MLC Study Notes 2012 Syllabus

Probability Theory Review

Distribution ( ) ( ) Mean Variance ( ) Shortcuts

{ } ( )
Bernoulli ( )
( ) ( )( )

Binomial ( ) ( ) ( )

( )
Uniform on [ ]
( )
Discrete Uniform

Exponential ( )

Summations Probability Definitions Law of Total Probability & Bayes Theorem Laws of Variance/Covar and Conditional Mean & Variance
( )

[ ] ( )
( )( ) ( ) ( )
[ ] [( ) ] [ ] [ ] ( [ ]) ( ) ( ) ( )
( ) ( ) ( ) ( )
[ ( )] ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )
( ) ( [ ])
( ) [( )( )] ( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) ( [ ]) ( [ ])
( ) ( ) [ ( )] ( )
( )

Financial Mathematics Review

Equivalent expressions Double the force of interest Annuities Increasing/Decreasing Annuities

( ) ( )
( ) ( ) ( )

( ) ( ) ( )
( ) ( ) ( )

1
MLC Study Notes 2012 Syllabus
Description Function notation Actuarial Notation Life Table Notation Force of Mortality Notation Continuous Moments Discrete Moments
T: Future lifetime of (x) ( ) [ ( )]
( ) = complete expectation of life
[ ( )]
K: # of completed future [ ( )] [ ( ) ] ( ) [ ( )] [ ( ) ] ( )
( ) ( ) [ ( )]
years by (x)

Total future lifetime

between ages x and x+n

( ) ( )
( ) ( )
( )
( )
( ) ( ) ( ) ( )
Survivor Function = Prob ( )
[ ( ) ] ( )
(x) lives t years ( )
( ) ( ) [ ( ) ]
( ) ( )

=
( )
Note:

( ) ( ) ( )
Probability density ( )
function ( ) ( )
Note: ( )

Prob (x) dies within t ( ) ( )

years ( ) ( ) ( ) ( )
( )
(Cumulative Distribution ( ) ( )
Function)

( ) ( )
( ) ( )
Prob (x) survives t years, ( ) ( )
but dies in next u years ( ) ( )

( )
{
( ) ( )
( )
Force of mortality
( ) ( ) Notes:
and
( ) ( )

Number of deaths of (x)

in t years

Recursive/Combining
( )
formulas ( )

2
MLC Study Notes 2012 Syllabus
Description Function notation Actuarial Notation Life Table Notation Force of Mortality Notation Continuous Moments Discrete Moments
[ ( )]
Constant Force of ( ) ( )
( ) [ ( )]
Mortality ( )
( )
( )

( )
( ) [ ( )]
( ) ( )
Uniform Distribution ( ) ( )
( ) [ ( )] [ ( )] [ ( )]
(DML) Median future lifetime for (x):
( )
( ) ( ) ( )

[ ( )] [ ( )] [ ( )]
Beta (MDML) ( ) ( ) ( ) ( )
[ ( )]
( ) ( )

( )
Gompertz ( )

( )
Makeham ( )

Weibull

Central Death Rate

percentile of
Ex: 90th percentile of T means
survival time

Fraction of the year

lived by those who die ( )
this year
Fractional Ages: ( ) ( ) ( )
Constant Force ( ) ( ) ( )

Fractional Ages: ( )
UDD
( )
[slowest killer of
CF,UDD,B] ( ) [ ( )] [ ( )]
( )

3
MLC Study Notes 2012 Syllabus
( ) Remember: Relationships
Pain graph If
Insurance Type Z = PV of benefit ( ) ( ) =0
CF UDD Annuities Premiums Reserves
on t-Z axis


( )
( )

( )
( ) ( )
Whole Life
( )

( ) ( )( )
Note:
n-year Pure
Endowment { ( )
( )
(Discounts for interest
( )
and mortality) (Bernoulli)


( )
n-year Term { ( )
( )
Continuous Insurance Payable at the moment of Death

n-year Deferred ( )
{ ( )
Whole
( )
( )
( )
n-year ( ) ( ( )
) ( )
{ ( )
Endowment Ins. ( ) ( )
( ) ( )
( ) ( )

( )
n-year Deferred
{ ( )
m-year term ( )
( )

( )
( ) ( ) ( )
Whole Life ( )
( )
increasing ( ) ( ) ( ) , since
( ) ( )
continuously ( ) ( )
( ) ( )
( )

n-year Term ( )
( )
increasing { ( ) ( )
continuously ( ) ( ) ( ) ( )

Whole Life
( ) ( )
decreasing {
continuously
Probabilities/
Percentiles for Ex: 90th percentile of ( ) 1) Solve for t: 2) Calculate ( ) 3) If CF with , then ( ) ( ) ( )

continuous means ( ) 1) Solve for t: 2) Substitute t in

insurances

4
MLC Study Notes 2012 Syllabus

( ) ( ) ( ) Relationships

Insurance Pain graph If

Z = PV of benefit ( ) ( ) =0
CF UDD/DML Annuities Premiums Reserves
Type on t-Z axis

( ) Under E.P.:
Whole Life
( )

n-year Pure ( )
{ ( )
Endowment ( )

( )
n-year Term { ( ( ) )
Discrete Insurance payable at the end-of-the-year of death

( )

n-year ( )
Deferred { ( )
Whole ( )
n-year ( ) ( )
Deferred { ( )
m-year term ( ( ) )

n-year

( ( ) )
Endowment {
( ) ( )
Ins.

( )

Whole Life
( ) ( ) ( ) ( )
increasing ( ) ( ) ( )
( ( ) )
continuously ( )
( )
[( ) ( )]
( ) ( ) ( )
n-year Term
increasing ( ) ( )
continuously ( ) ( ) ( ) ( )

Whole Life
( ) ( ) ( )
decreasing ( ) ( )
( ) ( ) ( )
continuously
( ) ( ) ( )
m-thly mthly insurance relationships are ( )
( ) ( ) ( )
insurance consistent with annual relationships ( )

5
MLC Study Notes 2012 Syllabus
Relationships
Y = PV of annuity and If Premiums
Annuity Type ( ) ( ) CF UDD/DML Insurance Reserves
Pain graph of Y on T =0
( )
( ) Most Important Identity
Use m.i.i. and (m.i.i):
Under E.P.:
Whole Life annuity
( )

(twin: Whole Life) ( ) ( ) ( ) ( )
( ) = Prob SBP is insufficient
Remember:

{ ( )
( )
n-year Temporary ( )
No payments during the first n years ( )
(twin: n-year Use m.i.i.
Endowment Ins.) ( ) ( ) ( )

{
n-year Deferred ( )
Use m.i.i.
Whole Life
Continuous Annuities

n-year Certain and { ( ) ( )

Use m.i.i.
Life Thereafter
First n years are certain

Deferred Temporary
{ Use m.i.i.
Ann.

Whole Life Ann. ( ) ( )

Increasing ( ) ( ) [ ( ) ]
Continuously ( )

Term Ann. Increasing

( )
Continuously

Term Ann. Decreasing ( ) ( )

Continuously ( ) ( )

Simultaneous
transformations on
interest and force-of-
interest {


Probabilities/ ( ) ( ) ( ) ( ) ( )
Ex: 90th percentile of means 1) Solve for t: 2) Calculate 3) If CF with , then ( )
Percentiles for
continuous annuities ( ) 1) Solve for t: 2) Substitute t in

6
 MLC Study Notes 2012 Syllabus
( ) ( ) Relationships
Y = PV of annuity and If
Annuity Type ( ) ( ) =0
CF UDD/DML Insurance Premiums Reserves
Pain graph of Y on T

( )
WL Annuity Due
(Twin: Whole ( ) Use m.i.i.
insurance) ( )

n-year { ( )

Temporary
Annuity Due ( ) ( ) ( ) Use m.i.i.
(Twin: n-yr

endowment
Annuities Due

insurance)

n-year Deferred
{
WL Annuity Due

n-year Certain
and WL after {
Due
Increasing Ann.
Due & ( ) ( ) ( ) ( ) ( ) ( )
Immediate
Inc/Dec Temp ( ) ( )
( ) ( ) ( ) ( ) ( )
Annuity Due (( ) )

( )
WL Annuity Switch to Annuity-Due
Immediate ( ) and Use m.i.i
( ) ( ) ( )
Annuities Immediate

n-year ( )
Temporary Switch to Annuity-Due
{ ( )
Annuity ( ) and Use m.i.i

Immediate
n-year Def. WL n-year Certain and WL after
{ {
Ann. Imm Immediate
n-year Certain Woolhouse [ ( ) ( )]
{
& WL after Imm UDD ( )
( )
( ) ( )
( ) ( ) ( ) ( ) ( ) ( )
( )
( )
( )
( ) ( ) ( ) ( )
Annuities ( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) ( ) ( )
( ) ( )
payable m-thly ( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) ( ) ( ( ))
( )
( )

( ) ( )( )
( ) ( ) ( ) ( )
( )
( )

7
 MLC Study Notes 2012 Syllabus
Relationships
Description Pain graph ( ) ( ) P under EP Variance under EP Insurance Annuities Reserves

( )
( ) ( ) ( ) ( ) Under E.P.:
Fully Continuous ( ) ( )
( ) ( ) ( )
Whole Life Ins. ( )
Continuous Premiums

( ) ( ) CF:
( ) ( ) CF:
CF: ( )

Fully Continuous ( )
( )
n-year ( ) ( ) ( ) ( )
( ) ( )
Endowment Ins. ( )
CF:
Fully Continuous Fully Continuous
Fully Continuous
n-pay n-year Deferred Whole
n-year Term Ins. ( ) Under EP: ( ) Under EP: ( )
Whole Life Ins. Life Annuity

Fully Discrete Whole ( ) ( ) ( ) ( )
( ) ( )
Life Ins. ( ) ( ) ( )
CF:

Discrete Premiums

Fully Discrete ( )
( )
n-year ( )

Endowment Ins. ( )

CF:
Fully Discrete Fully Discrete
Fully Discrete
n-pay n-year Deferred Whole
n-year Term Ins. ( )
Whole Life Ins. Life Annuity

Relative Variance of Loss at issue =
General & EP: EP: EP: ( )
( )
Equivalence Principle Benefit Prem = Net Prem EP: ( ) ( )
( )
Accumulated Cost of
Insurance (per survivor) ( )

Semi-continuous ( )

( ) ( )
True Fractional ( )
Premiums
( ) ( ) ( ) ( ) UDD:
( )
( ) ( ) (
( )
) ( ) ( )
( ) ( ) ( ) ( ) ( ) ( )
Gross Premiums
Gross premium ( ) ( ) ( )
Claim/Settlement Expense at t, %-of-premium exp., per policy exp.
Probabilities/

Percentiles for Ex: 90th percentile of means ( ) 1) Solve for t: 2) Solve for : 3) If CF with , then ( ) ( ) ( ) ( )
Premiums
Premium Per Policy ( )
( )

8
 MLC Study Notes 2012 Syllabus
Relationships
under EP
Description Graph ( ) ( ) ( ) Variance under EP Insurance Annuities Premiums

( ) ( ) ( )
( ) ( )
Fully ( )
Continuous [ ( ) ( )] ----------------------------
( ) ( )
Whole Life ( ) ( ) ( ) ( ) ( )
Insurance [ ] ( )
( ) ( )

( ) ( )

( )
Reserves

Fully
Continuous
n-year ---- ---- ---- ---- ---- ----
Endowment
Insurance
( )

Fully
Continuous ( ) [ ( ) ( )] ( )
( ) Fully
n-year Term n-pay WL ( ) Continuous
Insurance ( ) ( ) aka Limited Pay WL [ ] n-year deferred
( ) WL annuity ( )

Three Premium Dividing up Reserves

( )( )( )
Principle

Reserve

Creation, ( )
Ex. FDWL ( )

mthly Reserves,
Properties, Theorems, etc. of Reserves

( ) ( ) ( )
and Refund of ( ( ) ) ( ) ( ) ( )
Reserve
( ) ( ) ( )
Reserves and ( ) ( ) ( )
Gross Premiums ( ) ( ) ( )
Claim/Settlement Expense at t, %-of-premium exp., per policy exp.

( )( ) ( ) Premiums =>
Reserve ( ) Beginning of Year
Semi-Continuous Reserves Interim Benefit Reserves
Recursion ( )( ) ( ) Benefits =>
Moment of Death ( )( )
( )

( )( ) ( ) ( )
Gain by Source ( )( ) ( ) ( ) ( ) Thieles DiffEQ [ ] ( )
( )( ( )
) ( ( ) ( )
)(
( )
) [ [ ] ( )]
( [ ] )
Hattendorfs
Theorem [ ] ( ) [ ]
.

9
 MLC Study Notes 2012 Syllabus
1. Single life mortality 2. Multiple decrements
6. Continuing care
i.e. Insurance/annuity e.g.. Double indemnity Pension model 3. Permanent disability 4. Disability income 5. Multiple lives Common shock model
retirement
model model
1
0 1 0 1 1
0 1 3
1
0 3 0 3
Multi-state 0 1 0
2 2 2 2 2 2
Models 0: Alive
0: Both Alive 0: Both Alive 0: Independent
(examples) 1: Dead
0: Alive 0: Healthy 0: Healthy
1: Husband Alive
1: Disabled 1: Husband Alive 1: Temporary Help
1: Accidental Death 1: Sick 2: Wife Alive
2: Wife Alive 2: Permanent Help
2: Death from Other 2: Dead 2: Dead 3: Both Dead
3: Both Dead 3: Gone

1. Probabilities of transitions are independent of length of time in state (Markov property).

Properties &
2. Probability of two or more transitions in time is ( ), where is ( ) small.
Assumptions ( )

of Markov 3. is a differentiable function of for all . ( )

{
Chains 4.
( ) ( )
( )
Probabilities ( ) ( )
( )( ) ( )( ) ( )( )
Continuous annuity and insurance Kolmogorovs forward equations & Eulers Approximation
Discrete annuity
Insurances, ( () () () ( ) ( ) ()
) ( )
Annuities,

Kolmogorov,
and
() ( )
Reserves ( ) () ()
( ) ( ( ) ()
)

( )
EPV of Discrete Insurance: ( ) ( ) ( ) ( )
Probability Formulae: Life table formulae: ( )
Corresponding Notations:
( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) ( ) ( ) [ ] ( )

( )
( )
( )

Multiple ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) () ( )
Decrements ( ) ( ) ( ) ( ) ( ) ( ) Fractional Ages: ( ) ( ) ( ) ( )
( )
( ) ( ) ( ) ( ) ( )
( ) ( )
[ ]
( ) ( )
( )
( ) ( )
( )
( ) ( )
(
( )
)
( ) ( ) ( ( )) ( ) ( ) [ ( ) ] ( )
{ ( )
( )

( ) ( ) ( ) ( )
Continuous ( ) ( ) ( )
( )
( ) ( )

( ) ( )
[ ] ( )

( )
Insurance ( ) ( ) ( ) ( ) ( )
( )
( )
( ) ( ) ( ) ( )
and
( )
( ) ( ) ( ) ( )
( ) ( ) ( ) ( )
Associated [ ] ( ) ( ) ( ) ( )
( ) ( )
( ( )
)
Single ( )
Decrement ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )
If , paid n-years, and is constant, ( ) ( ) { ( ) ( ) ( )
(
( )
)
Tables then ( )

( ) ( ) ( ) ( ) ( ) ( )
Recursive: %-of-premium expense, per policy expense, = cash surrender value [ ( ) ( )]
Accumulating a unit of gross premium:
( ) ( )
Asset Shares [ ( ) ] ( )
( ) ( )
( ) ( )

10
 MLC Study Notes 2012 Syllabus
Type Model Probability Notation Function Notation Independent Lives CF UDD/Beta Moments Ins/Ann/Prem/Rsv
( )
Multiple ( ) ( ) [ ]
1

Lives: 0 ( )
3

2
Joint Life 0: Both Alive { ( ) ( ) ( ) ( ) *
1: Husband Alive ( )
(work with 2: Wife Alive
ps) 3: Both Dead ( )
( )
( ) [ ] ( )

Independent Lives: [ ] [ ]
Corresponding Notations:
Last ( ) ( )( )
Survivor ( ) [ ]
( ) ( ) ( )
[ ] [ ] ( )
(work with Exactly One: ( )
qs)

[ ] ( )( ) [ ] ( )
[ ] {

pays 1 at the death of (x) if (y) is still alive

( )
Contingent ( ( )
) ( ) ( )
{
Survival ( ) ( )

{
( )
( )

1
Common Shock Special:
0 3 [( ) ( )]
2 ( )
0: Both Alive [( ) ( )]
1: Husband Alive
2: Wife Alive ( ) [( ) ( )]
3: Both Dead

Annuity that pays to (y) after (x) dies Annuity pays to (y) after (x) dies or n years (whichever Ins. that pays on first death of (x) and (y) if w/in n years
Rever- Annuity pays to (y) after (x) dies or n years (whichever last)
first)
sionary [ ] ( ) Ins. that pays on last death of (x) and (y) if w/in n years

Interest ( ) ( ) ( ) ( ) ( ) ( ) ( )
( ) ( ) ( )
Rate Risk ( ) ( ) ( ) ( )

Salary ( ) ( ) ( ) Profit Signature: Replacement Ratio = R

( ) ( )
Scale ( ) ( ) ( )

Profit ( ) ( )
( ) Net Present Value = Expected PV of ( )
Measures Internal Rate of Return Future Profits
Discounted payback period
( )
( )( )
UL: FV= ( )( ) [ ( )( )]
( )( ) ( )( )
PV+P-E- ( ) ( )
( )( )( )
M+I ( ) ( )( ( ) ( )
)
( ) ( )
( ) ( )
( )( )

11