Dr Sanjeewa Perera

Department of Mathematics
University of Colombo





FM 2002 ACTUARIAL
MATHEMATICS I
1
FM 2002 ACTUARIAL
MATHEMATICS I
2
Introduction
The premium payment part of the insurance
contract is examined by developing techniques for
understanding what happens when premiums are
paid monthly or annually instead of just when the
insurance is issued. In the non-random setting a
sequence of equal payments made at equal
intervals in time was referred to as an annuity.
Here interest centers on annuities in which the
payments are made (or received) only as long as
the insured survives.
FM 2002 ACTUARIAL
MATHEMATICS I
3
Annuity Certain
Payments are made for a nonrandom period of
time.
Present value of annuity-immediate (Ordinary
annuity): Payments are made end of the period



Present value of annuity-due: Payments are made
beginning of the period
FM 2002 ACTUARIAL
MATHEMATICS I
4
1
1
n
n
j
n
j
v
a v
i
=

= =

1
1
1 1
1
n n
n
j
n
j
v v
a v
v d

=

= = =

Contingent Annuities
Payments are made for a random time interval.

The previous formulas (annuity certain) need to
be adapted to the case of contingent annuities.
FM 2002 ACTUARIAL
MATHEMATICS I
5
Life Annuity Due
(x) wishes to buy a life insurance policy.
Then (x) will pay a premium at the beginning of
each year until (x) dies.
A life annuity due for (x).
Consider the case in which the payment amount is
1.
The premiums are only paid annually the term of
this life annuity depends only on the curtate life of
(x).
FM 2002 ACTUARIAL
MATHEMATICS I
6
Life Annuity Due
There will be a total of K(x) + 1 payments.
The actuarial present value of the payments is:




Consider Life Annuity Immediate





FM 2002 ACTUARIAL
MATHEMATICS I
7
( ) 1
[ ]
x
K x
a E a
+
=
( ) 1
( ) 1
1 1
[ ]
K x
x
x
K x
A v
a E a E
d d
+
+
(
= = =
(

1 ( )
( )
1 1
[ ]
K x
x
x
K x
v A v
a E a E
i i

(
= = =
(

Whole life annuity-due








FM 2002 ACTUARIAL
MATHEMATICS I
8
( ) 1 ( ) 1
0
|
( ) 1 ( ) 1
0
[ ] ( )
=
x
K x K x
k
k x k x x k
K x K x
k
a E a a P K k
a q a p q

+ +
=

+
+ +
=
= = =
=

1
( ) 1
:
0 0 0
[ ]

k k
x k x
K x
x
k k k
k
a E a E v v p A

+
= = =
(
= = = =
(


The Mathematical Association of America offers
the following alternative to members aged 60. You
can pay the annual dues and subscription rate of
$90, or you can become a life member for a single
fee of $675. Life members are entitled to all the
benefits of ordinary members, including
subscriptions. Should one become a life member?

To answer this question, assume that the interest
rate is 6% . The actuarial present value of a life
annuity due of $90 per year is
FM 2002 ACTUARIAL
MATHEMATICS I
9
( ) 1
60
1 1
[ ]
1
1
=90 1003.8
1
x x
x
K x
A A
a E a
d v
A
v
+

= = =

FM 2002 ACTUARIAL
MATHEMATICS I
10
What is the probability that you will get at least
your money's worth if you become a life member?
What assumptions have you made?

To get your money's worth, you must live long
enough so that the present value of the annual
dues you would pay if you were not a life member
will exceed $ 675.
This gives a condition that K(60) must satisfy if
you are to get your moneys worth.
FM 2002 ACTUARIAL
MATHEMATICS I
11
Temporary Life Annuity
Pension benefits often take the form of a life
annuity immediate. Some times one has the option
of receiving a higher benefit, but only for a fixed
number of years or until death occurs, whichever
comes first. Such an annuity is called a temporary
life annuity.

FM 2002 ACTUARIAL
MATHEMATICS I
12
Suppose a life annuity immediate pays a
benefit of 1 each year for n years or until (x)
dies, whichever comes first.
Life annuity immediate, payments are made
at the end of each year, provided the
annuitant is alive.





FM 2002 ACTUARIAL
MATHEMATICS I
13
( )^( 1)
:
0
K x n
j
x n
j
a E v

=
(
=
(

FM 2002 ACTUARIAL
MATHEMATICS I
14
Relationship between endowment life
insurance

Show that


FM 2002 ACTUARIAL
MATHEMATICS I
15
: : x n x n
A a da =
: x n
A
Annuity Payable Continuously
This kind of annuity does not exist in the 'real
world.
But serves as a useful connecting bridge between
certain types of discrete annuities.
Suppose that the rate at which the benefit is paid
is constant and is 1 per unit time.
time interval (t, t + dt) the amount paid is dt and
the present value of this amount is exp(-o t) dt.
Present Value
FM 2002 ACTUARIAL
MATHEMATICS I
16
0
1 exp( )
exp( )
n
n
n
a t dt
o
o
o

= =
}
Actuarial Present value
FM 2002 ACTUARIAL
MATHEMATICS I
17
0
1 exp( )
exp( )
n
n
n
a t dt
o
o
o

= =
}
( )
1 exp( ( ))
x
T x
T x
a E a E
o
o

(
(
= =
(


Remarks
Formulas, cases (like whole life, endowment, etc),
expressions, relationships and concepts (like
temporary life annuity) developed under discrete life
annuity can be modified according to continuous
case too.
FM 2002 ACTUARIAL
MATHEMATICS I
18