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Contents
0 INTRODUCTION 9
The origin of this study guide . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Two sections each with a separate table of contents . . . . . . . . . . . . . . . 9
Wanting for more practice problems . . . . . . . . . . . . . . . . . . . . . . . 9
MLC syllabus change in Spring 2012 . . . . . . . . . . . . . . . . . . . . . . . 10
About Yufeng Guo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1 ACTUARIAL MATHEMATICS: CHAPTER 3 SURVIVAL DISTRIBU
TIONS AND LIFE TABLES 13
3.2.1 The Survival Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.2.2 TimeuntilDeath for a Person Age x . . . . . . . . . . . . . . . . . . . . 16
3.2.3 CurtateFutureLifetime . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.2.4 Force of Mortality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.33.5 Life Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.5.2 Recursion Formulas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.6 Assumptions for Fractional Ages . . . . . . . . . . . . . . . . . . . . . . . 28
3.7 Some Analytical Laws of Mortality . . . . . . . . . . . . . . . . . . . . . . 33
Modied DeMoivres Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.8 Select and Ultimate Tables . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
CHAPTER 3 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 39
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 43
Problems from Pre2000 SOACAS exams . . . . . . . . . . . . . . . . . . . . 56
Solutions to Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
2 ACTUARIAL MATHEMATICS CHAPTER 4 LIFE INSURANCE 61
4.2 Insurances Payable at the Moment of Death . . . . . . . . . . . . . . . . . 62
TYPES OF INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
4.2.1 Level Benet Insurance . . . . . . . . . . . . . . . . . . . . . . . 63
4.2.2 Endowment Insurance . . . . . . . . . . . . . . . . . . . . . . . . 66
4.2.3 Deferred Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.2.4 Varying Benet Insurance . . . . . . . . . . . . . . . . . . . . . . 70
4.3 Insurances Payable at the End of the Year of Death . . . . . . . . . . . . 73
4.4 Relationships between Insurances Payable at the Moment of death and the
End of the Year of Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
CHAPTER 4 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 81
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Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 83
Problems from Pre2000 SOACAS exams . . . . . . . . . . . . . . . . . . . . 93
Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
3 ACTUARIAL MATHEMATICS: CHAPTER 5 LIFE ANNUITIES 97
5.2 Continuous Life Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
The most important equation so far(!) . . . . . . . . . . . . . . . . . . . . . . 100
5.3 Discrete Life Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
5.4 Life Annuities with mthly Payments . . . . . . . . . . . . . . . . . . . . . 112
CHAPTER 5 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 116
Continuous Annuities: . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Discrete annuities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 118
Problems from Pre2000 SOACAS exams . . . . . . . . . . . . . . . . . . . . 131
Solutions to Pre2000 Problems: Chapter 5 . . . . . . . . . . . . . . . . . . . 133
4 ACTUARIAL MATHEMATICS: CHAPTER 6 BENEFIT PREMIUMS 135
6.2 Fully Continuous Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 136
6.3 Fully Discrete Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
6.4 True mthly Payment Premiums . . . . . . . . . . . . . . . . . . . . . . . 147
CHAPTER 6 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 151
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 152
Problems from Pre2000 SOACAS exams . . . . . . . . . . . . . . . . . . . . 168
Solutions to Pre2000 Exam Questions: Chapter 6 . . . . . . . . . . . . . . . 170
5 ACTUARIAL MATHEMATICS: CHAPTER 7 BENEFIT RESERVES 173
7.2 Fully Continuous Benet Reserves . . . . . . . . . . . . . . . . . . . . . . 174
7.3 Other Methods for Calculating the Benet Reserve . . . . . . . . . . . . . 177
1) Prospective Formula . . . . . . . . . . . . . . . . . . . . . . . . . . 177
2) Retrospective Formula . . . . . . . . . . . . . . . . . . . . . . . . . 177
3) Premium Dierence Formula . . . . . . . . . . . . . . . . . . . . . . 180
4) PaidUp Insurance Formula . . . . . . . . . . . . . . . . . . . . . . 180
5) Other Reserve Formulas . . . . . . . . . . . . . . . . . . . . . . . . 181
7.4 Fully Discrete Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
7.5 Benet Reserves on a SemiContinuous Basis . . . . . . . . . . . . . . . . 186
7.6 Benet Reserves Based on True mthly Benet Premiums . . . . . . . . . 187
CHAPTER 7 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 188
Continuous Reserve Formulas: . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
Discrete Reserves: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 190
Problems from Pre2000 SOACAS exams . . . . . . . . . . . . . . . . . . . . 194
Solutions to Pre2000 Questions: Chapter 7 . . . . . . . . . . . . . . . . . . . 196
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6 ACTUARIAL MATHEMATICS: CHAPTER 8 ANALYSIS OF BENEFIT
RESERVES 197
8.2 Benet Reserves for General Insurances . . . . . . . . . . . . . . . . . . . 197
8.3 Recursion Relations for Fully Discrete Benet Reserves . . . . . . . . . . 202
8.4 Benet Reserves at Fractional Durations . . . . . . . . . . . . . . . . . . . 205
8.5 The Hattendorf Theorem . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
CHAPTER 8 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 212
Chapter 8 More Formulas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 214
Problems from Pre2000 SOACAS exams . . . . . . . . . . . . . . . . . . . . 234
Solutions to Pre2000 Problems: Chapter 8 . . . . . . . . . . . . . . . . . . . 237
7 ACTUARIAL MATHEMATICS: CHAPTER 9 MULTIPLE LIFE FUNC
TIONS 241
9.2 Joint Distributions of Future Lifetimes . . . . . . . . . . . . . . . . . . . . 241
9.3 Joint Life Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
The following is important! . . . . . . . . . . . . . . . . . . . . . . . . 243
9.4 Last Survivor Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
9.5 More Probabilities and Expectations . . . . . . . . . . . . . . . . . . . . . 250
9.6 Dependent Lifetime Models . . . . . . . . . . . . . . . . . . . . . . . . . . 253
9.6.1 Common Shock (NonTheoretical Version) . . . . . . . . . . . . 253
9.7 Insurance and Annuity Benets . . . . . . . . . . . . . . . . . . . . . . . . 256
9.7.1 Survival Statuses . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
9.7.2 Special TwoLife Annuities . . . . . . . . . . . . . . . . . . . . . 262
9.7.3 Reversionary Annuities . . . . . . . . . . . . . . . . . . . . . . . 263
9.9 Simple Contingent Functions . . . . . . . . . . . . . . . . . . . . . . . . . 265
CHAPTER 9 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 268
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 270
Problems from Pre2000 SOACAS exams . . . . . . . . . . . . . . . . . . . . 283
Solutions to Pre2000 Exam Questions: Chapter 9 . . . . . . . . . . . . . . . 285
8 ACTUARIAL MATHEMATICS: CHAPTER 10 MULTIPLE DECREMENT
MODELS 287
10.2 Two Random Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
Probability density functions: . . . . . . . . . . . . . . . . . . . . . . . 289
10.3 Random Survivorship Group . . . . . . . . . . . . . . . . . . . . . . . . . 292
10.4 Deterministic Survivorship Group . . . . . . . . . . . . . . . . . . . . . . 292
10.5 Associated Single Decrement Tables . . . . . . . . . . . . . . . . . . . . . 296
10.5.1 Basic Relationships . . . . . . . . . . . . . . . . . . . . . . . . . 297
10.5.4 Uniform Distribution Assumption for Multiple Decrements . . . 298
10.6 Construction of a Multiple Decrement Table . . . . . . . . . . . . . . . . 300
CASE I : Two decrements that are uniformly distributed in the asso
ciated single decrement table . . . . . . . . . . . . . . . . . . . . . . . 300
CASE II : Three decrements that are uniformly distributed in the as
sociated single decrement table . . . . . . . . . . . . . . . . . . . . . . 300
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CASE III : Multiple decrements some are uniformly distributed in
the associated single decrement table and some are not. . . . . . . . . 300
CHAPTER 10 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 305
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 307
Problems from Pre2000 SOACAS Exams . . . . . . . . . . . . . . . . . . . . 317
Solutions to Pre2000 Problems: Chapter 10 . . . . . . . . . . . . . . . . . . . 320
9 ACTUARIAL MATHEMATICS: CHAPTER 11 APPLICATIONS OF MUL
TIPLE DECREMENT THEORY 323
11.2 Actuarial Present Values and Their Numerical Estimation . . . . . . . . 323
11.3 Benet Premiums and Reserves . . . . . . . . . . . . . . . . . . . . . . . 324
CHAPTER 11 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 327
ARCH Sample Exam Problem . . . . . . . . . . . . . . . . . . . . . . . . . . 327
Solution: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 329
10 ACTUARIAL MATHEMATICS: CHAPTER 15 INSURANCE MODELS
INCLUDING EXPENSES 335
15.2 Expense Augmented Models . . . . . . . . . . . . . . . . . . . . . . . . . 335
15.4 More Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338
15.6.1 Asset Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
CHAPTER 15 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 343
Asset Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 343
SOLUTIONS to Past SOACAS Exam Problems: . . . . . . . . . . . . . . . . 347
11 DANIEL CHAPTER 1  MULTISTATE TRANSITION MODELS FOR
ACTUARIAL APPLICATIONS 351
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
1.2 Nonhomogeneous Markov Chains . . . . . . . . . . . . . . . . . . . . . . 354
CHAPTER 2 CASH FLOWS AND THEIR ACTUARIAL PRESENT VALUES359
Section 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 359
Cash Flows while in states . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359
Cash Flows upon transitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
Actuarial Present Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
ARCH Warmup Questions: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369
Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 375
12 DANIEL STUDY NOTE ON POISSON PROCESS 385
5.3 The Poisson Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385
5.3.1 Counting Processes . . . . . . . . . . . . . . . . . . . . . . . . . . 385
5.3.2 Denition of the Poisson Process . . . . . . . . . . . . . . . . . . 386
5.3.3 Interarrival and Waiting Time Distributions . . . . . . . . . . . . 387
5.3.4 Further Properties of Poisson Processes . . . . . . . . . . . . . . 389
5.3.5 Conditional Distribution of the Arrival Times . . . . . . . . . . . 392
5.4 Generalizations of the Poisson Process . . . . . . . . . . . . . . . . . . . . 393
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5.4.1 Nonhomogeneous Poisson Process . . . . . . . . . . . . . . . . . 393
5.4.2 Compound Poisson Process . . . . . . . . . . . . . . . . . . . . . 395
5.4.3 Conditional or Mixed Poisson Processes: GammaPoisson Model 398
CHAPTER 5 Formula Summary . . . . . . . . . . . . . . . . . . . . . . . . . 401
ARCH Warmup Problems: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402
Solutions: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403
Past SOA/CAS Exam Questions: . . . . . . . . . . . . . . . . . . . . . . . . . 404
13 Practice Exam 417
Answer Key for Practice Exam . . . . . . . . . . . . . . . . . . . . . . . . . . 430
14 SOLUTION TO MAY 2007 MLC 449
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Chapter 0
INTRODUCTION
The origin of this study guide
Most of the study guide is from the original Arch manual written by by two gifted actuaries,
Nathan Hardiman and Robin Cunningham. My great thanks to them for passing the Arch
manual to me.
In 2006 I inherited the Arch manual when Nathan and Robin, who, each having a busy
day job, no longer had time to maintain or expand the Arch manual.
From 2006 to the Fall 2010, I had two study guides on MLC: the Arch and my Deeper
Understanding manual. Managing two separate manuals by the same author on the same
exam can be confusing to readers, who have diculty deciding which one to buy. To overcome
this confusion, I decided to discontinue the Arch manual starting from Spring 2011 and
transfer the Arch manual content to my Deeper Understanding manual for MLC.
Thanks to the Arch manual I nally learned LaTeX. Many of my Deeper Understanding
manuals were written in Microsoft Word with the MathType plugin. Though Word+MathType
gets one started fast and easy, documents produced this way are a nightmare to maintain.
Wanting to break away from Word+MathType, I tried several times to learn LaTeX but
always went nowhere. After taking over the Arch manual, I had no choice but to learn LaTeX
(because the Arch was written in LaTeX). After struggling several days, nally I got it and
became procient in LaTeX.
Two sections each with a separate table of contents
There are two sections that dont appear in the overall table of contents. These two sections
have separate tables of contents. One section is about Actuarial Mathematics Chapter 9
Multiple Life Functions; the other about the Poisson process. These two sections are toward
the end of this book (so scroll toward the end of this document to read these two sections).
Wanting for more practice problems
The strength of this study guide is that it explains the core concepts well. It gets you up and
running quickly toward learning the fundamentals of the core MLC knowledge.
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The weakness of this study guide is that it doesnt have a great number of practice
problems. If you use this book to learn the core concepts but need additional practice prob
lems, you can download the past course 3 and Exam M problems from the SOA website http:
//www.soa.org/ and the CAS website http://www.casact.org/admissions/studytools/.
MLC syllabus change in Spring 2012
SOA already announced that the MLC syllabus is to be changed in Spring 2012. SOA stated:
Changes are coming to the learning objectives and required readings for Exam
MLC eective with the Spring 2012 exam administration.
What is changing and when? The learning objectives for Exam MLC are being
revised to reect current theory and practice. A draft of the revised learning
objectives has been prepared to give advance notice for this change. Information
regarding textbooks and study materials for the exam will be released by the end
of the second quarter of 2011. The rst Exam MLC administration using the new
learning objectives will be held in the Spring of 2012.
Why Spring 2012? Currently, the life contingencies topic is taught as a two
semester fall/spring course sequence at most universities. As such the end of the
spring semester is an ideal time to oer the rst exam administration with the
revised syllabus.
A textbook covering all the learning objectives is not currently available. However,
it is anticipated that a suitable textbook will be available in early 2011.
About Yufeng Guo
Yufeng Guo was born in central China. After receiving his Bachelors degree in physics at
Zhengzhou University, he attended Beijing Law School and received his Masters of law. He
was an attorney and law school lecturer in China before immigrating to the United States.
He received his Masters of accounting at Indiana University. He has pursued a life actuarial
career and passed exams 1, 2, 3, 4, 5, 6, and 7 in rapid succession after discovering a successful
study strategy. Mr. Guos exam records are as follows:
Fall 2002 Passed Course 1
Spring 2003 Passed Course 2,3
Fall 2003 Passed Course 4
Spring 2004 Passed Course 6
Fall 2004 Passed Course 5
Spring 2005 Passed Course 7
Study guides by Mr. Guo:
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Deeper Understanding, Faster Calc: P
Deeper Understanding, Faster Calc: FM
Deeper Understanding, Faster Calc: MLC
Deeper Understanding, Faster Calc: MFE
Deeper Understanding, Faster Calc: C
Guos Solution to Derivatives Markets: Exam FM
Guos Solution to Derivatives Markets: Exam MFE
In addition, Mr. Guo teaches online classes for Exam P, FM, MFE, and MLC. For details
see http://actuary88.com.
If you have questions, you can email Mr. Guo at yufeng guo@msn.com.
All materials contained herein are copyrighted by Yufeng Guo. This PDF study manual is for
individual use for the sole purpose of taking Exam MLC. Reselling this manual is prohibited.
Redistribution of this manual in any form is prohibited.
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Chapter 1
ACTUARIAL MATHEMATICS:
CHAPTER 3 SURVIVAL
DISTRIBUTIONS AND LIFE
TABLES
Option A reference: Actuarial Mathematics Chapter 3
Option B reference: Models for Quantifying Risk Chapter 5,6
This text forms the heart and soul of the exam syllabus. The basic principles of life insurance
(and annuities) are explained throughout the book. You need to have a solid understanding
of this material in order to pass the exam. However, you do not need to understand the
majority of the underlying theory in this text. The key points that a student must learn
from this text are:
KEYPOINTS:
1. Notation much of this notation is new. While it can be confusing at rst, there is some
logic to it. It will help you to remember and understand the many symbols
if you regularly translate the notation into words as you read.
2. Basic ideas for example, chapter four introduces a variety of types of insurance. You
will want to make sure you have an understanding of these dierent products and their
benet designs. Another key point is that there are many parallels. Again in Chapter 4,
the rst part of the chapter considers products which pay a benet immediately upon
death. The second part of the chapter considers the same products except that the
benet is paid at the end of the year in which death occurs. It is helpful to realize that
you are really learning only one set of products, with a couple of benet options, rather
than two sets of products. These parallels run throughout the text (e.g., continuous vs
curtate functions).
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3. Learn key formulas there is no substitute for being able to recall the formula for,
say, a net level premium reserve for term insurance. If you can do this for most of the
formulas, you will be ready to answer questions quickly. This manual has tools to help
you learn these formulas, so dont feel overwhelmed!
To the text!!!
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Chapter 3 is all about notation, denitions, and a few basic ideas that are essential to
life contingencies. If you can make yourself comfortable with the symbols and methods of
Chapter 3, the rest of Actuarial Mathematics will be easier to absorb.
3.2.1 The Survival Function
Option A reference: Actuarial Mathematics Chapter 3.2.1
Option B reference: Models for Quantifying Risk Chapter 5.1
Consider a newborn (i.e. a person whose attained age = 0).
Denitions
X = newborns age at death
You can also think of X as the future lifetime of a newborn.
Dene F(x) = Pr (X x), where x 0. Read as the probability that death will occur
prior to (or at) age x. In statistics, F(x) is the cumulative distribution function for the
future lifetime of a newborn. If y > x, it is always true that F(y) > F(x).
This makes sense. For a newborn, F(98), the probability of dying before age 98, is greater
than F(94), the probability of dying before age 94.
Dene s(x) = 1 F(X) = 1 Pr(X x). The function s(x) is a survival function. Read
it as the probability that death does not occur by age x or the probability of attaining
(surviving to) age x.
Pr(x < X z) = probability that a newborn dies between ages x and z
= F(z) F(x)
= [1 s(z)] [1 s(x)]
= s(x) s(z)
O
x z
F(x) s(x)
the pdf
y=f(x)
The gure shows the probability distribution function f(x) for death at age x. For any value
of x, F(x) is equal to the area under the curve y = f(x) and to the left of x. Similarly s(x)
is equal to the area under the curve and to the right of x.
By the way, you may have noticed that in our discussion, we dropped the subscript X in
F
X
(x) ... you can ignore it. I dont know if the authors realize it but they are being a little
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inconsistent in their treatment of F and s! If two dierent random variables, say X and Y ,
referred to the future lifetimes of two dierent newborns, then you would need to keep the
F and s straight for each kid. Thats all the subscript is indicating.
3.2.2 TimeuntilDeath for a Person Age x
Option A reference: Actuarial Mathematics Chapter 3.2.2
Option B reference: Models for Quantifying Risk Chapter 5.3
Newborns are great, but if our pension and insurance companies are going to make money
we need to be able to deal with people who are older than 0. So ...
Consider a person with attained age = x.
The simple F(x) and s(x) functions no longer work, since we are now dealing with a person
who has already survived to age x. We are facing a conditional probability situation.
Pr(x < X zX > x)
= probability that person living at age x will die between ages x and z
= the probability that an xyearold will die before turning z
=
[F(z) F(x)]
[1 F(x)]
=
[s(x) s(z)]
[s(x)]
Why is this a conditional probability? Because it is the probability that a newborn will die
before age z given that the newborn survives to age x.
EXAMPLE:
1. Write two expressions (one with F only and one with s only) for the prob
ability that a newborn dies between 17 and 40, assuming the newborn dies
between 10 and 40.
2. Interpret the following expression in English (or the language of your choice!).
S(20) S(35)
1 S(80)
SOLUTION:
1.
F(40) F(17)
F(40) F(10)
or
s(17) s(40)
s(10) s(40)
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2. The probability of death between ages 20 and 35, given that the newborn
will not attain age 80.
Now, let the symbol (x) represent a person age x and let T(x) be the future lifetime of a
person age x. (So T(25) is the future lifetime of (25), a twentyveyearold.)
Two basic probability functions exist regarding T(x):
t
q
x
= probability that person age x will die within t years
= Pr[T(x) t] where t 0
t
p
x
= probability that person age x will survive at least t years
= Pr[T(x) > t] where t 0
x
x+t
Age
t
p
x t x
q
In the gure,
t
q
x
is the probability that (x)s death will occur in the ageinterval (x, x+t), and
t
p
x
is the probability that (x)s death will occur in the age interval (x +t, ). ( represents
the oldest possible age to which a person may survive.)
Useful notes:
t
p
0
is just s(t).
If t = 1, the convention is to drop the symbol 1, leaving us with either p
x
or q
x
.
Remember, these are the two basic functions. The formulas that follow are simply takeos
on
t
p
x
or
t
q
x
which you will learn with practice.
The symbol
tu
q
x
represents the probability that (x) (that is, a person age x) survives at least t more years,
but dies before reaching age x+t +u. This is equal to each of the following expressions, each
of which you want to be able to put into words:
Pr[t < T(x) t +u]
t+u
q
x
t
q
x
t
p
x
t+u
p
x
(As with q
x
and p
x
, if u = 1, we drop it, leaving
t
q
x
, the probability that (x) will survive t
years but not t + 1 years.)
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Useful formulas:
t
p
x
=
x+t
p
0
x
p
0
=
s(x +t)
s(x)
t
q
x
= 1
s(x +t)
s(x)
tu
q
x
=
s(x +t) s(x +t +u)
s(x)
=
s(x +t)
s(x)
s(x +t) s(x +t +u)
s(x +t)
=
t
p
x
u
q
x+t
This last equation makes sense. It says The probability of (x) dying between t and t + u
years from now (
tu
q
x
) is equal to the probability that (x) will rst survive t years (
t
p
x
) and
then die within u years (
u
q
x+t
).
If you dont remember anything else from the above, remember the following!
t
p
x
=
s(x +t)
s(x)
CONCEPT REVIEW:
1. Write the symbol for the probability that (52) lives to at least age 77.
2. Write the symbol for the probability that a person age 74 dies before age 91.
3. Write the symbol for probability that (33) dies before age 34.
4. Write the symbol for probability that a person age 43 lives to age 50, but
doesnt survive to age 67.
5. Write
56
q
x
in terms of F and then in terms of p.
SOLUTIONS:
1.
25
p
52
2.
17
q
74
3. q
33
4.
717
q
43
5.
56
q
x
=
s(x + 5) s(x + 11)
s(x)
=
F(x + 11) F(x + 5)
1 F(x)
=
5
p
x
(1
6
p
x+5
) or =
5
p
x
11
p
x
.
To help memorize symbols, practice translating symbols into words and express words in
symbols. You can also make ash cards and quiz yourself.
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3.2.3 CurtateFutureLifetime
Option A reference: Actuarial Mathematics Chapter 3.2.3
Option B reference: Models for Quantifying Risk Chapter 5.3.6
Suppose a person born on Jan 1, 1900 died on Sept 30, 1990. How old was he at death?
The true age was about 90.75 years old. The curtate age was 90. To nd the curtate age,
rst nd the true age. Next, throw away all the decimals and keep the integer. If theres no
decimal, then the curtate age is equal to the continuous (true) age. For example, if T(x) = 90,
then K(x) = 90. (This book and others use Curtate and Discrete interchangeably.)
Previously, we dened T(x) to be the future lifetime of (x). This is a continuous function.
Now we dene
K(x) = curtate future lifetime of (x)
= greatest integer in T(x)
= number of future years completed by (x) prior to death
= number of future birthdays (x) will have the opportunity to celebrate
A couple of formulas apply:
Pr(K(x) = k) = Pr(k T(x) < k + 1)
= Pr(k < T(x) k + 1)
=
k
p
x
k+1
p
x
=
k
p
x
q
x+k
=
k
q
x
(Remember, the 1 in front of q has been dropped.)
EXAMPLE:
If s(x) =
100x
100
for every x, what is the probability that K = 19 for (18)?
SOLUTION:
Pr(K(18) = 19) =
19
q
18
=
s(37) s(38)
s(18)
=
63 62
82
=
1
82
.
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3.2.4 Force of Mortality
Option A reference: Actuarial Mathematics Chapter 3.2.4
Option B reference: Models for Quantifying Risk Chapter 5.1.4
The force of mortality can be thought of as the probability of death at a particular instant
given survival up to that time. This is an instantaneous measure, rather than an interval
measure. There is good bit of theory in this section, but the most important items are the
following formulas and the table of relationships.
(x) =
f(x)
1 F(x)
=
s
(x)
s(x)
(3.2.13)
It is very important to know the relationships and requirements given in Table 3.2.1. These
will probably be tested on the exam. Below is a summary of the useful information in this
table. Each row shows 4 ways to express the function in the left column.
F(x) s(x) f(x) (x)
F(x) F(x) 1 s(x)
_
x
0
f(u) du 1 e
_
x
0
(t) dt
s(x) 1 F(x) s(x)
_
x
f(u) du e
_
x
0
(t) dt
f(x) F
(x) s
_
x
0
(t) dt
(x)
F
(x)
1F(x)
s
(x)
s(x)
f(x)
s(x)
(x)
EXAMPLE: Constant Force of Mortality
If the force of mortality is a constant for every age x, show that
1. s(x) = e
x
2.
t
p
x
= e
t
SOLUTION:
1.
s(x) = e
_
x
0
dt
= e
x
.
2.
t
p
x
=
s(x +t)
s(x)
= e
t
.
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3.33.5 Life Tables
Option A reference: Actuarial Mathematics Chapter 3.33.5
Option B reference: Models for Quantifying Risk Chapter 6
Life Table is widely used actuarial practice. Even today, Life Tables are often loaded into
systems for calculating reserves, premium rates, and the surrender cash value of an insurance
policy. Learning Life Tables will not only help you pass Exam MLC, it also helps you when
you become an actuary.
Denitions:
l
0
= number of people in cohort at age 0, also called the radix
l
i
= number of people in cohort at age i (those remaining from the original l
0
)
= limiting age at which probability of survival = 0 (s(x) = 0 for all x )
n
d
x
= number alive at age x who die by age x +n
Relationships:
l
x
= l
0
s(x)
q
x
=
l
x
l
x+1
l
x
n
q
x
=
l
x
l
x+n
l
x
n
p
x
=
l
x+n
l
x
n
d
x
= l
x
l
x+n
Illustrative Life Table: Basic Functions
Age l
x
d
x
1,000 q
x
0 100,000.0 2,042.2 20.4
1 97,957.8 131.6 1.4
2 97,826.3 119.7 1.2
3 97,706.6 109.8 1.1
.
.
.
.
.
.
.
.
.
.
.
.
40 93,131.6 259.0 2.8
41 92,872.6 276.9 3.0
42 92,595.7 296.5 3.2
43 92,299.2 317.8 3.4
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EXAMPLE: Life Table Mortality
Above is an excerpt from the Illustrative Life Table in the book. The following
questions are all based on this excerpt.
1. Find s(42).
2. Find
40
d
2
.
3. Find
38
q
3
.
4. Find
2
q
40
.
SOLUTION:
1. s(42) =
92,595.7
100,000
= 0.925957.
2.
40
d
2
= l
2
l
42
= 5230.6
3.
38
q
3
= 1
38
p
3
= 1
l
41
l
3
= 1
92,872.6
97,706.6
= 0.04947.
4.
2
q
40
=
2
p
40
q
42
=
92,595.7
93,131.6
(0.0032) = 0.003182.
Concepts which follow from the Life Table:
Based on Equation (3.2.13) on an earlier page, we can determine that the probability density
function f(t) for T(x) is given by f(t) =
t
p
x
(x +t). This says that the probability that (x)
will die at age x + t, symbolized by f(t), is equal to the probability that (x) will survive t
years and then be hit at that instant by the force of mortality.
Among other things, this tells us that
_
0
t
p
x
(x +t)dt =
_
0
f(t)dt = 1.
The completeexpectationoflife is the expected value of T(x) (or E[T(x)] for fans of
Statistics) and is denoted
e
x
. If you remember how to nd the expected value of a continuous
random variable, you can gure out that
e
x
= E[T(x)] =
_
0
t
p
x
dt
Var[T(x)] = 2
_
0
t
t
p
x
dt
e
2
x
(3.5.4)
The book shows how to gure both of these formulas out with integration by parts in Sec
tion 3.5.1. I suggest that you memorize these two expressions.
The median future lifetime of (x) is denoted m(x) and simply represents the number m such
that
m
p
x
=
m
q
x
. In other words, it is the number of years that (x) is equally likely to survive
or not survive. It can be found by solving any of the following:
Pr[T(x) > m(x)] =
1
2
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or
s[x +m(x)]
s(x)
=
1
2
or
m
p
x
=
1
2
.
The curtateexpectationoflife is E[K(x)] and is denoted e
x
(no circle). To remember
the dierence between e
x
and
e
x
, remember life is a continuous circle. So a circle means
continuous.
e
x
= E[T(x)] and e
x
= E[K(x)].
Here are the formulas, note the Continuous/Curtate parallel:
e
x
= E[K(x)] =
1
k
p
x
Var[K(x)] =
1
(2k 1)
k
p
x
e
2
x
EXAMPLE: Constant Force of Mortality
Find
e
0
and
e
50
if the force of mortality is a constant .
SOLUTION:
e
0
=
_
0
t
p
0
dt =
_
0
e
t
dt =
_
1
e
t
_
0
=
1
e
50
=
_
0
t
p
50
dt =
_
0
e
t
dt =
_
1
e
t
_
0
=
1
If the force of mortality is constant, your future expected lifetime is the same
whether you are 0 (a newborn) or 50.
EXAMPLE: DeMoivres Law for Mortality
(Well learn DeMoivre later in this chapter.)
If
s(x) =
_
50x
50
0 < x < 50
0 Otherwise
for all x between 0 and 50, nd e
0
and e
45
.
SOLUTION:
e
0
=
50
1
t
p
0
=
50
1
50 t
50
= 50
1
50
50
1
t
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= 50
1
50
(50)(51)
2
= 24.5
e
45
=
5
1
t
p
45
=
5
1
s(45 +t)
s(45)
=
5
1
5 t
5
=
4 + 3 + 2 + 1 + 0
5
= 2.
More Life Functions:
The expression L
x
denotes the total expected number of years, full or fractional, lived between
ages x and x +1 by survivors of the initial group of l
0
lives. Those who survive to x +1 will
live one year between x and x + 1, contributing one full year to L
x
. Those who die during
the year will contribute a fraction of a year to L
x
.
L
x
=
_
1
0
l
x+t
dt
The expression m
x
is the central death rate over the interval x to x +1. Make sure not to
confuse m
x
with m(x), the median future lifetime!
m
x
=
(l
x
l
x+1
)
L
x
L
x
and m
x
can be extended to time periods longer than a year:
n
L
x
=
_
n
0
l
x+t
dt
n
m
x
=
l
x
l
x+n
n
L
x
The remaining of Section 3.5.1 has obscure symbols T
x
and (x). They rarely show up in
the exam. Dont spend too much time on them.
Let T
x
be the total number of years lived beyond age x by the survivorship group with l
0
initial members (i.e. the l
x
people still alive at age x). Be careful with notation. This is not
T(x), the future lifetime of (x).
T
x
=
_
0
l
x+t
dt (3.5.16)
Note from the denitions that you can think of T
x
as
L
x
.
The nal symbol is (x). Its the expected death time given x dies next year.
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(x) = E [TT < 1] =
_
1
0
tf(t)dt
_
1
0
f(t)dt
=
_
1
0
ttpx (x+t)dt
_
1
0
tpx(x+t)dt
=
_
1
0
t
l
x+t
lx
(x+t)dt
_
1
0
l
x+t
lx
(x+t)dt
=
_
1
0
tl
x+t
(x+t)dt
_
1
0
l
x+t
(x+t)dt
If UDD, then f(t) = q
x
= c is a constant. Then (x) =
_
1
0
tcdt
_
1
0
cdt
=
_
1
0
tdt
_
1
0
dt
=
_
1
0
tdt =
1
2
.
EXAMPLE: Constant Force of Mortality
If l
0
= 1000 and the force of mortality is a constant = 0.1, nd
(A) L
5
(B) m
5
(C) T
5
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SOLUTION:
(A)
L
5
=
_
1
0
l
5+t
dt =
_
1
0
t
p
5
l
5
dt.
Since
l
5
= l
0
e
5
= 1000e
0.5
= 606.5,
we have
L
5
= 606.5
_
1
0
e
0.1t
dt = 606.5
_
10e
0.1t
_
1
0
= 606.5
_
10(1 e
0.1
)
_
= 577.16.
(B)
m
5
=
l
5
l
6
L
5
=
606.5 548.8
577.16
= 0.10
This approximates the rate at which people were dying between the 5th and
6th years.
(C)
T
5
=
_
0
1000e
0.1(5+t)
dt = 606.5
_
0
e
0.1t
dt = 6065
So if we add up all of the time lived by each of the people alive at t = 5, we
expect to get a total of 6065 years, or 10 years per person.
Relationship:
T
x
l
x
=
e
x
This relationship makes sense. It says that the average number of years lived,
e
x
, by the
members of l
x
is equal to the total number of years lived by this group divided by l
x
.
We can determine the average number of years lived between x and x+n by the l
x
survivors
at age x as:
n
L
x
l
x
=
_
n
0
t
p
x
dt
n
L
x
l
x
= nyear temporary complete life expectancy of (x)
=
e
x:n
(p.71)
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3.5.2 Recursion Formulas
Option A reference: Actuarial Mathematics Chapter 3.5.2
Option B reference: Models for Quantifying Risk Chapter 6
These are basically ways to avoid working integrals. They are based on the Trapezoid Rule
for integration maybe you remember the trapezoid rule from calculus.
Backward:
u(x) = c(x) +d(x) u(x + 1)
Forward:
u(x + 1) =
u(x) c(x)
d(x)
Note that the Forward Method is simply an algebraic recombination of the Backward Method.
Note also that this Forward formula is dierent from the book work out the formulas
yourself to convince yourself of their equivalence. Then, learn whichever form you nd more
straightforward.
The text shows how to use these formulas to compute e
x
and
e
x
starting with e
and
e
and
working backward. For e
x
, using the recursion once will produce e
1
, the second iteration
will produce e
2
, etc. until you get all the way back to e
0
, when you will have produced a
list of e
x
for every x between 0 and .
The formulas are: for e
x
,
u(x) = e
x
c(x) = p
x
d(x) = p
x
Starting Value = e
= u() = 0
So to start, set x + 1 = and the recursion will produce u(x) = u( 1).
For
e
x
,
u(x) =
e
x
c(x) =
_
1
0
s
p
x
ds
d(x) = p
x
Starting Value =
= u() = 0
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3.6 Assumptions for Fractional Ages
Option A reference: Actuarial Mathematics Chapter 3.6
Option B reference: Models for Quantifying Risk Chapter 6.5
(OK, you can start paying attention again ....)
The random variable T is a continuous measure of remaining lifetime. The life table has been
developed as an approximation of T, using a curtate variable K. As weve discussed, K is
only dened at integers. So, we need some way to measure between two integer ages. Three
popular methods were developed.
For all of the methods that follow, let x be an integer and let 0 t 1. Suppose that we
know the value of s(x) for the two integers x and x + 1 and we want to approximate s at
values between x and x+1. In other words, we want to approximate s(x+t) where 0 t 1.
Method 1: Linear Interpolation:
s(x +t) = (1 t)s(x) +t s(x + 1)
This method is also known as Uniform Distribution of Deaths, or UDD. Under UDD,
s(x + t) and
t
p
x
are both straight lines between t = 0 to t = 1. This method assumes that
the deaths occurring between ages x and x + 1 are evenly spread out between the two ages.
As you might imagine, this is usually not quite correct, but is a pretty good approximation.
(Please note: the linearity of s(x +t) and
t
p
x
is only assumed to hold up to t = 1!)
One key formula for UDD you might want to memorize is:
f(t) = q
x
To see why, please note that the number of deaths from time zero to time t is a fraction of
the total deaths in a year
s(x) s(x +t) = t[s(x) s(x + 1)]
Here for convenience we interpret s(x + t) as the number of people alive at age x + t. For
example, if s(x + 0.5) = 0.9, we say that for each unit of people at age x, we have 0.9 unit
of people at age x + 0.5, with one unit being one billion, one million, or any other positive
constant.
t
q
x
=
s(x) s(x +t)
s(x)
= t
s(x) s(x + 1)
s(x)
= tq
x
f(t) =
d
dt
t
q
x
= q
x
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You can also come up with f(t) = q
x
by intuitive thinking. Under UDD, death occurs at
a constant speed. If 12 people died in one year, then one person died each month. So f(t)
must be a constant. Then:
q
x
=
_
1
0
f(t)dt = f(t)
_
1
0
dt = f(t)
Method 2: Exponential Interpolation: Forget about the complex formula:
log s(x +t) = (1 t) log s(x) +t log s(x + 1)
All you need to know is that under the constant force of mortality, (x + t) = for
0 t 1.
Method 3: Harmonic Interpolation: This method is more commonly called the Balducci
assumption or the Hyperbolic assumption.
Forget about the complex formula
1
s(x +t)
=
1 t
s(x)
+
t
s(x + 1)
All you need to know about Balducci assumption is this:
1t
q
x+t
= (1 t)q
x
The above formula says that if you are x + t years old (where 0 t 1), then your chance
of dying in the remainder of the year is a fraction of your chance of dying in the whole year.
You can derive all the other formulas using
1t
q
x+t
= (1 t)q
x
. Later Ill show you how to
derive other formulas in Balducci assumptions.
Uniform Constant
Function Distribution Force Hyperbolic
t
q
x
tq
x
1 p
t
x
tqx
1(1t)qx
(x +t)
qx
1tqx
log p
x
qx
1(1t)qx
1t
q
x+t
(1t)qx
1tqx
1 p
1t
x
(1 t)q
x
y
q
x+t
yqx
1tqx
1 p
y
x
yqx
1(1yt)qx
t
p
x
1 tq
x
p
t
x
px
1(1t)qx
t
p
x
(x +t) q
x
p
t
x
log p
x
qxpx
[1(1t)qx]
2
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Table 3.6.1
Table 3.6.1 summarizes UDD, constant force of mortality, and the Balducci assumption.
Dont try to memorize the whole table. Learn basic formulas and derive the rest on the spot.
Under UDD, for 0 t 1:
f(t) = q
x
= constant
t
q
x
=
_
t
0
f(t)dt =
_
t
0
q
x
dt = q
x
_
t
0
dt = tq
x
t
p
x
= 1
t
q
x
= 1 tq
x
(x +t) =
x
(t) =
f(t)
t
p
x
=
q
x
1 tq
x
t
p
x
(x +t) = f(t) = q
x
y
p
x+t
=
s(x +t +y)
s(x +t)
=
s(x)
t+y
p
x
s(x)
t
p
x
=
t+y
p
x
t
p
x
=
1 (t +y)q
x
1 tq
x
y
q
x+t
= 1
y
p
x+t
=
yq
x
1 tq
x
1t
q
x+t
=
(1 t)q
x
1 tq
x
Under constant force of mortality, for 0 t 1:
x
(t) =
t
p
x
= e
_
t
0
dt
= e
t
p
x
= e
= ln p
x
t
p
x
= e
t
= (e
)
t
= (p
x
)
t
y
p
x+t
=
t+y
p
x
t
p
x
=
(p
x
)
t
(p
x
)
(t+y)
= (p
x
)
y
Finally, lets derive log s(x +t) = (1 t) log s(x) +t log s(x + 1)
s(x +t) = s(x)e
t
log s(x +t) = log s(x) t
s(x + 1) = s(x)e
x
(t)
f(t) =
d
dt
t
p
x
=
d
dt
p
x
1 (1 t)q
x
=
q
x
p
x
[1 (1 t)q
x
]
2
Derive (x +t):
(x +t) =
f(t)
t
p
x
=
q
x
1 (1 t)q
x
Derive
y
q
x+t
:
y
q
x+t
= 1
s(x +t +y)
s(x +t)
Use the formula: s(x +t) =
px
1(1t)qx
Replace t with t +y, assuming 0 t +y 1:
s(x +t +y) =
p
x
1 (1 t y)q
x
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y
q
x+t
= 1
s(x +t +y)
s(x +t)
= 1
1 (1 t)q
x
1 (1 t y)q
x
=
p
x
1 (1 t y)q
x
Finally, lets derive
1
s(x+t)
=
1t
s(x)
+
t
s(x+1)
s(x +t) =
p
x
1 (1 t)q
x
1
s(x +t)
=
1 (1 t)q
x
p
x
=
1 (1 t)(1 p
x
)
p
x
=
(1 t)p
x
+t
p
x
= (1 t) +
t
p
x
Since s(x) = 1 and s(x + 1) = p
x
, we have:
1 t
s(x)
+
t
s(x + 1)
= 1 t +
t
p
x
1
s(x +t)
=
1 t
s(x)
+
t
s(x + 1)
Now you see that you really dont need to memorize Table 3.6.1. Just memorize the following:
Under UDD, f(t) = q
x
is a constant.
Under constant force of mortality, (x +t) = .
Under Balducci,
1t
q
x+t
= (1 t)q
x
.
A couple of timesaving formulas that are valid under UDD only!!
e
x
= e
x
+
1
2
Var(T) = Var(K) +
1
12
EXAMPLE:
You are given that q
x
= 0.1. Find (A)
0.5
q
x
, (B)
0.5
q
x+0.5
under each of
Uniform Density of Deaths (UDD)
Exponentially distributed deaths (constant force)
Harmonic Interpolation (Balducci, hyperbolic)
SOLUTION:
(A) UDD:
0.5
q
x
= (0.5)(0.1) = 0.05
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CF:
0.5
q
x
= 1 (0.9)
0.5
= 0.0513
Balducci:
0.5
q
x
=
(0.5)(0.1)
1 (0.5)(0.1)
= 0.0526.
(B) UDD:
0.5
q
x+0.5
=
(0.5)(0.1)
1 (0.5)(0.1)
= 0.0526
CF:
0.5
q
x+0.5
= 1 (0.9)
0.5
= 0.0513
Balducci:
0.5
q
x+0.5
= (0.5)(0.1) = 0.05.
3.7 Some Analytical Laws of Mortality
Option A reference: Actuarial Mathematics Chapter 3.7
Option B reference: Models for Quantifying Risk Chapter 5.2
Although computers have rendered Analytical Laws of Mortality less imperative to our pro
fession, they are still important for understanding mortality and particularly for passing the
exam. The book describes four basic analytical laws/formulas. Of these 4 laws, De Moivres
Law is frequently tested in the exam. The other 3 laws are rarely tested in the exam (I would
skip these 3 laws).
De Moivres Law:
(x) = ( x)
1
and s(x) = 1
x
, where 0 x <
Gompertz Law:
(x) = Bc
x
and s(x) = exp[m(c
x
1)]
where B > 0, c > 1, m =
B
log c
, x 0
Makehams Law:
(x) = A+Bc
x
and s(x) = exp[Ax m(c
x
1)]
where B > 0, A B, c > 1, m =
B
log c
, x 0
Weibulls Law:
(x) = kx
n
and s(x) = exp(ux
n+1
)
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where k > 0, n > 0, u =
k
(n + 1)
, x 0
Notes:
Gompertz is simply Makeham with A = 0.
If c = 1 in Gompertz or Makeham, the exponential/constant force of mortality results.
In Makehams law, A is the accident hazard while Bc
x
is the hazard of aging.
We will be seeing more of these laws later in the book. To be ready for the exam, you should
become intimately familiar with De Moivres Law. DeMoivres Law says that at age x, you
are equally likely to die in any year between x and .
Here are some key lifefunctions for DeMoivres Law in the form of an example. If you dont
read the proofs, still make an eort to understand the formulas and what they mean.
EXAMPLE:
Under DeMoivres law, show that
1.
t
p
x
=
x t
x
2.
t
q
x
=
t
x
3.
e
0
=
2
4.
e
0
=
1
2
5.
e
x
=
x
2
6.
e
x
=
x 1
2
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SOLUTION:
1.
t
p
x
=
s(x +t)
s(x)
=
x t
x
2.
t
q
x
= 1
t
p
x
=
t
x
3.
e
0
=
_
0
t
dt =
_
( t)
2
2
_
=
2
4.
e
0
=
1
k
p
0
=
1
k
=
1
1
k =
1
2
5.
e
x
=
_
x
0
x t
x
dt =
x
2
6. Since mortality is uniform over all years under DeMoivres law, it is uniform
over each individual year, so UDD applies. Therefore
e
x
=
e
x
1
2
=
x 1
2
We could have done (4) this way also.
Modied DeMoivres Law
Often on the exam, a modied version of DeMoivres Law arises. This occurs, for example,
when
(x) =
c
x
where c is a positive constant. This gives rise to a set of formulas for each of the quantities
found for standard DeMoivres Law (c = 1) in the example above. All of the formulas for
Modied DeMoivres Law are listed in the formula summary at the end of this chapter.
3.8 Select and Ultimate Tables
Option A reference: Actuarial Mathematics Chapter 3.8
Option B reference: Models for Quantifying Risk Chapter 6.6
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Suppose you are trying to issue life insurance policies and two 45 yearold women apply for
policies. You want to make sure you charge appropriate premiums for each one to cover the
cost of insuring them over time. One of the women is simply picked from the population
at large. The second women was picked from a group of women who recently passed a
comprehensive physical exam with ying colors signicantly healthier than the general
population.
Is it equitable to charge the same premium to the two women? No because you have
additional information about the second woman that would cause you to expect her to have
better mortality experience than the general population. Thus, to her premiums, you might
apply a select mortality table that reects better the mortality experience of very healthy
45 year olds. However, after 15 years, research might show that being very healthy at 45
does not indicate much of anything about health at age 60. So, you might want to go back
to using standard mortality rates at age 60 regardless of status at age 45. After all, 15 years
is plenty of time to take up smoking, eat lots of fried foods, etc.
This simple scenario illustrates the idea behind select and ultimate tables. For some period
of time, you expect mortality to be dierent than that for the general population the select
period. However, at some point, youre just not sure of this special status anymore, so those
folks fall back into the pack at some point the ultimate table.
Consider table 3.8.1. The symbol [x] signies an xyr old with select status. Note that
for the rst two years (columns 1,2), select mortality applies with q
[x]
and q
[x]+1
. However,
at duration 3 (column 3), its back to standard mortality, q
x+2
. This table assumes the
selection eect wears o in just 2 years.
Excerpt from the AF80 SelectandUltimate Table in Bowers, et al.
(1) (2) (3) (4) (5) (6) (7)
[x] 1,000 q
[x]
1,000 q
[x]+1
1,000 q
x+2
l
[x]
l
[x]+1
l
x+2
x + 2
30 0.222 0.330 0.422 9,906.74 9,904.54 9,901.27 32
31 0.234 0.352 0.459 9,902.89 9,900.58 9,897.09 33
32 0.250 0.377 0.500 9,898.75 9,896.28 9,892.55 34
33 0.269 0.407 0.545 9,894.29 9,891.63 9,887.60 35
34 0.291 0.441 0.596 9,889.45 9,886.57 9,882.21 36
Table 3.8.1
Here are a few useful formulas and relationships. In general,
q
[x]
< q
[x1]+1
< q
x
Why would this hold? The expression q
x
represents a pick from the general population.
The expression q
[x]
indicates special knowledge about the situation for example, recently
passing a physical exam (This formula assumes we are trying to select out healthy people,
of course). The expression q
[x1]+1
indicates special knowledge about the situation as before
for example, recently passing a physical exam, but this time the applicant has had a year
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for health to deteriorate since she was examined at age x 1 (one year ago) rather than at
age x.
EXAMPLE: Select and Ultimate Life Table
Using the select and ultimate life table shown above nd the value of
1000
_
3
q
32
3
q
[32]
_
.
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SOLUTION:
3
q
32
deals only with the ultimate table so I am only interested in the values of
l
x
+ 2 in Column (6).
3
q
32
= 1
3
p
32
= 1
l
35
l
32
= 1
9,888
9,901
= 0.001313
For
3
q
[32]
, we need l
[32]
and l
[32]+3
which is just l
35
since the select period is only
2 years. So
3
q
[32]
= 1
l
35
l
[32]
= 1
9,888
9,899
= 0.001111
So the answer is 0.202.
Two important points regarding this example:
The probability that [32] will die in the next 3 years is lower if [32] is taken from a
select group. People you are sure are healthy should be less likely to die than someone
drawn from the general population.
To follow the people alive from the 9898.75 selected at age 32, you rst follow the
numbers to the right until you hit the ultimate column and then proceed down the
ultimate column. This is useful! You can quickly evaluate that
5
p
[31]
=
9882
9903
by counting o 5 years 2 to the right and then 3 down.
Conclusion
Chap. 3 introduces a lot of new concepts and notation. Make sure you understand the
notation in Table 3.9.1 this is the foundation for the rest of the text.
Chapter 3 Suggested Problems: 1(do rst row last), 5, 6, 7, 9, 12, 18abc, 20, 28,
30, 36, 39 There are lots for this chapter, some chapters in this book will have very few.
(Solutions are available at archactuarial.com on the Download Samples page.)
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CHAPTER 3 Formula Summary
s(x) = 1 F(X) = 1 Pr(X x)
Pr(x < X z) = F(z) F(x) = s(x) s(z)
Pr(x < X zX > x) =
[F(z) F(x)]
[1 F(x)]
=
[s(x) s(z)]
[s(x)]
t
p
x
= e
_
_
t
0
(x+s)ds
_
t
p
x
=
s(x +t)
s(x)
t
q
x
= 1
t
p
x
tu
q
x
=
t
p
x
u
q
x+t tu
q
x
=
t+u
q
x
t
q
x tu
q
x
=
t
p
x
t+u
p
x
Pr(K(x) = k) =
k
p
x
k+1
p
x
=
k
p
x
q
x+k
=
k
q
x
Life Tables:
l
x
= l
0
s(x)
n
d
x
= l
x
l
x+n
q
x
=
l
x
l
x+1
l
x
p
x
=
l
x+1
l
x
n
q
x
=
l
x
l
x+n
l
x
n
p
x
=
l
x+n
l
x
Constant Force of Mortality
If the force of mortality is a constant for every age x,
s(x) = e
x
t
p
x
= e
t
e
x
=
1
Var[T] =
1
2
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Expected Future Lifetime
e
x
= E[T(x)] =
_
0
t
p
x
dt Var[T(x)] = 2
_
0
t
t
p
x
dt
e
2
x
e
x
= E[K(x)] =
1
k
p
x
Var[K(x)] =
1
(2k 1)
k
p
x
e
2
x
Under UDD only,
e
x
= e
x
+
1
2
Var(T) = Var(K) +
1
12
Median future lifetime
Pr[T(x) > m(x)] =
1
2
s[x +m(x)]
s(x)
=
1
2
m
p
x
=
1
2
Make sure not to confuse m
x
with m(x), the median future lifetime!
L
x
=
_
1
0
l
x+t
dt
n
L
x
=
_
n
0
l
x+t
dt
m
x
=
(l
x
l
x+1
)
L
x
n
m
x
=
l
x
l
x+n
n
L
x
T
x
=
_
0
l
x+t
dt
T
x
l
x
=
e
x
n
L
x
l
x
=
_
n
0
t
p
x
dt =
e
x:n
a(x) is the average number of years lived between age x and age x + 1 by those of the
survivorship group who die between age x and age x + 1. With the assumption of uniform
distribution of deaths over the interval (x, x + 1),
a(x) = 1/2.
Without this assumption,
a(x) =
_
1
0
t l
x+t
(x +t)dt
_
1
0
l
x+t
(x +t)dt
=
_
1
0
t
t
p
x
(x +t)dt
_
1
0
t
p
x
(x +t)dt
By the way, a(x) is a minor concept in MLC. Ill be surprised if SOA tests this obscure
concept. I would skip it.
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De Moivres Law: (x) = ( x)
1
and s(x) = 1
x
, where 0 x <
Gompertz Law: (x) = Bc
x
and s(x) = exp[m(c
x
1)]
where B > 0, c > 1, m =
B
log c
, x 0
Makehams Law: (x) = A+Bc
x
and s(x) = exp[Ax m(c
x
1)]
where B > 0, A B, c > 1, m =
B
log c
, x 0
Weibulls Law: (x) = kx
n
and s(x) = exp(ux
n+1
)
where k > 0, n > 0, u =
k
(n + 1)
, x 0
DeMoivres Law and Modied DeMoivres Law:
If x is subject to DeMoivres Law with maximum age , then all of the relations on the left
below are true. The relations on the right are for Modied DeMoivres Law with c > 0.
DeMoivre Modied DeMoivre
(x) =
1
x
(x) =
c
x
s(x) =
x
s(x) =
_
x
_
c
l
x
= l
0
l
0
_
x
_
c
e
x
= E[T] =
x
2
e
x
=
x
c+1
Var[T] =
(x)
2
12
Var[T] =
(x)
2
c
(c+1)
2
(c+2)
t
p
x
=
xt
x
t
p
x
=
_
xt
x
_
c
x
(t) =
1
xt
x
(t) =
c
xt
Be careful on the exam  Modied DeMoivre problems are often disguised in a question that
starts something like
You are given
s(x) =
_
1
x
80
_
2
In cases like this, you have to recognize that the question is just a modied DeMoivre written
in a dierent algebraic form.
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Note that in this table, the function listed at left are given in terms of the functions across
the top row!
F(x) s(x) f(x) (x)
F(x) F(x) 1 s(x)
_
x
0
f(u) du 1 e
_
x
0
(t) dt
s(x) 1 F(x) s(x)
_
x
f(u) du e
_
x
0
(t) dt
f(x) F
(x) s
_
x
0
(t) dt
(x)
F
(x)
1F(x)
s
(x)
s(x)
f(x)
s(x)
(x)
Assumptions for fractional ages.
Uniform Constant
Function Distribution Force Hyperbolic
t
q
x
tq
x
1 p
t
x
tqx
1(1t)qx
(x +t)
qx
1tqx
log p
x
qx
1(1t)qx
1t
q
x+t
(1t)qx
1tqx
1 p
1t
x
(1 t)q
x
y
q
x+t
yqx
1tqx
1 p
y
x
yqx
1(1yt)qx
t
p
x
1 tq
x
p
t
x
px
1(1t)qx
t
p
x
(x +t) q
x
p
t
x
log p
x
qxpx
[1(1t)qx]
2
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Past SOA/CAS Exam Questions:
All of these questions have appeared on SOA/CAS exams between the years 2000 and 2005.
You will nd that they often involve some clever thinking in addition to knowledge of
actuarial math. These questions are used with permission.
1. Given:
(i)
e
0
= 25
(ii) l
x
= x, 0 x
(iii) T(x) is the future lifetime random variable.
Calculate Var[T(10)].
(A) 65 (B)93 (C) 133 (D) 178 (E) 333
Solution:
e
0
=
_
0
_
1
t
_
dt =
2
2
=
2
= 25 = 50
e
10
=
_
40
0
_
1
t
40
_
dt = 40
40
2
(2)(40)
= 20
Var [T(x)] = 2
_
40
0
t
_
1
t
40
_
dt (20)
2
= 2
_
t
2
2
t
3
3 40
_
40
0
(20)
2
= 133
Key: C
2. For a certain mortality table, you are given:
(i) (80.5) = 0.0202
(ii) (81.5) = 0.0408
(iii) (82.5) = 0.0619
(iv) Deaths are uniformly distributed between integral ages.
Calculate the probability that a person age 80.5 will die within two years.
(A) 0.0782 (B) 0.0785 (C) 0.0790 (D) 0.0796 (E) 0.0800
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Solution:
0.0408 = (81.5) =
q
81
1 (1/2)q
81
q
81
= 0.0400
Similarly,
q
80
= 0.0200 and q
82
= 0.0600
2
q
80.5
=
1/2
q
80.5
+
1/2
p
80.5
_
q
81
+p
81
1/2
q
82
_
=
0.01
0.99
+
0.98
0.99
[0.04 + 0.96(0.03)] = 0.0782
Key: A
3. Mortality for Audra, age 25, follows De Moivres law with = 100. If she takes up hot
air ballooning for the coming year, her assumed mortality will be adjusted so that for
the coming year only, she will have a constant force of mortality of 0.1.
Calculate the decrease in the 11year temporary complete life expectancy for Audra if
she takes up hot air ballooning.
(A) 0.10 (B) 0.35 (C) 0.60 (D) 0.80 (E) 1.00
Solution: STANDARD:
e
25:11
=
_
11
0
(1
t
75
)dt = t
t
2
2 75

11
0
= 10.1933
MODIFIED:
p
25
= e
_
1
0
0.1ds
= e
0.1
= 0.90484
e
25:11
=
_
1
0
t
p
25
dt +p
25
_
10
0
(1
t
74
)dt
=
_
1
0
e
0.1t
dt +e
0.1
_
10
0
(1
t
74
)dt
=
1 e
0.1
0.1
+e
0.1
_
t
t
2
2 74
_

10
0
= 0.95163 + 0.90484(9.32432) = 9.3886
Here we use a recursive formula:
e
x:n
=
e
x:1
+
1
p
x
e
x+1:n1
The dierence is 0.8047. Key: D
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4. You are given the following extract from a selectandultimate mortality table with a
2year select period:
x l
[x]
l
[x]+1
l
x+2
x + 2
60 80,625 79,954 78,839 62
61 79,137 78,402 77,252 63
62 77,575 76,770 75,578 64
Assume that deaths are uniformly distributed between integral ages.
Calculate
0.9
q
[60]+0.6
.
(A) 0.0102 (B) 0.0103 (C) 0.0104 (D) 0.0105 (E) 0.0106
Solution:
l
[60]+0.6
= (0.6)(79,954) + (0.4)(80,625) = 80,222.4
l
[60]+1.5
= (0.5)(79,954) + (0.5)(78,839) = 79,396.5
0.9
q
[60]+0.6
=
80,222.4 79,396.5
80,222.4
= 0.0103
Key: B
5. Given:
(i) (x) = F +e
2x
, x 0
(ii)
0.4
p
0
= 0.50
Calculate F.
(A) 0.20 (B) 0.09 (C) 0.00 (D) 0.09 (E) 0.20
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Solution:
0.4
p
0
= 0.5 = e
_
0.4
0
(F+e
2x
)dx
= e
0.4F
_
e
2x
2
_
0.4
0
= e
0.4F
_
e
0.8
1
2
_
0.5 = e
0.4F0.6128
ln(0.5) = 0.4F 0.6128
0.6931 = 0.4F 0.6128 F = 0.20
Key: E
6. An actuary is modeling the mortality of a group of 1000 people, each age 95, for the
next three years.
The actuary starts by calculating the expected number of survivors at each integral age
by
l
95+k
= 1000
k
p
95
, k = 1, 2, 3
The actuary subsequently calculates the expected number of survivors at the middle of
each year using the assumption that deaths are uniformly distributed over each year of
age.
This is the result of the actuarys model:
Age Survivors
95 1000
95.5 800
96 600
96.5 480
97
97.5 288
98
The actuary decides to change his assumption for mortality at fractional ages to the
constant force assumption. He retains his original assumption for each
k
p
95
.
Calculate the revised expected number of survivors at age 97.5.
(A) 270 (B) 273 (C) 276 (D) 279 (E) 282
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Solution: From UDD, l
96.5
=
l
96
+l
97
2
.
480 =
600 +l
97
2
l
97
= 360
Likewise, from l
97
= 360 and l
97.5
= 288, we get l
98
= 216.
For constant force, e
=
l
98
l
97
=
216
360
= 0.6
0.5
p
x
= e
0.5
= (0.6)
1
2
= 0.7746
l
97.5
= (0.7746)l
97
= (0.7746)(360) = 278.86
Key: D
7. For a 4year college, you are given the following probabilities for dropout from all causes:
q
0
= 0.15
q
1
= 0.10
q
2
= 0.05
q
3
= 0.01
Dropouts are uniformly distributed over each year.
Compute the temporary 1.5year complete expected college lifetime of a student enter
ing the second year,
e
1:1.5
.
(A) 1.25 (B) 1.3 (C) 1.35 (D) 1.4 (E) 1.45
Solution:
e
1:1.5
=
_
1.5
0
t
p
1
dt
=
_
1
0
t
p
1
dt +
1
p
1
_
0.5
0
x
p
2
dx
=
_
1
0
(1 0.1t)dt + 0.9
_
0.5
0
(1 0.05x)dx
=
_
t
0.1t
2
2
_
1
0
+ 0.9
_
x
0.05x
2
2
_
0.5
0
= 0.95 + 0.444 = 1.394 Key: D
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8. For a given life age 30, it is estimated that an impact of a medical breakthrough will
be an increase of 4 years in
e
30
, the complete expectation of life.
Prior to the medical breakthrough, s(x) followed de Moivres law with = 100 as the
limiting age.
Assuming de Moivres law still applies after the medical breakthrough, calculate the
new limiting age.
(A) 104 (B) 105 (C) 106 (D) 107 (E)108
Solution: For deMoivres law,
e
30
=
30
2
.
Prior to medical breakthrough = 100
e
30
=
10030
2
= 35.
After medical breakthrough
e
30
=
e
30
+4 = 39.
30
= 39 =
30
2
= 108. Key E
9. For a selectandultimate mortality table with a 3year select period:
(i)
x q
[x]
q
[x]+1
q
[x]+2
q
x+3
x + 3
60 0.09 0.11 0.13 0.15 63
61 0.10 0.12 0.14 0.16 64
62 0.11 0.13 0.15 0.17 65
63 0.12 0.14 0.16 0.18 66
64 0.13 0.15 0.17 0.19 67
(ii) White was a newly selected life on 01/01/2000.
(iii) Whites age on 01/01/2001 is 61.
(iv) P is the probability on 01/01/2001 that White will be alive on 01/01/2006.
Calculate P.
(A) 0 P < 0.43 (B) 0.43 P < 0.45 (C) 0.45 P < 0.47
(D) 0.47 P < 0.49 (E) 0.49 P 1.00
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Solution:
5
p
[60]+1
=
_
1 q
[60]+1
_ _
1 q
[60]+2
_
(1 q
63
) (1 q
64
) (1 q
65
)
= (0.89)(0.87)(0.85)(0.84)(0.83) = 0.4589
Key: C
10. You are given:
(x) =
_
0.04, 0 < x < 40
0.05, x > 40
Calculate
e
25:25
.
(A) 14.0 (B) 14.4 (C) 14.8 (D) 15.2 (D) 15.6
Solution:
e
25:25
=
_
15
0
t
p
25
dt +
15
p
25
_
10
0
t
p
40
dt
=
_
15
0
e
0.04t
dt +
_
e
_
15
0
0.04 ds
__
10
0
e
0.05t
dt
=
1
0.04
_
1 e
0.60
_
+e
0.60
_
1
0.05
_
1 e
0.50
_
_
= 11.2797 + 4.3187 = 15.60
Key: E
11. T, the future lifetime of (0), has a spliced distribution.
(i) f
1
(t) follows the Illustrative Life Table.
(ii) f
2
(t) follows DeMoivres Law with = 100.
(iii)
f
T
(t) =
_
k f
1
(t), 0 t 50
1.2 f
2
(t), 50 < t
Calculate
10
p
40
.
(A) 0.81 (B) 0.85 (C) 0.88 (D) 0.92 (E) 0.96
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SOLUTION: From the Illustrative Life Table:
l
50
l
0
= 0.8951
l
40
l
0
= 0.9313
1 =
_
0
f
T
(t) dt =
_
50
0
kf
1
(t) dt +
_
50
1.2 f
2
(t) dt
= kF
1
(50) + 1.2 (F
2
() F
2
(50))
= k (1
50
p
0
) + 1.2(1 0.5)
= k(1 0.8951) + 0.6
k =
1 0.6
1 08951
= 3.813
For x 50,
F
T
(x) =
_
x
0
3.813f
1
(t) dt = 3.813F
1
(x)
This gives us the following two results:
F
T
(40) = 3.813
_
1
l
40
l
0
_
= 0.262
F
T
(50) = 3.813
_
1
l
50
l
0
_
= 0.400
10
p
40
=
1 F
T
(50)
1 F
T
(40)
=
1 0.400
1 0.262
= 0.813
12. For a double decrement table, you are given:
(i)
(1)
x
(t) = 0.2
()
x
(t), t > 0
(ii)
()
x
(t) = kt
2
, t > 0
(iii) q
(1)
x
= 0.04
Calculate
2
q
(2)
x
.
(A) 0.45 (B) 0.53 (C) 0.58 (D) 0.64 (E) 0.73
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SOLUTION:
We can use the exponential formulation for p
(x)
0.04 = q
(1)
x
= 1p
(1)
x
= 1e
_
1
0
(1)
x
(t) dt
= 1e
_
1
0
0.2
()
x
(t) dt
= 1e
_
1
0
0.2kt
2
dt
= 1e
0.2k/3
e
0.2k/3
= 0.96
(1)
x
(t) = 0.2
()
x
(t)
(2)
x
(t) = 0.8
()
x
(t)
2
q
(2)
x
=
_
2
0
t
p
()
x
(2)
x
(t)dt =
_
2
0
t
p
()
x
(0.8)
()
x
(t)dt = 0.8
2
q
()
x
To get
2
q
()
x
, we use
2
q
()
x
= 1
2
p
()
x
= 1 e
_
2
0
()
x
(t) dt
= 1 e
_
2
0
kt
2
dt
= 1 e
8k/3
= 1
_
e
0.2k/3
_
40
= 1 (0.96)
40
2
q
()
x
= 0.8046
2
q
(2)
x
= (0.8)(0.8046) = 0.644
13. You are given:
(i)
e
30:40
= 27.692
(ii) s(x) = 1
x
, x
(iii) T(x) is the future lifetime random variable for (x).
Calculate Var(T(30)).
(A) 332
(B) 352
(C) 372
(D) 392
(E) 412
SOLUTION:
e
30:40
=
_
40
0
t
p
30
dt
=
_
40
0
30t
30
dt
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=
_
t
t
2
2(30)
_

40
0
= 40
800
30
= 27.692
= 95
t
p
30
=
65t
65
Now, realize (after getting = 95) that T(30) is uniformly on (0, 65), its variance is
just the variance of a continuous uniform random variable:
V ar =
(650)
2
12
= 352.08
Key: B
14. For a life table with a oneyear select period, you are given:
(i)
x l
[x]
d
[x]
l
x+1
e
[x]
80 1000 90 8.5
81 920 90
(ii) Deaths are uniformly distributed over each year of age.
Calculate
e
[81]
.
(A) 8.0
(B) 8.1
(C) 8.2
(D) 8.3
(E) 8.4
SOLUTION:
Complete the table:
l
81
= l
[80]
d
[80]
= 910
l
82
= l
[81]
d
[81]
= 830
p
[80]
=
910
1000
= 0.91
p
[81]
=
830
920
= 0.902
p
81
=
830
910
= 0.912
Use the recursive formula:
e
x:n
=
e
x:1
+
1
p
x
e
x+1:n1
We have:
e
[80]
=
e
80:1
+
1
p
[80]
e
81
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Notice under UDD,
t
p
x
is a straight line. Since
e
x:1
is the area of the function
t
p
x
bounded by t = 0 and t = 1, under UDD we have
e
x:1
= 0.5(
0
p
x
+
1
p
x
) = 0.5(1 +
1
p
x
)
You can also derive the above equation using the standard formula:
e
x:1
=
_
1
0
t
p
x
dt =
_
1
0
(1
t
q
x
)dt =
_
1
0
(1 tq
x
)dt
Since q
x
is a constant, you can verify that:
_
1
0
(1 tq
x
)dt = 1 0.5q
x
= 0.5(1 +
1
p
x
)
Hence:
e
x:n
= 0.5(1 +
1
p
x
) +
1
p
x
e
x+1:n1
= 0.5(
1
q
x
+
1
p
x
+
1
p
x
) +
1
p
x
e
x+1:n1
=
0.5
1
q
x
+
1
p
x
(1 +
e
x+1:n1
).
Set n = , we have: e
x
=
1
2
q
x
+p
x
(1 + e
x
)
e
[80]
=
1
2
q
[80]
+p
[80]
(1 + e
81
)
8.5 =
1
2
(1 0.91) + (0.91) (1 + e
81
)
e
81
= 8.291
e
81
=
1
2
q
81
+p
81
(1 + e
82
)
e
82
= 8.043
e
[81]
=
1
2
q
[81]
+p
[81]
(1 + e
82
)
=
1
2
(1 0.912) + (0.912)(1 + 8.043)
= 8.206
Key: C
15. You are given:
(x) =
_
0.05 50 x < 60
0.04 60 x < 70
Calculate
414
q
50
.
(A) 0.38
(B) 0.39
(C) 0.41
(D) 0.43
(E) 0.44
SOLUTION:
4
p
50
= e
(0.05)(4)
= 0.8187
10
p
50
= e
(0.05)(10)
= 0.6065
8
p
60
= e
(0.04)(8)
= 0.7261
18
p
50
= (
10
p
50
)(
8
p
60
) = 0.6065 0.7261 = 0.4404
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414
q
50
=
4
p
50
18
p
50
= 0.8187 0.4404 = 0.3783
Key: A
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16. For a population which contains equal numbers of males and females at birth:
(i) For males,
m
(x) = 0.10, x 0
(ii) For females,
f
(x) = 0.08, x 0
Calculate q
60
for this population.
(A) 0.076
(B) 0.081
(C) 0.086
(D) 0.091
(E) 0.096
SOLUTION:
s(60) = P[T(0) > 60] (i.e. the probability that a newborn survives to age 60)
Using the double expectation:
s(60) = P[T(0) > 60] = P(MaleNewborn)P[T(MaleNewborn) > 60]+P(Femalenewborn)
P[T(FemaleNewborn) > 60] = 0.5e
(0.1)(60)
+ 0.5e
(0.08)(60)
= 0.005354
Similarly,
s(61) = 0.5e
(0.1)(61)
+ 0.5e
(0.08)(61)
= 0.00492
q
60
= 1
0.00492
0.005354
= 0.081
Key: B
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Problems from Pre2000 SOACAS exams
1. You are given: (x) =
1
80 x
, 0 x < 80.
Calculate the median future lifetime of (20).
(A) 5.25 (B) 6.08 (C) 8.52 (D) 26.08 (E) 30.00
2. You are given:
t
p
x
= (0.8)
t
, t 0
l
x+2
= 6.4
Calculate T
x+1
.
(A) 4.5 (B) 7.2 (C) 28.7 (D) 35.9 (E) 44.8
Use the following information for the next 4 questions:
You are given:
T(x) is the random variable for the future lifetime of (x).
The p.d.f. of T is f
T
(t) = 2e
2t
, t 0.
3. Calculate
e
x
(A) 0.5 (B) 2.0 (C) 10.0 (D) 20.0 (E) 40.0
4. Calculate Var[T].
(A) 0.25 (B) 0.50 (C) 1.00 (D) 2.00 (E) 4.00
5. Calculate m(x), the median future lifetime of (x).
(A)
e
4
2
(B)
e
2
2
(C)
ln 2
2
(D)
ln 4
2
(E) 1
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6. Calculate m
x
, the centraldeathrate at age x.
(A)
e
2
2
(B) e
2
(C) 2e
2
(D) 1 (E) 2
7. You are given:
s(x) =
_
1
x
e
x
.
(A)
+ 1
(B)
+ 1
(C)
2
+ 1
(D)
2
x
(E)
( x)
( + 1)
8. You are given:
q
60
= 0.3
q
61
= 0.4
f is the probability that (60) will die between ages 60.5 and 61.5 under the uniform
distribution of deaths assumption.
g is the probability that (60) will die between ages 60.5 and 61.5 under the Balducci
assumption.
Calculate 10,000(g f).
(A) 0 (B) 85 (C) 94 (D) 178 (E) 213
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Solutions to Chapter 3
1. Key: A We need to nd t such that
t
p
20
= 0.5
0.5 = e
_
t
0
(20+s) ds
= e
_
t
0
(60s)
0.5
ds
= e
2[(60s)
0.5
]
t
0
= e
2[
60t
60]
ln 0.5 = 2
_
60 t
60
_
60 t = 7.40 t = 5.25
2. Key: D
T
x+1
=
_
0
l
x+1+t
dt
l
x+1
=
6.4
0.8
= 8 l
x+1+t
= 8(0.8)
t
T
x+1
= 8
_
0
(0.8)
t
dt =
8
ln 0.8
(0.8)
t

0
=
8
ln 0.8
= 35.9
3. Key: A This is constant force of mortality (CFM) with = 2.
E[T] =
1
= 0.5 =
e
x
4. Key: A (CFM) Var[T] =
1
2
= 0.25
5. Key: C
0.5 =
t
p
x
= e
t
= e
2t
t =
ln 2
2
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6. Key: E
m
x
=
l
x
l
x+1
L
x
=
l
x
(1 e
)
_
1
0
l
x
t
p
x
dt
=
l
x
(1 e
2
)
l
x
_
1
0
e
t
dt
==
1 e
2
1
2
(1 e
2
)
= 2
7. Key: A This is a Modied DeMoivre problem with constant equal to . So
(x) =
x
,
e
x
=
x
+ 1
Multiplying these two quantities gives
+ 1
8. Key: B In both cases the probability is given by
0.5
p
60
0.5
q
60.5
+
1
p
60
0.5
q
61
UDD: [1 (0.5)(0.3)]
(0.5)(0.3)
1(0.5)(0.3)
+ (0.7) (0.5)(0.4) = 0.2900 = f
Balducci:
0.7
1(0.5)(0.3)
(0.5)(0.3)
1
+ (0.7)
(0.5)(0.4)
1(0.5)(0.4)
= 0.2985 = g
10,000(g f) = 85
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Function ONLY
Yufeng Guo
November 28, 2010
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Contents
1 Integrals 1
1.1
R
n
0
c
o
dt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2
R
n
0
tc
o
dt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3
R
n
0
t
2
c
o
dt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 1 [(A /)
n
] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4.1 If A is continuous nonnegative . . . . . . . . . . . . . . . 2
1.4.2 If A is nonnegative integer . . . . . . . . . . . . . . . . . 3
2 Multiple lives 1
r:n
, 2
r:n
7
2.1 1
r:n
, 2
r:n
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 1
r:n
, 2
r:n
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.3
n
1
r
,
n
2
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.4 1
r:n
+ 2
r:n
=1
r:n
. . . . . . . . . . . . . . . . . . . . . . . . . . 57
2.4.1 1
r:n
+ 2
r:n
= 1
r:n
. . . . . . . . . . . . . . . . . . 57
2.4.2 1
r:n
+ 2
r:n
= 1
r:n
. . . . . . . . . . . . . . . . . . 57
2.4.3
n
1
r
+
n
2
r
=
n
r
. . . . . . . . . . . . . . . . . . . . . . 57
2.5 1
r:n
+ 1
r:n
= 1
/r\:n
. . . . . . . . . . . . . . . . . . . . . . . . 57
2.5.1 1
r:n
+ 1
r:n
= 1
/r\:n
. . . . . . . . . . . . . . . . . 57
2.5.2 1
r:n
+ 1
r:n
= 1
/r\:n
. . . . . . . . . . . . . . . . 58
2.5.3
n
1
r
+
n
1
r
=
n
r
. . . . . . . . . . . . . . . . . . . . . . 58
2.6 1
r:n
2
r:n
= 1
/r\:n
1
r:n
=1
r:n
. . . . . . . . . . . . . . . . . . 58
2.6.1 1
r:n
2
r:n
= 1
/r\:n
1
r:n
= 1
r:n
. . . . . . 58
2.6.2 1
r:n
2
r:n
= 1
/r\:n
1
r:n
= 1
r:n
. . . . . . 58
2.6.3
n
n
2
r
=
n
n
1
r
=
n
1
r
. . . . . . . . . . . . . . 58
2.7 Also see . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3 First death, last death 67
3.1 First to die . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
iii
494 of 674
CONTENTS CONTENTS
3.2 Lasttodie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
3.3 Typical problems . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3.4 j
r:
(t) , j
r
(t) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
3.4.1 constant j . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
3.4.2 UDD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
3.4.3 Also See . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
3.5 mean and variance: T (rj) , T (rj) ,
T(r)
,
T(r)
, a
T(r)
, a
T(r)
103
3.5.1 constant force of mortality . . . . . . . . . . . . . . . . . . 103
3.5.2 de Moivres law . . . . . . . . . . . . . . . . . . . . . . . . 106
3.5.3 Also see . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
3.6 Co [T (rj) , T (rj)] , Co
T(r)
,
T(r)
, Co
a
T(r)
, a
T(r)
. 111
4 Joint life annuity 125
4.1 Formulas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
4.1.1 Reversionary annuity . . . . . . . . . . . . . . . . . . . . . 126
4.1.2 Also see . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
4.2 Complex annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
5 Solution to Sample MLC (Multiple Life Function) 129
5.1 q1

r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
5.2 q31
0
c
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
5.3 q46 joint life annuity immediate . . . . . . . . . . . . . . . . . . . 130
5.4 q73 exactly one alive . . . . . . . . . . . . . . . . . . . . . . . . . 130
5.5 q91
0
c
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
5.6 q94 j
r
(t) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
5.7 q104 1
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
5.8 q112 joint life annuity . . . . . . . . . . . . . . . . . . . . . . . . 132
5.9 q123

r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
5.10 q128

r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
5.11 q150
0
c
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
5.12 q173 joint life annuity . . . . . . . . . . . . . . . . . . . . . . . . 133
5.13 q193 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
5.14 q261
r
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
5.15 q262
n
1
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
5.16 q263
n
2
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
5.17 q265 1
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
5.18 q266
n
1
r
,
n
2
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
5.19 q268 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
5.20 q269
n
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
5.21 q270
0
c
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
5.22 q271 1
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
5.23 q272 \ ar [T (rj)] . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
5.24 q273 Co [T (rj) , T (rj)] . . . . . . . . . . . . . . . . . . . . . . 138
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495 of 674
CONTENTS CONTENTS
5.25 q278
n
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
5.26 q279
n
2
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
5.27 q280
n
r
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
5.28 q281 1
r:n
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
5.29 q282 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
www.actuary88.com c Yufeng Guo v
496 of 674
Preface
This is Guos problem solving dictionary for Exam MLC for Multiple Life
Function only (Actuarial Mathematics Chapter 9).
When I was studying for the actuarial exam, I often bought a primary study
manual and secondary study manual (in case that the primary manual didnt
explain some topics clearly enough). Even having two study guides, however,
I often found that some topics were still not explained clearly in either the
manual. Then I thought how nice it would be if I could just buy a small study
manual that covered only some of the most dicult topics.
Multiple Life Function is one of the most dicult topics in Exam MLC. If you
already have a study manual, chances are that some concepts are still murky
in your head. Hence this study manual. This study guide oers crystal
clear explanation to many core concepts on multiple life function and
provides challenging problems.
This study guide doesnt Common Shock. Why not? Because Professor Jim
Daniel has published a ne essay on Common Shock as a free download (and as
an ad for his MLC seminar). You dont need to read another essay from me. Just
go to his website http://www.actuarialseminars.com/Misc/Shock.pdf and
download the wonderful pdf le. By the way, consider Professor Jim Daniels
seminar especially if your employer foots the bill.
This study guide has many heavy duty integrals. To better explain how I
evaluate dicult integrals, I also included a chapter on integrals.
At the end of this book is my solution to Sample MLC problems about
Multiple Life Function.
This book is the exclusive property of Yufeng Guo. Redistribution of this
book in any form without the authors permission is prohibited.
Please report any errors to yufeng_guo@msn.com.
vii
498 of 674
2.1. 1
:
, 2
:
CHAPTER 2. MULTIPLE LIVES 1
:
, 2
:
Problem 2.7.
You are given the following information about a 10year term insurance on
two independent lives and :
If either life dies within the 10 year term, 1 is immediately paid on the
rst death if it is the life of ; 05 is immediately paid on the rst death
if it is the life of
If the second death occurs within the remainder of the 10 years term, twice
the amount previously paid is paid immediately upon the second death
() = 004
() = 006
= 008
Calculate the net single premium of this insurance policy.
Solution.
payment NSP
1 upon s death if dies rst in 10yr term 1
:10
2 upon s death if dies second in the remainder of 10yr term 2 2
:10
05 upon s death if dies rst in 10yr term 05 1
:10
1 upon s death if dies second in the remainder of 10yr term 2
:10
1
:10
=
1
10(
+)
=
004
004 + 008
1
10(004+008)
= 0232 94
1
:10
=
1
10(
+)
=
004
004 + 006 + 008
1
10(004+006+008)
=
0185 49
2
:10
= 1
:10
1
:10
= 0232 94 0185 49 = 0047 45
1
:10
=
1
10(
+)
=
006
006 + 008
1
10(006+008)
= 0322 89
1
:10
=
1
10(
+)
=
006
004 + 006 + 008
1
10(004+006+008)
=
0278 23
2
:10
= 1
:10
1
:10
= 0322 89 0278 23 = 0044 66
Total NSP:
1
:10
+ 2 2
:10
+ 05 1
:10
+ 2
:10
= 0185 49 + 2 (0044 66) +
05 (0278 23) + 0047 45 = 0461 38
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521 of 674
CHAPTER 2. MULTIPLE LIVES 1
Y :
, 2
Y :
2.1. 1
Y :
, 2
Y :
Comments.
Notation. 1
r:10
= 1
r:10
, 2
r:10
= 2
r:10
.
Dont be scared by the phrase "in the remainder of the 10 year term." If
j is the 2nd death within the 10year term, then j automatically dies in the
remainder of the 10 year term (because r needs to die rst within 10 years.)
Finally, since 1
r:10
+ 2
r:10
= 1
r:10
, the total NSP can be simplied
as:
1
r:10
+2 2
r:10
+0.5 1
r:10
+ 2
r:10
= 2 2
r:10
+0.5 1
r:10
+1
r:10
= 2 (0.044 66) + 0.5 (0.278 23) + 0.232 94 = 0.461 38
Problem 2.8.
You are given the following information about a whole life insurance on two
independent lives r and j:
It pays 1 immediately upon rs death if r dies before j
It pays 2 immediately upon rs death if r dies after j
It pays 3 immediately upon js death if j dies before r
It pays 4 immediately upon js death if j dies after r
j
r
(t) = 0.02
j
(t) = 0.03
c = 0.04
Calculate the net single premium of this insurance policy.
Solution.
payment NSP
1 upon rs death if r dies rst 1
r
2 upon rs death if r dies second 2 2
r
3 upon js death if j dies rst 3 1
r
4 upon js death if j dies second 4 2
r
r
=
j
r
j
r
+ c
=
0.02
0.02 + 0.04
= 0.333 33
1
r
=
j
r
j
r
+ j
+ c
=
0.02
0.02 + 0.03 + 0.04
= 0.222 22
2
r
=
r
1
r
= 0.333 33 0.222 22 = 0.111 11
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522 of 674
MLC Problem Solving Dictionary: Poisson
Process ONLY
Yufeng Guo
November 28, 2010
639 of 674
Contents
1 Old SOA/CAS problems 1
2 Recent SOA problems 5
3 Original problems 7
4 Bernoulli Process (not in Daniels study note but good to know) 19
5 FAQ about the Daniels study note 25
iii
641 of 674
Preface
This is Guos problem solving dictionary for Exam MLC for Poisson process
only (Daniel study note).
This book is the exclusive property of Yufeng Guo. Redistribution of this
book in any form without the authors permission is prohibited.
Please report any errors to yufeng_guo@msn.com.
v
643 of 674
CHAPTER 3. ORIGINAL PROBLEMS
1(t
: = 1, 2, 3) =
3
0.2
(0.561 80) +
2
0.2
(0.337 08) +
1
0.2
(0.101 12 ) = 12.
303 4
The expected total hunting time, given that he has been hunting for 3 hours
is:
3 + 12. 303 4 = 15. 303 4
Problem 3.3.
Customers arrive at a bank according to a Poisson process with ` = 2
customers per hour. Calculate the probability that 4 customers arrives between
8 a.m. and 10 a.m. and the third customer arrives between 9 : 20 a.m. and
9 : 30 a.m..
Solution.
Set 8 a.m. as time zero. Lets use minutes to measure time. Consider the
interval (0, 120), the time between 8 a.m. and 10 a.m..
Let t represent a time point between 9 : 20 a.m. and 9 : 30 a.m.. So
t (80, 90).
4 Customers arrive during (0, 120) and the 3rd customer arrives during
(80, 90). This means:
2 customers arrive during (0, t). Probability: 1 [ (t) = 2] = c
(`t)
2
2!
1 (the third) customer arrives during (t, t +dt). Prob: 1 [ (dt) = 1] =
c
()
(`dt)
1
1!
= `dtc
()
`dt
1 (the 4th) customer arrives during (t, 120). Prob: 1 [ (120 t) = 1] =
c
(120)
`(120 t)
1!
Total probability: c
(`t)
2
2!
`dtc
(120)
`(120 t)
1!
= c
120
`
4
t
2
(120 t)
2
dt
where ` =
2
60
=
1
30
per minute (2 per hour)
Next, we add up the above probability for any t (80, 90):
R
90
80
c
120
`
4
t
2
(120 t)
2
dt =
`
4
c
120
2
R
90
80
t
2
(120 t) dt
`
4
c
120
2
=
1
30
4
c
120
1
30
2
=
1
30
4
c
4
2
R
90
80
r
2
(120 r) dr =
R
90
80
120r
2
r
3
dr =
40r
3
1
4
r
4
90
80
= 40
90
3
80
3
1
4
90
4
80
4
= 2517 500
www.actuary88.com c Yufeng Guo 15
659 of 674
CHAPTER 3. ORIGINAL PROBLEMS
`
4
c
120
2
R
90
80
t
2
(120 t) dt =
1
30
4
c
4
2
2517 500 =
1007
648
c
4
= 2.
846 27 10
2
If you want to use an hour as the unit time, then ` = 2
Consider the interval (0, 2), the time between 8 a.m. and 10 a.m..
Let t represent a time point between 9 : 20 a.m. and 9 : 30 a.m.. So
t
1
20
60
=
4
3
, 1
30
60
=
3
2
.
4 Customers arrive during (0, 2) and the 3rd customer arrives during
4
3
,
3
2
.
This means:
2 customers arrive during (0, t). Probability: 1 [ (t) = 2] = c
(`t)
2
2!
1 (the third) customer arrives during (t, t +dt). Prob: 1 [ (dt) = 1] =
c
()
(`dt)
1
1!
= `dtc
()
`dt
1 (the 4th) customer arrives during (t +dt, 2) (t, 2). Prob: 1 [ (2 t) = 1] =
c
(2)
`(2 t)
1!
Total probability: c
(`t)
2
2!
`dt c
(2)
`(2 t)
1!
= c
2
`
4
t
2
(2 t)
2
dt
Next, we add up the above probability for any t
4
3
,
3
2
:
R
32
43
c
2
`
4
t
2
(2 t)
2
dt =
`
4
c
2
2
R
32
43
t
2
(2 t) dt =
2
4
c
2(2)
2
R
32
43
t
2
(2 t) dt =
1007
648
c
4
= 2. 846 27 10
2
Problem 3.4.
Customers arrive at a bank according to a Poisson process with a constant
`. Calculate the conditional probability that given 4 customers arrives between
8 a.m. and 10 a.m., the third customer arrives between 9 : 20 a.m. and 9 : 30
a.m..
Solution.
Set 8 a.m. as time zero. Lets use an hour as the unit. Consider the interval
(0, 2), the time between 8 a.m. and 10 a.m..
= 4 customers arrive during the interval (0, 2).
1 = 3rd customers arrive during the interval
4
3
,
3
2
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