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Preface

P-7
Preface

Thank you for choosing ACTEX.


A new version of Exam MLC is launched in Spring 2014. The new Exam MLC is significantly
different from the old one, most notably in the following aspects:
(1) Written-answer questions are introduced and form a major part of the examination.
(2) The number of official textbooks is reduced from two to one. The new official textbook,
Actuarial Mathematics for Life Contingent Risks 2nd edition (AMLCR), contains a lot more
technical materials than other textbooks written on the same topic.
(3) The level of cognitive skills demanded from candidates is much higher. In particular, the
new learning objectives require candidates to not only calculate numerical values but also,
for example, interpret the results they obtain.
(4) Several new (and more advanced) topics, such as participating insurance, are added to the
syllabus.
Because of these major changes, ACTEX have decided to bring you this new study manual,
which is written to fit the new exam.
We know very well that you may be worried about written-answer questions. To help you best
prepare for the new exam, this manual contains some 150 written-answer questions for you to
practice. Seven full-length mock exams, written in exactly the same format as that announced in
SoAs Exam MLC Introductory Note, are also provided. Many of the written-answer questions
in our mock exams are highly challenging! We are sorry for giving you a hard time, but we do
want you to succeed in the real exam.
The learning outcomes of the new exam syllabus require candidates to be able to interpret a lot
of actuarial concepts. This skill is drilled extensively in our written-answer practice problems,
which often ask you to interpret a certain actuarial formula or to explain your calculation. Also,
as seen in SoAs Exam MLC Sample Written-Answer Questions (e.g., #9), you may be asked in
the new exam to define or describe a certain insurance product or actuarial terminology. To help
you prepare for this type of exam problems, we have prepared a special chapter (Chapter 0),
which contains definitions and descriptions of various products and terminologies. The special
chapter is written in a fact sheet style so that you can remember the key points more easily.
Proofs and derivations are another key challenge. In the new exam, you are highly likely to be
asked to prove or derive something. This is evidenced by, for example, problem #4 in SoAs
Exam MLC Sample Written-Answer Questions, which demands a mathematical derivation of
the Kolmogorov forward differential equations for a certain transition probability. In this new
study manual, we do teach (and drill) you how to prove or derive important formulas. This is in
stark contrast to some other exam prep products in which proofs and derivations are downplayed,
if not omitted.
We have paid special attention to the topics that are newly introduced in the recent two syllabus
updates. Seven full-length chapters (Chapters 0, 10, 12 16) and two sections (amount to more

Actex 2015

| Johnny Li and Andrew Ng | SoA Exam MLC

Preface

P-8

than 300 pages) are especially devoted to these topics. Moreover, instead of treating the new
topics as orphans, we demonstrate, as far as possible, how they can be related to the old topics
in an exam setting. This is very important for you, because multiple learning outcomes can be
examined in one single exam question.
We have made our best effort to ensure that all topics in the syllabus are explained and practiced
in sufficient depth. For your reference, a detailed mapping between this study manual and the
official textbook is provided on pages P-10 to P-12.
Besides the topics specified in the exam syllabus, you also need to know a range of numerical
techniques in order to succeed. These techniques include, for example, Eulers method, which is
involved in SoAs Exam MLC Sample Multiple-Choice Question #299. We know that quite a
few of you have not even heard of Eulers method before, so we have prepared a special chapter
(Appendix 1, appended to the end of the study manual) to teach you all numerical techniques
required for this exam. In addition, whenever a numerical technique is used, we clearly point out
which technique it is, letting you follow our examples and exercises more easily.
Other distinguishing features of this study manual include:
We use graphics extensively. Graphical illustrations are probably the most effective way to
explain formulas involved in Exam MLC. The extensive use of graphics can also help you
remember various concepts and equations.
A sleek layout is used. The font size and spacing are chosen to let you feel more comfortable
in reading. Important equations are displayed in eye-catching boxes.
Rather than splitting the manual into tiny units, each of which tells you a couple of formulas
only, we have carefully grouped the exam topics into 17 chapters. Such a grouping allows
you to more easily identify the linkages between different concepts, which, as we mentioned
earlier, are essential for your success.
Instead of giving you a long list of formulas, we point out which formulas are the most
important. Having read this study manual, you will be able to identify the formulas you must
remember and the formulas that are just variants of the key ones.
We do not want to overwhelm you with verbose explanations. Whenever possible, concepts
and techniques are demonstrated with examples and integrated into the practice problems.
We write the practice problems and the mock exams in a similar format as the released exam
and sample questions. This will enable you to comprehend questions more quickly in the
real exam.
On page P-13, you will find a flow chart showing how different chapters of this manual are
connected to one another. You should first study Chapters 0 to 10 in order. Chapter 0 will give
you some background factual information; Chapters 1 to 4 will build you a solid foundation; and
Chapters 5 to 11 will get you to the core of the exam. You should then study Chapters 12 to 16
in any order you wish. Immediately after reading a chapter, do all practice problems we provide
for that chapter. Make sure that you understand every single practice problem. Finally, work on
the mock exams.

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| Johnny Li and Andrew Ng | SoA Exam MLC

Preface

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Before you begin your study, please download the exam syllabus from SoAs website:
http://www.soa.org/Files/Edu/edu-2015-spring-exam-mlc-syllabus.pdf
On the last page of the exam syllabus, you will find a link to Exam MLC Tables, which are
frequently used in the exam. You should keep a copy of the tables, as we are going to refer to
them from time to time. You should also check the exam home page periodically for updates,
corrections or notices.
If you find a possible error in this manual, please let us know at the Customer Feedback link
on the ACTEX homepage (www.actexmadriver.com). Any confirmed errata will be posted on
the ACTEX website under the Errata & Updates link.
Enjoy your study!

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| Johnny Li and Andrew Ng | SoA Exam MLC

Preface

P-10
Syllabus Reference
Our Manual

AMLCR

Chapter 0: Some Factual Information


1
0.1 0.6
Chapter 1: Survival Distributions
1.1
2.1, 2.2
1.2
2.2
1.3
2.4
1.4
2.6
1.5
2.3
Chapter 2: Life Tables
2.1
2.2
2.3
2.4
2.5

3.1, 3.2
3.3
3.7, 3.8, 3.9
2.5, 2.6

Chapter 3: Life Insurances


3.1
4.4.1, 4.4.5, 4.4.7, 4.6
3.2
4.4.2, 4.4.6, 4.4.7, 4.6
3.3
4.4.3
3.4
4.4.8, 4.5
3.5
4.4.4
3.6
4.5
3.7
Chapter 4: Life Annuities
4.1
5.5
4.2
5.4.1, 5.4.2, 5.9, 5.10
4.3
5.4.3, 5.4.4
4.4
5.6
4.5
5.8
4.6
5.11.1
4.7
5.11.2, 5.11.3
4.8

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Preface

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Our Manual

AMLCR

Chapter 5: Premium Calculation


5.1
6.1, 6.2
5.2
6.5
5.3
6.5
5.4
6.4
5.5
6.7
Chapter 6: Net Premium Reserves
6.1
7.1, 7.3.1, 7.8
6.2
7.3.3
6.3
7.4
6.4
7.7
Chapter 7: Insurance Models Including Expenses
7.1
6.6
7.2
7.3.2, 7.5
7.3
7.9
7.4
6.7, 7.3.4, 7.3.5
Chapter 8: Multiple Decrement Models: Theory
8.1
8.8
8.2
8.8, 8.9
8.3
8.8, 8.10
8.4
8.12
Chapter 9: Multiple Decrement Models: Applications
9.1
9.2
9.3
7.6
9.4
Chapter 10: Multiple State Models
10.1
8.13
10.2
8.2, 8.3, 8.11
10.3
8.4, 8.5
10.4
8.6
10.5
8.7

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Preface

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Our Manual

AMLCR

Chapter 11: Multiple Life Functions


11.1
9.2 9.4
11.2
9.2 9.4
11.3
9.5 9.7
Chapter 12: Interest Rate Risk
12.1
12.2
12.3

11.1 11.3
11.1 11.3
6.8, 11.4

Chapter 13: Profit Testing


13.1
13.2
13.3

12.2 12.4
12.5
12.6, 12.7

Chapter 14: Universal Life Insurance


14.1
13.1 13.2, 13.4.1, 13.4.2, 13.5
14.2
13.4.1, 13.4.2, 13.4.5, 13.4.6
14.3
13.4.7
14.4
13.4.3
14.5
13.4.4, 13.4.8
Chapter 15: Participating Insurance
15.1
15.2

13.3
13.3

Chapter 16: Pension Mathematics


16.1
16.2
16.3
16.4

10.3
10.1, 10.2
10.4
10.5, 10.6

Appendix 1: Numerical Techniques


A1.1
A1.2
A1.3

8.6
7.5.2
7.5.2

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| Johnny Li and Andrew Ng | SoA Exam MLC

Preface

P-13
Flow Chart

1. Survival
Distributions

0. Some Factual
Information

2. Life Tables

5. Premium
Calculation

3. Life Insurances

6. Net Premium
Reserves

4. Life Annuities

7. Insurance Models
Including Expenses

A1. Numerical
Techniques

8. Multiple Decrement
Models: Theory

9. Multiple Decrement
Models: Applications

16. Pension
Mathematics

10. Multiple State


Models

11. Multiple Life


Functions

13. Profit Testing

14. Universal Life


Insurance

15. Participating
Insurance

Actex 2015

12. Interest Rate


Risk

| Johnny Li and Andrew Ng | SoA Exam MLC

Preface

P-14

Actex 2015

| Johnny Li and Andrew Ng | SoA Exam MLC

Chapter 1: Survival Distributions

C1-1

Chapter 1

Survival Distributions

OBJECTIVES

1.

To define future lifetime random variables

2.

To specify survival functions for future lifetime random variables

3.

To define actuarial symbols for death and survival probabilities and


develop relationships between them

4.

To define the force of mortality

In Exam FM, you valued cash flows that are paid at some known future times. In Exam MLC,
by contrast, you are going to value cash flows that are paid at some unknown future times.
Specifically, the timings of the cash flows are dependent on the future lifetime of the underlying
individual. These cash flows are called life contingent cash flows, and the study of these cash
flows is called life contingencies.
It is obvious that an important part of life contingencies is the modeling of future lifetimes. In
this chapter, we are going to study how we can model future lifetimes as random variables. A
few simple probability concepts you learnt in Exam P will be used.

1. 1 Age-at-death Random Variable


Let us begin with the age-at-death random variable, which is denoted by T0. The definition of T0
can be easily seen from the diagram below.

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Chapter 1: Survival Distributions

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Death occurs

Age
T0

The age-at-death random variable can take any value within [0, ). Sometimes, we assume that
no individual can live beyond a certain very high age. We call that age the limiting age, and
denote it by . If a limiting age is assumed, then T0 can only take a value within [0, ].
We regard T0 as a continuous random variable, because it can, in principle, take any value on
the interval [0, ) if there is no limiting age or [0, ] if a limiting age is assumed. Of course, to
model T0, we need a probability distribution. The following notation is used throughout this
study guide (and in the examination).
F0(t) = Pr(T0 t) is the (cumulative) distribution function of T0.
f0(t) =

d
F0 (t ) is the probability density function of T0. For a small interval t, the product
dt

f0(t)t is the (approximate) probability that the age at death is in between t and t + t.
In life contingencies, we often need to calculate the probability that an individual will survive to
a certain age. This motivates us to define the survival function:
S0(t) = Pr(T0 > t) = 1 F0(t).
Note that the subscript 0 indicates that these functions are specified for the age-at-death
random variable (or equivalently, the future lifetime of a person age 0 now).
Not all functions can be regarded as survival functions. A survival function must satisfy the
following requirements:
1. S0(0) = 1. This means every individual can live at least 0 years.
2. S0( ) = 0 or lim S 0 (t ) = 0. This means that every individual must die eventually.
t

3. S0(t) is monotonically decreasing. This means that, for example, the probability of surviving
to age 80 cannot be greater than that of surviving to age 70.

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Chapter 1: Survival Distributions

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Summing up, f0(t), F0(t) and S0(t) are related to one another as follows.

F O R M U L A
Relations between f0(t), F0(t) and S0(t)

f 0 (t ) =

d
d
F0 (t ) = S0 (t ) ,
dt
dt

S 0 (t ) = f 0 (u )du = 1 f 0 (u )du = 1 F0 (t ) ,

Pr(a < T0 b) =

b
a

f 0 (u )du = F0 (b) F0 (a ) = S 0 (a ) S 0 (b) .

(1.1)
(1.2)
(1.3)

Note that because T0 is a continuous random variable, Pr(T0 = c) = 0 for any constant c. Now, let
us consider the following example.

Example 1.1

[Structural Question]

You are given that S0(t) = 1 t/100 for 0 t 100.


(a) Verify that S0(t) is a valid survival function.
(b) Find expressions for F0(t) and f0(t).
(c) Calculate the probability that T0 is greater than 30 and smaller than 60.

Solution
(a) First, we have S0(0) = 1 0/100 = 1.
Second, we have S0(100) = 1 100/100 = 0.
Third, the first derivative of S0(t) is 1/100, indicating that S0(t) is non-increasing.
Hence, S0(t) is a valid survival function.
(b) We have F0(t) = 1 S0(t) = t/100, for 0 t 100.
Also, we have and f0(t) =

d
F0(t) = 1/100, for 0 t 100.
dt

(c) Pr(30 < T0 < 60) = S0(30) S0(60) = (1 30/100) (1 60/100) = 0.3.
[ END ]

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| Johnny Li and Andrew Ng | SoA Exam MLC

Chapter 1: Survival Distributions

C1-4
1. 2 Future Lifetime Random Variable

Consider an individual who is age x now. Throughout this text, we use (x) to represent such an
individual. Instead of the entire lifetime of (x), we are often more interested in the future
lifetime of (x). We use Tx to denote the future lifetime random variable for (x). The definition of
Tx can be easily seen from the diagram below.

x + Tx

Now

Death
occurs

Tx

Age

Time from now

[Note: For brevity, we may only display the portion starting from age x (i.e., time 0) in future
illustrations.]
If there is no limiting age, Tx can take any value within [0, ). If a limiting age is assumed, then
Tx can only take a value within [0, x]. We have to subtract x because the individual has
attained age x at time 0 already.
We let Sx(t) be the survival function for the future lifetime random variable. The subscript x
here indicates that the survival function is defined for a life who is age x now. It is important to
understand that when modeling the future lifetime of (x), we always know that the individual is
alive at age x. Thus, we may evaluate Sx(t) as a conditional probability:
S x (t ) = Pr(Tx > t ) = Pr(T0 > x + t | T0 > x)
=

Pr(T0 > x + t T0 > x) Pr(T0 > x + t ) S0 ( x + t )


.
=
=
Pr(T0 > x)
Pr(T0 > x)
S0 ( x)

The third step above follows from the equation Pr( A | B) =


Exam P.

Actex 2015

Pr( A B)
, which you learnt in
Pr( B)

| Johnny Li and Andrew Ng | SoA Exam MLC

Chapter 1: Survival Distributions

C1-5

F O R M U L A
Survival Function for the Future Lifetime Random Variable

S x (t ) =

S0 ( x + t )
S0 ( x)

(1.4)

With Sx(t), we can obtain Fx(t) and fx(t) by using


Fx(t) = 1 Sx(t) and fx(t) =

d
Fx (t ) ,
dt

respectively.

Example 1.2

[Structural Question]

You are given that S0(t) = 1 t/100 for 0 t 100.


(a) Find expressions for S10(t), F10(t) and f10(t).
(b) Calculate the probability that an individual age 10 now can survive to age 25.
(c) Calculate the probability that an individual age 10 now will die within 15 years.

Solution
(a) In this part, we are asked to calculate functions for an individual age 10 now (i.e., x = 10).
Here, = 100 and therefore these functions are defined for 0 t 90 only.
First, we have S10 (t ) =

S0 (10 + t ) 1 (10 + t ) /100


t
=
= 1 , for 0 t 90.
S0 (10)
1 10 /100
90

Second, we have F10(t) = 1 S10(t) = t/90, for 0 t 90.


Finally, we have f10 (t ) =

d
1
F10 (t ) =
.
dt
90

(b) The probability that an individual age 10 now can survive to age 25 is given by
Pr(T10 > 15) = S10(15) = 1

15
5
= .
90 6

(c) The probability that an individual age 10 now will die within 15 years is given by
Pr(T10 15) = F10(15) = 1 S10(15) =

1
.
6
[ END ]

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Chapter 1: Survival Distributions

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1. 3 Actuarial Notation

For convenience, we have designated actuarial notation for various types of death and survival
probabilities.
Notation 1: t px

We use t px to denote the probability that a life age x now survives to t years from now. By
definition, we have
t px

= Pr(Tx > t) = Sx(t).

When t = 1, we can omit the subscript on the left-hand-side; that is, we write 1px as px.
Notation 2: t qx

We use t qx to denote the probability that a life age x now dies before attaining age x + t. By
definition, we have
t qx

= Pr(Tx t) = Fx(t).

When t = 1, we can omit the subscript on the left-hand-side; that is, we write 1qx as qx.
Notation 3: t|u qx

We use t |u qx to denote the probability that a life age x now dies between ages x + t and x + t + u.
By definition, we have
t|u qx

= Pr(t < Tx t + u) = Fx(t + u) Fx(t) = Sx(t) Sx(t + u).

When u = 1, we can omit the subscript u; that is, we write t |1 qx as t | qx.


Note that when we describe survival distributions, p always means a survival probability,
while q always means a death probability. The | between t and u means that the death
probability is deferred by t years. We read t | u as t deferred u. It is important to remember
the meanings of these three actuarial symbols. Let us study the following example.

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Chapter 1: Survival Distributions

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Example 1.3
Express the probabilities associated with the following events in actuarial notation.
(a) A new born infant dies no later than age 45.
(b) A person age 20 now survives to age 38.
(c) A person age 57 now survives to age 60 but dies before attaining age 65.
Assuming that S0(t) = e0.0125t for t 0, evaluate the probabilities.

Solution
(a) The probability that a new born infant dies no later than age 45 can be expressed as

45q0.

[Here we have q for a death probability, x = 0 and t = 45.]


Further, 45q0 = F0(45) = 1 S0(45) = 0.4302.
(b) The probability that a person age 20 now survives to age 38 can be expressed as 18p20. [Here
we have p for a survival probability, x = 20 and t = 38 20 = 18.]
Further, we have 18p20 = S20(18) =

S0 (38)
= 0.7985.
S0 (20)

(c) The probability that a person age 57 now survives to age 60 but dies before attaining age 65
can be expressed as

3|5q57.

[Here, we have q for a (deferred) death probability, x = 57, t =

60 57 = 3, and u = 65 60 = 5.]
Further, we have 3|5q57 = S57(3) S57(8) =

S0 (60)
S (65)
0
= 0.058357.
S0 (57)
S0 (57)
[ END ]

Other than their meanings, you also need to know how these symbols are related to one another.
Here are four equations that you will find very useful.
Equation 1: t px + t qx = 1

This equation arises from the fact that there are only two possible outcomes: dying within t
years or surviving to t years from now.

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Chapter 1: Survival Distributions

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Equation 2: t+u px = t px u px+t

The meaning of this equation can be seen from the following diagram.
Survive from time t to t + u:
probability = u px+ t

Survive from time 0 to t:


probability = t px

Time from now


0
(Age x)

t
(Age x + t)

t+u

Survive from time 0 to t + u:


probability = t+u px
Mathematically, we can prove this equation as follows:
t +u

px = S x (t + u ) =

S0 ( x + t + u ) S0 ( x + t ) S0 ( x + t + u )
=
= S x (t ) S x +t (u ) = t px u px +t .
S0 ( x)
S0 ( x)
S0 ( x + t )

Equation 3: t|u qx = t+u qx t qx = t px t+u px

This equation arises naturally from the definition of t|u qx.


We have t|u qx = Pr(t < Tx t + u) = Fx( t + u) Fx( t ) = t|u qx = t+u qx t qx.
Also, t|u qx = Pr(t < Tx t + u) = Sx(t) Sx(t + u) = t px t+u px.
Equation 4: t|u qx = t px u qx+t

The reasoning behind this equation can be understood from the following diagram:
Survive from time 0 to time t:
probability = t px
Death occurs: prob.= uqx+t
0
(Age x)

t
(Age x + t)

Time from now


t+u

t|u qx

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Chapter 1: Survival Distributions

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Mathematically, we can prove this equation as follows:


t|u qx

= t px t + u px

(from Equation 3)

= t px t px u px+t (from Equation 2)


= t px (1 u px+t )
= t px u qx+t

(from Equation 1)

Here is a summary of the equations that we just introduced.

F O R M U L A
Relations between t px, t qx and t|u qx
t px

+ t qx = 1,

(1.5)

= t px u px+ t,

(1.6)

= t+u qx t qx = t px t+u px = t px u qx+ t.

(1.7)

t+u px
t|u qx

Let us go through the following example to see how these equations are applied.

Example 1.4
You are given:
(i)

px = 0.99

(ii)

px+1 = 0.985

(iii)

3px+1

= 0.95

(iv) qx+3 = 0.02


Calculate the following:
(a) px+3
(b) 2px
(c) 2px+1
(d) 3px
(e)

1|2qx

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Chapter 1: Survival Distributions

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Solution
(a) px+3 = 1 qx+3
= 1 0.02 = 0.98
(b) 2px = px px+1
= 0.99 0.985 = 0.97515
(c) Consider 3px+1 = 2px+1 px+3
0.95 = 2px+1 0.98
2px+1 = 0.9694
(d) 3px = px 2px+1
= 0.99 0.9694 = 0.9597
(e)

1|2qx

= px 2qx+1
= px (1 2px+1)
= 0.99 (1 0.9694) = 0.0303
[ END ]

1. 4 Curtate Future Lifetime Random Variable

In practice, actuaries use Excel extensively, so a discrete version of the future lifetime random
variable would be easier to work with. We define
K x = Tx ,

where y means the integral part of y. For example, 1 = 1 , 4.3 = 4 and 10.99 = 10. We
call Kx the curtate future lifetime random variable.
It is obvious that Kx is a discrete random variable, since it can only take non-negative integral
values (i.e., 0, 1, 2, ). The probability mass function for Kx can be derived as follows:
Pr(Kx = 0) = Pr(0 Tx < 1) = qx,
Pr(Kx = 1) = Pr(1 Tx < 2) = 1|1qx,
Pr(Kx = 2) = Pr(2 Tx < 3) = 2|1qx,

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Chapter 1: Survival Distributions

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Inductively, we have

F O R M U L A
Probability Mass Function for Kx

Pr(Kx = k) = k|1qx,

k = 0, 1, 2,

(1.8)

The cumulative distribution function can be derived as follows:


Pr(Kx k) = Pr(Tx < k + 1) = k+1qx,

for k = 0, 1, 2, .

It is just that simple! Now, let us study the following example, which is taken from a previous
SoA Exam.

Example 1.5 [Course 3 Fall 2003 #28]


For (x):
(i)

K is the curtate future lifetime random variable.

(ii)

qx+k = 0.1(k + 1),

k = 0, 1, 2, , 9

Calculate Var(K 3).


(A) 1.1

(B) 1.2

(C) 1.3

(D) 1.4

(E) 1.5

Solution
The notation means minimum. So here K 3 means min(K, 3). For convenience, we let
W = min(K, 3). Our job is to calculate Var(W). Note that the only possible values that W can
take are 0, 1, 2, and 3.
To accomplish our goal, we need the probability function of W, which is related to that of K.
The probability function of W is derived as follows:
Pr(W = 0) = Pr(K = 0) = qx = 0.1
Pr(W = 1) = Pr(K = 1) = 1|qx
= px qx+1

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Chapter 1: Survival Distributions

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= (1 qx)qx+1
= (1 0.1) 0.2 = 0.18
Pr(W = 2) = Pr(K = 2) = 2|qx
= 2px qx+ 2 = px px+1 qx+ 2
= (1 qx)(1 qx+1) qx+ 2
= 0.9 0.8 0.3 = 0.216

Pr(W = 3) = Pr(K 3) = 1 Pr(K = 0) Pr(K = 1) Pr(K = 2) = 0.504.


From the probability function for W, we obtain E(W) and E(W 2 ) as follows:
E(W) = 0 0.1 + 1 0.18 + 2 0.216 + 3 0.504 = 2.124
E(W 2 ) = 02 0.1 + 12 0.18 + 22 0.216 + 32 0.504 = 5.58
This gives Var(W) = E(W 2 ) [E(W)]2 = 5.58 2.1242 = 1.07. Hence, the answer is (A).
[ END ]

1. 5 Force of Mortality

In Exam FM, you learnt a concept called the force of interest, which measures the amount of
interest credited in a very small time interval. By using this concept, you valued, for example,
annuities that make payouts continuously. In this exam, you will encounter continuous life
contingent cash flows. To value such cash flows, you need a function that measures the
probability of death over a very small time interval. This function is called the force of mortality.
Consider an individual age x now. The force of mortality for this individual t years from now is
denoted by x+t or x(t). At time t, the (approximate) probability that this individual dies within a
very small period of time t is x+t t. The definition of x+t can be seen from the following
diagram.

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Survive from time 0 to time t:


Prob. = Sx(t)

Death occurs
during t to t + t:
Prob. x+ t t
Time from now
t

t + t

Death between time t and t + t:


Prob. (measured at time 0) fx(t)t

From the diagram, we can also tell that fx(t) t = Sx(t)x+t t. It follows that
fx(t) = Sx(t)x+t = t px x+ t .
This is an extremely important relation, which will be used throughout this study manual.
Recall that f x (t ) = Fx (t ) = S x (t ) . This yields the following equation:

x +t =

S x (t )
,
S x (t )

which allows us to find the force of mortality when the survival function is known.
Recall that

d ln x 1
d ln g ( x) g ( x)
= , and that by chain rule,
=
for a real-valued function g.
dx
x
dx
g ( x)

We can rewrite the previous equation as follows:

x +t =

S x (t )
S x (t )

d[ln S x (t )]
dt
x +t dt = d[ln S x (t )].

x +t =

Replacing t by u,
x +u du = d[ln S x (u )]
t

x +u du = d[ln S x (u )]
t

x +u du = ln S x (t ) ln S x (0)
0

t
S x (t ) = exp x +u du .
0

This allows us to find the survival function when the force of mortality is known.

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Chapter 1: Survival Distributions

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F O R M U L A
Relations between x+t, fx(t) and Sx(t)

fx(t) = Sx(t)x+ t = t px x+ t,

x +t =

S x (t )
,
S x (t )

t
S x (t ) = exp x +u du .
0

(1.9)
(1.10)
(1.11)

Not all functions can be used for the force of mortality. We require the force of mortality to
satisfy the following two criteria:
(i)

x+t 0 for all x 0 and t 0.

(ii)

x +u du = .

Criterion (i) follows from the fact that x+t t is a measure of probability, while Criterion (ii)
follows from the fact that lim S x (t ) = 0.
t

Note that the subscript x + t indicates the age at which death occurs. So you may use x to
denote the force of mortality at age x. For example, 20 refers to the force of mortality at age 20.
The two criteria above can then be written alternatively as follows:
(i)

x 0 for all x 0.

(ii)

x dx = .

The following two specifications of the force of mortality are often used in practice.
Gompertz law

x = Bcx
Makehams law

x = A + Bcx
In the above, A, B and c are constants such that A B, B > 0 and c > 1.

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Let us study a few examples now.

Example 1.6

[Structural Question]

For a life age x now, you are given:


S x (t ) =

(10 t ) 2
,
100

0 t < 10.

(a) Find x+t .


(b) Find fx(t).

Solution
(a) x +t

2(10 t )

S x (t )
100 = 2 .
=
=
S x (t )
10 t
(10 t ) 2
100

(b) You may work directly from Sx(t), but since we have found x+ t already, it would be quicker
to find fx(t) as follows:
fx(t) = Sx(t)x+t =

(10 t ) 2
2
10 t

=
.
100
10 t
50
[ END ]

Example 1.7

[Structural Question]

For a life age x now, you are given

x+t = 0.002t,

t 0.

(a) Is x+ t a valid function for the force of mortality of (x)?


(b) Find Sx(t).
(c) Find fx(t).

Solution
(a) First, it is obvious that x+t 0 for all x and t.
Second,

x +u du = 0.002udu = 0.001u 2 0 = .
0

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Hence, it is a valid function for the force of mortality of (x).

t
t
(b) Sx(t) = exp x + u du = exp 0.002udu = exp(0.001t 2 ) .

(c) fx(t) = Sx(t)x+t = 0.002texp(0.001t2).


[ END ]

Example 1.8 [Course 3 Fall 2002 #35]


You are given:
(i)

1
R = 1 exp x +t dt
0

(ii)

1
S = 1 exp ( x + t + k )dt
0

(iii) k is a constant such that S = 0.75R.


Determine an expression for k.
(A) ln((1 qx) / (1 0.75qx))
(B) ln((1 0.75qx) / (1 px))
(C) ln((1 0.75px) / (1 px))
(D) ln((1 px) / (1 0.75qx))
(E) ln((1 0.75qx) / (1 qx))

Solution
First, R = 1 Sx(1) = 1 px = qx.
Second,
t
t
S = 1 exp ( x + t + k )du = 1 e k exp x + t du = 1 e k S x (1) = 1 e k px .
0

Since S = 0.75R, we have

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Chapter 1: Survival Distributions

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1 e k px = 0.75qx
e k =

1 0.75qx
px

ek =

px
.
1 0.75qx

1 qx
px
k = ln
= ln

1 0.75qx
1 0.75qx

Hence, the answer is (A).


[ END ]

Example 1.9

[Structural Question]

(a) Show that when x = Bcx, we have


t

px = g c

( c t 1)

where g is a constant that you should identify.


(b) For a mortality table constructed using the above force of mortality, you are given that 10p50

= 0.861716 and 20p50 = 0.718743. Calculate the values of B and c.

Solution
(a) To prove the equation, we should make use of the relationship between the force of
mortality and tpx.
t

t
t
B x t

p x = exp x + s ds = exp Bc x + s ds = exp


c (c 1) .
0
0

ln c

This gives g = exp(B/lnc).


(b) From (a), we have 0.861786 = g c

50

( c10 1)

and 0.718743 = g c

50

( c 20 t 1)

. This gives

c 20 1 ln(0.718743)
=
.
c10 1 ln(0.861716)

Solving this equation, we obtain c = 1.02000. Substituting back, we obtain g = 0.776856 and
B = 0.00500.
[ END ]

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Chapter 1: Survival Distributions

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Now, let us study a longer structural question that integrates different concepts in this chapter.

Example 1.10

[Structural Question]

The function
18000 110 x x 2
18000
has been proposed for the survival function for a mortality model.
(a) State the implied limiting age .
(b) Verify that the function satisfies the conditions for the survival function S0(x).
(c) Calculate 20p0.
(d) Calculate the survival function for a life age 20.
(e) Calculate the probability that a life aged 20 will die between ages 30 and 40.
(f) Calculate the force of mortality at age 50.

Solution
(a) Since
18000 110 2
S 0 ( ) =
= 0,
18000
We have 2 + 110 18000 = 0 ( 90)( + 200) = 0 = 90 or = 200 (rejected).
Hence, the implied limiting age is 90.
(b) We need to check the following three conditions:
(i)

S 0 (0) =

18000 110 0 0 2
=1
18000

(ii)

S 0 ( ) =

18000 110 2
=0
18000

(iii)

d
2 x + 110
S 0 ( x) =
<0
dx
18000

Therefore, the function satisfies the conditions for the survival function S0(x).

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Chapter 1: Survival Distributions

(c)

20

C1-19

p0 = S 0 (20) =

18000 110 20 20 2
= 0.85556
18000

(90 20 x)(20 + x + 200)


18000
(90 20)(20 + 200)
18000
(70 x)( x + 220) 15400 150 x x 2
=
=
.
15400
15400

S (20 + x)
S 20 ( x) = 0
=
S 0 (20)

(d)
(d)

(e) The required probability is


10|10q20 = 10p20

20p20

(70 10)(10 + 220) (70 20)(20 + 220)


= 0.89610 0.77922 = 0.11688

15400
15400

(f) First, we find an expression for x.


110 2 x
S 0 ( x)
2 x + 110
18000
.
=
x =
=
x
x
(
90

)(
+
200
)
S 0 ( x)
(90 x)( x + 200)
18000

Hence, 50 =

2 50 + 110
= 0.021.
(90 50)(50 + 200)
[ END ]

You may be asked to prove some formulas in the structural questions of Exam MLC. Please
study the following example, which involves several proofs.

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Chapter 1: Survival Distributions

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Example 1.11

[Structural Question]

Prove the following equations:


(a)

d
t p x = t pxx+t
dt

(b) t q x =
(c)

x
0

t
0

p x x + s ds

p x x + t dt = 1

Solution
(a) LHS =

t
t
d
d
d t

exp( x + s ds ) = exp( x + s ds ) x + s ds = t p x ( x +t ) = RHS


t px =
0
0
dt
dt
dt 0

(b) LHS = t qx = Pr(Tx t) =


(c) LHS =

x
0

p x x + t dt =

t
0

f x ( s )ds =

x
0

t
0

p x x + s ds = RHS

f x (t )dt = xqx = 1 = RHS

[ END ]

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Chapter 1: Survival Distributions

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Exercise 1
1. [Structural Question] You are given:
S0 (t ) =

1
, t 0.
1+ t

(a) Find F0(t).


(b) Find f0(t).
(c) Find Sx(t).
(d) Calculate p20.
(e) Calculate 10|5q30.
2. You are given:

Find an expression for t p5.

(30 t ) 2
f 0 (t ) =
,
9000

3. You are given:


f 0 (t ) =
Find 10.

for 0 t < 30

20 t
,
200

0 t < 20.

4. [Structural Question] You are given:

x =

1
,
100 x

0 x < 100.

(a) Find S20(t) for 0 t < 80.


(b) Compute 40p20.
(c) Find f20(t) for 0 t < 80.
5. You are given:

x =

2
,
100 x

for 0 x < 100.

Find the probability that the age at death is in between 20 and 50.
6. You are given:

(i) S0(t) = 1

(ii) 40 = 220.

0 t < ,

> 0.

Find .

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7. Express the probabilities associated with the following events in actuarial notation.
(a) A new born infant dies no later than age 35.
(b) A person age 10 now survives to age 25.
(c) A person age 40 now survives to age 50 but dies before attaining age 55.
Assuming that S0(t) = e0.005t for t 0, evaluate the probabilities.
8. You are given:
2

S0 (t ) = 1
,
100

0 t < 100.

Find the probability that a person aged 20 will die between the ages of 50 and 60.
9. You are given:
(i)

2px

(ii)

px+2 = 0.985

(iii)

5qx

= 0.98
= 0.0775

Calculate the following:


(a) 3px
(b) 2px+3
(c)

2|3qx

10. You are given:


qx+k = 0.1(k + 1),

k = 0, 1, 2, , 9.

Calculate the following:


(a) Pr(Kx = 1)
(b) Pr(Kx 2)
11. [Structural Question] You are given x = for all x 0.
(a) Find an expression for Pr(Kx = k), for k = 0, 1, 2, , in terms of and k.
(b) Find an expression for Pr(Kx k), for k = 0, 1, 2, , in terms of and k.
Suppose that = 0.01.
(c) Find Pr(Kx = 10).
(d) Find Pr(Kx 10).

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12. Which of the following is equivalent to


(A)

t px

(B)

t qx

t
0

p x x + u du ?

(C) fx(t)
(D) fx(t)
(E) fx(t)x+t
13. Which of the following is equivalent to
(A) t px x+t

d
t px ?
dt

(B) x+t
(C) fx(t)
(D) x+t
(E) fx(t)x+t
14. (2000 Nov #36) Given:
(i)

x = F + e2x, x 0

(ii)

0.4p0

= 0.50

Calculate F.
(A) 0.20
(B) 0.09
(C) 0.00
(D) 0.09
(E) 0.20
15. (CAS 2004 Fall #7) Which of the following formulas could serve as a force of mortality?
(I)

x = Bcx,

B > 0, C > 1

(II) x = a(b + x)1,

a > 0, b > 0

(III) x = (1 + x)3,

x0

(A) (I) only


(B) (II) only
(C) (III) only
(D) (I) and (II) only
(E) (I) and (III) only

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16 (2002 Nov #1) You are given the survival function S0(t), where
(i)

S0(t) = 1,

0t1

(ii)

S0(t) = 1

et
, 1 t 4.5
100

(iii) S0(t) = 0,

4.5 t

Calculate 4.
(A) 0.45
(B) 0.55
(C) 0.80
(D) 1.00
(E) 1.20
1/ 2

17. (CAS 2004 Fall #8) Given S0 (t ) = 1


, for 0 t 100, calculate the probability that
100
a life age 36 will die between ages 51 and 64.
(A) Less than 0.15
(B) At least 0.15, but less than 0.20
(C) At least 0.20, but less than 0.25
(D) At least 0.25, but less than 0.30
(E) At least 0.30
18. (2007 May #1) You are given:
(i)

3p70

= 0.95

(ii)

2p71

= 0.96

(iii)

75
71

x dx = 0.107

Calculate 5p70.
(A) 0.85
(B) 0.86
(C) 0.87
(D) 0.88
(E) 0.89

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Chapter 1: Survival Distributions

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19. (2005 May #33) You are given:


0.05
0.04

x =

50 x < 60
60 x < 70

Calculate 4|14q50 .
(A) 0.38
(B) 0.39
(C) 0.41
(D) 0.43
(E) 0.44
20. (2004 Nov #4) For a population which contains equal numbers of males and females at birth:
(i) For males, xm = 0.10, x 0
(ii) For females, xf = 0.08, x 0
Calculate q60 for this population.
(A) 0.076
(B) 0.081
(C) 0.086
(D) 0.091
(E) 0.096
21. (2001 May #28) For a population of individuals, you are given:
(i) Each individual has a constant force of mortality.
(ii) The forces of mortality are uniformly distributed over the interval (0, 2).
Calculate the probability that an individual drawn at random from this population dies
within one year.
(A) 0.37
(B) 0.43
(C) 0.50
(D) 0.57
(E) 0.63

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22. [Structural Question] The mortality of a certain population follows the De Moivres Law;
that is
1
x =
, x < .
x
(a) Show that the survival function for the age-at-death random variable T0 is
S 0 ( x) = 1

, 0 x < .

(b) Verify that the function in (a) is a valid survival function.


(c) Show that
t

px = 1

1
, 0 t < x, x < .
x

23. [Structural Question] The probability density function for the future lifetime of a life age 0
is given by
f 0 ( x) =

( + x) +1

, > 0


(a) Show that the survival function for a life age 0, S0(x), is S 0 ( x) =
.
+ x
(b) Derive an expression for x.
(c) Derive an expression for Sx(t).
(d) Using (b) and (c), or otherwise, find an expression for fx(t).
24. [Structural Question] For each of the following equations, determine if it is correct or not.
If it is correct, prove it.
(a) t|uqx = tpx + uqx+t
(b) t+uqx = tqx uqx+t
(c)

d
t p x = t p x ( x x +t )
dx

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Solutions to Exercise 1
1. (a) F0 (t ) = 1
(b) f 0 (t ) =

1
t
=
.
1+ t 1+ t

d
1+ t t
1
F0 (t ) =
=
.
2
dt
(1 + t )
(1 + t ) 2

1
S0 ( x + t ) 1 + x + t
1+ x
=
=
.
(c) S x (t ) =
1
S0 ( x)
1+ x + t
1+ x
(d) p20 = S20(1) = 21/22.
(e) 10|5q30 = 10p30 15p30 = S30(10) S30(15) =

2. S0(t) =

30
t

f0

(u )du =

30
t

(30 u ) 2 du
9000

1 + 30
1 + 30
31 31

=
= 0.0822.
1 + 30 + 10 1 + 30 + 15 41 46

[(30 u) ]
=

3 30
t

27000

(30 t ) 3
.
27000
3

S0 (5 + t ) (30 5 t )3
t
If follows that t p5 = S5 (t ) =
=
= 1 .
3
S0 (5)
(30 5)
25

3. S0(t) =

20
t

f0

(u )du =

20
t

(20 u )du
200

[(20 u) ]
=

20 t
f 0 (t )
2
= 200 2 =
t =
.
20 t
S 0 (t ) (20 t )
400

2 20
t

400

(20 t ) 2
.
400

Hence, 10 = 2/(20 10) = 0.2.


4. (a) First, note that 20+t =

1
1
=
. We have
100 20 t 80 t

t 1
du
S 200 (t ) = exp 20+u du = exp
0 80 u
0

= exp([ln(80 u )]t0 ) = exp(ln


(b)

40p20

80 t
t
) = 1 .
80
80

= S20(40) = 1 40/80 = 1/2.

t 1 1

(c) f20(t) = S20(t)20+t = 1


= .
80 80 t 80

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Chapter 1: Survival Distributions

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5. Our goal is to find Pr(20 < T0 < 50) = S0(20) S0(50).

Given the force of mortality, we can find the survival function as follows:
t
t 2

S 0 (t ) = exp u du = exp
du
0
0

100 u

t
100 t

= exp(2[ln(100 u )] ) = exp(2 ln
) = 1

100
100

t
0

So, the required probability is (1 20/100)2 (1 50/100)2 = 0.82 0.52 = 0.39.


x
1
1
S ( x)

6. x = 0
=

S 0 ( x)
x

We are given that 40 = 220. This implies

40

2
, which gives = 60.
20

7. (a) The probability that a new born infant dies no later than age 35 can be expressed as 35q0.
[Here we have q for a death probability, x = 0 and t = 35.]
Further, 35q0 = F0(35) = 1 S0(35) = 0.1605.
(b) The probability that a person age 10 now survives to age 25 can be expressed as 15p10.
[Here we have p for a survival probability, x = 10 and t = 25 10 = 15.]
Further, we have 15p10 = S10(15) =

S 0 (25)
= 0.9277.
S 0 (15)

(c) The probability that a person age 40 now survives to age 50 but dies before attaining age
55 can be expressed as 10|5q40. [Here, we have q for a (deferred) death probability, x =
40, t = 50 40 = 10, and u = 55 50 = 5.]
Further, we have 10|5q40 = S40(10) S40(15) =

S0 (50)
S (55)
0
= 0.0235.
S0 (40)
S0 (40)

8. The probability that a person aged 20 will die between the ages of 50 and 60 is given by
30|10q20

= 30p20 40p20 = S20(30) S20(40).


2

20 + t
1

2
S 0 (20 + t )
t
100

S 20 (t ) =
=
= 1 .
2
S 0 (20)
80
20

100
2

25
16
30
40
, S20(40) = 1 =
. As a result, 30|10q20 = 9/64.
So, S20(30) = 1 =
64
64
80
80

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Chapter 1: Survival Distributions

9. (a)

3px

C1-29

= 2px px+2 = 0.98 0.985 = 0.9653.

(b)

px 2 px + 3 = 5 px = 1 5 qx

2 px +3 =
(c)

2|3qx

1 5 qx 1 0.0775
=
= 0.95566
0.9653
3 px

= 2px 5px = 0.98 (1 0.0775) = 0.0575.

10. (a) Pr(Kx = 1) = 1|qx = px qx+1 = (1 qx)qx+1 = (1 0.1) 0.2 = 0.18


(b) Pr(Kx = 0) = qx = 0.1
Pr(Kx = 2) = 2|qx = 2px qx+ 2 = px px+1 qx+2 = (1 qx)(1 qx+1)qx+ 2
= 0.9 0.8 0.3 = 0.216.
Hence, Pr(Kx 2) = 0.1 + 0.18 + 0.216 = 0.496.
11. (a) Given that x = for all x 0, we have t px = et, px = e and qx = 1 e.
Pr(Kx = k) = k|qx = kpx qx+k = e k (1 e).
(b) Pr(Kx k) = k+1qx = 1 k+1px = 1 e(k + 1).
(c) When = 0.01, Pr(Kx = 10) = e10 0.01(1 e0.01) = 0.0090.
(d) When = 0.01, Pr(Kx 10) = 1 e(10 + 1) 0.01 = 0.1042.
12. First of all, note that upx x+u in the integral is simply fx(u).

t
0

p x x + u du = f x (u )du = Pr(Tx t ) = Fx(t) = t qx.


0

Hence, the answer is (B).


13. Method I: We use t px = 1 t qx. Differentiating both sides with respect to t,
d
d
d
Fx (t ) = f x (t ) .
t px =
t qx =
dt
dt
dt
Noting that fx(t) = t px x+t, the answer is (A).
Method II: We differentiate t px with respect to t as follows:
t
d
d
d
S x (t ) = exp x +u du
t px =
0

dt
dt
dt
t
t
d
= exp x +u du x +u du .
0
dt 0

d t
Recall the fundamental theorem of calculus, which says that
g (u )du = g (t ) . Thus
dt c
d
t

t p x = exp x + u du ( x + t ) = t p x x + t .
0

dt

Hence, the answer is (A).

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Chapter 1: Survival Distributions

C1-30
14. First, note that
0.4

0
0.4 p0 = 0.5 = e

u du

0.4

= e 0

( F + e 2 u )du

The exponent in the above is

0.4

0.4

( F + e )du = Fu + e 2u
2

0
= 0.4 F 1.11277 + 0.5
= 0.4 F 0.61277
2u

As a result, 0.5 = e0.4F0.61277, which gives F = 0.2. Hence, the answer is (E).
15. Recall that we require the force of mortality to satisfy the following two criteria:
(i) x 0 for all x 0,

(ii)

x dx = .

All three specifications of x satisfy Criterion (i). We need to check Criterion (ii).
We have

Bc x
Bc dx =
ln c

=,
0

dx = a ln(b + x) 0 = ,
b+ x

and

1
1
dx =
3
(1 + x)
2(1 + x) 2

=
0

1
.
2

Only the first two specifications can satisfy Criterion (ii). Hence, the answer is (D).
[Note: x = Bcx is actually the Gompertz law. If you knew that you could have identified
that x = Bcx can serve as a force of mortality without doing the integration.]
16. Recall that x +t =

S x (t )
.
S x (t )

Since we need 4, we use the definition of S0(t) for 1 t 4.5:


S0 (t ) = 1

et
,
100

S 0 (t ) =

et
.
100

e4
e4
As a result, 4 = 1004 =
= 1.203 . Hence, the answer is (E).
e
100 e 4
1
100

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Chapter 1: Survival Distributions

C1-31

17. The probability that a life age 36 will die between ages 51 and 64 is given by
S36(15) S36(28).
1/ 2

36 + t
1

1/ 2
S 0 (36 + t )
100
64 t
=
We have S 36 (t ) =
=
=
1/ 2
S 0 (36)
64
36

100

64 t
.
8

7
6
and S36(28) = . As a result, the required probability is
8
8
S36(15) S36(28) = 1/8 = 0.125.
Hence, the answer is (A).
This gives S36(15) =

18. The computation of 5p70 involves three steps.


First, p70 =

p70 0.95
=
= 0.9896 .
0.96
2 p71

75

x dx
Second, 4 p71 = e 71
= e 0.107 = 0.8985 .

Finally, 5p70 = 0.9896 0.8985 = 0.889. Hence, the answer is (E).


19. 4p50 = e0.05 4 = 0.8187
10p50
8p60

= e0.05 10 = 0.6065

= e0.04 8 = 0.7261

18p50

= 10p50 8p60 = 0.6065 0.7261 = 0.4404

Finally, 4|14q50 = 4p50 18p50 = 0.8187 0.4404 = 0.3783. Hence, the answer is (A).
20. For males, we have
t

u du
0.10du
S (t ) = e 0
= e 0
= e 0.10t .

m
0

For females, we have


t

u du
0.08du
S (t ) = e 0
= e 0
= e 0.08t .
f
0

For the overall population,


S0 (60) =

e 0.160 + e 0.0860
= 0.005354 ,
2

and
e 0.161 + e 0.0861
= 0.00492 .
S0 (61) =
2

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Chapter 1: Survival Distributions

C1-32
Finally, q60 = 1 p60 = 1

S0 (61)
= 0.081 . Hence, the answer is (B).
S0 (60)

21. Let M be the force of mortality of an individual drawn at random, and T be the future
lifetime of the individual. We are given that M is uniformly distributed over (0, 2). So the
density function for M is fM() = 1/2 for 0 < < 2 and 0 otherwise.
This gives
Pr(T 1)
= E[Pr(T 1| M )]

= Pr(T 1| M = ) f M ( )d
0

2
1
= (1 e ) d
0
2
1
= (2 + e 2 1)
2
1
= (1 + e 2 )
2
= 0.56767.

Hence, the answer is (D).


22. (a) We have, for 0 x < ,

ln(1 )
1
x
ds ) = exp([ln( s )]0x = e = 1 .
S 0 ( x) = exp( s ds ) = exp(
0
0 s

(b) We need to check the following three conditions:


(i)

S0(0) = 1 0/ = 1

(ii)

S0() = 1 / = 0

(iii)

S 0() = 1/ < 0 for all 0 x < , which implies S0(x) is non-increasing.

Hence, the function in (a) is a valid survival function.


(c) t p x =

x+t

S0 ( x + t )
= x t = 1 t , for 0 t < x, x < .
=
x
S 0 ( x)
x
x
1

( + s )

23. (a) S 0 ( x) = 1 F0 ( x) = 1 f 0 ( s )ds = 1


(b) x =

ds =
+1

( + x )

f 0 ( x)

=
.
S 0 ( x) + x

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Chapter 1: Survival Distributions

C1-33

S0 ( x + t ) + x + t + x
=
(c) S x (t ) =

S 0 ( x)
+ x+t

+ x

(d) f x (t ) = S x (t ) x +t

+x
=
.

+ x+t + x+t

24. (a) No, the equation is not correct. The correct equation should be t|uqx = tpx uqx+t.
(b) No, the equation is not correct. The correct equation should be t+upx = tpx upx+t.
(c) Yes, the equation is correct. The proof is as follows:

d
d S0 ( x + t )
p =
t x
dx
dx S0 ( x)
=

S0 ( x) S '0 ( x + t ) S0 ( x + t ) S '0 ( x)
[ S0 ( x)]2

S0 ( x)( f 0 ( x + t )) S0 ( x + t ))( f 0 ( x))


[ S0 ( x)]2

f 0 ( x + t ) S0 ( x + t ) f 0 ( x)
+
S0 ( x)
S0 ( x) S0 ( x)

f 0 ( x + t ) S0 ( x + t ) S0 ( x + t ) f 0 ( x )
+
S0 ( x + t ) S0 ( x )
S0 ( x) S0 ( x)

= x + t t px + t px x
= t px ( x x + t )

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Chapter 1: Survival Distributions

C1-34

Actex 2015

| Johnny Li and Andrew Ng | SoA Exam MLC

Mock Test 7

T7-1
Mock Test 7

Section A: Multiple Choice Questions. Each question is worth 2 points.


1.

Let Y be the present value random variable for a special three-year temporary life annuity.
You are given:
(i)

The life annuity pays 2 + k at time k, for k = 0, 1, and 2.

(ii)

Payment ceases after 3 years.

(iii) v = 0.9
(iv) px = 0.8, px+1 = 0.75, px+2 = 0.5
Calculate the standard deviation of Y.
(A) 1.2
(B) 1.8
(C) 2.4
(D) 3.0
(E) 3.6
2.

For a special fully continuous insurance on (x) and (y), you are given:
(i)

Tx and Ty are independent.

(ii)

x+t = 0.08, t > 0

(iii) y+t = 0.04, t > 0


(iv) = 0.06
(v)

is the annual rate of net premium payable until the first of (x) and (y) dies.

(vi) The insurance pays 1 at the moment when the first of (x) and (y) dies, and 3 when
the second of (x) and (y) dies.
Calculate .
(A) 0.06
(B) 0.08
(C) 0.10
(D) 0.12
(E) 0.14

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Mock Test 7

T7-2
3.

Consider a permanent disability model with three states:


State 0: Healthy, State 1: Permanently disabled, State 2: Dead.
The transition intensities are x01 = 0.02, x02 = 0.03, 12
x = 0.05.
For a person who is healthy at age 50, calculate the probability that he cannot survive to
age 70, and he has entered the state of permanent disability before reaching 60.
(A) 0.06
(B) 0.08
(C) 0.10
(D) 0.12
(E) 0.14

4.

For a universal life insurance policy, you are given:


(i)

The death benefit is $50,000 plus the account value at the end of the year of death.
The benefit is payable at the end of the year of death.

(ii)

The account value at the beginning of year 1 (before premium payment and
deductions) is $12,000.

(iii) The account value at the beginning of year 2 (before premium payment and
deductions) is $13,900.
(iv) Level premiums of $2,000 each are made at the beginning of each year.
(v)

The annual expense charge is $50 plus 5% of the annual premium.

(vi) The credited interest rate for years 1, 2 and 3 is 5% per annum effective.
(vii) There is no corridor factor requirement for this policy.
(viii) In calculating the cost of insurance, it is assumed that the force of mortality is
constant for all ages. The interest rate used is 6% per annum effective.
Assume that the policy is still in force at the end of year 2. Project the account value at the
end of year 2.
(A) 14,695
(B) 14,995
(C) 15,295
(D) 15,595
(E) 15,895

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Mock Test 7

5.

T7-3

For a special 20-year term insurance on (38), you are given:


(i)

The death benefit is 10,000.

(ii)

The death benefit is payable at the moment of death.

(iii) During the 5th year and the 6th year the gross premium is 145 per annum, paid
continuously at a constant rate.
(iv) The force of mortality follows Makehams law with A = 0.00022, B = 0.00004 and
c = 1.1.
(v)

The force of interest is 4%.

(vi) Expenses are:


5% of premium payable continuously
100 payable at the moment of death
(vii) At the end of the 5th year the expected value of the present value of future losses
random variable is 950.
Eulers method with steps of h = 1/12 years is used to calculate a numerical solution to
Thieles differential equation.
Calculate the expected value of the present value of future losses random variable at the
1
end of 5 years.
6
(A) 975
(B) 962
(C) 949
(D) 936
(E) 923
6.

You are given:


(i)

Mortality follows the Illustrative Life Table.

(ii)

Deaths between integral ages are uniformly distributed.

Calculate the 75-percentile of the age at death for a life aged 40 years.
(A) 27
(B) 44
(C) 53
(D) 68
(E) 85

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Mock Test 7

T7-4
7.

For a double decrement table for disabled, there are two modes of decrement: (r) for
recovery, and (d) for death. It is given:
0.1(3 t ) 0 t < 3
0
t3

(i)

22( r )+t =

(ii)

22( d+) t = 0.1t .

It is also given that the prices of three zero-coupon bonds, all of which will pay 1,000 at
maturity, are as follows:
Maturity (in years)
1
2
3

Current price
980
955
900

Mark is disabled and is scheduled to begin receiving disability payments today, his 22nd
birthday. On every birthday up to and including his 25th, he will receive $1,000 as long as
he has not yet recovered or died. There will be no payments beyond his 25th birthday.
Calculate the expected present value of Marks disability payments.
(A) 2,250
(B) 2,620
(C) 2,690
(D) 2,780
(E) 2,840
8.

For a fully discrete 2-year term insurance of 100 on (x), you are given:
(i)

i = 0.05

(ii)

The net premium is 19.

(iii) The time-1 net premium reserve is 4.5.


Calculate the standard deviation of the loss-at-issue random variable.
(A) 46
(B) 47
(C) 48
(D) 49
(E) 50

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Mock Test 7

9.

T7-5

You are given:


(i)

= 0.05

(ii)

Ax = 0.44

(iii)

Ax = 0.22

Consider a portfolio of 100 fully continuous whole life insurances. The ages of the all
insureds are x, and their lifetimes are assumed to be independent. The face amount of the
policies, the premium rate and the number of policies are as follows:
Face amount
100
400

Premium rate
4.3
17.5

Number of Policies
75
25

By using a normal approximation, calculate the probability that the present value of the
aggregate loss-at-issue for the insurers portfolio will exceed 700.
(A) 1 (2.28)
(B) 1 (0.17)
(C) (0)
(D) (0.17)
(E) (2.28)
10.

For a fully discrete 15-year endowment insurance of 1,000 on (50) that has been in force
for 5 years, you are given:
(i)

Mortality follows the Illustrative Life Table.

(ii)

i = 0.06

(iii) At issue, the net premium was calculated using the equivalence principle.
(iv) When the insured decides to stop paying premiums after 5 years, the death benefit
remains at 1,000 but the pure endowment value is reduced such that the expected
prospective loss at age 55 is unchanged.
Calculate the reduced pure endowment value.
(A) 260
(B) 280
(C) 300
(D) 320
(E) 340

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Mock Test 7

T7-6

11. The expense-loaded premium, G, for a fully-discrete 3-year endowment insurance of 1,000
on (x) is calculated using the equivalence principle. Expenses are paid at the beginning of
each year. You are given:
(i)

The net premium for the insurance is 323.12.

(ii)

G = 390.20

(iii) Renewal expenses of 10% of each gross premium and per policy expense of 3 are
payable at the beginning of the second and the third policy year.
Calculate the expense reserve at the end of the second year.
(A) 25
(B) 35
(C) 45
(D) 55
(E) 60
12. You are given the following about a homogeneous discrete-time Markov chain with 3
states:
State 0: Employed full-time
State 1: Employed part-time
State 2: Unemployed
(i)

Workers transit through the labour force according to the following matrix:
0.9 0.07 0.03
0.05 0.8 0.15

0.25 0.15 0.6

(ii)

Workers transit through the labour force independently at the end of the year.

Consider two workers X and Y, one employed full-time at time 0, another employed parttime at time 0.
Calculate the probability that either one of them, but not both, will be unemployed at the
end of year 2.
(A) 0.18
(B) 0.20
(C) 0.22
(D) 0.24
(E) 0.26

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Mock Test 7

T7-7

13. You are given:


(i)

Deaths are uniformly distributed over each year of age.

(ii)

q70 = 0.02

(iii) i = 0.07
(iv)

A71 = 0. 445

Calculate A70( 4 ) .
(A) 0.402
(B) 0.415
(C) 0.423
(D) 0.431
(E) 0.443
14.

An employee aged exactly 35 on January 1, 2010 has an annual salary of 26,000 during
that year. Salaries are revised annually on December 31 each year. Future salaries are
estimated using the salary scale given in the table below, where Sy / Sx, y > x denotes the
ratio of salary earned in the year of age from y to y + 1 to the salary earned in the year of
age x to x + 1, for a life in employment over the entire period (x, x + 1).
x
35
36
M
62
63
64
65

Sx
1.130
1.210
M
3.589
3.643
3.698
3.751

If the final average salary is defined as the average salary in the three years before
retirement, compute the members expected final average salary. Assume the retirement
age is 65.
(A) 74,812
(B) 79,447
(C) 83,829
(D) 85,071
(E) 96,131

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Mock Test 7

T7-8
15.

Which of the following statement(s) is/are true for a universal life insurance sold with a
no-lapse guarantee?
(I)

The policy must be discontinued if the account value drops to zero.

(II) The no-lapse guarantee is more likely to come into effect if the interest rate used to
calculate the cost of insurance is smaller.
(III) The no-lapse guarantee is more likely to come into effect if the death probability
used to calculate the cost of insurance is smaller.
(A) (I) only
(B) (I) and (II) only
(C) (I) and (III) only
(D) (II) and (III) only
(E) (I), (II) and (III)

16.

Which of the following is/are strictly increasing function(s) of Tx for all Tx 0?


(I)

The present value random variable for a continuous whole life annuity of $1 on (x)

(II) The present value random variable for a continuous n-year temporary life annuity of
$1 on (x)
(III) The net future loss at issue random variable for a fully continuous whole life
insurance of $1 on (x).
(A) (I) only
(B) (III) only
(C) (I), (II) only
(D) (I), (III) only
(E) (I), (II) and (III)

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Mock Test 7

17.

T7-9

An insurer issues a 10-year deferred whole life annuity to a life aged 40. The annuity pays
$10,000 at the beginning of each year, starting in the 11th policy year, as long as the
policyholder survives. Level premiums are paid at the beginning of each year during the
first 10 years.
If the policyholder dies within the first 10 years, premiums paid will be returned to the
policyholder without interest.
The insurer incurs initial expenses of $1,000 plus 50% of the first premium, and renewal
expenses of 1% of each subsequent premium.
You are given:
(i)

1
( IA) 40:10
| = 1.6

(ii)

a&&40:10| = 8.5

(iii) a&&40 = 19.5


Calculate the gross annual premium using the equivalence principle.
(A) 17,550
(B) 17,650
(C) 17,750
(D) 17,850
(E) 17,950
18.

Let Y be the present value random variable for a fully continuous 10-year deferred 10-year
payment life annuity with a payment rate of 10 per annum on (22), with the following
cumulative distribution function:
F22(t) = 1 (1 + 0.04t)e0.04t.
The force of interest is 0.06.
Find Pr(Y 25).
(A) 0.13
(B) 0.22
(C) 0.31
(D) 0.40
(E) 0.49

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Mock Test 7

T7-10

19. For a participating fully discrete whole life insurance of 10,000 on (50), you are given:
(i)

The gross premium is 160.

(ii)

Reversionary bonuses are based on 90% of profits before dividends, calculated using
this information:
Item
(d )
q 69

Value
0.019

( w)
q 69
i
Expenses, payable at the start of the year
Cumulative face amount of reversionary
bonuses credited in years 1 19
Bonus declared at end of year 19
Reserve end of year 19
Reserve end of year 20

0.075
0.06
10
3165.5
204
4765.0
5210.5

(iii) Lapses occur immediately before a premium is due.


(iv) Reserve at the end of year k + 1 in the table above includes reserves for reversionary
bonuses credited in years 1 to k.
(v)

Cash value is 80% of the reserve.

(vi) Reversionary bonuses face amounts are determined using 1000A69 = 499.7 and
1000A70 = 515.0.
(vii) Policyholders who die during year 20 receive their share of year 20 profits as a
dividend.
Calculate the compound reversionary bonus rate for year 20.
(A) 0.15%
(B) 0.25%
(C) 0.35%
(D) 0.45%
(E) 0.55%

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Mock Test 7

20.

T7-11

A multiple decrement table has 2 decrements, death (d) and withdrawal (w). Withdrawals
occur once a year two-thirds of the way through the year of age. Deaths in the associated
single-decrement table are uniformly distributed over each year of age.
You are given:
(i)

l x( ) = 1000

(ii)

qx(w) = 0.2

(iii) l x(+1) = 750


Calculate d x(d ) .
(A) 54
(B) 58
(C) 62
(D) 68
(E) 71

Section B: Written Answer


1.

Consider a Markov model with three states, Healthy (0), Disabled (1), and Dead (2). The
annual transition matrix in the first three years is given by
0

0 0.7 0.25 0.05


P0 = 1 0 0.75 0.25,
2 0
0
1

0
1
2
0 0.7 0.2 0.1
P1 = P2 = 1 0 0.75 0.25.
2 0
0
1

Transitions (if any) happen at the end of each year.


(a) Calculate the probability that an insured who is healthy at time 0 and is already
deceased by time 3 has never been to the state of disability before death.
[5 points]
(b) You are given that i = 0.08. Calculate the net level premium for a 3-year insurance that
pays 100 at the end of the year of death when the insured dies after becoming disabled.
Assume that and that premium is payable at the beginning of every policy year when
the insured is healthy.
[3 points]
(c) What does it mean when a stochastic process is Markov?

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[3 points]

Mock Test 7

T7-12
2.

For a population, the death probabilities for healthy individuals follow the life table below:
k

0
0.13

qx+k

1
0.15

2
0.17

(i)

1000 lives aged x are observed at the beginning of a study. Future lifetimes during
the first year are originally independent before they are exposed to a virus.

(ii)

Immediately after the 1000 lives are observed at the beginning, all lives are exposed
to a virus. Each life has a probability of 0.3 to become infected.

(iii) The death probabilities for each year are 150% of the death probabilities of healthy
individuals of the same age.
Let kLH be the number of healthy survivors at time k, originated from the 1000 lives, and
I
kL be the number of infected survivors at time k for k = 0, 1, 2.
(a) What is the distribution of 0LH?

[1 point]

(b) Find E(2LH + 2LI ), the expected number of survivors at time 2.

[3 points]

It is anticipated that a vaccine would be available to all infected survivors at low cost at
time 2, with a probability of 0.3. If the vaccine is available, the infected individual would
immediately recover and their death probabilities are again given by the life table above.
(c) Calculate the expected number of survivors at the end of year 3.

3.

[6 points]

A term life insurance policy issued to a life aged 60 has the following expected profit at
the end of each year given that the policy is in force at the beginning of the year:
Time in years
Profit

0
400

1
210

2
190

3
450

The expected profits calculated above are without allowances for reserves.
Under the profit test basis, the mortality rates are given by the Illustrative Life Table, but
the age is set 2 years lower than the true age of the policyholder. The interest rate is 5.5%
per year. The insurance company sets reserves by zeroization.
(a) Calculate the zeroized reserves and the expected profits at issue of the policy.
[6 points]
(b) Find the annual rate of return for the policy with allowance for reserves computed in
(a).
[1 point]

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Mock Test 7

4.

T7-13

(a) Let x be an integer. Show that


( I A )1x:1| =

i 1 1
vq x
i

if deaths are uniformly distributed over each year of age.


[4 points]
(b) Suppose that mortality follows the Illustrative Life Table and that deaths are uniformly
distributed over each year of age.
Find 1000 ( I A )145:2| under i = 5%.
[6 points]
5.

You are given:


(i)

= 0.05

(ii)

x = 0.0008 + 0.00005 1.1x

(iii) [x]+s = 0.92s x+s for 0 s 2 and [x]+s = x+s for s > 2.
(a) Find 5p60 and 2p[55].
(b) By using the trapezium rule with 5 subintervals, compute a[ 55]:5| .

[5 points]
[5 points]

(c) A life selected at age 55 purchases a fully continuous deferred life annuity that starts
payments at his retirement age 60, with 5 years of certain payments. The payment rate
is 1000 per annum. The life makes continuous premium of rate P per annum for 5
years or until he dies, whichever occurs first.
You are also given that a65 = 9.38707. Using the equivalence principle, compute P.
(d) It is further given that a[ 55]:3| = 2.7546.

[4 points]

Suppose that at time 3, the life becomes unemployed and he decides to surrender the
policy. The insurance company applies a surrender charge of 10% to the net premium
reserve built up from the policy and reduces the payment of the 5-year certain whole
life annuity accordingly.
Calculate the new payment rate.

*** End of Examination ***

Actex 2015

| Johnny Li and Andrew Ng | SoA Exam MLC

[4 points]

Mock Test 7

T7-14
Solutions to Mock Test 7
Section A
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
1.

C
E
B
E
A
E
B
D
A
C

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

A
D
C
C
D
A
A
A
D
B

[Chapter 4] Answer: (C)


2
Kx = 0

Y = 2 + 3v = 4.7
Kx =1
2 + 3v + 4v 2 = 7.94 K 2
x

The corresponding probabilities are

Pr(Kx = 0) = 0.2, Pr(Kx = 1) = 0.8 0.25 = 0.2, Pr(Kx 2) = 0.8 0.75 = 0.6.
As a result,
E(Y ) = 2 0.2 + 4.7 0.2 + 7.94 0.6 = 6.104,
E(Y 2) = 22 0.2 + 4.72 0.2 + 7.942 0.6 = 43.04416.
Var(Y) = 43.04416 6.1042 = 5.785344, giving a standard deviation of 2.4.
2.

[Chapter 11] Answer: (E)


Since lifetimes are independent, Txy has a force of failure of

xy +t = x +t + y +t = 0.12 ,
0.12
2
= .
0.12 + 0.06 3
0.08
4
0.04
2
= and Ay =
= and hence by symmetric relation,
Also, Ax =
0.08 + 0.06 7
0.04 + 0.06 5
32
.
Axy = Ax + Ay Axy =
105
a constant, so that Axy =

By the relation between insurance and annuity, a xy =

1 Axy

1 2 / 3 50
=
.
6 / 100
9

By the equivalence principle,

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Mock Test 7

T7-15
a xy = Axy + 3Axy
=

3.

Axy
a xy 3 Axy

2/3
= 0.1436
50 / 9 3 32 / 105

[Chapter 10] Answer: (B)


Let the time for the person to enter state 1 be S, and the time for the person to enter state 2
be T. The joint density of the random vector (S, T ) is given by
00 01
11
12
0.05 s
f ( s, t ) = s p50
50+ s t s p50
0.02 e 0.05( t s ) 0.05 = 0.001e 0.05t ,
+ s 50 + t = e

for 0 < s < t. The event under consideration is given by the figure below:
t
So, the answer can be obtained from
10

20

0.001e 0.05t dtds


20

10

= 0.02(e 0.05 s e 1 )ds


0

1 e 0.5

= 0.02
10e 1
0.05

= 0.08381
4.

10

[Chapter 14] Answer: (E)

According to Statement (viii), it is assumed in calculating the cost of insurance that the
force of mortality is constant for all ages. Hence, qt* = 1 e. This is a specified amount
plus the account value (Type B) policy. Because there is no corridor factor requirement,
we can write the cost of insurance for year t as
CoIt = qt* vq X = (1 e )(1.061)(50000),
which is a constant that is independent of t. We let CoI = CoI1 = CoI2. The account value
at the end of year 1 is given by
AV1 = (AV0 + P1 EC1 CoI)(1 + i1c ).
Hence, we have
13900 = (12000 + 0.95 2000 50 CoI)(1.05),
which gives CoI = 611.904762.
The account value at the end of year 2 is given by
AV2 = (AV1 + P2 EC2 CoI)(1 + i2c )
= (13900 + 0.95 2000 50 611.904762)(1.05) = 15895.

Actex 2015

| Johnny Li and Andrew Ng | SoA Exam MLC

Mock Test 7

T7-16
5.

[Chapter 7] Answer: (A)


Thieles differential equation says
d tV g
= Gt (1 ct ) et + ( t + x +t ) t V g (bt + Et ) x +t .
dt
For x = 38, t = 5, we have x+t = 43 = 0.00022 + 0.00004 1.143 = 0.0026296,
d tV g
dt

= 145(1 0.05) + 0.0426296 950 (10000 + 100) 0.0026296 = 151.68916 .


t =5

So,

g
5+1/12V

950 + 151.68916 1/12 = 962.64076.

Similarly, for x = 38, t = 5 + 1/12, and we have

x+t = 43+1/12 = 0.00022 + 0.00004 1.143+1/12 = 0.0026488,


d tV g
dt
So,

6.

= 145(1 0.05) + 0.0426488 5+1 / 12 V g (10000 + 100) 0.0026488 = 152.05259 .


t =5 +1 / 12

g
5+1/6V

962.64076 + 152.05259 1/12 = 975.3.

[Chapter 2] Answer: (E)


We have l40 = 9,313,166.
Let t be the 75-percentile of T40. Then we want Pr(T40 t) = 0.75, and t would be the 75percentile for the future lifetime T40. This means the 75-percentile for the age at death is
40 + t.
1

l 40+t
= 0.75 l40+t = 0.25l40 = 2,328,291.5.
l 40

Since l85 = 2,358,246 and l86 = 2,066,090, we have 85 40 + t 86. This means the
answer must be (E).
7.

[Chapters 9 and 12] Answer: (B)


( )
(r )
(d )
The total force of decrement is 22
+ t = 22 + t + 22 + t = 0.1(3 t ) + 0.1t = 0.3 for 0 t < 3,
( )
= e 0.3t for 0 t 3.
which is constant. As a result, t p 22
The expected present value of the disability payments is
( )
( )
( )
1,000(1 + v(1) p 22
+ v(2) 2 p 22
+ v(3) 3 p 22
)

= 1000(1 + 0.98e 0.3 + 0.955e 0.6 + 0.9e 0.9 )


= 2616.03

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Mock Test 7

8.

T7-17

[Chapter 6]: Answer: (D)


By the recursive relation for reserves,
(hV + h)(1 + i) = h+1V + (bh+1 h+1V)qx+h.
Putting h = 0,
19 1.05 = 4.5 + (100 4.5)qx qx = 0.161780.

Putting h = 1,

(4.5 + 19) 1.05 = 0 + (100 0)qx+1 qx+1 = 0.24675.


Kx = 0
100v 19 = 76.23810

2
So, 0 L = 100v 19(1 + v) = 53.60771 K x = 1 , with probabilities
19(1 + v) = 37.09524
Kx 2

Pr(Kx = 0) = 0.161780, Pr(Kx = 1) = 0.83822 0.24675 = 0.206831


Pr(Kx = 2) = 0.83822 0.75325 = 0.631389
Since E(0L) = 0,
Var(0L) = E(0L2) = 76.23812 0.16178 + 53.607712 0.206831 + 37.095242 0.631389
= 2403.521,
giving SD(0L) = 49.
9.

[Chapters 6 and 12] Answer: (A)


The mean of the loss of a policy with face 100 is
100(0.44) 4.3

1 0.44
= 4.16.
0.05

The variance of the loss of a policy with face 100 is


2

4.3

2
100 +
(0.22 0.44 ) = 913.3344 .
0.05

The mean of the loss of a policy with face 400 is


400(0.44) 17.5

1 0.44
= 20.
0.05

The variance of the loss of a policy with face 400 is


2

17.5

2
400 +
(0.22 0.44 ) = 14850 .
0.05

As a result, the expected present value of aggregate loss is


75(4.16) + 25(20) = 812,
and the variance is 75(913.3344) + 25(14850) = 439750.08. The required probability is

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Mock Test 7

T7-18
Pr( L > 700) Pr( Z >

700 + 812
439750.08

) = Pr( Z > 2.28) = 1 (2.28) .

10. [Chapter 9] Answer: (C)


The reserve at the end of 5 years, which is the expected prospective loss at age 55, is

a&&55:10|

1000 5V50:15| = 10001

a&&
50:15|

12.2758 0.48686 9.8969

= 10001
15
13.2668 (7533964 / 8950901) 9.8969 / 1.06
7.457395
= 10001
= 238.3336
9.790894
Let S be the reduced pure endowment. When the policy is paid up after 5 years, the reserve
is used to support
1
+ S 10 E55 = (305.14 0.48686 439.8) + 0.48686S
1000 A55
:10|
= 91.01897 + 0.48686S

Setting the above to 238.3336 and solving, we get S = 302.6.


11. [Chapter 7] Answer: (A)
The level expense premium is Pe = 390.20 323.12 = 67.08.
The expense reserve at time 3 is 0. By using the recursion relation for expense reserves,
(2Vg + Pe 0.1G 3)(1 + i) = qx+2 0 + px+2 3Ve
g
2V

= Pe + 0.1G + 3 = 67.08 + 39.02 + 3 = 25.06.

12. [Chapter 10] Answer: (D)


0.9 0.07 0.03 0.9 0.07 0.03 0.821 0.1235 0.0555
P = 0.05 0.8 0.15 0.05 0.8 0.15 = 0.1225 0.666 0.2115
0.25 0.15 0.6 0.25 0.15 0.6

P(X: 0 to 2) = 0.0555, P(X: 0 not to 2) = 0.9445


P(Y: 0 to 2) = 0.2115, P(Y: 0 not to 2) = 0.7885
The required probability is 0.9445 0.2115 + 0.0555 0.7885 = 0.2435.
13. [Chapter 3] Answer: (C)
By UDD, A71 =

A71 , and hence A71 =

By recursive relation for life insurances,

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ln 1.07
0.445 = 0.4301157.
0.07

| Johnny Li and Andrew Ng | SoA Exam MLC

Mock Test 7

T7-19

0.02 + 0.98 0.4301157


= 0.4126293.
1.07
i
Then by i(m) = m[(1 + i)1/m 1], i(4) = 0.0682341, and hence A70( 4 ) = ( 4 ) A70 = 0.42331.
i
A70 = vq70 + vp 70 A71 =

14. [Chapter 16] Answer: (C)


26000

S 62 + S 63 + S 64
10.93
= 26000
= 83828.9 .
3S 35
3 1.13

15. [Chapter 14] Answer: (D)


For a universal life policy with a no lapse guarantee, the death benefit cover continues
even if the account value declines to zero, provided that the policyholder pays a prespecified minimum premium at each premium date. Hence, Statement (I) is FALSE.
This guarantee comes into effect when the account value (AVt1) and the premium (Pt) are
not sufficient to cover the cost of insurance (CoIt). Hence, the guarantee is more likely to
come into effect if the cost of insurance is higher.
If the interest rate used to calculate the cost of insurance is smaller, the resulting cost of
insurance is higher, and hence the no-lapse guarantee is more likely to come into effect.
Statement (II) is TRUE.
If the death probability used to calculate the cost of insurance is smaller, the resulting cost
of insurance is smaller, and hence the no-lapse guarantee is less likely to come into effect.
Statement (III) is TRUE.
16. [Chapters 4, 5] Answer: (A)
The present value random variable for a continuous whole life annuity of $1 on (x) is
given by
1 vTx
Y = aT | =
,
Tx 0,
x

which is clearly a strictly increasing function of Tx for all Tx 0.


The present value random variable for a continuous n-year temporary life annuity of $1 on
(x) is

1 v Tx
=
a
Tx |

Y =
1

vn
a =
n|

Tx n
Tx > n.

This is not a strictly increasing function of Tx, because when Tx > n, the present value
random variable is a constant.
The net future loss at issue random variable for a fully continuous whole life insurance of
$1 on (x) is given by

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Mock Test 7

T7-20
P P
P
P
L = v Tx PaT | = 1 + v Tx = 1 + e Tx ,
x


which is clearly a strictly decreasing function of Tx for all Tx 0.
Hence, the answer is (I) only.
17. [Chapters 7] Answer: (A)
Let P be the gross annual premium.

APV of benefits = APV of the return of premium benefit + APV of the deferred annuity
APV of benefit = P ( IA)140:10| + 1000010| a&&40 .
APV of expenses = Initial expenses + APV of renewal expenses
= 1000 + 0.5P + 0.01P( a&&40:10| 1) .
APV of premiums = P a&&40:10| .
Using the equivalence principle, we find P such that APV of benefits + APV of expenses =
APV of premiums. This gives
P=

1000010| a&&40 + 1000


10000(19.5 8.5) + 1000
=
= 17549.41
1
0.99a&&40:10| 0.49 ( IA) 40:10|
0.99 8.5 0.46 1.6

18. [Chapter 4] Answer: (A)

0
T22 < 10
0.0610
0.6
The definition of Y is Y = 10e
aT 10| = 10e aT 10| 10 T22 < 20 .
22
22

0.6
=
10
e
a
41
.
27
T22 20

10|

1 e 0.06 (T22 10 )
0.6

0
.
1
25
)
=
Pr(
4.555297)
e
22 10|
0.06
= Pr(e 0.06(T22 10 ) 0.7266822)
= Pr(T22 15.3211)
= 1 1.612844e 0.61284
= 0.1261

Pr(Y 25) = Pr(aT

19. [Chapter 15] Answer: (D)


The sum insured during policy year 20 is S + RB19 = 10000 + 3165.5 = 13165.5.
We are given 19V = 4765.0 and 20V = 5210.5.
Also, Div19 = B19A69 = 204 0.4997 = 101.9388.
Hence, 19V = 4765.0 + 101.9388 = 4866.9388.
The profit before the distribution of bonus is

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Mock Test 7

T7-21

Pr20 = 1.06(4866.9388 + 160 10) 0.019 13165.5 0.981 0.075 0.8 5210.5
0.981 0.925 5210.5
= 32.9826
The dividend is Div20 = 32.9826 0.9 = 29.6844.
The extra death benefit that can be purchased using the bonus is
B20 = 29.6844 / A70 = 29.6844 / 0.515 = 57.64.
The compound reversionary bonus rate for year 20 is
b20 = B20 / S20 = 57.64 / 13165.5 = 0.44%.
20. [Chapter 8] Answer: (B)
From (i) and (iii), we have p x( ) = 0.75. Then by
p x( ) = p x( w) p x( d ) ,
we get px(d ) = 0.9375. Since death is UDD under its associated single decrement table,
2
2
q x( w) = 2 / 3 p x( d ) 0.2 = (1 q x( d ) ) 0.2 = (1 0.0625) 0.2 = 0.1917 .
3
3
(w )
(d )
Hence, d x = 1000 0.1917 = 191.7, and d x = 1000 750 191.7 = 58.3.
Section B
1.

[Chapter 10]
(a) We first compute the probability that the insured is dead by time 3.
0.7 0.25 0.05 0.7 0.2 0.1 0.49 0.3275 0.1825
0 0.75 0.25 0 0.75 0.25 = 0

,
2P0 =

0
0
1 0
0
1 0
0
1
0.49 0.3275 0.1825 0.7 0.2 0.1 0.343 0.343625 0.313375
.
0

0 0.75 0.25 = 0
3P0 =

0
0
1 0
0
1 0
0
1
As a result,
Pr(Y3 = 2 | Y0 = 0) = 0.313375.

Then we calculate the probability that the insured is dead by time 3, and he has never
become disabled. The possible paths and the respective probabilities are shown below:
Path
0222
0022
0002

Probability
0.05
0.7 0.1 = 0.07
0.7 0.7 0.1 = 0.049

As a result, Pr(dead by time 3 and never become disabled before) = 0.169.

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Mock Test 7

T7-22
The answer required is 0.169 / 0.313375 = 0.54.
(b) We first calculate the APV of the benefit:
Path
012
0012
0112

Probability
0.25 0.25 = 0.0625
0.7 0.2 0.25 = 0.035
0.25 0.75 0.25 = 0.046875

0.0625 0.081875
APV of benefit = 100
+
= 11.85787 .
2
1.08 3
1.08
0.7
0.49

+
= 2.068244 P .
The APV of the premium is P1 +
2
1.08 1.08
By the equivalence principle, the level annual premium is
11.85787 / 2.068244 = 5.733.
(c) A stochastic process has the Markov property if the conditional probability distribution
of future states of the process, given both past and present values of states, depends
only upon the present state. Loosely speaking, given the present, you can forget about
the past.
2.

[Chapter 1]
For a person who is infected, the death probabilities are
k

qx+k

0
0.195

1
0.225

2
0.255

(a) 0LH is binomial distributed with parameters n = 1000 and p = 0.7.


(b) 2px for healthy individuals = (1 0.13)(1 0.15) = 0.87 0.85 = 0.7395
2px for infected individuals = (1 0.195)(1 0.225) = 0.805 0.775 = 0.623875
E(2LH | 0LH) = 0.73950LH.
Expected number of survivors out of the 0LI = 1000 0LH infected people is
E(2LI | 0LH) = 0.623875(1000 0LH).
So, given 0LH, the expected number of survivors is
E(2L | 0LH) = 0.73950LH + 0.623875(1000 0LH) = 623.875 + 0.1156250LH.
So, the expected number of survivors is
E(2L) = 623.875 + 0.115625 1000 0.7 = 704.8125.
I

(c) Let 3L be the number of survivors at time 3 originated from the infected survivors at
time 2. Given that the vaccine is available and the value of 2LI, 3LI ~ B(2LI, 0.83). So,
E(3LI | 2LI, vaccine is available) = 0.832LI

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Mock Test 7

T7-23

Given that the vaccine is not available and the value of 2LI, 3LI ~ B(3LI, 0.745). So,
E(3LI | 2LI, vaccine is not available) = 0.7452LI
E(3LI | 2LI) = (0.3 0.83 + 0.7 0.745)2LI = 0.77052LI .
Obviously, E(3LH | 0LH) = 3px 0LH = 0.83 0.7395 0LH = 0.6137850LH
E(3LH) = 0.83 0.7395 700 = 0.613785 700 = 429.6495
E(3LI | 0LI) = E[E(3LI | 2LI) | 0LI] = 0.7705E(2LI | 0LI) = 0.7705 0.6238750LI
E(3LI) = 0.7705 0.623875 300 = 144.208706
So, E(3L) = 144.208706 + 429.6495 = 573.858.
3.

[Chapter 13]
(a) The survival probabilities under the profit test basis are as follows
k
0
1
2
3

p60+k = p58+k under ILT


0.98842
0.98738
0.98624
0.98499

Since Pr3 > 0, 3VZ = 2VZ = 0. We look at Pr2:


190 + 1.0551VZ = 0 1VZ = 180.09479.
0.98842 180.09479 210
, 0) = max(30.3, 0) = 0 .
1.055
This revised profit vector is
Then 0 V Z = max(

Pr0 = 400, Pr1 = 210 0.98842 180.09479 = 31.99071,


Pr2 = 0, Pr3 = 450
We also have 2p60 = 0.9759461.
The profit signature is (400, 31.99071, 0, 439.1757).
Time in years
Profit

0
400

1
31.99071

2
0

3
439.1757

(b) Using a financial calculator, the IRR for the policy is 5.8995%.
4.

[Chapter 3]
1

(a) ( I A )1x:1| = te t f x (t )dt = te t q x dt = q x te t dt .


The integral is just the PV of a 1-year continuously increasing annuity certain:
a1| v
1
t
te
t
=
I
a
=
d
(
)
.

1|
0

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Mock Test 7

T7-24
So,
( I A )1x:1| = q x

a1| v

= vq x

s1| 1

= vq x

i / 1

= vq x

i 1 1
.
i

[Alternatively, if you cannot recognize the integral as an annuity certain, you may
simply compute it using integration by parts, as follow:

1
0

te t dt =

1
0

tde t =

which is the same as

a1| v

1
0

e t dt =

1 e

1 v

.]

(b) It is not difficult to see that we have the recursion-like formula

( I A )145:2| = ( I A )145:1| + 1 E 45 [( I A )146:1| + A461 :1| ] .


Applying UDD on A461 :1| , we have A461 :1| =

So, ( I A )145:2|

1
A46
.
:1|

0.05 1
1

= 0.508232
ln 1.05 ln 1.05 0.05
q
p q
0.05 q 46
= 45 0.508232 + 45 46 0.508232 +
.
1.05
1.05 1.05
ln 1.05 1.05

With q45 = 0.004, p45 = 0.996, q46 = 0.00431, we get 1000 ( I A )145:2| = 7.9052.
5.

[Chapters 2 + 9]
(a) Under Makehams law of mortality, t p x = exp[ At
Putting x = 60 and t = 5, we get
5p60 = exp(0.004

For 2p[55], we note

2
0

Bc x t
(c 1)] .
ln c

0.00005 1.160
(1.15 1)) = 0.903465.
ln 1.1

0.9 2 s (0.0008 + 0.00005 1.155+ s )ds

2
2
= 0.810.0008 (10 / 9) s ds + 0.00005 1.155 (11 / 9) s ds

0
0
55
0.0008

0.00005 1.1
= 0.81
[(10 / 9) 2 1] +
[(11 / 9) 2 1]
ln(11 / 9)
ln(10 / 9)

= 0.0250437

which gives 2p[55] = exp(0.0250437) = 0.97991897


5

(b) a[55]:5| = e 0.05 s s p[ 55] ds . Let f (s) = e0.05s s p[55] = sE[55].


0

Applying the trapezium rule,

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| Johnny Li and Andrew Ng | SoA Exam MLC

Mock Test 7

T7-25

a[55]:5|

f (0) + f (5) + 2[ f (1) + f (2) + f (3) + f (4)]


.
2

f (0) = 1, f (2) = e0.1 0.97991897 = 0.88666735


0.0008

0.00005 1.155
(10 / 9 1) +
(11 / 9 1) ]
f (1) = e
exp[ 0.81
ln(11 / 9)
ln(10 / 9)

= 0.9425535
0.05

p57 = 0.987281, 2p57 = 0.973554, 3p57 = 0.958752


f (3) = e0.15 0.97991897 p57 = 0.832696
f (4) = e0.2 0.97991897 2p57 = 0.781073
f (5) = e0.25 0.97991897 3p57 = 0.731683
Then a[ 55]:5| 4.30883.
(c) The expected present value of the benefits is
1 e 0.25

+ e 0.25 0.903465 9.38707


1000 5 E[ 55] (a5| + 5 E 65 a 65 ) = 1000 f (5)
0.05

= 1000 0.731683 11.02891


= 8069.666.

So, P = 8069.666 / 4.30883 = 1872.82.


(d) The net premium reserve at time 3, calculated using the retrospective formula, is
P
s[55]:3|

Pa[55]:3|
3

E[ 55]

1872.82 2.7546
= 6195.382.
0.832696

After applying the surrender charge, the policy would be supported by 5557.844.
By the equivalence principle,
5557.844 = e0.1 2p58 R 11.02891,
where 2p58 = 0.971104. On solving, R = 575.3627.

Actex 2015

| Johnny Li and Andrew Ng | SoA Exam MLC

Mock Test 7

T7-26

Actex 2015

| Johnny Li and Andrew Ng | SoA Exam MLC