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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table

ACTL 1101 Introduction to Actuarial Studies


Michael Sherris
c University of New South Wales (2015)

School of Risk and Actuarial Studies, UNSW Business School
ARC Centre of Excellence in Population Ageing Research
m.sherris@unsw.edu.au

Week 3:
Survival Models and the Life Table

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table

1 Survival models

2 The life table

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

1 Survival models

2 The life table

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Survival Models

Probability model to calculate


the probability that a life will survive
expected payments for insurance and annuity contracts
Two important tools:
survival function
hazard rate

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Survival Function

Continuous random variable X that denotes the age-at-death


Cumulative distribution function of X is denoted by FX (x)
Probability density function of X is denoted by fX (x) = FX0 (x)

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Survival Function for a New-Born

The survival function for a new-born is


s(x) = Pr (X > x) = 1 FX (x),

FX (0) = 0, so that s(0) = 1

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x 0

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Survival Function for a Life Aged x


Conditional probability - Probability that two events A and B
occur is equal to the probability that one occurs times the
probability that the other occurs given that one has already
occurred
Pr (A and B) = Pr (A) Pr (B|A)
= Pr (B) Pr (A|B)
where Pr (A|B) is the probability that A occurs given that B
has already occurred
Pr (B|A) =
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Pr (A and B)
Pr (A)

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Survival Function for a Life Aged x (Contd)

Given that life is aged x, the probability that the life will
survive to age z (z > x) is:
Pr (X > z|X > x) =
=
=

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Pr (X > z and X > x)


Pr (X > x)
Pr (X > z)
Pr (X > x)
s(z)
s(x)

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Survival Function for a Life Aged x - Example

x
Example 3.1: If s (x) = 1 100
for 0 x < 100. Determine the
probability that a life aged 20 will survive to age 65.

Solution:
The required probability is
1
s (65)
=
s (20)
1

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65
100
20
100

= 0.4375

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Death Probability for a Life Aged x

The probability that a life aged x will die between the ages of y
and z (z > y > x) is:
Pr (y < X z|X > x) =
=
=

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Pr (y < X z and X > x)


Pr (X > x)
Pr (X > y ) Pr (X > z)
Pr (X > x)
s(y ) s(z)
s(x)

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Future Lifetime of a Life Aged x

A life aged x is denoted by the symbol (x)


The future lifetime random variable is denoted by T (x)
Remember that X denotes the age-at-death, so we have:
T (x) = X x

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

International Actuarial Notation

Death probabilities:
t qx

= Pr [(x) will die within t years]


= Pr [T (x) t]

t0

In particular, when t = 1
qx

= Pr [(x) will die within a year]


= Pr [T (x) 1]

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

International Actuarial Notation (Contd)


Survival probabilities:
t px

= Pr [(x) will survive at least t years]


= Pr [T (x) > t]
= 1 t qx

In particular, when t = 1
px

= Pr [(x) will survive at least a year]


= Pr [T (x) > 1]
= 1 qx

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

International Actuarial Notation (Contd)

Link actuarial notation to survival function:


x p0
t px

t qx

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= s(x)

x+t p0
x p0

=1

s(x + t)
s(x)

s(x + t)
s(x)

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

International Actuarial Notation (Contd)


The probability that a life aged x survives t years and dies in
the next u years:
h
i
q
=
Pr
t
<
T
(x)

t
+
u
t|u x
s(x + t) s(x + t + u)
s (x)
 


s(x + t)
s(x + t + u)
1
= 1
s (x)
s (x)
= t+u qx t qx
=

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t px

t+u px

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

International Actuarial Notation - Example

Example 3.2: If s (x) = 1


x 2
100

for 0 x 100, calculate 5 p35 .

Solution:
The required probability is
5 p35

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1
s (40)
=
=
s (35)
1


40 2
100

35 2
100

= 0.85207

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Hazard Rate
A key feature of survival models is the hazard rate or failure
rate function
In actuarial studies and demography, for a survival function,
the hazard rate or failure rate is referred to as the force of
mortality
Definition:
(x) =
=
=
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d
dx
s (x)
s (x)
s 0 (x)
s (x)
fX (x)
1 FX (x)

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Hazard Rate: Actuarial Natation

The force of mortality is denoted by x


x is a conditional probability density function - the probability
density of the age-at-death (X ) given that the life has survived
to age x

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Hazard Rate: Mathematics

By definition (y ) =

d
dy
s(y )
s(y )

d
= dy
ln s (y ), so that

(y ) dy = d ln s (y )
Integrating from x to x + t we have


Z x+t
Z x+t
s (x + t)

(y ) dy =
d ln s (y ) = ln
s (x)
x
x

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Hazard Rate: Mathematics (Contd)

Solving the equation, we have:


s (x + t)
s (x)

Z


(y ) dy

= exp
x

t px

and

Z


(y ) dy

s(x) = exp
0

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x+t

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Hazard Rate: Mathematics (Contd)

Cumulative distribution function of the age-at-death X :


FX (x) = 1 s(x)
Z
= 1 exp


(y ) dy

Probability density function of the age-at-death X :


Z x

d
FX (x) = (x) exp
(y ) dy
fX (x) =
dx
0
= (x) s(x)

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Hazard Rate: Mathematics (Contd)

Cumulative distribution function of future lifetime T (x):



Z x+t
s(x + t)
(y ) dy
= 1 exp
FT (x) (t) = 1
s(x)
x
Probability density function of the age-at-death X :
Z x+t

d
fT (x) (t) =
FT (x) (t) = (x + t) exp
(y ) dy
dt
x
= (x + t) t px

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
Survival models

Hazard Rate - Example

Example 3.3: Evaluate

R
0

(x) s(x)dx.

Solution:
(x) s(x) = fX (x) is the probability density function, so the
integral is equal to 1
This is the probability that a new-born will die between the
ages of 0 and

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

1 Survival models

2 The life table

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

The Life Table

The life table is a table showing for each age x:


qx - the probability of death between age x and x + 1
dx - the (expected) number of deaths aged x last birthday
lx - the (expected) number alive at exact age x

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

The Life Table (Contd)


Lx - the number living aged between x and x + 1 (x last
birthday)
Lx is also the (expected) number of years lived by the lx lives
aged x over the year from age x to x + 1
Lx is a measure of the number of lives exposed-to-risk of dying
aged x last birthday
Any life in this group who dies will be classified as a death at
age x
Lx is often calculated as follows:
Z 1
lx + lx+1
Lx =
lx+t dt
2
0

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

The Life Table (Contd)

Tx - the number of lives aged x or greater


Tx is also the (expected) total future lifetime of the lx lives
aged x

P
Tx =
Lx+t
t=0

The average number of years lived by the lx lives is

Tx
lx

ex - the average future lifetime of a life aged x


ex is also referred to as the complete residual life expectancy

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Examples of Life Tables: IA64-70


IA64-70 Table for Australian Insured Lives
This table is based on the mortality of whole-of-life (without
term riders) policies for mainly male lives from data
contributed by 14 Life Offices
The data used was for the period January 1964 to December
1970
The table was published by The Institute of Actuaries of
Australia
The table shows only the ultimate mortality rates - lives with
policies for more than 2 years

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Examples of Life Tables: A90-92

A90-92 Table for Australian Males


Population mortality table based on all male lives in Australia
in the 1991 census and male deaths over the period 1990 to
1992
The death rates are determined as the average deaths of males
between 1990-92 divided by the 1991 census figures for each
age.
These rates are smoothed using an actuarial technique called
graduation (covered in later actuarial courses)

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Construction of Life Table

Insurance company, population census and deaths data provide


the information to calculate qx
Table starts with a radix which is the base for the table
For the population mortality table (A90-92 males) the radix is
l0 = 1, 000, 000
In the case of the IA64-70 table the radix chosen was
l10 = 1, 000, 000

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Construction of Life Table (Contd)

Proceed as follows:
dx

= qx lx

lx+1 = lx dx
lx + lx+1
Lx =
2
Tx = Tx+1 + Lx
Tx
ex =
lx

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Construction of Life Table (Contd)

lx values are interpreted as the number of lives exact age x


surviving from the initial l0 lives
Consider a group of l0 newborns then the probability that any
one of these will survive to age x is s(x)
Assuming lives are independent then the number of survivors
to age x (denoted by V ) has a binomial distribution with
n = l0 and p = s(x) since each life can either survive to age x
with probability p or die before age x with probability (1 p):
V Binomial(l0 , s(x))

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Construction of Life Table (Contd)

Expected number of lives out of the initial l0 lives who survive


to exact age x will be given by the expected value of the
binomial distribution, i.e.:
lx = E (V ) = l0 s(x)
The variance of the number of lives surviving to age x will be
Var (V ) = l0 s(x) [1 s (x)]

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Construction of Life Table (Contd)

Survival probabilities are calculated as follows:


t px

=
=
=

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s (x + t)
s (x)
l0 s (x + t)
l0 s (x)
lx+t
lx

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Using the Life Table - Example

Example 3.4: Use the IA64-70 Life Table to calculate

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the expected age at death of a life aged 20

the probability that a life aged 20 will survive to age 40

the probability that a life aged 20 will die within the next 10
years

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Using the Life Table - Solution


Solution to Example 3.4:
1

20 + e20 = 20 + 53.71 = 73. 71.

The required probability is:


20 p20

The required probability is:


10 q20

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l40
966752
=
= . 974 81
l20
991729

l20 l30
l20
991729 978901
=
991729
= 1. 293 5 102
=

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Laws of Mortality

Simple models have been proposed for the hazard rate for human
lives - referred to as laws of mortality
De Moivres Law
Gompertz Law
Makehams Law

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Laws of Mortality: De Moivres Law

In 1725, Abraham de Moivre assumed the number alive


according to the life table decreased in arithmetical progression
lx is a linear function of x
s (x) = 1

x
,

0x <

Hazard rate (force of mortality) is given by


(x) =

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s 0 (x)
1
=
,
s (x)
x

0x <

Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Laws of Mortality: Gompertz Law

In 1825, Benjamin Gompertz hypothesized that the force of


mortality increases with age in geometrical progression
Hazard rate
(x) = Bc x ,
where B > 0, c > 1, and x 0

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Laws of Mortality: Gompertz Law (Contd)

Chance of death increases more and more rapidly with age


Z x

s (x) = exp
(y ) dy
Z0 x

y
Bc dy
= exp
0


B y x
= exp
c
ln c
0


B
x
= exp
(c 1)
ln c

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Fitting Gompertz Law to Life Table Data

Parameters of the Gompertz curve are B and c


Least squares selects the numerical values of the parameters by
minimizing the sum of the squared differences between the
Law values and the actual values

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Fitting Gompertz Law to Life Table Data (Contd)

Denote actual values for s(x) from the life table by s a (x)
Over the age range xl to xu select values of B and c that
minimize the function
2

xu 
X
B
a
x
(c 1)
s (x) exp
ln c
x=x
l

Use a spreadsheet such as Excel and the Solver, or other


software packages such as R, MATLAB, SAS, etc.

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Fitting Gompertz Law to Life Table Data (Contd)

Australian IA64-70 Life Table over the ages 10 to 110


Gompertz curve using least squares was given by
(x) = 0.000046 (1.100837)x
Up to around age 80 the Gompertz curve provides a
reasonable fit to the IA64-70 data

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Laws of Mortality: Makehams Law

In 1867, Makeham suggested an addition of a constant to


account for accidents and infections as well as an increase in
hazard geometrically with age
Hazard rate
(x) = A + Bc x ,
where A > B, B > 0, c > 1, and x 0

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Fitting Makehams Law to Life Table Data

IA64-70 Life Table over the ages 10 to 110


Best fit Makeham curve was
(x) = 0.0003225 + 0.000031 (1.1066413)x

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Summary

This week
Survival models, including survival function, hazard rate, and
international actuarial notation
The life table, including each variable in the life table, how to
construct and interpret a life table, and three laws of mortality
Read Chapter 3 of the textbook
Do exercises in Chapter 3

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Introduction to Actuarial Studies Week 3: Survival Models and the Life Table
The life table

Summary - Next Week

Next week
Attend tutorials, prepare to discuss exercises from Chapter 3
and Tutorial Exercises Week 4
Read Chapter 4 (just to get the main ideas and identify new
topics)
Basic financial mathematics

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