Survival Models - Background

Actuaries use analysis of past experience to try to predict future experience. For example, future mortality rates are unknown and an estimate of these rates is needed so that the cost of providing insurance cover (such as a lump sum on the insured persons death) can, in turn, be estimated. The basis of such calculations is typically the estimate of qx, the probability that a life currently aged exactly x will die within 1 year. In order to estimate this figure we examine a relevant population of lives age x last birthday, and perform separate estimates for each year of age. If we were able to observe all of the lives from their xth birthday until the earlier of death or their next birthday, we could calculate a simple binomial estimate of the probability of death aged x last birthday based on this data by looking at the proportion who died (that x = d / N ). This is easily is, dividing the number of deaths by the original population: q derived using the method of maximum likelihood estimation. The real life circumstances are a little different. We are still only interested in single years of age, such as those aged x last birthday. But our data comes from an insurance company, where policyholders are able to join and exit the observation at any time, not just on birthdays and deaths. Policies can be bought and surrendered at any time. So here we have a number of people who are not in our investigation for the whole year. Should someone who is present for only half a year count the same in the denominator of our estimate as someone who is present for the whole year? Instead of a simple count of the number of people in the population, we set the denominator to be the (Initial) Exposed to Risk Ex: a figure which allows for the part-year contributions as well as the whole years. The model is therefore extended to allow for people joining and leaving the investigation. If we concentrate only on lives aged x last birthday then life i, say, contributes from the date they are first observed with age x last birthday until the date they are no longer observed with age x last birthday. A complication arises with people who die age x last birthday. Consider if our population was made up of one person whom we observed from his xth birthday until his death, 6 months later. In the original experiment, our estimate of qx would be d/N = 1/1 = 1, since our whole population has died. If we only count the half year for this person, our estimate could be d/Ex = 1/0.5=2 so we estimate the value of a probability to be greater than 1! Instead, if someone dies in our population aged x last birthday, we must count the remaining time until the next birthday in the exposed to risk. This way our estimate here will again be: d/Ex = 1/1 = 1

x = This gives us an estimate of: q

where

dx Ex

dx is the count of all of the lives in the population who were observed to die aged x last birthday, and Ex is the sum of the part years during which each life in the population was observed to be aged x last birthday, including that part of the year between death and the following birthday if the life was observed to die aged x last
birthday A fuller derivation of this result is included as an appendix to this document