MASTER EN CIENCIAS ACTUARIALES Y FINANCIERAS
SEGUROS DE VIDA
TUTORIAL 1
1. A person aged 30 is working for MIDAS Co. This firm provides for an insurance of £20,000
payable at the moment of death for all active workers. This coverage will stop when the
employee reaches 65 y.o. . This worker has also decided to buy an extra insurance from a
private insurance company of £30,000 also payable at death but after retirement ( after his
65th birthday ). Assuming the effective rate of interest p.a. i!5% and life table A1967:70 and
U.D.D., find the expected value of both random variables: present values of the insurance
contracts (also known as actuarial present values).
2. A couple of 45(husband) and 42(wife), married 23 years ago, are planning a trip around the
world for their 25th anniversary. For that reason, they think about buying an insurance of
amount £20,000 payable exactly on the 25th anniversary date for one(and only one) of the
members of the couple. Assuming life table A1967:70 and i!4%, in your opinion, who do you
think should be buying the insurance contract, husband or wife?
Remark For exercise 2 use the following criteria for your advice:
1. The actuarial present value of both contracts.
2. The risk involved in both contracts measured by the standard deviation.
Question 1
The first contract is clearly a 35-year term insurance because the retirement age is 65 and the
worker is currently 30. We are fully aware that the present value of this contract is a random
variable, and in order to summarize the information provided by the random variable in just one
figure, we can assess the expected value, also known as the net single premium (in actuarial terms).
Working with the simplification C!1, we know that
A1 ! A 30 ! 35 E 30 A 65
30:35!
and the former formula is valid for insurance payable at the end of the year of death, the only case
that can be found in the life tables suggested A1967:70. Nevertheless, remember that assuming
U.D.D.
!
A1 ! i A1
30:35! ! 30:35!
!
where, as we already know, A 1 is the actuarial present value(expected value) of the term
30:35!
insurance payable right after death.
Let us now obtain the figures found in previous formulas:
A 30 ! 0. 13200(pg. 61 tables)
A 65 ! 0. 52240
35 35 l
! 1 1
35 p 30 !
65
35 E 30 (pg. 30, 31)
1. 05 1. 05 l 30
35 27, 442. 681
! 1 ! 0. 1470
1. 05 33, 839. 370
! ! ln"1. 05# ! 0. 0488
Also remember that
35 E 30 ! D 65
D 30
but unfortunately, these values are not included in life table for i!5%.
Finally,
!
20, 000 A 1 ! 20, 000 i $A 30 ! 35 E 30 A 65 %
30:35! !
! 1, 131. 30
The second contract is a 35-year deferred whole life insurance payable at the instant of death,
and the expected value of this random variable, again starting for C!1, is
! !
35| A 30 ! 35 E 30 A 65 ! 35 E 30
i A 65
!
assuming U.D.D. ; and the final figure is
!
30, 000 35| A 30 ! 2, 360. 43
Mind also that the correction factor for insurance payable at the instant of death
i ! 1. 025
!
increases the value of the discrete consideration, payable at the end of the year of death, in about a
2.5%.
Question 2
The kind of contract this couple is looking for is a 2-year pure endowment because the 25th
anniversary will be after two years.
We have to realize that only one member of the couple can buy the insurance and our task is
giving them some advice on which member of the couple is the most suitable for the insurance
contract.
Let us start studying these two random variables using just the expected value(see pg. 30
tables), for C!1
E$Z "H# % ! 2 E 45 ! V 2 l 47 ! V 2 33, 045. 181 ! 0. 9019
l 45 33, 231. 486
E$Z "W# % ! 2 E 42 ! V 2 l 44 ! V 2 33, 309. 271 ! 0. 9035
l 42 33, 439. 528
where
V! 1
1. 05
and finally for C!£20,000
20, 000 E$Z "H# % ! 18, 038
20, 000 E$Z "W# % ! 18, 070
It is clear that, using the criterium of the actuarial present value, the couple will be better off if
the husband buys the policy instead of the wife because it’ll be cheaper.
Let us now introduce the second point of view, the standard deviation as a measure of the risk
involved in the random variables assessed using its expected value. The moments of second order
in a 2-year pure endowment are easily obtained, for C!1
E$Z 2"H# % ! "V 2 # 2 l 47 ! 0. 8181
l 45
E$Z 2"W# % ! "V 2 # 2 l 44 ! 0. 8195
l 42
now the variance for C!20,000
2
Var$Z "H# % ! "20, 000# 2 E$Z 2"H# % ! "E$Z "H# %# ! "1, 367. 68# 2
Var$Z "W# % ! "20, 000# 2 E$Z 2"W# % ! "E$Z "W# %# 2 ! "1, 129, 68# 2
The conclusion in this case is that the 2-year endowment contract for the husband has got more
risk involved (greater value of the sd) than the same one for his wife.
The final conclusion is that the policy for the husband is cheaper but with more risk involved
than the one for the wife, the decision is up to this couple, our work as actuaries is done. The final
decision is related with the risk aversion curve of the couple, whatever it is.