Actuarial Mathematics of Life Insurance
How can calculate premium in life insurance?
The ratemaking of life insurance policies (i.e. calculation premiums) is depending upon
three elements, they are:
i) Mortality rates: These rates mean probabilities of death and survival of life
insurance policies. They can be calculated by Mortality table.
ii) Interest (i.e. interest rate that by which the premiums are invested)
iii) Sum insured (i.e. the face value of the policy)
Using the foregoing elements, the fundamental relationship between the net
premium and the future benefits for any type of life insurance policies may be
expressed on the purchase date as follows:
Present value of net premiums = present value of future benefits (on purchase date)
What is the mortality table?
The answer:
The mortality table is "a statistical table by means of which the probabilities of
death and survival may be measred at any given age for a group of individual".
As shown from the following table
Commissioners 1958 standard Ordinary CSO table of mortabity
Age
Number of living Number of dying Probability of survival
Probability of death (q x)
Male Femal (Lx) (dx) (Px)
0 10000000 70800 0.00708 0.99292
1 9929200 17475 0.00176 0.99824
2 9911725 15066 0.00152 0.99848
3 9896659 14449 0.00146 0.99854
4 9882210 13835 0.0014 0.9986
5 9868375 13322 0.00135 0.99865
6 9855053 12812 0.0013 0.9987
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1- Construction The Mortality Table
After study of mortabity table and its contents the following question may be raised:
How can we construct the mortabity table?
The answer:
The mortality table, may be constructed according to the following steps:
Determining the radix of the table.
Using the foregoing relationships, in particular, the relationships qx = 1 – px
and px = 1 – qx for calcutating probabilities of death and survival
Finding number of living for all ages using the relationships Lx + 1 = Lx .
Px
, Lx + 2 = Lx + 1 . Px+1 …. and so on
Finding number of dying for all ages using the relationships dx = Lx – Lx+1
, dx+1 = Lx+1 – Lx+2 …. and so on
2- Expectation of life
What is the expectation of life?
Expectation of life at age (x) is meant," the average number of year to be lived in
future by persons now aged(x)"
Expectation of life is classified into two types, they are:
i)Curtate expectation of life (ex):
For calculating the curtate expectation (ex) we assume that:
1) We have a group of individuals (Lx) aged (x) as indicated in the following
diagram.
Lx L x +1 L x +2 L w -1 Lw
X X+1 X+2 W-1 w =100
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2) All deaths that occur for the individuals in any year take place at the beginning
of that year (i.e. fractional parts of years are neglected).
L x 1 L x 2 L x 3 ............ L w 1
ex
Lx
ex is The curtate expectation with negligence of the fractional parts of years.
ii)The complete expectation of life ( e x )
Given that deaths that occur for individuals in any year take place at the end of year,
Hence
L x L x 1 ............ L w 1
ex
Lx
the complete expectation of life will equal the arithmatic average of formulas
1 1 1 w x 1
ex
2
ex Lw t
2 L x t 1
A Notice:The complete expectation of life takes into consideration the fractional
parts of years. Moreover, it is useful in making comparison between the various
of mortality tables.
Solved problems
Example 1:
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Given that mortality rates of population in TANTA over the ages 30,31,32,33,34 and
35 as follows:
q30 = 0.0155 , q31 = 0.0156 , q32 = 0.0158
q33 = 0.0159 , q34 = 0.0160 , q35 = 0.0162
Required: Construction of a mortality table in TANTA, if you know L30 = 1000,000
individuals
solution
A life table may be constructed according to the following steps.
First step: Finding survival rates by relationship Px = 1 – qx , P x = 1 – qx
P30 = 1 – 0.0155 = 0.9845 and so on for the next ages as indicated in the following
table:
x Lx dx qx Px
30 1000,000 0.0155 0.9845
31 984500 0.0156 0.9844
32 0.0158 09842
33 0.0159 0.9841
34 0.0160 0.9840
35 0.0162 0.9838
Second step: Finding number of living (Lx) by relationship Lx+1 = Lx . Px
L31 = L30 . P30
For next age as indicated int the following table:
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x Lx dx qx Px
30 1000,000 0.0155 0.9845
31 984500 0.0156 0.9844
32 696142 0.0158 09842
33 953829 0.0159 0.9841
34 938663 0.0160 0.9840
35 923645 0.0162 0.9838
Third step: Finding number of dying (dx) by relationship dx = Lx – Lx-1
D30 = L30 – L31 = 1000,000 – 984500 = 15500 and so on for next ages as indicated
in the following table
x Lx dx qx Px
30 1000,000 15500 0.0155 0.9845
31 984500 15358 0.0156 0.9844
32 696142 15313 0.0158 09842
33 953829 15166 0.0159 0.9841
34 938663 15018 0.0160 0.9840
35 923645 14963 0.0162 0.9838
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x Lx dx qx Px
40 370
41 99630
42 99231
43 454
44 98350 0.9950
Solution
Using the relashinships that have already studied, we may complete the previous
table, age by age, as follows:
1) age 40:
Lx = Lx+1 + dx
L40 = L41 + d40 = 99630 + 370 = 100,000
d 40 370
Also q40 = 0.00370
L 40 100000
So, P40 = 1 – q 40 = 1 – 0.00370
2-) age 41:
d41 = L41 – L42 = 99630 – 99231 = 399
d 41 399
q41 = 0.00400
L 41 99630
P41 = 1 – 0.00400 = 0.99600
L 43 = L 42 – d42 = 99231 – 427 = 98804
3) age 42:
d43 = L44 + d43 = 98350 + 454 = 98804
q42 = L41 – L43 = 99231 – 98804 = 427
d 42 427
q42 = 0.00430
L 42 99231
4)age 43 and 44:
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d 43 454
q43 = 0.0046
L 43 98804
P43 = 1 – 0.0046 = 0.99540
q44 = 1 – 0.995 = 0.005
d44 = L44 x q44 = 98350 x 0.005 = 492
Hence, the mortality table will be completed as follows:
x Lx dx qx Px
40 1000000 370 0.0037 0.99630
41 99630 399 0.0040 0.9960
42 99231 427 0.0043 0.9957
43 98804 454 0.0046 0.9954
44 98350 492 0.0050 0.9950
A notice: The preceding table may be constructed by other method by
completing Lx first, then dx, then qx and px .. try by yourself.
Example 3: Calculate both the curtate expectation of life and the complete
expectation of life for the ages 95 – 100 in the following table:
x Lx ex
ex
95 59
96 35
97 12
98 7
99 3
100 1
101 0
Solution
The curtate expection of life (ex) can be constrocted by the following relationship:
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L x L x 1 ............ L w 1
ex
Lw
Then, the complete expectation of life can be constructed by the relationship
1
ex ex as shown below:
2
L 96 L 97 L 98 L 98 L 99 L100 L101
e 95
L 95
35 12 7 3 1 0
0.9830
59
e 95 0.5 0.9830 1.4830
Also :
L97 L98 L98 L99 L100 L101
e96
L96
12 7 3 1 0
0.6571
35
e95 0.5 0.6571 1.1571
and so on for the next ages (97 – 100), then the table will become as follows:
x Lx ex
ex
95 59 0.9830 1.4830
96 35 0.6571 1.1571
97 12 0.61661 1.4166
98 7 0.5714 1.0714
99 3 0.3333 0.8333
100 1 0 0.500
101 0 - -
3- Probabilities of Death and Survival for a Person
3.1 Probability of death (q x):
d x L x L x 1
qx
Lx Lx
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L x 1 3.2 Probability of survival (Px):
Px
Lx
L x 1
Px
Lx
As we have already seen ,the heart of the morality table is, qx, that is called
probability of death. This probability has a vital role in calulating the net premium
for any life insurance policy where, The premium equals the probability (qx or px)
multiplied by sum insured.
3.3-Probability of death for a person aged (x) over
n year(nqx)
The symbol nqx means the probability that a person aged (x) will die before reaching
age (x+n). In other words, the probability that a person will die over n years. That is
between age (x) and age (x+n) as indicated in following diagram
n
Lx dx L x +1 d x+1
X X+1 x+n-1 x+n
d x d x 1 d x 2 ............ d x n 1 L x L x n
Consquently, n q (6.10)
x
Lx Lx
6.5.2-Probability of survival for a person aged (x) n years (npx)
The npx means the probability that a person aged (x) will live to reach age (x+n).
That is out of the Lx persons alive at age (x) there are Lx+n survivors at age (x+n) as
indicated in the preceding diagram. Hence,
L xn
nPx
Lx (6.11)
6.5.3- Probability of survival of a person n years
and his death over 1 year (n/qx)
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The sympol n/qx means the probability that a person aged (x) will live to reach age
(x+n), then die between age (x+n) and age (x+n+1) as indicated in the following
diagram.
n
d x+n
Lx L x +1 L x+n-1 L x+n L x+n+1
X X+1 x+n-1 x+n x+n+1
Hence,
L x n L x n 1 (6.12)
n
/qx
Lx
or
d xn
n
/qx (6.12) repeated
Lx
2.5.4-probability of survival of a person n year and
his death over m years (n / mq x )
This symbol n/mqx means the probability that a person aged (x) will live to reach age
(x+n) then die between age (x + n) and age (x + n + m) as indicated in the following
diagram:
m
Lx L x +1 L x+n-1 L x+n Lx + n + m
X X+1 x+n-1 x+n x+n+m
Hence
d x n d x n 1 d x n 2 ...... d x n m 1
n m
/ qx (6.13)
Lx
or
L xn L xnm
n m
/ qx = npx – n+mpx ( 6.13) repeated
Lx
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In conclusion by contemplating the preceding notation, it should be noted that:
a) The letter P with the proper subscripts is used to denote the probability
of a person living a given period
b) The letter q is used to denote the probability of a person dying during a
given period
Solved problem
Example 4
Interpret in words the following symbols, then calculate their values using the
American life table (1958 CSO)
a) q25 , P60
b) 5P30 , 7q27
c) 6/q35 , 7/5q25
solution
a) q25: means a probability that a person aged (25) will die over one year. That is
between age (25) and age (26)
L 25 L 26 9575636 9557155
q 25 0.00193
L 25 9575636
or
d 25 18981
q 25 0.00193
L 25 9575636
P60: means a probability that a person aged (60) will live to reach age (61)
L 61 7542106
P60 0.9797
L 60 7698698
b)5p30: means a probability that a person aged (30) will live to reach age (35)
L 35 9373807
5
P60 0.9888
L 30 9480358
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7
q25: means probability that a person aged (25) will die over seven years. That
is between age 25 and 1ge 32
L 25 L 32 9575636 9439447
7
q 25 0.0142
L 25 9575636
c)6/q35: means a probability that a person aged (35) will live to reach age (41), then
die between age (41) and age (42):
L 41 L 42 9208737 9173375
6 / q 35 0.0037
L 35 9373807
or
d 41 35362
6 / q 35 0.0037
L 35 9373807
7 5
/ q25: means a probability that a person aged (25) will live to reach age (32) then
die between age (32) and age (37)
L 32 L 37 9439447 9325594
7
/ 5 q 25 0.01189
L 25 9575636
or
d 32 d 33 d 34 d 35 d 36
7
/ 5 q 25
L 25
21239 21850 22551 23528 24685
9575636
0.01189
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