MASTER EN CIENCIAS ACTUARIALES Y FINANCIERAS
SEGUROS DE VIDA
TUTORIAL 2
1. A temporary annuity of 1 per annum is payable annually in arrears to a man now aged 60. The
annuity is payable during the man’s lifetime for a maximum of fourteen years. The first
payment is due at the end of the first year, at exactly age 61.
On the basis of A1967-70 ultimate mortality and an effective rate of interest of 5% per annum,
find
a. The expected value of the present value of this random variable.
b. The standard deviation.
Remark Use these values if necessary
A 60:15! ! 0. 54639"i ! 5%# A 60:15! ! 0. 31254"i ! 10. 25%#
2. Find, on the basis of A1967-70 mortality and i ! 4% p.a. the values of
a. A 55:20!
b. A 1
35:10!
c. A 1
25:2!
d. 20 E 55
!
e. 3| A
18:10!
f. a 18:32!
g. ä 19:5!
h. 5| ä 20:12!
3. Using the life table ELT:12 with i ! 4% , find the values of
!
a. a 40:32!
b. ä 18:32!
!
c. 2| A 18:21!
d. A 19
SOLUTIONS
Question 1
It is easy to see that this is a temporary annuity, 14-year term annuity. The age of the annuitant
at issue is 60.
The question now is: due or immediate? Well, as long as it is paid in arrears starting at the end
of the first year, when the annuitant is 61 y.o., this should be a 14-year temporary
annuity-immediate.
After this considerable mental effort, let us now obtain the value of the expected value of the
random variable: present value of this stream of payments for i ! 0. 05 "5%# and mortality
A1967:70,
a 60:14! ! ä 60:15! ! 1 ! ä 60 ! 15 E 60 ä 75 !1
15 l 75
! 11. 588 ! 1 6. 960 ! 1
1. 05 l 60
15
! 11. 588 ! 1 " 18507. 942 " 6. 960 ! 1
1. 05 30039. 787
! 8. 5253
This the Net Single Premium, the quantity that should be paid at issue, all at once, to provide
for this insurance in expected value terms.
The standard deviation is slightly more difficult to obtain. Remember that the best way to
obtain higher order moments "k # 2# is to use the moments of an n-year endowment. The formula
we need is on page 5 of the handouts
2
Var$Y dx % ! 1 " 2 A x:n! ! "A x:n! # 2 #
d
Remember also that
2
A x:n! ! A x:n! @i " ! i 2 " 2i or 2!
In our case, for i ! 0. 05 "5%#
i " ! i 2 " 2i ! 0. 1025 "10. 25%#
Using the values specified in the Remark 1, we finally obtain
2
Var$Y dx % ! 1 " 2 A x:n! ! "A x:n! # 2 #
d
2
! 1 " "0. 31254 ! "0. 54639# 2 #
0.05
1.05
! 6. 1731
And the Standard deviation is then
SD$Y dx % ! 6. 1731 ! 2. 4846
Let me just remind you this equality again
1 ! d ä x:n! " A x:n!
This expresion means that one pound here and now has exactly the same value as a n-year
temporary actuarial annuity-due paying interest in advance d (something logical because it is an
annuity-due, paid in advance, remember) plus an n-year endowment payable at the end of the year
of death. In other words, if we keep on paying the interest over one pound capital (d) every year in
advance while we are still alive and if we die, at the end of that sad year, we pay the pound back,
EVERYBODY will be willing to lend us that pound!. There is nothing to gain or lose with this
deal, no risk at all, that is the meaning of the equality.
Obviously, the expected value requested can also be obtained with the former expression
1 ! A 60:15!
a 60:14! ! ä 60:15! ! 1 ! !1
d
! 1 ! 0.0.05
54639 ! 1 ! 8. 525
" 1.05 #
Question 2
Before starting the operations for each of the particular cases of this question, it is very good for
you, to write down the concept first, in other words: what is the meaning of the ”funny” actuarial
symbols.
a) The first symbol is the expected value of the random variable: present value of a 20-year
discrete endowment for a person aged 55, payable either at the end of the year of death or when the
person reaches 75 and the sum assured is C!1,
A 55:20! ! A 55 ! D 75 A 75 " D 75
D 55 D 55
! 0. 44896 ! 976. 91702 " 0. 71966 " 976. 91702
3664. 5684 3664. 5684
! 0. 52369
Remember that it is the sum of a 20-year term insurance plus a 20-year pure endowment.
b) The second symbol stands for the expected value of the random variable: present value of a
35-year term insurance payable at the end of the year of death for a person aged 35
A1 ! A 35 ! D 45 A 45
35:10! D 35
! 0. 22810 ! 5689. 1776 " 0. 32560
8545. 0060
!2
! 1. 1319 # 10
By the way, why is it so cheap?
c) and d) The next symbols are examples of our old friend, the financial-actuarial discount
factor or the expected value of the random variable: c) present value of a 2-year pure endowment
for a person aged 25 and d) present value of a 20-year pure endowment for a person aged 55
c# A 1 ! 2 E 25 ! D 27 ! 11758. 953 !. 92329
25:2! D 25 12735. 886
d# 20 E 55 ! A 1 ! D 75 ! 976. 91702 ! 0. 26658
55:20! D 55 3664. 5684
We can then conclude that if we decide to pay a person now aged 55 one pounds when she or
he reaches 75, the present value of this liability is the figure above. Remember that we used the
pure financial discount factor (V 20 ) and the probability that this person is still alive at 75 y.o. : the
financial-actuarial discount factor.
e) Let us now attempt the next symbol. This the expected value of the random variable (also
known as actuarial present value or Net Single Premium): present value of a 3-year deferred
10-year endowment for a person aged now 18 and payble right after death.
The cryptic and tremendously complicated formula is
! !
3| A 18:10! ! 3 E 18 A 21:10!
! !
! 3 E 18 A 21 ! 10 E 21 A 31 " 10 E 21
! !
! D 21 A 21 ! D 31 A 31 " D 31
D 18 D 21 D 21
Unfortunately, we cannot find the values for the continuous insurances on life table A1867:70.
A big disgrace!, wait!, but if we assume U.D.D. we can use the correction factor and link both
considerations: discrete and continuous
! ! !
A 18:10! ! D 21 A 21 ! D 31 A 31 " D 31
3|
D 18 D 21 D 21
! D 21 i A ! D 31 i A 31 " D 31
D 18 ! 21 D 21 ! D 21
! 14945. 767 " 0. 05 ". 13796 ! 10025. 471 " 0. 05 " 0. 19704
16859. 584 ln"1. 05# 14945. 767 ln"1. 05#
" 14945. 767 " 10025. 471
16859. 584 14945. 767
! . 59991
When dealing with continuous endowments, be careful NOT to multiply the correction factor
i
!
also by the pure endowment term " DD 3121 .
f) The next symbol we face it is not the expected value of the present value of an insurance but
the expected value of an annuity. Remember that the main two differences between insurances and
annuities are:
– Insurances are just single future payments, annuities are usually streams
of future payments.
– Insurances (except the pure endowment) are payable in case of death,
annuities instead are paid while the person is still alive.
This symbol is the expected value of random variable: present value of 32-year temporary
annuity-immediate for a person now aged 13. When dealing with annuities-immediate, the best way
is to express the expected value in terms of annuities-due, easily found in the life tables.
Then, we can write
a 18:32! ! ä 18:33! ! 1 ! ä 18 ! D 51 ä 51 ! 1
D 18
! 22. 752 ! 4399. 0830 " 15. 678 ! 1
16859. 584
! 17. 661
Remember the formulae
a x:n! ! ä x:n"1! ! 1
ax ! äx ! 1
g) The next symbol is again an annuity, the expected value of the random variable: present
value of a 5-year annuity-due for a person aged 19.
The formula is easy
ä 19:5! ! ä 19 ! D 24 ä 24
D 19
! 22. 645 ! 13254. 913 " 22. 020
16194. 979
! 4. 6226
Why do you think it is so expensive?
h) Finally, let us consider the expected value of the random variable: present value of a 2-year
deferred 12-year temporary annuity-due issued for a person now aged 20. The almost
impossible-to-understand formula is
5| ä 20:12! ! 5 E 20 ä 25:12! ! 5 E 20 "ä 25 ! 12 E 25 ä 37 #
! D 25 ä 25 ! D 37 ä 37
D 20 D 25
! 12735. 886 " 21. 877 ! 7886. 1842 " 19. 6211
15557. 436 12735. 886
! 7. 9632
Question 3
This exercise is similar to the former question but considering a different mortality basis,
ELT:12.
a) The first symbol is the expected value of the random variable: present value of a 32-year
continuous annuity issued for a person aged 40
! ! !
a 40:32! ! a 40 ! D 72 a 72
D 40
! 17. 343 ! 2887. 1 " 6. 682
19535
! 16. 355
!
Look how close is to a 40 !!
Also remember that in life table ELT:12, we can only find values for the continuous benefits,
either whole life insurance or perpetuities.
b) The second symbol is the expected value of the random variable: present value of 32-year
temporary annuity-due for a life aged 18. We can then write
ä 18:32! ! ä 18 ! D 50 ä 50
D 18
but we cannot find ä x on life table ELT:12 !!
But not everything is lost, let us just remember this formula for a second
1 ! d äx " Ax
then it is not very hard to deduce
äx ! 1 ! Ax
d
but we still haven’t found what we are looking for because, again, we cannot find A x (discrete
insurance) in the life table ELT:12. Before contemplating the idea of just abandon the idea of
becoming an actuary, think that if we assume U.D.D.
!
A x ! i A x or
!
!
A x ! ! A x !!!!
i
Then we can write
!
!
1 ! Ax ! ä ! 1! Ax
äx ! x
i
d d
and finally
! !
! !
1! A 18 1! A 50
ä 18:32! ! i
! D 50 i
d D 18 d
ln"1.04# ln"1.04#
1! " 0. 14926 1! " 0. 44429
! 0.04
0.04
! 12676 " 0.04
0.04
1.04
47642 1.04
! 18. 291
c) The next symbol is now the expected value of the random variable: present value of 2-year
deferred, 21-year endowment insurance, payable at the instant of death, for person now aged 18.
The formula for this ”messy” expected value is
! ! ! !
2| A 18:21! ! 2 E 18 A 20:21! ! 2 E 18 A 20 ! 21 E 20 A 41 " 21 E 20
! !
! D 20 A 20 ! D 41 A 41 " D 41
D 18 D 20 D 20
! 43947 " . 15943 ! 18740 " 0. 33101 " 18740
47642 43947 43947
! 0. 41021
d) After the heavy exercise of the former formulas, let us finish this tutorial with something
slightly easier. The symbol requested is the expected value of the random variable: present value of
a whole of life insurance payable at the end of the year of death for a life aged 19. Again another
difficult case because we cannot find this value straight in this table, ELT:12, but we should
remember right away that assuming U.D.D.
!
A 19 ! ! A 19 !
ln"1. 04#
" 0. 15426 !. 15125
i 0. 04