Chapter 9

Measurement of Risk and

Mortality Table
Slide prepared
prepared by:
by:Abdullah
AbdullahAl
AlYousuf
Yousuf Khan
Khan
Slide
Assistant Professor
Professor IUBAT
IUBAT
Assistant

McGraw-Hill/Irwin

Copyright 2006 by The McGraw-Hill Companies, Inc. All

rights reserved.

Measurement of Risk and Mortality

Table
The risks are measured or evaluated
for fixation of premium to be charged
by the insurer.
There are two methods of calculation
of premium;
Value of Service
Cost of Service

methods of calculation of
premium;
Value of Service;
It determines the rate of premium according to
the utility or value to insurance to each
proponents.
Since the value or utility varies with each person, the
premium rates will also vary.

But this principle can not be used because its

utility to each individual cannot be
determined.
The value is higher to the richer section of the
society and to the head of large family.
Moreover, high premium will not attract business.
So the Value of Service cannot be used due to its
impractibility.

methods of calculation of
premium;
Cost of Service;
Premium should be charged according to the cost to the
insurer.
In insurance, demand side does not play important role.
That is why it is called, an insurance is not bought, it is sold.
So, the insurer must fix the cost of the premium to be charged
on a particular risk or policy.
The cost includes all expenses of the business plus a small
profit margin.
Above the profit margin, the insurer is not expected to gain.
The insurance business is expected run on no loss, no gain basis.

The premium charged to meet the amount of claim, is called

net premium.
Administrative cost is another type of cost;
Fixed cost
Recurring cost

Cost of Claims
The claims may arise at the death or at the end of the
policy.
In annuity contract, the payment shall continue to death,
therefore, the expectation of survival will be the basis of
cost.
In life insurance, payment of claims depends upon the
death. The death is certain but not the time.
Therefore, the main problem is to decide when the death will
take place.
Forecasting of death is very important facto to decide the
period and amount of claim.
If these are decided, the premiums can easily be calculated.
The forecasting of death can be done on;
The experience on medical science, and
The experience of past records

Forecasting the Death

The death of one life cannot be
forecasted but the expectations of
number of deaths from a group of the
same age can be forecasted on the
basis of;
Theory of Probability and
The Law of Large Number

Forecasting the Death

Theory of Probability;
It reveals the chances of death of a person out
of a group.
Can be three types;
Certainty; expressed as one. It means the chance of
happening a certain event, say death, is 100 percent.
Simple probability; when the events are mutually
exclusive. e.g. if at the age of 40, 2 persons die out
of 10,000. the probability of a death of a person can
be expressed as; 2/10,000=.02 percent or 0.0002 of
units.
Compound probability; is combined with two persons
simple probability. (see example)

Estimation of Probability
Can be estimated on the;
Priori basis;
Estimated merely on the basis of knowledge, not by
experiment or practice. E.g. it is well known fact that
the death rate after the age of 50 will continue to
increase year after year.

Posteriori basis;
Calculated on the basis of experiment.
Estimations involves a large number of data to be
accurate.
But 100 percent accuracy and universal experiment is
not possible.

Law of Large Numbers

The accuracy of probability depends
on two factors;
Accuracy of data
The large number of units

It has been observed that the larger

the number, the lesser the deviation
between actual and probable
estimation.

Mortality Table
Mortality table is such data which records
the past mortality and is put in such form
as can be used in estimating the course of
future data.
Past deaths recorded to predict future
mortality.
A large number of persons are selected and
served for death and survival rate till all of
them is dead.
It is also described as the picture of a
generation of individuals passing through time.

Features of Mortality Table

Observation of Generations; persons of a generation
is selected and observed till death.
Start from a point; and will continue up to the point
till everyone dies.
Yearly estimation; records the yearly death or
survival rate. Each year is considered.
Mortality and Survival rates; any table giving
mortality rates is not mortality table unless mortality
rate of a generation is calculated each year.
Each years number of living is the previous years number of
living minus previous years number of dying.
Therefore, as persons go on dying year after year the number
o living goes on shrinking till it is reduced to zero and
mortality tables ends there.

Construction of Mortality
Table
Attained age;
Means age nearer to birth date - should be
selected.
E.g. persons of age of 19 years 6 months to
20 years 5 months 29 days will be treated
as the age of 20 years.
The selected persons of the attained age will
be observed and the number of deaths will be
recorded during a year till the persons selected
are dead.
The number of death in a year is deducted
from the number of living at the beginning of
year to get the number of living in the
beginning of the next year.

Criticism of Mortality Table

A large number of persons or an attained
age is difficult to get.
Constant watch (monitoring) is not
possible.
Requires long period to construct the table.
Waste of money and time to record.
Even though its constructed, it will be of no
use due to the changes might have
occurred over the years.

Construction of Death Rates

on Yearly Basis
To avoid the above difficulties, death rate is calculated on a
yearly basis.
The death rate is calculated for every age.
Separate sample is taken for each age.
The number of living in each age is observed and the
number of death during the year is recorded.
The death rate for the age is calculated by dividing number
of deaths by number of living in each age.
A year is selected because a year constitutes various types
of weather, therefore, low, high, and normal mortalities are
averaged in the year.

Example of Construction of
Death Rates
Age
20
21
22

Number of Number
Living
of Death

Death
Rate

Survivors
Rate

1,000,000
998,000
995,000

0.002
0.003
0.004

0.998
0.997
0.996

2,000
3,000
4,000

Construction of Death Rate

To avoid the difficulties in calculating death rates, it is
calculated on yearly basis.
It is calculated for every age with separate sample taken
from each age.
The number of living in each age is observed and the
number of death during the year is recorded.
The death rate for a given age is calculated by dividing
number of death by the number of living in each age.

A year is selected because a year constitutes various

types of weather, therefore, low, high, and normal
mortalities are averaged in the year.
Premiums are quoted on yearly basis so the cost
depending on mortality shown also be based on yearly
basis.

Sources of Mortality
Information
For construction of a mortality table,
number of living in the beginning of each
year and the number of deaths during the
year are required.
The mortality table must be constructed as
accurately as possible to represent the past
experience.
The sources of mortality can be obtained
from;
Population Statistics accuracy may of question
Records of Insurers very accurate

Construction of Mortality
Table; Example
10,000 persons are taken at the age of 20, 20,000
persons at age 21, 5,000 persons at age 22,
10,000 persons at 23, 20,000 persons at age of
24.
The number of deaths observed at these ages are
20, 80, 15, 60, and 100 respectively.
Therefore the death rates will be 0.002, 0.004,
0.003, 0.006, 0.005 respectively at this stage.
The death rate is calculated by the following
formula;

Table 9.1 Yearly Death

Age

Number of
Living

Number of
Death

Death
Rate

Survivors
Rate

20

10,000

20

0.002

21

20,000

80

0.004

22

5,000

15

0.003

23

10,000

60

0.006

24

20,000

100

0.005

Crude and Graduated Mortality

Rates
Crude Death Rates;
The yearly death rates may be different
because;
The generation of an age is not observed.
Different persons at different ages are observed.
There may be a large number for observation.
The date may be cent percent correct.

Graduated Mortality Rates;

By smoothing the fluctuations of crude
rates with the help of interpolation and
graphical methods.

Crude and Graduated

Mortality Rates
Chart Title
6
5.5
5

4.9
4.5

4.4

3.5

3.3

3
2.5
2
1

1.8

1.5
1.4

0
20

21

22

23

24

Graduated Mortality
Rate
Crude Death Rates

Table 9.2 Mortality Table

Age

Number of
Living

Number of Deaths

Mortality Rate

Survival Rate

lx

dx

qx

px=1-qx

20

1,000,000

2,000

0.002

0.998

21

998,000

2,994

0.003

0.997

22

995,006

3,980

0.004

0.996

23

991,026

4,955

0.005

0.995

24

986,065

5,716

0.006

0.994

The number of death at a particular age is calculated by multiplying the number of

living at the age with the mortality rate.
Thus, dx= lx qx. Here at the age 20 the d20 = l20 q20 = 1,000,000 0.002 = 2,000.
Number of living persons is calculated as follows;

l21=l20 d20 = 1,000,000 2,000 = 998,000

Example
The death rate of a person aged 20
after 3 years can be calculated as
follows;
q x 3

l x l x 3

lx

q203

l20 l203

l20

q203

1,000,000 991,026

0.009874
1,000,000

A Complete Mortality Table

Hm Maikaham Graduation Mortality Table
Age

No. of
Living at
x

No. of
Deaths
between
x and
x+1

Death
Rate

Survival
Rate

Force of
Mortalit
y at age
x

No. of
Survival
at min
age lx
and lx
+1
Lx=
(lx+x+1)

Total
Survival
No.

Complete
Expectati
on of Life
at age x

Age

lx

dx

qx= dx/lx

Px=1-qx

Ux

Tx=Lx

x=Tx/L
x

20

96,061

548

0.00572

0.99428

0.00550

95,787

4,044,238

42.101

20

21

95,513

582

0.00608

0.99392

0.00592

95,222

3,948,451

41.339

21

22

94,931

609

0.00643

0.99357

0.00629

94,626

3,853,229

40.590

22

23

94,322

631

0.00668

0.99332

0.00659

94,007

3,758,603

39.849

23

24

93,691

647

0.00691

0.99309

0.00682

96,367

3,664,596

39.114

24

Description of the Table

1. Column (x).

Column x denotes the age of the

prospect.
The mortality table can start from any
age and continue to 100 to 120 years,
as required by the insurer.

Column (lx)

This column indicates the number of

living persons at the beginning of each
year.
The table starts from age 0, the number
in the column lx against for this age
group l0, is, say e.g. 9,000,000 or any
number that represents the number of
persons age 0.
If the table starts with the age 30, the
starting value for lx will be l30

Column dx;

Number of persons dying between age x

and x+1 are shown in this column.
The difference of lx - lx +1 is the number
of persons die between ages x and x+1.
Thus dx = lx - lx +1

Column (qx= dx/ lx);

this column indicates the probability of
death.
It gives for a successive values of x the
probability that a person aged x dies
within one year, i.e. before reaching the
age x+1.
Thus the death rate or mortality at age x
is equal to the number of deaths at age x
divided by the number ofqxliving
l l at age x
q

l
l
or
x 1

Column Px;
The column (Px) indicates the rate of
survival. It gives for successive ages the
probability that a life aged x survives to
age x+1. thus, the probability of survival
(Px) is equal to number of survivors to
age x+1 divided by total number of living
age x. Hence, Px= lx+1/ lx

It is also known as Px=1-qx

Force of Mortality (Ux);

Te force of mortality at age x is denoted by Ux
The force of mortality at age x can thus be
defined as the limiting value of the nominal
yearly rate of mortality at age x, over a small
interval of time dt as the length of interval dt
tends to zero.
In practice the smallest interval we can
consider is one day i.e., dt = 1/365 days of a year.
1
(l l
)
x

The death between age x and 365

arex x 1/ 365
l x l( x 1/ 365)
and the rate of mortality at age x per day is
lx
The corresponding yearly rate is365(l x l x 1/ 365 )
lx

No. of survival at mid age x and

x+1(Lx)
The number of persons in the
population between ages x to x+1 is
denoted by
Lx.
1
Lx l x d x
2
Thus

Complete Expectation of Life at age x (x)

This column is known as the complete
expectation of life denoted by the
symbol x.
The expectation of life is the average
number of complete years of life lived
by each person aged x, after reaching
age x.
It is an average obtained by dividing by
lx, the total number of futures years of
life lived by the lx persons.

Types of Mortality Table

Aggregate Table
A table constituted without distinguishing
the select , and ultimate lives.
The lives from which the mortality rates
of the aggregate lives are derived being
a mixture of the select lives and
ultimate live, the aggregate rates lie
between the select and ultimate rates for
the same age attained.
Also called Mixed and General Mortality
Table.

The Select Table

Mortality table giving rate depending
on both age and duration elapsed
since entry are called select mortality
tables.
Table 9.3 Mortality Rate/ 1000 (dx)
Years of Insurance
Age

6 years
and
over

Age
attained

20

2.73

3.59

3.80

3.96

4.13

4.31

25

21

2.78

3.66

3.86

4.01

4.18

4.35

26

22

2.83

3.72

3.91

4.07

4.21

4.38

27

23

2.86

3.76

3.06

4.08

4.24

4.41

28

Formation of a Select
table
Table 9.4 Select Mortality Table
Age
x

Number of Living
lz

Number of Death
lx

Death Rate per Thousand

l

35
35+1
35+2
35+3
36
36+1

100,000
99,684
99,256
99,802
100,000
99,677

316
428
454
474
323
411

3.16
4.29
4.57
4.80
3.23
4.42

Ultimate Mortality Table

A mortality table in which the rates in
the select period are omitted and
only the ultimate rates are tabulated
is called an ultimate mortality table.
Table 9.5 Ultimate Mortality Table
Age at entry

6 and over

Age attained

20

4.31
4.35
4.38
4.41

25
26
27
28

21
22
2823

Interest Factor
The second factor after death rate is interest
factor;
For calculating net premium
Because the premium is obtained in advance, and
Claim is paid subsequently on a later date when
claims made.

So during this period the insurer can earn

certain interest.
Since the insurer can earn additional amount
on the premium collected, its benefit should
be given to the policyholder.

Questions
Fill up the blanks
Age
(x)
20
21

Number of
Living
(lx)
1,000,000

Number of
Deaths
(dx)

Probability of
Death
(qx)
0.00409

Probability of
Survival
(Px)

0.00370

22

0.99653

23

0.99658

24

0.00342

25

0.00335