the gross premium reserve.
: ̅| - EPV at issue of premiums through t;
If the gross premium is calculated using the equivalence principle ́ : ̅| - EPV at issue of term insurance through time t
on the same basis as the reserve, then the expense loading is the excess of
the gross premium over the net premium. = +
́ :̅̅̅| ́|
:̅̅̅

The expense reserve at time t is the expected present value of Premium Difference Formula
future expenses minus the expected present value of future expense – EPV of insurance at duration t
loadings. – EPV of annuity at duration t
– annual net premium at duration t

= − → −

Paid up Insurance Formula

= −

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EXAM MLC – Models for Life Contingencies
 18

Lesson 37 – Reserves: Special Formulas for Whole Life and Endowment Lesson 38 – Reserves: Variance of Loss
Insurance 38.1 Continuous Whole Life or Endowment

37.1 Annuity-ratio formula ( | )= ( + )

Endowment 38.2 Continuous Premium Continuous Whole Life (EP)
= + − |−
:̅̅̅̅̅̅ : ̅| + :̅̅̅̅̅̅
− | ̅ + −( ̅ + ) ⁡
( | )=
= − + :̅̅̅̅̅̅
− | − − + :̅̅̅̅̅̅
− | − ̅
:̅|
+ :̅̅̅̅̅̅̅
− |
38.3 Annual Premium Annual Whole Life, integral k (EP)
= − + :̅̅̅̅̅̅
− | − + + :̅̅̅̅̅̅
− |
:̅| −( + ) ⁡ +
+ :̅̅̅̅̅̅
− | ( | )=
= − −
: ̅| 38.4 Continuous Premium Continuous Endowment (EP)
Whole Life ̅ ̅
+ :̅̅̅̅̅̅̅
− | − + :̅̅̅̅̅̅̅
− | ⁡
+
= − ( | )=
( − ̅ :̅̅̅| )
37.2 Insurance-ratio formula 38.5 Annual Premium Annual Endowment
Endowment
+ :̅̅̅̅̅̅̅
− | + :̅̅̅̅̅̅̅
− | − + :̅̅̅̅̅̅̅
− | ⁡
= − ( | )=
:̅|
− ( − :̅̅̅| )
+ :̅̅̅̅̅̅̅
− |
= − 38.6 Gross Future Loss of Whole Life and Endowment
− :̅|
− |−
+ :̅̅̅̅̅̅̅ :̅| −
= ⁡⁡ ( | > ) =( + :̅̅̅̅̅̅̅
− | − + :̅̅̅̅̅̅̅
− | + +
− :̅|
Whole Life
+ −
= ⁡⁡
−

37.3 Premium-Ratio Formula

Endowment
+ :̅̅̅̅̅̅
− | − : ̅|
= ⁡⁡
+ − |+
:̅̅̅̅̅̅
Whole Life
+ −
= ⁡⁡
+ +

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 19

Lesson 39: Reserves: Recursive Formulas Lesson 40 – Reserves: Modified Reserves

General Recursion formulas
− � +� − + − + 1) For the full preliminary term method, the reserve at the end of the
39.1 =
+ − first year is 0. Thereafter, the reserve is the net premium reserve
39.2 ( − +� − ) + = + − ( − )+ for an otherwise similar policy (with the same maturity date as the
original policy) issued one year later.
1) For paid up insurance, the net premium reserve is the net single 2) For any modified reserve method, the expected present value of
premium the valuation premiums must equal the expected present value of
2) For term insurance, the net premium reserve at expiry is 0 the benefits.
3) For endowment insurance, the net premium reserve right before
maturity is the endowment benefit.
4) Deferred annuities and insurances have no benefit during the
deferral period, so omit the + − term in equation (39.1) for
recursions during the deferral period.

If FA + net premium reserve is paid at the end of the year of death:

39.3 =( − +�− ) + − + −
39.4 = � ̅̅̅| − ∑= + − + −

Deferred annuities and insurances

39.5 = � ̅̅̅|

Gross Premium Reserve

− �+ − − − + − + − +
39.6 =
− + −

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EXAM MLC – Models for Life Contingencies
 20

Lesson 41: Reserves – Other Topics +EPV of future net premiums, altered contract
Valuation between premium dates = EPV (Future Benefits, altered contract)

Exact Formula Reduced paid up face amount for whole life nonforfeiture option:
� +� + + − −
+ + �
41.1 + = 41.9 =
+ +

Exact Formula with UDD: Extended term duration n for whole life nonforfeiture option:
� +� + + − + +
− 41.10 = +́ :̅̅̅|
41.2 + =
− +
Pure endowment PE for extended term option on endowment
Traditional approximation (linear interpolation): insurance:
41.3 + = − ( + + )+ + 41.11 = +́ :̅̅̅̅̅̅̅
− |+ ⁡ − +

Thiele’s diffe e tial e uatio

41.4 = + − −( + − )�[ ]+

Nu e i al solutio s ith Eule ’s ethod:

Using derivatives at the lower end of each interval to go from + ℎ to

41.5 +ℎ − ≈ℎ + − −( + + )�[ ]+
+ℎ� −ℎ( − − + �[ ]+ )
41.6 =
+ℎ �[ ]+ +�

Using derivatives at the upper end of each interval to go from to +

ℎ

41.7 − −ℎ ≈ℎ + − −( + + )�[ ]+
41.8 −ℎ = − ℎ(�[ ]+ + ) +ℎ − + + + �[ ]+

Policy alterations
Equivalence principle formula, with the value transferred:
+EPV of future gross premiums, altered contract
= EPV (Future Benefits and expenses, altered contract)

Equivalence principle formula on net basis:

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EXAM MLC – Models for Life Contingencies
 21

Lesson 43 – Markov Chains: Discrete – Probabilities Continuing Care Retirement Community

Common Shock model
Single Life Mortality Both Alive (0)  Husband Alive (1)
Insurance/Annuity model Both Alive (0)  Wife Alive (2)
Alive (0)  Dead (1) Both Alive (0)  Neither Alive (3)
Husband Alive (1)  Neither Alive (3)
Multiple decrements and pensions Wife Alive (2)  Neither Alive (3)
Double Indemnity model
Alive (0)  Accidental Death (1) General
Alive (0)  Death from other causes (2) Independent Living Unit (0)  Temporary Health Care (1)
Pension model Independent Living Unit (0)  Permanent Health Care (2)
Active (0)  Terminated (1) Independent Living Unit (0)  Gone (3)
Active (0)  Disabled (2) Temporary Health Care (1)  Independent Living Unit (0)
Active (0)  Retired (3) Temporary Health Care (1)  Gone (3)
Active (0)  Dead (4) Temporary Health Care (1)  Permanent Health Care (2)
Permanent Health Care (2)  Gone (3)
Permanent Disability
Permanent disability model Chapman – Kolmogorov Equations
Healthy (0)  Disabled (1)
Disabled (1)  Dead (2)
Healthy (0)  Dead (2) = ∑ − +
=
Disability income
Disability income model
Healthy (0)  Sick (1)
Sick (1)  Healthy (0)
Healthy (0)  Dead (2)
Sick (1)  Dead (2)

Multiple Lives
Multiple lives model
Both Alive (0)  Husband Alive (1)
Both Alive (0)  Wife Alive (2)
Husband Alive (1)  Neither Alive (3)
Wife Alive (2)  Neither Alive (3)

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EXAM MLC – Models for Life Contingencies
 22

Lesson 44 – Markov Chains: Continuous – Probabilities Probability of moving two states with constant forces of transition:

−� ∙ −� ∙ −� ∙
Assumptions for Markov Chain models: 44.10 =� � ( + + )
� ∙ −� ∙ � ∙ −� ∙ � ∙ −� ∙ � ∙ −� ∙ � ∙ −� ∙ � ∙ −� ∙
1) Probabilities of transitions are independent of length of time in
state (Markov property)
2) Probability of 2 or more transitions in time ℎ is ℎ . Kol ogo o ’s fo a d e uatio s:
3) is differentiable function of for all , . 44.11 =∑ = �+ − � +
≠

Definition of � Eule app o i ate solutio to Kol ogo o ’s fo a d e uatio s

44.1 � = lim ℎ ⁡
⁡ 44.12 +ℎ ≈ +ℎ∑ = � + − � +
ℎ→ ℎ ≠

44.2 ℎ ⁡ = ℎ� + ℎ
44.3 ℎ ⁡ = ℎ ��̅ ⁡ + ℎ
̅
��
44.4 ℎ ⁡ = −ℎ∑ ≠ � + ℎ

Probability of staying in any state continuously:

̅
��
44.5 = exp⁡ − ∫ ∑ ≠ � +

Probability of at least one direct transition from state 0 to state 1 by

time t
̅̅̅̅
44.6 ∫ � +

For permanent disability model:

̅̅̅̅
44.7 =∫ � + − ̅̅̅̅+

For permanent disability model with constant forces of transition:

− −(� +� −� )
−�
� ⁡⁡⁡⁡⁡� +� ≠�
44.8 ={ � +� −� ⁡
−�
� ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡� +� =�

Probability of moving to next state with constant forces of transition:

−� ∙ −� ∙
44.9 =� ( + )
� ∙−� ∙ � ∙−� ∙

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EXAM MLC – Models for Life Contingencies
 23

Lesson 45 – Markov Chains: Premiums and Reserves Lesson 46 – Multiple Decrement Models: Probabilities
∞
45.1 ̅ = ∫ −�
45.2 = ∑∞= Correspondence of Markov Chain notation with multiple decrement
∞ notation
45.3 ̅ = ∫ ∑ ≠ −� � +
Markov Chain Notation Multiple Decrement Notation
45.4 = − −∑= � +
+ −
≠
∙ �
45.5 −ℎ ≈ − ℎ +ℎ +ℎ∑ = � + + −
≠ �

Probability Formulas
�
46.1 =∑=
�
46.2 = −∑ =
�
46.3 | = +
− �
46.4 =∑ = +
� + − �
46.5 | = + =∑ = +

Life Table Formulas

�
=∑ =
� � �
+ = −
� � �
⁡ + = ⁡
� � �
+ = + = | ⁡⁡
� � � � � �
+ = + = |

Expected present value of discrete life insurance

�
46.6 = ∑∞= − ∑= + −

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EXAM MLC – Models for Life Contingencies
 24

Lesson 47 – Multiple Decrement Models: Forces of Decrement Lesson 48 – Multiple Decrement Models: Associated Single Decrement
�
47.1 =∫ � + Tables
� General Formulas and methods:
47.2 � + =� � 48.1
′
= exp⁡ − ∫ � +
� � ′ ′
47.3 = exp⁡ − ∫ � +
48.2 =∫ � +
� ′ �
47.4 � + =∑ = ⁡� +
48.3 ∏ =
( , − , − ) �
47.5 , , = = � +
∞
From 46.1
47.6 =∫ , = ∞
�
=∑ =
� �
=∑ = , = � +
Fractional Ages To go from multiple-decrement probabilities to associated single-
decrement probabilities:
Uniform distribution of decrement between integral ages in multiple �
1. Calculate
decrement table: 2. Calculate µx+t using equation (47.2)
= ⁡⁡⁡ 3. Calculate
′
using equation (48.1)
4. As a check, if you are calculating all of the rates, you can use
Constant Force of decrement between integral ages �
equation (48.3) and see if you can reproduce
�
= �
−( ) ⁡
To go from associated single-decrement probabilities to multiple-
decrement probabilities:
1. Calculate µx fo all j’s usi g o e of the si gle-decrement formulas
� ′
2. Calculate by multiplying the ’s togethe , o
summing µ ’s a d e po e tiati g.
�
3. Calculate using equation (47.1)

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EXAM MLC – Models for Life Contingencies
 25

Lesson 49 – Multiple Decrement Models: Relations between Multiple Lesson 50 – Multiple Decrements: Discrete Decrements
Decrement Rates and Associated Single Decrement Rates

′ � �
/
49.1 = ⁡
′
� n
49.2 = �
n
′
′
49.3 = −
′ ′ ′ ′
′ +
49.4 = − +

Table 49.2: Summary of formulas for going between multiple-

decrement and associated single-decrement tables

Assumptions < + Formula

′ � �
Decrements are uniformly = /
+ +
distributed in multiple ′
� ln
decrement table = �
ln
There are two decrements ′
′
uniformly distributed in the = −
associated single- ′ ′
= −
decrement tables
′ ′ ′ ′
There are three ′ +
decrements uniformly = − +
distributed in the
′ ′ ′ ′ ′
associated single- = − + +
decrement tables

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EXAM MLC – Models for Life Contingencies
 26

Lesson 51 – Multiple Decrements: Continuous Insurances Lesson 53 – Multiple Lives: Joint Life Probabilities

If is the benefit random variable for an insurance paying at time 53.1 + =

upon occurrence of decrement , then | = + : + = − +
∙
∞ � + = = exp − ∫ � + : +
51.1 [ ]=∫ ∑ = � +
53.2 = −( − )( − )= + −
∞ �
51.2 [ ]=∫ ∑ = � + ⁡
If lives are independent, then
∗
Special formula for additional EPV of additional benefit = − =
paid for the first years on secondary decrement with constant � + : + =� + +� +
force � :
∗
= exp − ∫ (� + +� + )
� ̅ :̅̅̅|
In particular:
For CFM: � = � + �
For beta with parameters ,⁡ and � − = � − ,� + : + is
beta with parameters + and � −

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Lesson 54 – Multiple Lives: Last Survivor Probabilities Lesson 55 – Multiple Lives: Moments
54.1 + = + ̅̅̅̅
54.2 ̅̅̅̅ = + − Expected Value Formulas:
∞
55.1 =∫
∞
If independent, ̅̅̅̅ =∫ ̅̅̅̅
54.3 ̅̅̅̅ = + − =∫
:̅̅̅|
54.4 | ̅̅̅̅ = ̅̅̅̅ − + ̅̅̅̅ 55.2 ̅̅̅̅ = + −

If independent, For two independent uniform lives with =� − =� − :

� + + � +
54.5 �̅̅̅̅ = 55.3 = −
̅̅̅̅

Variance and Covariance Formulas:

∞
55.4 ( )= ∫ − ( ) ⁡⁡
( , ̅̅̅̅ ) = ( , )+( − )( − )

If independent,
55.5 ( , ̅̅̅̅ ) =( − )( − )

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Lesson 56 – Multiple Lives: Contingent Probabilities Lesson 57 – Multiple Lives: Common Shock

Relationships for probabilities (double bar = 2) Both Alive (0)  Husband Alive (1)
56.1 ∞ ́ = ∞ ̿ Both Alive (0)  Wife Alive (2)
56.2 ∞ ́ + ∞ ́ = Both Alive (0)  Neither Alive (3)
Husband Alive (1)  Neither Alive (3)
Wife Alive (2)  Neither Alive (3)
56.3 ∞ ̿ + ∞ ̿ =
56.4 ́ = ̿ +
56.5 ́ + ́ = � is constant
56.6 ̿ + ̿ = ̅̅̅̅ � + =� + : + +�
56.7 = ́ + ̿ � + =� + : + +�

Probabilities when � + = � + for

56.8 ́ =
+

Formula for contingent survival probabilities for uniform mortality

Let (x) and (y) have lifetimes with uniform mortality with � and �
respectively. Set = � − and = � − . Then
− ⁡⁡⁡ min , ⁡⁡⁡⁡
56.9 ́ = − ⁡⁡⁡⁡⁡⁡⁡ ⁡ ⁡ ⁡⁡⁡⁡

{ ⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡⁡ ⁡ ⁡

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Lesson 58 – Multiple Lives: Insurances Lesson 59 – Multiple Lives: Annuities

58.1 ̅ + ̅ = ̅ + ̅̅̅̅̅ 59.1 | = −

58.2 ̅ + ̅ = ̅ + ̅̅̅̅̅
58.3 ̅ ́ + ̅ ́ = ̅ To convert last-survivor annuities to joint annuities, use a formula of
̅ ̿ + ̅ ̿= ̅̅̅̅̅ the following form:
̅́ + ̅ ̿ = ̅ ̅̅̅̅̅ = ̅ + ̅ − ̅
̅́ − ̅ ̿= ̅ − ̅̅̅̅̅ = ̅ − ̅
Techniques for evaluating two-life annuities:
1. Two-annuity technique – Calculate the annuities for each life,
ignoring the other life. Compare the amount paid in the joint
status to the amounts paid by the individual annuities, and add the
excess (or subtract the deficiency) from the sum of the individual
annuities
2. Three-annuity technique – Calculate the annuities for each life
when exactly one is alive and the joint status annuity, and add
these three annuities up.
3. Reversionary annuity technique – If an annuity is paid to after
expires, where and can be any combination of lives
and certain statuses, then
| = − :
| = − :
̅ | = ̅ −̅ :

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Lesson 61 – Pension Mathematics Lesson 62 – Interest rate risk: Replicating Cash Flows

Salary rate function ̅ is an index of the instantaneously earned Let be the present value of paid at time . Then
salary.
The spot rate is the annual interest rate on a -year zero-coupon
Salary Scale is an index of the salary earned during the year of age bond:
, + ].⁡ The salary rate earned at age is approximated by − .5
+ =
k-year final average salary is the average of the salaries earned in the The forward rate , is the rate for a − year zero-coupon bond
last years before retirement. issued at time .
− +
( + , ) = =
Career average salary is the average of salaries earned during the +
entire career.

Replacement ratio is the ratio of the pension paid in the first year of
retirement over the salary earned in the last year before retirement.

Service table is a table showing, year by year, the number of

decrements from each of four causes: death, withdrawal, disability
retirement, age retirement.

Accrual rate in a defined benefit plan is the percentage of the benefit

basis that is paid annually as a pension for each year of service. For
example, if the benefit basis is a 3-year final average, the accrual rate is
. %, a d a eti ee had ea s of se i e, the the eti ee’s e efit
would be 60% of 3-year final average.

Salary scale is defined from salary rate as follows:

61.1 =∫ ̅ +

Salary rate is approximated from salary scale as follows:

61.2 ̅ = − .

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Lesson 63 – Interest rate risk: Diversifiable and non-diversifiable risk Lesson 64 – Profit Tests: Asset Shares

If � is some situation (such as interest rate or mortality rate) which is the Recursive Formula:
same for all policyholders, then ( − + − − − − ) + − + − − + − ⁡
� [� ( |� )] =
63.1 = [ |�] + − −
+ − + −

The first summand is non-diversifiable risk. The second summand is Accumulating gross premiums - The accumulated value of unit of gross
diversifiable risk. premium after years is
−
− :̅̅̅| +
⁡⁡
Where is the percentage of first year premium expense and is the
percentage of renewal premium expense.

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Lesson 65 – Profit Tests: Profit for Traditional Products Lesson 66 – Profit Tests: Participating Insurance

Precontract expenses – Expenses incurred initially before issue of the If dividends are paid as cash, subtract them from the profit. No other
contract. Placed at the end of year 0 in profit tests. change is needed to the profit test.

Profit If dividends are used to buy paid-up insurance and are paid in cash to
65.1 =( − + − − − ) + − + − ( + )− deaths and withdrawals, divide the dividend by the net single premium for
( + )− � the insurance to compute the amount of paid-up insurance purchased.
+ −
When dividends are used to buy paid-up insurance, the paid-up insurance is
Change in Reserve alled a e e sio a o us .
�
65.2 � = + − − + −
If dividends are used to buy paid-up insurance but not paid to all deaths
Profit Vector – Vector of net profits per policy in force at the beginning of and withdrawals, increase the reversionary bonus by dividing the
each year. Denoted by . probability of receiving it.
Profit Signature – Vector of net profits per policy issued. In single-
decrement model, equals + − . Denoted by � . Reversionary bonuses increase the reserves, death benefits, and surrender
benefits. Higher reserves lead to higher interest.
Profit Measures
The bonus rate is the bonus divided by the face amount related to the
IRR – Internal rate of return. The rate at which the expected present value bonus. There are three types of reversionary bonus:
of the profit signature is 0. Simple: the bonus is applied only to the original face amount.
NPV – Net present value of profit signature components discounted at risk Compound: the bonus is applied to the original face amount +
discount rate , which is also called the ℎ ⁡ cumulative reversionary bonuses through the end of the previous year.
65.3 ∞
=⁡∑ = � Super-compound: separate bonus rates are computed for the
original face amount and for the cumulative reversionary bonuses.
NPV (k) – Partial NPV. Net present value of profit signature components up
to and including time discounted at the hurdle rate .
65.4 ⁡ =⁡∑ = �
Profit margin – Ratio of NPV to present value of premiums computed at the
hurdle rate.
DPP – Discounted payback period
Zeroization of reserves means setting the reserves so that the profit is 0 in
each year except the first.

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Lesson 67 – Profit tests: Universal life Simplified version of account formulas

Let the accumulated fund be − + − + . Then:
Type B
67.1 = − + − − + − + For Type A, this amount pays to those who survive and the face
67.2 = − + − + − + − if = amount to those who die.
67.3 � = + −
For Type B, this amount pays to everybody plus the face amount to
Type A those who die.
67.4 = − + − − � +
67.5 If the corridor applies, this amount pays the to everybody plus −
− + − + − + − to those who die, where is the corridor factor.
=
− + −
67.6 if =
( − + − − + − ) +
=
− + − +
67.7
+ − ( − − + − + )
� =
− + − +
67.8
+ − ( − − + − + )
� =
− + −
If corridor applies
67.10
− + − +
=
− + − + −
67.9 =
− + − +
=
− + − + −

67.11
+ − − − + − +
� =
− + − + −

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Lesson 68: Profit Tests: Gain by Source

68.1

( − + − − − ) + − + − ( + )− + − ( + )
= �
⁡⁡
+ −

Total profit formula:

( − + − − − ) + − + − + − + −

Total gain is the excess of actual profit over expected profit.

Components of gain: (In each component, primed are actual, starred are
assumed)
′
Interest − ∗ − + −
∗
Expense: − ′ + + + − ∗
− ′
∗ ′
Mortality: + − − + − + −
∗ ′
Lapse: + − − + − ⁡ + −

When computing the components of gain, assumptions should be changed

sequentially. In the above order, actual interest would be used in expense
and actual settlement expense would be used in mortality, but assumed
annual expense would be used in interest. Different orders are possible.

Monica E. Revadulla Formula Summary of ASM 2014

EXAM MLC – Models for Life Contingencies