Tutorial material

01 Foundations

Note that all pages correspond to the bottom right page # of the book (not the PDF actual page):
1. Assume a ten-year investment product pays $𝑘 × 1.01𝑘 at the end of every discrete year,
𝑘. Find the total payment made.
Solution (based on Slide 7 formula in 01 Foundations slide deck):
10

𝑇𝑜𝑡𝑎𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 = ∑ 𝑘 × 1.01𝑘

𝑘=1
11−1

= 1.01 × ∑ 𝑘 × 1.01𝑘−1
𝑘=1
1.0111 − 1
11 × 1.0111−1 − ( 1.01 − 1 )
= 1.01 ×
1.01 − 1
1.0111 − 1
11 × 1.0110 −
= 1.01 × 0.01
0.01
= 101 × (11 × 1.0110 − 100 × (1.0111 − 1))
≈ 58.98488.

𝑐𝑒 −𝑐𝑥 𝑓𝑜𝑟 𝑥 > 0

2. If 𝑋 is a positive valued random variable with 𝑓(𝑥) = { , with 𝑐 > 0.
0 𝑓𝑜𝑟 𝑥 ≤ 0
Assuming 𝑥 > 0,
a) Derive 𝐹(𝑥).
b) Derive 𝑆(𝑥).
c) Derive ℎ(𝑥).
d) Derive the median.
e) Derive 𝐸[𝑎𝑋 + 𝑏], where 𝑎, 𝑏 ∈ ℝ.
f) If 𝑌 = ln(𝑥), derive 𝐹𝑌 (𝑦).
Solution (based on material and formulas in Slides 9, 11, and 14 to 16):
𝑥
a) 𝐹(𝑥) = ∫−∞ 𝑓(𝑡)𝑑𝑡
0 𝑥

= ∫ 0𝑑𝑡 + ∫ 𝑐𝑒 −𝑐𝑡 𝑑𝑡
−∞ 0
𝑥

= 𝑐 ∫ 𝑒 −𝑐𝑡 𝑑𝑡
0
𝑥

= 𝑐 × ∫(𝑒 −𝑐 )𝑡 𝑑𝑡
0
𝑒 −𝑐𝑥 − 1
=𝑐×( )
ln(𝑒 −𝑐 )

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 𝑒 −𝑐𝑥 − 1
=𝑐×( )
−𝑐
1 − 𝑒 −𝑐𝑥
=𝑐×( )
𝑐

= 1 − 𝑒 −𝑐𝑥

b) 𝑆(𝑥) = 1 − 𝐹(𝑥) = 1 − (1 − 𝑒 −𝑐𝑥 ) = 𝑒 −𝑐𝑥

𝑓(𝑥) 𝑐𝑒 −𝑐𝑥
c) ℎ(𝑥) = 𝑆(𝑥) = =𝑐
𝑒 −𝑐𝑥
1
d) Median → 𝐹(𝑚) ≡ = 1 − 𝑒 −𝑐𝑚
2
⟺
1 1
𝑒 −𝑐𝑚 = 1 − =
2 2
⟺
𝑐𝑚
𝑒 =2
⟺
𝑐𝑚 = ln(2)
⟺
1
𝑚 = ln(2)
𝑐
e) 𝐸[𝑎𝑋 + 𝑏] = 𝑎𝐸[𝑋] + 𝑏.
∞

𝐸[𝑋] = ∫ 𝑥𝑓(𝑥)𝑑𝑥
−∞
0 ∞

= ∫ 𝑥 × 0𝑑𝑥 + ∫ 𝑥 × 𝑐𝑒 −𝑐𝑥 𝑑𝑥
−∞ 0
∞

= 0 + 𝑐 ∫ 𝑥 × (𝑒 −𝑐 )𝑥 𝑑𝑥
0
∞

= 𝑐 × 𝑒 −𝑐 ∫ 𝑥 × (𝑒 −𝑐 )𝑥−1 𝑑𝑥
0
1
−𝑐
1
= 𝑐𝑒 × ×
(ln(𝑒 −𝑐 ))2 𝑒 −𝑐
1
=𝑐×
(−𝑐)2
1
=𝑐× 2
𝑐
1
=
𝑐
1 𝑎
Thus, 𝐸[𝑎𝑋 + 𝑏] = 𝑎 × 𝑐 + 𝑏 = 𝑐 + 𝑏.
f) 𝐹𝑌 (𝑦) = Pr{𝑌 ≤ 𝑦}
= Pr{ln(𝑋) ≤ 𝑦}

2
 = Pr{𝑋 ≤ 𝑒 𝑦 }
= 𝐹(𝑒 𝑦 )
𝑦
= 1 − 𝑒 −𝑐𝑒 .

3. Assume the following joint distribution of two binary random variables:

𝑋 Y Pr{𝑋 = 𝑥, 𝑌 = 𝑦}
0 0 0.6
0 1 0.2
1 0 0.1
1 1 0.1
Find 𝐶𝑜𝑟𝑟(𝑋, 𝑌)
𝐸[𝑋𝑌] − 𝐸[𝑋]𝐸[𝑌]
𝐶𝑜𝑟𝑟(𝑋, 𝑌) =
√𝑉𝑎𝑟(𝑋)𝑉𝑎𝑟(𝑌)
∞ ∞

𝐸[𝑋𝑌] = ∑ ∑ 𝑥𝑦 × Pr{𝑋 = 𝑥, 𝑌 = 𝑦}
𝑥=−∞ 𝑦=−∞
= 0 × 0 × Pr{𝑋 = 0, 𝑌 = 0}
+0 × 1 × Pr{𝑋 = 0, 𝑌 = 1}
+1 × 0 × Pr{𝑋 = 1, 𝑌 = 0}
+1 × 1 × Pr{𝑋 = 1, 𝑌 = 1}
= 1 × 1 × Pr{𝑋 = 1, 𝑌 = 1}
= 1 × 1 × 0.1 = 0.1

Noting that 𝑉𝑎𝑟(𝑋) = 𝐸[𝑋 2 ] − (𝐸[𝑋])2 and 𝑉𝑎𝑟(𝑌) = 𝐸[𝑌 2 ] − (𝐸[𝑌])2 we will derive
the general expression of 𝐸[𝑋 𝑘 ]:
∞
𝑘]
𝐸[𝑋 = ∑ 𝑥 𝑘 𝑃𝑟{𝑋 = 𝑥}
𝑥=−∞
= 0𝑘 × Pr{𝑋 = 0} + 1𝑘 × Pr{𝑋 = 1}
= 1𝑘 × Pr{𝑋 = 1}
= 1 × Pr{𝑋 = 1}
= Pr{𝑋 = 1}
= Pr{𝑋 = 1, 𝑌 = 0} + Pr{𝑋 = 1, 𝑌 = 1}
= 0.1 + 0.1
= 0.2
Thus,
𝐸[𝑋] = 0.2
𝐸[𝑋 2 ] = 0.2
𝑉𝑎𝑟(𝑋) = 𝐸[𝑋 − (𝐸[𝑋])2 = 0.2 − 0.22 = 0.16
2]

∞
𝑘]
𝐸[𝑌 = ∑ 𝑦 𝑘 𝑃𝑟{𝑌 = 𝑦}
𝑦=−∞
= 0 × Pr{𝑌 = 0} + 1𝑘 × Pr{𝑌 = 1}
𝑘

= 1𝑘 × Pr{𝑌 = 1}

3
 = 1 × Pr{𝑌 = 1}
= Pr{𝑌 = 1}
= Pr{𝑌 = 1, 𝑋 = 0} + Pr{𝑌 = 1, 𝑋 = 1}
= Pr{𝑋 = 0, 𝑌 = 1} + Pr{𝑋 = 1, 𝑌 = 1}
= 0.2 + 0.1
= 0.3
Thus,
𝐸[𝑌] = 0.3
𝐸[𝑌 2 ] = 0.3
𝑉𝑎𝑟(𝑌) = 𝐸[𝑌 2 ] − (𝐸[𝑌])2 = 0.3 − 0.32 = 0.21.

Therefore,
0.1 − 0.2 × 0.3
𝐶𝑜𝑟𝑟(𝑋, 𝑌) = ≈ 0.21822.
√0.16 × 0.21

4. Page 10: Example 7 → Mixture distribution continuous.

5. Page 11: #3 → Time value of money problem.
6. Page 12: #8 → Force of interest discounting (constant values spliced across two ranges of
t).
7. Page 13: # 15 → Conditional probability.
8. Page 25: #1 (i), (ii), and (v) → Survival probabilities and time until death and curtate.
9. Page 25: #2 → Survival probability.
10. Page 32: #1 → Expected insurance payment of an insurance product.
11. Page 32: #2 → Force of mortality; median.

02 Life tables & parametric survival models

Note that all pages correspond to the bottom right page # of the book (not the PDF actual page):
1. LTAM reading table practice (attached table; goal is to show them how to read the table).
a. Question: Assume Bob is 20 years old. What is the probability he dies between
the ages 80 and 90 assuming the LTAM Standard Ultimate Life table?
b. Solution:
i. For Bob aged 20 today, we want to calculate the probability that he
dies between 60 and 70 years from now.
ii. Thus, we wish to calculate

iii. Using the LTAM Standard Ultimate Life table, we have

2. Hard: P. 40 Example 8 → Mode (interesting case where you don’t take the derivative
since the function is increasing and has limits).
3. P. 41 Example 16 → Expected lifetime.
4. P.44:

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 a. # 1.
b. # 2.
c. # 3.
5. P. 49 Example 17 → Generalize de Moivre example.
6. P. 49 Example 18 → Generalize de Moivre example.
7. P. 51 Example 22 → Mixture distribution example.
8. P.52 Exercise 4 → Exponential.
9. P.64 Exercise 14 → Uniform (answer P.78).
10. P.67 Exercise 28 → Var(T_x) (answer P.80).
11. Fractional ages:
a. UDD: Page 54 Example 23.
b. UDD/Constant force of mortality: Page 55 Example 24.
c. UDD/constant force of mortality: Page 56 #2.
12. Select and ultimate mortality:
a. Example 26 Page 60.
b. Example 27 Page 60.
c. Example 28 Page 61.
d. Section 8 exercise (there is only one) Page 62.

03 Life insurance products:

1. Discrete:
a. If a whole life insurance policy pays at end of year of death a benefit of 𝛼 if the
insured dies at time 0 ≤ 𝑡 < 1 and 𝛽 if they died after time 𝑡. Derive the APV of
the above-mentioned insurance policy:
i. 𝐴𝑃𝑉 = Pr{𝑇𝑥 ≤ 𝑡} 𝛼𝑣 + Pr{𝑡 < 𝑇𝑥 ≤ 1} 𝛽𝑣 + 𝛽 ∑∞ 𝑘=1 𝑣
𝑘+1
𝑘| 𝑞𝑥
∞

= 𝑡 𝑞𝑥 𝛼𝑣 + (𝑞𝑥 − 𝑡 𝑞𝑥 )𝛽𝑣 + 𝛽 ∑ 𝑣 𝑘+1 𝑘| 𝑞𝑥

𝑘=1
∞

= 𝑡 𝑞𝑥 𝑣 × (𝛼 − 𝛽) + 𝑞𝑥 𝛽𝑣 + 𝛽 ∑ 𝑣 𝑘+1 𝑘| 𝑞𝑥
𝑘=1
∞
0+1
= 𝑡 𝑞𝑥 𝑣 × (𝛼 − 𝛽) + 0| 𝑞𝑥 𝛽𝑣 + 𝛽 ∑ 𝑣 𝑘+1 𝑘| 𝑞𝑥
𝑘=1
∞

= 𝑡 𝑞𝑥 𝑣 × (𝛼 − 𝛽) + 𝛽 ∑ 𝑣 𝑘+1 𝑘| 𝑞𝑥
𝑘=0
= 𝑡 𝑞𝑥 𝑣 × (𝛼 − 𝛽) + 𝛽𝐴𝑥
= 𝛽𝐴𝑥 − (𝛽 − 𝛼) 𝑡 𝑞𝑥 𝑣

b. Hard: LTAM 2021 Spring Exam 2 MCQ 6 (Parrot question, n-year-term

insurance).
c. Hard: Exercise 35 Page 139 and solution Page 154 (n-year term insurance using
LTAM table).
d. Exercise 2 Page 100 (whole life insurance).
e. Hard: Exercise 25 Page 137 (whole life with select and ultimate mortality).
f. Example 36 Page 104 (n-year pure endowment).

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 g. Using the LTAM (assuming 𝑖 = 0.05) find:
i. 𝐴130:20|
̅̅̅̅̅ . Solution:
o Note that we have 𝐴30:20|
̅̅̅̅̅ and 30 𝐸20 available in LTAM, and
o 𝐴30:20| 𝐴130:20|
̅̅̅̅̅ = ̅̅̅̅̅ 𝐴301:20|
+ ̅̅̅̅̅ =𝐴130:20|
+ ̅̅̅̅̅ 30 𝐸20
o Thus,
o 𝐴130:20|
̅̅̅̅̅ = 𝐴30:20|
̅̅̅̅̅ − 30 𝐸20 .
o = 0.37900 − 0.37254 = 0.00646.

ii. 10| 𝐴40 .

Solutions :
o 10| 𝐴40 = 𝑣 10 10𝑝40 × 𝐴40+10
o = 10 𝐸40 × 𝐴50
o = 0.60920 × 0.18931 = 0.115327652

h. Exercise 10 Page 134 and solution Page 147 (interpreting word problem).
i. Exercise 1 Page 146 and solution Page 161 (varying insurance).
j. Hard: Exercise 60 Page 145 and solution Page 161 (de Moivre’s law discrete).
k. Exercise 53 Page 143 and solution Page 155 (de Moivre’s law).
l. Exercise 55 Page 143 and solution Page 159 (exponential: discrete and
continuous).

2. Continuous:
a. Example 42 Page 112 (whole life insurance with a twist).
b. Hard: Exercise 57 Page 137 and solution Page 160 (whole life insurance).
c. Example 44 Page 114 (n-year term insurance).
d. Exercise 1 Page 123 and solution Page 147 (exponential).
e. Exercise 4 Page 133 and solution Page 147 (varying insurance).
f. Exercise 18 Page 136 and solution Page 150 (special n-year endowment
insurance).

3. Example 50 Page 125 (Normal approximation usage).

4. Example 57 Page 130 (Covariance calculation example).
5. Exercise 3 Page 133 (Covariance calculation example).
6. Exercise 3 Page 146 (payments at fraction of year).

04 Life annuity products

1. Discrete annuities:
a. Exercise 2: Page 197. Solution Page 207.
b. Exercise 18 (goes back to basics on probability): Page 199. Solution Page 209.
c. Exercise 20: Page 199. Solution Page 210.
d. Using a. and LTAM table, find 𝑎̈ 20:40
̅̅̅̅| .
i. This can be broken down to 𝑎̈ 20:20 ̅̅̅̅| + 20𝐸20 𝑎̈ 40:20
̅̅̅̅| .
ii. We thus have 13.0559 + 0.37440 × 12.9935 ≈ 17.92067.
2. Continuous annuities:
a. Exercise 1: Page 197. Page 197. Solution Page 207.

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b. Exercise 12: Page 198. Solution Page 208.
c. Exercise 15: Page 198. Solution Page 209.