Principles of Actuarial Science

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414 Ohduqlqj Remhfwlyhv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
415 Hduo| Ruljlqv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
41514 Suredelolw| 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
41515 Pruwdolw| dqg Frpsrxqg Lqwhuhvw 1 1 1 1 1 1 1 1 1
41516 Ghyhorsphqw ri Lqvxudqfh dqg Shqvlrqv 1 1 1 1 1 1
416 Edvlf Sulqflsohv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
41614 Ghwhuplqlvwlf dqg Vwrfkdvwlf Prghov 1 1 1 1 1 1 1
41615 Suredelolw| dqg Vwdwlvwlfv 1 1 1 1 1 1 1 1 1 1 1 1 1
41616 Ulvn Srrolqj 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
41617 Odz ri Odujh Qxpehuv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
41618 Lqwhuhvw udwhv dqg hfrqrplfv 1 1 1 1 1 1 1 1 1 1 1 1
41619 Ulvn dqg Hfrqrplfv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
4161: Ilqdqfldo Sulqflsohv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
4161; Dfwxduldo Prghoolqj Sulqflsohv 1 1 1 1 1 1 1 1 1 1 1
4161< Ilqdqfldo Vhfxulw| V|vwhpv dqg Ulvn Pdqdjhphqw
417 Frpsxwlqj Wrrov 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
418 Frqfoxvlrq 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
419 Ixuwkhu uhdglqj 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
41: Vroxwlrqv wr H{huflvhv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
5 Jdphv ri Fkdqfh
514 Ohduqlqj Remhfwlyhv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
515 Suredelolw| 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
51514 Shupxwdwlrqv dqg Frpelqdwlrqv 1 1 1 1 1 1 1 1 1 1
51515 Suredelolw| 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
51516 Udqgrp yduldeohv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
51517 Suredelolw| ghqvlw| ixqfwlrqv 1 1 1 1 1 1 1 1 1 1 1 1
51518 H{shfwdwlrq 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
516 Vrph suredelolw| ghqvlwlhv riwhq xvhg lq dfwxduldo vflhqfh
51614 Glvfuhwh 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
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614 Ohduqlqj Remhfwlyhv 1 1 1 1 1 1 1 1 1
615 Vxuylydo Prghov dqg Kd}dug Udwhv
61514 Vxuylydo ixqfwlrq 1 1 1 1 1 1
61515 Dfwxduldo qrwdwlrq 1 1 1 1 1
61516 Kd}dug udwhv 1 1 1 1 1 1 1 1 1
616 Wkh Olih Wdeoh 1 1 1 1 1 1 1 1 1 1 1
617 Odzv ri Pruwdolw| 1 1 1 1 1 1 1 1 1 1
61714 GhPrlyuh*v Odz 1 1 1 1 1 1 1
61715 Jrpshuw} Odz 1 1 1 1 1 1 1
61716 Pdnhkdp*v Odz 1 1 1 1 1 1 1
618 Frqfoxvlrq 1 1 1 1 1 1 1 1 1 1 1 1 1 1
619 Vroxwlrqv wr H{huflvhv 1 1 1 1 1 1 1 1
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714 Ohduqlqj Remhfwlyhv 1 1 1 1 1 1 1 1 1 1 1
715 Frpsrxqg Lqwhuhvw 1 1 1 1 1 1 1 1 1 1 1
71514 Lqwurgxfwlrq 1 1 1 1 1 1 1 1 1 1 1
71515 Ghqlwlrqv 1 1 1 1 1 1 1 1 1 1 1 1
71516 Hhfwlyh lqwhuhvw udwhv 1 1 1 1 1
71517 Uhfxuuhqfh uhodwlrqv 1 1 1 1 1 1
71518 Dfwxduldo qrwdwlrq 1 1 1 1 1 1 1
71519 Ohdvhv dqg ]hur0Frxsrq Erqgv
7151: Frqwlqxrxv Frpsrxqglqj 1 1 1
716 Olih Dqqxlwlhv 1 1 1 1 1 1 1 1 1 1 1 1 1 1
71614 Dfwxduldo Qrwdwlrq 1 1 1 1 1 1 1
717 Lqyhvwphqw Pdqdjhphqw 1 1 1 1 1 1 1 1
71714 Dvvhw fodvvhv 1 1 1 1 1 1 1 1 1 1 1
71715 Dvvhw Doorfdwlrq 1 1 1 1 1 1 1 1
71716 W|shv ri Ixqg Pdqdjhu 1 1 1 1
718 Frqfoxvlrqv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
719 Vroxwlrqv wr H{huflvhv 1 1 1 1 1 1 1 1 1 1
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814 Ohduqlqj Remhfwlyhv 1 1 1 1 1 1 1 1 1 1 1 1 1 1
815 Ulvn dqg H{shfwhg Xwlolw| 1 1 1 1 1 1 1 1 1 1
81514 Lqwurgxfwlrq 1 1 1 1 1 1 1 1 1 1 1 1 1 1
81515 H{shfwhg ydoxhv 1 1 1 1 1 1 1 1 1 1 1 1
81516 H{shfwhg Xwlolw| 1 1 1 1 1 1 1 1 1 1 1
816 Wlph Suhihuhqfh 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
817 Pdujlqdo Xwlolw| dqg Sulflqj +pruh dgydqfhg,
818 Suhplxp Sulqflsohv +pruh dgydqfhg, 1 1 1 1 1
81814 Sulqflsoh ri htxlydohqfh 1 1 1 1 1 1 1 1
81815 Hvvfkhu wudqvirup 1 1 1 1 1 1 1 1 1 1 1
819 Frqfoxvlrqv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
81: Vroxwlrqv wr H{huflvhv 1 1 1 1 1 1 1 1 1 1 1 1 1
9 Dfwxduldo Pdqdjhphqw dqg Dffrxqwlqj
914 Ohduqlqj Remhfwlyhv 1 1 1 1 1 1 1 1 1 1 1 1
915 Surw dqg Vxusoxv 1 1 1 1 1 1 1 1 1 1 1 1
916 Edodqfh Vkhhw 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
91614 Dfwxduldo ydoxdwlrq 1 1 1 1 1 1 1 1
91615 Vroyhqf| 1 1 1 1 1 1 1 1 1 1 1 1 1 1
917 Frqfoxvlrqv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
918 Vroxwlrqv wr H{huflvhv 1 1 1 1 1 1 1 1 1 1 1
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:14 Ohduqlqj Remhfwlyhv 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
:15 Dfwxduldo Pdqdjhphqw ri Ilqdqfldo Vhfxulw| V|vwhpv
:16 Srrolqj ri Ulvn dqg Glyhuvlfdwlrq 1 1 1 1 1 1 1 1 1 1
:17 Ulvn Fodvvlfdwlrq 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
:18 Udwlqj dqg H{shulhqfh Dgmxvwphqwv 1 1 1 1 1 1 1 1 1 1
:19 Prudo Kd}dug dqg Dgyhuvh vhohfwlrq 1 1 1 1 1 1 1 1 1 1
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;15 Klvwrulfdo Ghyhorsphqw 1 1 1 1 1 1 1 1 1 1
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;1515 Vflhqwlf Olih Lqvxudqfh 1 1 1 1 1
;1516 Hduo| Ghyhorsphqwv lq Dxvwudold
;16 Olih Lqvxudqfh Surgxfwv 1 1 1 1 1 1 1 1 1
;1614 Zkroh ri olih 1 1 1 1 1 1 1 1 1 1 1 1
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7;
Ghprjudsk|
IA64-70 Ultimate (mainly male insured lives)

Age
qx
dx
lx
Lx
10 0.00034
340.0
999999
999829
11 0.00035
349.9
999659
999484
12 0.00038
379.7
999309
999119
13 0.00043
429.5
998929
998715
14 0.00053
529.2
998500
998235
15 0.00070
698.6
997971
997621
16 0.00094
937.4
997272
996803
17 0.00123 1225.5
996335
995722
18 0.00156 1552.4
995109
994333
19 0.00184 1828.1
993557
992643
20 0.00192 1904.1
991729
990777
21 0.00181 1791.6
989824
988929
22 0.00160 1580.9
988033
987242
23 0.00138 1361.3
986452
985771
24 0.00118 1162.4
985091
984510
25 0.00107 1052.8
983928
983402
26 0.00103 1012.4
982876
982369
27 0.00101
991.7
981863
981367
28 0.00100
980.9
980872
980381
29 0.00101
989.7
979891
979396
30 0.00103 1008.3
978901
978397
31 0.00105 1026.8
977893
977379
32 0.00109 1064.8
976866
976333
33 0.00113 1102.7
975801
975250
34 0.00117 1140.4
974698
974128
35 0.00123 1197.5
973558
972959
36 0.00130 1264.1
972361
971729
37 0.00139 1349.8
971097
970422
38 0.00149 1444.9
969747
969024
39 0.00160 1549.3
968302
967527
40 0.00174 1682.1
966752
965911
41 0.00190 1833.6
965070
964154
42 0.00209 2013.2
963237
962230
43 0.00230 2210.8
961224
960118
44 0.00254 2435.9
959013
957795
45 0.00282 2697.5
956577
955228
46 0.00314 2995.2
953879
952382
47 0.00350 3328.1
950884
949220
48 0.00391 3704.9
947556
945704
49 0.00437 4124.6
943851
941789
50 0.00489 4595.3
939726
937429
Iljxuh 4
Tx
e0x
63241421
63.24
62241592
62.26
61242108
61.28
60242989
60.31
59244274
59.33
58246039
58.36
57248418
57.41
56251615
56.46
55255893
55.53
54261560
54.61
53268917
53.71
52278140
52.82
51289212
51.91
50301969
50.99
49316198
50.06
48331688
49.12
47348286
48.17
46365917
47.22
45384550
46.27
44404169
45.32
43424773
44.36
42446376
43.41
41468997
42.45
40492663
41.50
39517413
40.54
38543285
39.59
37570326
38.64
36598597
37.69
35628176
36.74
34659152
35.79
33691624
34.85
32725713
33.91
31761559
32.97
30799329
32.04
29839211
31.11
28881416
30.19
27926188
29.28
26973807
28.37
26024587
27.46
25078883
26.57
24137094
25.69
Wkh Olih Wdeoh
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Age
qx
dx
lx
Lx
0
0.00814
8140.0
999999
1
0.00064
634.8
991859
2
0.00047
465.9
991224
3
0.00034
336.9
990758
4
0.00025
247.6
990421
5
0.00021
207.9
990174
6
0.00020
198.0
989966
7
0.00019
188.1
989768
8
0.00018
178.1
989580
9
0.00018
178.1
989402
10
0.00018
178.1
989224
11
0.00017
168.1
989046
12
0.00018
178.0
988877
13
0.00022
217.5
988699
14
0.00030
296.5
988482
15
0.00044
434.8
988185
16
0.00063
622.3
987751
17
0.00084
829.2
987128
18
0.00103
1015.9
986299
19
0.00117
1152.8
985283
20
0.00126
1240.0
984130
21
0.00130
1277.8
982890
22
0.00131
1285.9
981613
23
0.00130
1274.4
980327
24
0.00130
1272.8
979052
25
0.00130
1271.1
977780
26
0.00130
1269.5
976509
27
0.00130
1267.8
975239
28
0.00130
1266.2
973971
29
0.00130
1264.5
972705
30
0.00131
1272.6
971441
31
0.00132
1280.6
970168
32
0.00133
1288.6
968887
33
0.00135
1306.3
967599
34
0.00138
1333.5
966292
35
0.00142
1370.2
964959
36
0.00147
1416.5
963589
37
0.00152
1462.5
962172
38
0.00159
1527.5
960710
39
0.00167
1601.8
959182
40
0.00177
1694.9
957580
41
0.00188
1797.1
955885
42
0.00201
1917.7
954088
43
0.00217
2066.2
952171
44
0.00235
2232.7
950104
45
0.00256
2426.6
947872
46
0.00281
2656.7
945445
47
0.00309
2913.2
942788
48
0.00340
3195.6
939875
49
0.00377
3531.3
936680
50
0.00418
3900.6
933148
51
0.00464
4311.7
929248
52
0.00517
4781.9
924936
53
0.00577
5309.3
920154
54
0.00644
5891.6
914845
55
0.00720
6544.5
908953
56
0.00804
7255.4
902409
57
0.00897
8029.5
895154
58
0.01001
8880.1
887124
59
0.01115
9792.4
878244
60
0.01241
10777.5
868451
Iljxuh 5
Tx
995929
991542
990991
990590
990298
990070
989867
989674
989491
989313
989135
988962
988788
988591
988334
987968
987439
986714
985791
984707
983510
982252
980970
979690
978416
977144
975874
974605
973338
972073
970804
969528
968243
966946
965626
964274
962880
961441
959946
958381
956733
954987
953130
951138
948988
946658
944117
941332
938277
934914
931198
927092
922545
917500
911899
905681
898781
891139
882684
873348
863063
e0x
74319391
73323462
72331920
71340929
70350339
69360042
68369972
67380105
66390431
65400940
64411627
63422493
62433531
61444743
60456152
59467818
58479850
57492411
56505697
55519906
54535199
53551688
52569437
51588467
50608777
49630361
48653217
47677344
46702738
45729400
44757327
43786523
42816996
41848753
40881807
39916181
38951907
37989027
37027586
36067640
35109259
34152526
33197539
32244409
31293272
30344283
29397625
28453508
27512176
26573899
25638985
24707787
23780695
22858149
21940650
21028751
20123070
19224288
18333150
17450466
16577118
74.32
73.93
72.97
72.01
71.03
70.05
69.06
68.08
67.09
66.10
65.11
64.12
63.14
62.15
61.16
60.18
59.21
58.24
57.29
56.35
55.41
54.48
53.55
52.62
51.69
50.76
49.82
48.89
47.95
47.01
46.07
45.13
44.19
43.25
42.31
41.37
40.42
39.48
38.54
37.60
36.66
35.73
34.80
33.86
32.94
32.01
31.09
30.18
29.27
28.37
27.48
26.59
25.71
24.84
23.98
23.14
22.30
21.48
20.67
19.87
19.09
83
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IA64-70 Ultimate
Age
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
Interest rate
qx
0.00489
0.00547
0.00612
0.00685
0.00766
0.00856
0.00956
0.01067
0.01190
0.01327
0.01477
0.01643
0.01826
0.02027
0.02249
0.02491
0.02758
0.03049
0.03368
0.03716
0.04096
0.04511
0.04962
0.05452
0.05984
0.06561
0.07186
0.07861
0.08590
0.09376
0.10221
0.11129
0.12102
0.13144
0.14255
0.15440
0.16698
0.18033
0.19445
0.20934
0.22501
0.24145
0.25863
0.27655
0.29517
0.31445
0.33435
0.35481
0.37578
0.39719
0.41896
0.44101
0.46326
0.48563
0.50802
0.53036
0.55254
0.57449
0.59613
0.61738
0.63817
1.00000
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0.05
lx
999,999
995109.0
989665.8
983609.0
976871.3
969388.4
961090.5
951902.5
941745.7
930538.9
918190.6
904629.0
889765.9
873518.8
855812.6
836565.3
815726.5
793228.8
769043.2
743141.8
715526.7
686218.7
655263.4
622749.2
588796.9
553563.3
517244.0
480074.9
442336.2
404339.5
366428.6
328976.0
292364.2
256982.3
223204.6
191386.7
161836.6
134813.2
110502.3
89015.1
70380.7
54544.3
41374.6
30673.9
22191.0
15640.9
10722.6
7137.5
4605.1
2874.6
1732.8
1006.8
562.8
302.1
155.4
76.4
35.9
16.1
6.8
2.8
1.1
0.4
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1.00000
0.99511
0.98967
0.98361
0.97687
0.96939
0.96109
0.95190
0.94175
0.93054
0.91819
0.90463
0.88977
0.87352
0.85581
0.83657
0.81573
0.79323
0.76904
0.74314
0.71553
0.68622
0.65526
0.62275
0.58880
0.55356
0.51724
0.48008
0.44234
0.40434
0.36643
0.32898
0.29236
0.25698
0.22320
0.19139
0.16184
0.13481
0.11050
0.08902
0.07038
0.05454
0.04137
0.03067
0.02219
0.01564
0.01072
0.00714
0.00461
0.00287
0.00173
0.00101
0.00056
0.00030
0.00016
0.00008
0.00004
0.00002
0.00001
0.00000
0.00000
0.00000
PV
(1+I)^-k
1.00000 1.00000
0.95238 0.94772
0.90703 0.89766
0.86384 0.84968
0.82270 0.80368
0.78353 0.75954
0.74622 0.71718
0.71068 0.67650
0.67684 0.63741
0.64461 0.59983
0.61391 0.56369
0.58468 0.52892
0.55684 0.49546
0.53032 0.46325
0.50507 0.43224
0.48102 0.40240
0.45811 0.37369
0.43630 0.34608
0.41552 0.31955
0.39573 0.29409
0.37689 0.26967
0.35894 0.24631
0.34185 0.22400
0.32557 0.20275
0.31007 0.18257
0.29530 0.16347
0.28124 0.14547
0.26785 0.12859
0.25509 0.11284
0.24295 0.09823
0.23138 0.08478
0.22036 0.07249
0.20987 0.06136
0.19987 0.05136
0.19035 0.04249
0.18129 0.03470
0.17266 0.02794
0.16444 0.02217
0.15661 0.01731
0.14915 0.01328
0.14205 0.01000
0.13528 0.00738
0.12884 0.00533
0.12270 0.00376
0.11686 0.00259
0.11130 0.00174
0.10600 0.00114
0.10095 0.00072
0.09614 0.00044
0.09156 0.00026
0.08720 0.00015
0.08305 0.00008
0.07910 0.00004
0.07533 0.00002
0.07174 0.00001
0.06833 0.00001
0.06507 0.00000
0.06197 0.00000
0.05902 0.00000
0.05621 0.00000
0.05354 0.00000
0.05099 0.00000
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Income
Year 1
Year 2
Year 3
Year 4
Year 5
Premium
Interest
Expenses Claims
$18,335.58
$666.78 $5,000.00
$0.00
$18,335.58
$1,616.90
$0.00
$0.00
$18,335.58
$2,614.52
$0.00
$0.00
$18,335.58
$3,662.02
$0.00
$0.00
$18,335.58
$4,761.90
$0.00 $100,000.00
Liability
increase
Profit
$14,002.35
-$0.00
$19,952.47
$0.00
$20,950.10
-$0.00
$21,997.60
$0.00
-$76,902.52
$0.00
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433/ 4333/ dqg 43/333
Number
10.00
50.00
100.00
1,000.00
Standard
Variance of Average
Deviation of
Loss
Average Loss
9,900,000.00
3,146.43
1,980,000.00
1,407.12
990,000.00
994.99
99,000.00
314.64
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314
3
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Utility
Loss
Probability
Utility ln(1+W) ln(1+100000-W)
100,000
0.1
11.51
0.00
0
0.9
0.00
11.51
1.15
10.36
Expected Utility
Lq wkh wdeoh wkh uljkw kdqg froxpq vkrzv wkh h{shfwhg xwlolw| iru wkh orvv iru dq lq0
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Average
Utility
Loss
Probability Utility ln(1+W) ln(1+100000-W)
Loss 1
Loss 2
Loss 3
100,000
100,000
100,000
100,000.00
0.001
11.51
0.00
0
100,000
100,000
66,666.67
0.009
11.11
10.41
100,000
0
100,000
66,666.67
0.009
11.11
10.41
0
0
100,000
33,333.33
0.081
10.41
11.11
100,000
100,000
0
66,666.67
0.009
11.11
10.41
0
100,000
0
33,333.33
0.081
10.41
11.11
100,000
0
0
33,333.33
0.081
10.41
11.11
0
0
0
0.00
0.729
0.00
11.51
Expected
Utility
2.84
11.37
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State
Boom
Normal
Recession
Probability A
0.1
0.6
0.3
Expected value
1,500
1,000
500
500
1,000
1,500
1,000
1,000
1,000
(A-muA)*(C-muC) (B-muB)(C-muC)
0
0
0
0
0
0
900
1,100
1,000
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-1
-0.75
-0.5
-0.25
0
0.25
0.5
0.75
1
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0
3,125,000
6,250,000
9,375,000
12,500,000
15,625,000
18,750,000
21,875,000
25,000,000
Standard
Deviation
0.00
1767.77
2500.00
3061.86
3535.53
3952.85
4330.13
4677.07
5000.00
486
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Long Run Proportion on Each Discount Level
Poisson parameter
Discount level
0.1
0.2
0.3
Low
0.01447 0.05451 0.11317
Middle
0.09379 0.17139 0.22985
High
0.89174 0.77410 0.65698
0.4
0.18280
0.26941
0.54778
0.5
0.25676
0.29244
0.45080
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$100,000.00
Sum Insured
Age
qx
Death Risk
20
0.00192
192
25
0.00107
107
30
0.00103
103
35
0.00123
123
40
0.00174
174
45
0.00282
282
50
0.00489
489
55
0.00856
856
60
0.01477
1477
65
0.02491
2491
70
0.04096
4096
75
0.06561
6561
80
0.10221
10221
85
0.15440
15440
90
0.22501
22501
95
0.31445
31445
100
0.41896
41896
105
0.53036
53036
110
0.63817
63817
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rqh ri wzr olyhv duh dolyh1 D pduulhg frxsoh pljkw sxufkdvh dq dqqxlw| wkdw sd|v d
ixoo sd|phqw zkloh erwk duh dolyh dqg wkhq 93( ri wkh ixoo dqqxlw| sd|phqw diwhu wkh
uvw ghdwk ri wkh kxvedqg ru zlih/ zlwk wkh sd|phqwv fhdvlqj rq wkh ghdwk ri wkh odvw
vxuylyru1
494
;1618 Xqexqgohg Srolflhv

Lq wkh 4<;3*v wkh olih lqvxudqfh lqgxvwu| lq pdq| ghyhorshg frxqwulhv lqwurgxfhg qhz
irupv ri olih lqvxudqfh surgxfw1 Wkhvh surgxfwv duh riwhq uhihuuhg wr dv xqexqgohg
srolflhv vlqfh wkh ghdwk dqg glvdelolw| fryhu lv vhsdudwhg iurp wkh vdylqjv frpsrqhqw
ri wkh wudglwlrqdo srolflhv1 Wkhuh duh ydulrxv w|shv ri wkhvh surgxfwv dydlodeoh1
Suhplxpv fdq eh sdlg dv vlqjoh suhplxpv ru dv uhjxodu suhplxpv1 Vlqjoh
suhplxp frqwudfwv kdyh d vlqjoh xs iurqw suhplxp sd|phqw dw wkh frpphqfhphqw
ri wkh frqwudfw1 Uhjxodu suhplxp frqwudfwv sd| suhplxpv gxulqj wkh whup ri wkh
frqwudfw/ xvxdoo| lq dgydqfh1
Wkhuh duh wzr pdlq w|shv ri xqexqgohg frqwudfw lq Dxvwudold1 Wkh| duh wkh
lqyhvwphqw dffrxqw srolf| dqg wkh xqlw olqnhg srolf|1 Erwk wkhvh w|shv ri srolf|
vhsdudwh wkh vdylqjv dqg surwhfwlrq +lqvxudqfh, frpsrqhqwv ri wkh srolf|1
Wkhvh srolflhv rshudwh olnh edqn dffrxqwv1 Dq dffrxqw lv hvwdeolvkhg iru hdfk
srolf|1 Wkh suhplxpv duh sdlg lqwr wkh dffrxqw1 Wkh h{shqvhv duh fkdujhg wr wkh
dffrxqw lqfoxglqj d pruwdolw| fkdujh iru dq| olih lqvxudqfh fryhu dqg d fkdujh iru dq|
glvdelolw| fryhu1 Wkh edodqfh ri wkh dffrxqw diwhu h{shqvhv dqg pruwdolw| fkdujhv lv
lqyhvwhg e| wkh frpsdq|1
Iru dq lqyhvwphqw dffrxqw srolf|/ wkh olih lqvxudqfh frpsdq| lqyhvwv wkh df0
frxqw edodqfhv lqwr d srrohg ixqg1 Wkh doorfdwlrq ri wkh ixqg wr glhuhqw w|shv ri
dvvhwv lv ghwhuplqhg e| wkh olih lqvxudqfh frpsdq|1 Dw wkh hqg ri hdfk |hdu wkh lq0
yhvwphqw uhwxuq rq wkh srrohg ixqg lv fuhglwhg wr wkh lqglylgxdo srolflhv dv dq lqwhuhvw
fuhglw vlplodu wr krz lqwhuhvw lv fuhglwhg wr d edqn dffrxqw1 Wkh udwh ri lqwhuhvw dgghg
wr wkh dffrxqw lv wkh fuhglwlqj udwh1 Wkh lqyhvwphqw uhwxuq grhv qrw xvxdoo| lqfoxgh
xquhdolvhg jdlqv dqg orvvhv1 Wkh lqvxudqfh frpsdq| riwhq jxdudqwhhv dq lqwhuhvw udwh
wkdw zloo eh fuhglwhg iru wkh iroorzlqj |hdu1
Wkh ydoxh ri wkh srolf| lv wkh dprxqw lq wkh lqyhvwphqw dffrxqw1 Iru vrph
surgxfwv wkh lqlwldo h{shqvhv duh qrw doo fkdujhg wr wkh dffrxqw dw wkh vwduw ri wkh
srolf|1 Lqvwhdg wkh fkdujh iru wkhvh lv vsuhdg ryhu wkh whup ri wkh srolf|1 Lq wklv
fdvh dq| lqlwldo h{shqvhv wkdw kdyh qrw ehhq fkdujhg li wkh srolf| whuplqdwhv hduo|
zloo kdyh wr eh fkdujhg dv d oxps vxp dprxqw dw whuplqdwlrq1 Wklv fkdujh lv xvxdoo|
fdoohg d vxuuhqghu fkdujh vlqfh hduo| whuplqdwlrq ri dq lqvxudqfh srolf|/ zkhq wkhuh
lv d edodqfh lq wkh lqyhvwphqw dffrxqw/ lv fdoohg d vxuuhqghu1
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h{fhsw wkdw wkh edodqfh ri wkh dffrxqw lv ghwhuplqhg e| wkh ydoxh ri wkh lqyhvwphqwv1
Wkh suhplxp ohvv h{shqvhv dqg pruwdolw| fkdujhv lv xvhg wr sxufkdvh d qxpehu ri
xqlwv lq d srrohg ixqg1 Hdfk xqlw kdv d ydoxh htxdo wr wkh pdunhw ydoxh ri wkh dvvhwv/
lqfoxglqj xquhdolvhg jdlqv dqg orvvhv/ glylghg e| wkh qxpehu ri xqlwv rzqhg e| doo
ri wkh srolf|kroghuv1 Wkh srolf|kroghu vhohfwv wkh sursruwlrq ri wkhlu suhplxp wr
eh lqyhvwhg lq wkh glhuhqw dvvhw fodvvhv1 Wkxv wkh| fdq vhohfw wr kdyh wkhlu ixqgv
lqyhvwhg lq d pl{ ri glhuhqw w|shv ri dvvhwv 0 vxfk dv grphvwlf htxlwlhv/ lqwhuqdwlrqdo
htxlwlhv/ {hg lqwhuhvw dqg fdvk1 Dv wkh pdunhw ydoxh ri wkh dvvhwv fkdqjhv wkhq vr
grhv wkh ydoxh ri d xqlw lq wkh ixqg1 Li wkhvh srolflhv vxuuhqghu wkhq wkhuh pd| dovr eh
495
Olih Lqvxudqfh
d vxuuhqghu fkdujh li doo ri wkh lqlwldo h{shqvhv kdyh qrw ehhq fkdujhg wr wkh srolf|1
;1619 Xqlyhuvdo Olih
Lq Qruwk Dphulfd wkh xqexqgohg olih lqvxudqfh srolflhv duh fdoohg xqlyhuvdo olih lqvxu0
dqfh1 Wkhvh duh h{leoh srolflhv wkdw doorz wkh suhplxp dqg wkh olih lqvxudqfh fryhu
wr eh ydulhg e| wkh srolf|kroghu1 Wkh srolf|kroghu qrplqdwhv d suhplxp dqg dq
dprxqw ri lqvxudqfh fryhu1 Wkh suhplxp lv xvhg wr sd| h{shqvhv dqg wkh pruwdolw|
fkdujhv dqg lv wkhq lqyhvwhg lq d udqjh ri glhuhqw dvvhw fodvvhv dv vhohfwhg e| wkh
lqvxuhg1
;161: Glvdelolw|
Glvdelolw| srolflhv duh lvvxhg e| olih lqvxudqfh frpsdqlhv dv dgglwlrqdo ehqhwv zlwk
orqj whup lqvxudqfh srolflhv dqg dv vhsdudwh srolflhv1 Wkh dgglwlrqdo ehqhwv duh
fdoohg ulghu glvdelolw| ehqhwv ru WSG +Wrwdo dqg Shupdqhqw Glvdelolw|, ehqhwv1
Wkhvh ehqhwv sd| wkh vxp lqvxuhg li wkh olih lv wrwdoo| dqg shupdqhqwo| glvdeohg1
Wklv lv xvxdoo| d yhu| vhyhuh irup ri glvdelolw| zkhuh wkh lqvxuhg lv xqdeoh wr fduu|
rxw wkhlu rzq rffxsdwlrq ru dq| rffxsdwlrq1
Vhsdudwh glvdelolw| lqfrph srolflhv surylgh d shufhqwdjh ri wkh lqvxuhg*v lqfrph
lq wkh hyhqw ri glvdelolw| iru d {hg shulrg ru wr d {hg djh1 Wkh ghqlwlrq ri glvdelolw|
fdq ydu| iurp frpsdq| wr frpsdq|1 Wkh| fdq eh iru d glvdelolw| wkdw suhyhqwv wkh
lqvxuhg fduu|lqj rxw wkhlu rzq rffxsdwlrq ru wkhlu rzq ru dq| rffxsdwlrq1
;161; Fulwlfdo Looqhvv
Fulwlfdo looqhvv srolflhv sd| d ehqhw li wkh lqvxuhg vxhuv vshflhg looqhvvhv ru vxujlfdo
surfhgxuhv1 Iru h{dpsoh wkhvh srolflhv xvxdoo| fryhu fdqfhu/ khduw dwwdfn/ vwurnh/ dqg
frurqdu| e|sdvv1 Fulwlfdo looqhvv ehqhwv duh riwhq surylghg dorqj zlwk olih lqvxudqfh
fryhu1 Wkh ehqhw rq fulwlfdo looqhvv lv xvxdoo| wkh sd|phqw ri wkh vxp lqvxuhg wkdw
zrxog qrupdoo| eh sdlg rq ghdwk xqghu wkh lqvxudqfh srolf|1 Wkhuh duh dovr vwdqg
dorqh fulwlfdo looqhvv srolflhv1
H{huflvh ;14 Rewdlq wkh dssolfdwlrq irupv iru d whup lqvxudqfh srolf| dqg d vlfn0
qhvv lqvxudqfh srolf|1 \rx pd| qg vrph ri wklv lqirupdwlrq rq wkh ZZZ1 Zkdw
fryhudjh grhv wkh srolf| surylghB Zkdw lqirupdwlrq grhv wkh frpsdq| uhtxluh iru
wkh olih wr eh lqvxuhg +l1h1 khdowk/ rffxsdwlrq/ djh/ vh{/ vprnlqj vwdwxv hwf1,B Zkdw
suhplxp udwhv dsso| iru vwdqgdug olyhv 0 krz gr wkh| ydu| e| djh dqg vh{B
;161< Pdlq Ihdwxuhv ri Olih Lqvxudqfh Frqwudfwv
Olih lqvxudqfh frqwudfwv duh iru orqj whupv1 Wkh| lqyroyh d jxdudqwhh wr pdnh sd|0
phqwv pdq| |hduv lq wkh ixwxuh1 Zkroh ri olih lqvxudqfh dqg dqqxlwlhv lqyroyh sd|0
phqwv ghshqglqj rq ghdwk ru vxuylydo iru dv orqj dv wkh roghvw djh ri wkh olih wdeoh1
Iru h{dpsoh dq dqqxlw| frxog lqyroyh d frpplwphqw wr pdnh sd|phqwv iru ryhu 73
|hduv1 Whup lqvxudqfh frqwudfwv riwhq surylgh fryhu iru shulrgv dv orqj dv wzhqw| ru
wkluw| |hduv1 Vdylqjv surgxfwv xvxdoo| kdyh whupv ri dw ohdvw 43 |hduv1
Wkh sd|phqwv duh prvwo| {hg ru olqnhg wr dq lqgh{ vxfk dv wkh FSL1 Wkh
dprxqw ri wkh sd|phqw fdq eh hvwlpdwhg zlwk d kljk ghjuhh ri frqghqfh1 Iru d
Dfwxduldo Pdqdjhphqw
496
odujh qxpehu ri olyhv lqvxuhg/ wkh h{shfwhg fodlpv sd|phqwv rq ghdwk ru vxuylydo fdq
eh hvwlpdwhg1 Pruwdolw| lpsuryhphqwv fdq fdxvh vrph xqfhuwdlqw| lq wkh hvwlpdwh ri
ixwxuh sd|phqwv exw dq doorzdqfh fdq xvxdoo| eh pdgh iru wklv1
Hyhq wkrxjk wkh srolflhv duh lvvxhg iru orqj whupv/ lq pdq| fdvhv wkh srolflhv
duh odsvhg ru vxuuhqghuhg sulru wr wkh pdwxulw| gdwh ri wkh srolf|1 D srolf| odsvhv
zkhq d srolf|kroghu grhv qrw sd| wkh suhplxp dqg qr frqwudfwxdo sd|phqw lv rzhg
wr wkh srolf|kroghu1
D srolf|kroghu fdq vxuuhqghu wkhlu srolf| sulru wr wkh pdwxulw| gdwh ri wkh
srolf| dqg uhfhlyh d sd|phqw rq wkh srolf|1 Wklv sd|phqw lv fdoohg wkh vxuuhqghu
ydoxh1 Riwhq wkh vxuuhqghu ydoxh lv jxdudqwhhg1 D plqlpxp vxuuhqghu ydoxh lv xvxdoo|
uhtxluhg e| olih lqvxudqfh odz lq pdq| frxqwulhv1
Odsvhv dqg vxuuhqghuv duh kdug wr iruhfdvw ehfdxvh wkh| fdq ghshqg rq ixwxuh
hfrqrplf frqglwlrqv1 Iru h{dpsoh li wkhuh lv d uhfhvvlrq wkhq riwhq srolf|kroghuv
zlwk vdylqjv srolflhv zloo qhhg wr vxuuhqghu wkh srolflhv wr dffhvv wkhlu vdylqjv wr
fryhu vkruw whup qhhgv1
;17
Wkh prvw lpsruwdqw ulvn dqg qdqfldo pdqdjhphqw urohv ri wkh dfwxdu| lq olih lqvxu0
dqfh duh=
Ghvljq ri lqvxudqfh frqwudfwv dqg udwlqj ri ulvnv wr hqvxuh wkdw wkh dssursuldwh
udwh lv fkdujhg iru sduwlflsdwlqj lq wkh lqvxudqfh ulvn srro
Ydoxdwlrq ri srolf| oldelolwlhv wr hqvxuh wkdw wkh surw iurp wkh lqvxudqfh exvl0
qhvv lv uhdolvwlf dqg wkdw wkh frpsdq| lv vroyhqw/ dqg
Irupxodwlrq ri dq lqyhvwphqw srolf| iru wkh dvvhwv ri wkh olih lqvxudqfh frpsdq|1
Zh zloo frqvlghu d vlpsoh whup lqvxudqfh frqwudfw dv dq looxvwudwlrq1
;1714 Suhplxp Udwlqj dqg Ydoxdwlrq ri Srolf| Oldelolw|
Suhplxp udwlqj
Frqvlghu d whup lqvxudqfh rq d olih E% iru d whup ri ? |hduv wkdw sd|v wkh vxp lqvxuhg
7 li wkh olih glhv gxulqj wkh whup dqg sd|v qrwklqj li wkh olih vxuylyhv wkh whup1
Wr fdofxodwh wkh suhplxp iru wklv srolf| zh zloo xvh wkh sulqflsoh ri htxly0
dohqfh zkhuh zh htxdwh wkh h{shfwhg suhvhqw ydoxh ri wkh uhyhqxh wr wkh h{shfwhg
suhvhqw ydoxh ri wkh h{shqvhv lqfoxglqj fodlpv sd|phqwv1 Wkh h{shfwhg ydoxhv pd|
eh fdofxodwhg xvlqj prglhg suredelolwlhv ri ghdwk lq rughu wr lqfoxgh d ulvn ordglqj
iru wkh lqvxudqfh frpsdq| ru wklv frxog eh doorzhg iru e| dgglqj d vhsdudwh surw
ordglqj1
Dvvxph wkdw
wkh ghdwk ehqhw ri 7 lv sdlg dw wkh hqg ri wkh |hdu ri ghdwk
497
Olih Lqvxudqfh
lqwhuhvw udwhv duh frqvwdqw dqg gr qrw ydu| zlwk wkh wlph wr uhfhlsw ri d fdvk
rz/ dqg
wkh hhfwlyh lqwhuhvw udwh shu |hdu lv
Fodlp Sd|phqwv Uhfdoo wkdw zh xvhg A E% wr ghqrwh wkh ixwxuh olihwlph +d frqwlq0
xrxv udqgrp yduldeoh, iru d olih E%1 Wkxv li f lv wkh djh0dw0ghdwk +dovr d frqwlqxrxv
udqgrp yduldeoh, wkhq wkh ixwxuh olihwlph lv wkh djh dw ghdwk ohvv wkh fxuuhqw djh=
A E% ' f %
Iru wkh whup lqvxudqfh wkh ehqhw lv dvvxphg wr eh sdlg dw wkh hqg ri wkh
|hdu ri ghdwk vr wkdw li ghdwk rffxuv lq wkh uvw |hdu ri wkh srolf|/ zkhq wkh olih lv
djhg %c wkhq wkh suhvhqw ydoxh ri wkh ghdwk ehqhw zloo eh
7
' 7
E n
zloo eh
Li ghdwk rffxuv zkhq wkh olih lv djhg % n wkhq wkh suhvhqw ydoxh ri wkh ehqhw
7
' 72
E n 2
Lq jhqhudo/ li ghdwk rffxuv zkhq wkh olih lv djhg % n & odvw eluwkgd| zkhuh
& ' fc c 2c ? wkhq wkh suhvhqw ydoxh ri wkh fodlp sd|phqw dw wkh hqg ri wkh
|hdu ri ghdwk zloo eh

7&n iru & ' fc c 2c ?
'
f iru & ?
Lq rughu wr ghwhuplqh wkh suhplxp zh qhhg wr fdofxodwh wkh h{shfwhg suhvhqw ydoxh
ri wkh fodlpv sd|phqw1 Wr gr wklv zh uhtxluh wkh suredelolw| wkdw ghdwk zloo rffxu
zkhq wkh olih lv djhg % n & odvw eluwkgd| zkhuh & ' fc c 2c ? 1
Ohw
g ' lqwhjhu sduw ri A E%
wkhq wkh suredelolw| glvwulexwlrq ri g +d glvfuhwh udqgrp yduldeoh, fdq eh uhdglo|
ghwhuplqhg dv iroorzv
h dg ' &o ' h d& A E% & n o
' h d% n & f % n & n mf : %o
' & ^%
' & R% ^%n&
Wklv mxvw vwdwhv wkdw wkh fkdqfh wkdw d olih fxuuhqwo| djhg % zloo glh djhg % n &
odvw eluwkgd| lv wkh suredelolw| wkdw wkh olih vxuylyhv wr djh % n & Esuredelolw| & R%
wlphv wkh suredelolw| wkdw wkh olih glhv lq wkh iroorzlqj |hdu djhg %n& Esuredelolw| ^%n&
498
H{dpsoh ;17 Ghulyh dq h{suhvvlrq iru h dg ' &o lq whupv ri wkh vxuylydo ixqfwlrq
r E%
Vroxwlrq ;17 Vlqfh r E% ' h Ef : % zh kdyh
h dg ' &o ' h d% n & f % n & n mf : %o
r E% n & r E% n & n
'
r E%
H{huflvh ;15 Vkrz wkdw/ xvlqj wkh qrwdwlrq ri wkh olih wdeoh/
_%n&
h dg ' &o '
,%
Wkh h{shfwhg suhvhqw ydoxh ri wkh fodlp sd|phqwv lv mxvw wkh suhvhqw ydoxh ri
wkh fodlp sd|phqwv iru hdfk |hdu wkdw ghdwk fdq rffxu pxowlsolhg e| wkh suredelolw|
wkdw ghdwk rffxuv dw wkdw djh dqg wkhq vxpphg iru doo srvvleoh djhv1 Iru wkh whup
lqvxudqfh wklv lv vxpphg iru djhv % n & odvw eluwkgd| zkhuh & ' fc c 2c ? 1
Wkxv wkh h{shfwhg suhvhqw ydoxh ri wkh fodlp sd|phqwv iru wkh whup lqvxudqfh
lv
?3
[
7
E R ^
&n & % %n&
E
n

&'f
' 7
?3
[
&n E& R% ^%n&
&'f
Wkh dfwxduldo qrwdwlrq iru wkh h{shfwhg suhvhqw ydoxh ri wkh fodlp sd|phqwv
iru d whup lqvxudqfh rq d olih djhg % zlwk vxp lqvxuhg ri '4 sd|deoh rq ghdwk zlwklq
? |hduv zlwk wkh vxp lqvxuhg sd|deoh dw wkh hqg ri wkh |hdu ri ghdwk lv %G ? Wkh
fdslwdo lqglfdwhv wkdw wklv lv wkh h{shfwhg ydoxh ri d fodlp +Dvvxudqfh, sd|phqw1
Wkh deryh wkh djh lqglfdwhv lw lv sdlg rq wkh rffxuuhqfh ri ghdwk li wklv rffxuv uvw
ri wkh wzr srvvleoh hyhqwv lqglfdwhg % G ? 0 ghdwk dw djh % ru wkh h{slu| ri ? |hduv1
Xvlqj wkh vwdqgdug dfwxduldo qrwdwlrq zh fdq zulwh
%G ? '
?3
[
&n E& R% ^%n&
&'f
H{dpsoh ;18 Ghwhuplqh wkh h{shfwhg suhvhqw ydoxh ri wkh fodlp sd|phqwv iru d 8
|hdu whup lqvxudqfh rq d olih djhg 53 zlwk vxp lqvxuhg '433333 xvlqj wkh iroorzlqj
pruwdolw| udwhv dqg d 9( s1d1 hhfwlyh lqwhuhvw udwh1
Djh
53
54
55
56
57
^%
31334<5
31334;4
3133493
313346;
313344;
499
Olih Lqvxudqfh
Vroxwlrq ;18 Zh zloo dvvxph wkdw ghdwk fodlpv duh sdlg dw wkh hqg ri wkh |hdu
ri ghdwk1 Lq rughu wr ghwhuplqh wkh h{shfwhg suhvhqw ydoxh zh qhhg wr ghwhuplqh
&n
&n ' fS
dqg & R% iru & ' fc c 2c c dqg e
Wkh iroorzlqj wdeoh vkrzv wkhvh ydoxhv dorqj zlwk wkh fdofxodwlrq ri wkh h{shfwhg
suhvhqw ydoxh ri fodlp sd|phqwv iru '41
Age
qx
20
21
22
23
24
0.00192
0.00181
0.00160
0.00138
0.00118
vk+1
0
1
2
3
4
kp20
0.9433962
0.8899964
0.8396193
0.7920937
0.7472582
1.0000000
0.9980800
0.9962735
0.9946794
0.9933068
Expected
value
Probability =
kp20q20+k
0.0019200
0.0018065
0.0015940
0.0013727
0.0011721
0.0067206
Wkh h{shfwhg suhvhqw ydoxh ri wkh fodlp sd|phqwv iru d vxp lqvxuhg ri '433333 lv
433333fffS.2fS ' S.2fS
Wkh ydoxhv iru & R% duh ghwhuplqhg e| wdnlqj f R% ' dqg wkhq fdofxodwlqj & R% xvlqj
wkh uhodwlrqvkls wkdw
&n R%
'
'
& R%
ER%n&
& R% E ^%n&
iru & ' c 2c c dqg e

Wkxv
R2f
2 R2f
' f R2f E ^2f

' E fffb2
' fbbHfH
' R2f E ^2
' fbbHfH E fffH
' fbbS2.D
Wkh ydoxhv iru &n fdq dovr eh fdofxodwhg lq d vlplodu uhfxuvlyh dssurdfk e| qrwlqj
wkdw
&n '
&
n
49:
Wkxv
fS
' fbebS2
'

fS
fbebS2
'
fS
' fHHbbbSe
2 '
dqg vr rq1
Wkxv zh fdq fdofxodwh doo ri wkh &n ydoxhv e| glylglqj hdfk suhylrxv ydoxh e| n
Wkh h{shfwhg ydoxh ri wkh fodlp sd|phqwv lv wkh vxp ri wkh suhvhqw ydoxhv dw wkh hqg
ri hdfk srvvleoh djh dw ghdwk wlphv wkh suredelolw| ri sd|phqw1 Wklv lv
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73
74
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Age
20
21
22
23
24
qx
0.00192
0.00181
0.00160
0.00138
0.00118
k
0
1
2
3
4
vk
1.0000000
0.9433962
0.8899964
0.8396193
0.7920937
Expected
value
kp20
1.0000000
0.9980800
0.9962735
0.9946794
0.9933068
4.4502088
49<
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yduldqfh htxdo wr 41
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fxpxodwlyh glvwulexwlrq iru wkh elqrpldo glvwulexwlrq lv qrw dydlodeoh1 Wkh Qrupdo
glvwulexwlrq lv dq dssur{lpdwlrq1
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wkh suredelolw| wkdw wkh frpsdq| zloo qrw kdyh vx!flhqw ixqgv wr sd| lwv wrwdo fodlpv1
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h d~ 2eSo ' fbb
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fbb. ' fffSH
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Wkh iroorzlqj judsk vkrzv wkh suredelolw| ghqvlw| ri wkh elqrpldo/ Srlvvrq dqg qrupdo
glvwulexwlrqv iru wkh qxpehu ri fodlpv lq wklv h{dpsoh1
Approximation to Binomial Distribution of Number of Deaths
0.10000
0.09000
0.08000
0.07000
Probability
0.06000
Binomial
Normal
Poisson
0.05000
0.04000
0.03000
0.02000
0.01000
0.00000
0
10
20
30
40
50
60
Number of Deaths
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wr sd| wkh fodlpv wkhq wkh frpsdq| zloo eh lqvroyhqw dqg wkh srolf|kroghuv zloo qrw
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oldelolw| phdqv wkdw vkduhkroghuv ri d frpsdq| duh rqo| uhvsrqvleoh iru wkh ghewv ri
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lq wkh frpsdq|1
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4? dAc ? n o
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fodlpv zklfk lv
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zloo kdyh wr phhw wkh glhuhqfh/ A E? n c rxw ri wkhlu rzq uhvrxufhv1
Vlpxodwlrq
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frpsoh{ sruwirolrv ri srolflhv wkh ghwhuplqdwlrq ri suredelolw| ri uxlq/ h{shfwhg surw
dqg rwkhu qdqfldo yduldeohv fdq ehvw eh grqh xvlqj vlpxodwlrq1 Wkh xvh ri vlpxodwlrq
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ri ixwxuh fodlpv dqg h{shqvhv ohvv wkh h{shfwhg suhvhqw ydoxh ri ixwxuh suhplxpv dv
dw wkh gdwh ri wkh oldelolw|1
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xvhg wr ghwhuplqh wkh surw iurp wkh lqvxudqfh srolf|1 Uhdolvwlf ghwhuplqdwlrq ri
surw uhtxluhv wkh xvh ri uhdolvwlf ydoxhv iru ixwxuh lqwhuhvw udwhv dqg pruwdolw| udwhv
zkhq ydoxlqj oldelolwlhv1
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zlwk wkh lqwhuhvw udwhv xvhg wr ydoxh wkh dvvhwv ri wkh lqvxudqfh frpsdq|1
Wkh h{shfwhg ydoxh ri wkh srolf| oldelolw| fdq eh fdofxodwhg uhfxuvlyho|1 Ghqrwh
wkh h{shfwhg ydoxh ri wkh srolf| oldelolw| dw djh % n | iru wkh whup lqvxudqfh rq d olih
djhg % iru d whup ri ? |hduv zlwk vxp lqvxuhg sd|deoh dw wkh hqg ri wkh |hdu ri ghdwk
e| | T%G ? 1
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htxdo wr 7 vlqfh wklv dprxqw lv gxh dqg sd|deoh rq ghdwk dqg ehfrphv wkh srolf|
oldelolw| rqfh wkh olih kdv glhg1
Li wkh olih vxuylyhv wr wkh hqg ri wkh |hdu/ zlwk suredelolw| R%n| / wkhq wkh
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Dw wkh vwduw ri wkh |hdu d suhplxp lv uhfhlyhg dqg wkh srolf| ydoxh dorqj zlwk
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4;3
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k
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lqj pruwdolw| udwhv/ d 9( s1d1 hhfwlyh lqwhuhvw udwh/ lqlwldo h{shqvhv ri 318( ri wkh
vxp lqvxuhg dqg uhqhzdo h{shqvhv ri '433 shu suhplxp sd|phqw +gdwd lv dv iru wkh
suhylrxv h{dpsohv,1
Djh
53
54
55
56
57
^%
31334<5
31334;4
3133493
313346;
313344;
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dw wkh hqg ri hdfk |hdu iru wkh yh |hduv ri wkh srolf| whup xvlqj d uhfxuvlyh
irupxod1
Frpphqw rq wkh ydoxhv rewdlqhg1
Vroxwlrq ;143
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lq wkh wdeoh ehorz
Age
4;4
qx
20
21
22
23
24
Expected
Value of
Policy
Liability
0.00192
0.00181
0.00160
0.00138
0.00118
0.00
-443.68
-372.80
-276.43
-152.05
0.00
Wkhvh ydoxhv duh ghwhuplqhg dv iroorzv1

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n ff S.
fS
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fffb2 fffff n E fffb2 EeeSH
n Dff n ff S.
fS
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zkhuh zh kdyh dovr lqfoxghg wkh lqlwldo h{shqvhv iru wkh srolf|1
4;5
Olih Lqvxudqfh
Lq wklv fdvh zh vhh wkdw wkh h{shfwhg ydoxh ri wkh srolf| oldelolw| lv qhjdwlyh1 Wklv
phdqv wkdw wkh oldelolw| lv hhfwlyho| dq dvvhw iru wkh olih lqvxudqfh frpsdq|1
Wkh uhdvrq wkdw lw lv dq dvvhw lv wzrirog1 Wkh uvw uhdvrq lv wkdw wkh lqlwldo
h{shqvhv duh lqfxuuhg dw wkh frpphqfhphqw ri wkh srolf| exw duh uhsdlg rxw ri
wkh suhplxpv ryhu yh |hduv1
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h{shqvhv lv wdnhq lqwr dffrxqw dv dq dvvhw lq wkh ydoxh ri wkh srolf| oldelolw|1
Hyhq li wkh lqlwldo h{shqvhv duh vhw wr }hur wkh srolf| oldelolw| lv vwloo qhjdwlyh1
Lq wkh wdeoh ehorz wkh ydoxhv duh fdofxodwhg zlwk wkh lqlwldo h{shqvhv vhw wr }hur1
Age
qx
20
21
22
23
24
0.00192
0.00181
0.00160
0.00138
0.00118
Expected
Value of
Policy
Liability
0.00
-31.98
-54.92
-58.23
-39.70
0.00
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wklv djh udqjh1 Wkh suhplxp lv ohyho vr wkdw lq wkh hduo| |hduv wkh suhplxp
zloo eh wrr orz frpsduhg wr wkh h{shfwhg frvw ri wkh ghdwk fryhu1 Wkh h{fhvv
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zkhq wkh suhplxp h{fhhgv wkh frvw ri ghdwk fryhu1 Wkxv wklv lv olnh d ordq wr
wkh srolf|kroghuv1
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qhjdwlyh oldelolw| ydoxh dv dq dvvhw1 Wklv lv vlpso| ehfdxvh wkhuh lv qr jxdudqwhh
wkdw wkh srolf|kroghu zloo sd| wkh odwhu suhplxpv1 Li wkh srolf|kroghu odsvhv
wkh srolf| wkhq wkh| zloo qrw sd| dq| qhjdwlyh srolf| ydoxh wr wkh olih lqvxudqfh
frpsdq|1 Whup lqvxudqfh frqwudfwv gr qrw kdyh vxuuhqghu ydoxhv ru ydoxhv rq
odsvh1 Wkh| fhuwdlqo| gr qrw uhtxluh wkh srolf|kroghu wr sd| dq| xquhfrxshg
lqlwldo h{shqvhv qru dq| h{shfwhg ghdwk fodlpv frvwv wkdw kdyh qrw ehhq fkdujhg
lq wkh ohyho suhplxp1
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ri htxlydohqfh1 Dvvxph wkh iroorzlqj pruwdolw| udwhv/ d 8( s1d1 hhfwlyh lqwhuhvw
udwh/ lqlwldo h{shqvhv ri 318( ri wkh vxp lqvxuhg dqg uhqhzdo h{shqvhv ri '433 shu
suhplxp sd|phqw +dv iru wkh suhylrxv h{huflvhv,1
}i
73
74
75
76
77
4;6
^%
31334:7
31334<3
313353<
3133563
3133587
Ghwhuplqh wkh h{shfwhg ydoxh ri wkh srolf| oldelolw| iru wklv whup lqvxudqfh dv
dw wkh hqg ri hdfk |hdu iru wkh yh |hduv ri wkh srolf| whup xvlqj d uhfxuvlyh
irupxod1
Frpphqw rq wkh ydoxhv rewdlqhg1
;1716 Rwkhu olih lqvxudqfh ehqhwv
Zh kdyh rqo| frqvlghuhg d whup lqvxudqfh vlqfh wklv surgxfw lqyroyhv rqo| sd|phqw
ri d ghdwk ehqhw1 Lw kdv dovr ehhq dvvxphg wkdw ehqhwv duh sdlg dw wkh hqg ri wkh
|hdu ri ghdwk1 Lq sudfwlfh lw riwhq wdnhv wlph wr pdnh d ghdwk ehqhw sd|phqw vlqfh
wkhuh lv wkh qhhg wr surylgh grfxphqwdwlrq wr wkh lqvxudqfh frpsdq| dqg duudqjh
iru sd|phqw1
Lw lv qrw gl!fxow wr doorz iru ehqhwv wr eh sdlg lpphgldwho| rq ghdwk1 Lq
wklv fdvh wkh sd|phqw gdwh zloo eh wkh djh dw ghdwk zklfk lv d frqwlqxrxv udqgrp
yduldeoh Doo ri wkhvh uhvxowv iru whup lqvxudqfh fdq eh h{whqghg wr rwkhu w|shv ri olih
lqvxudqfh srolf| lqyroylqj olih lqvxudqfh surwhfwlrq1 Wklv lv fryhuhg lq odwhu dfwxduldo
vxemhfwv1
;1717 Lqyhvwphqw Srolf|
Wkh dfwxdu| kdv dq lpsruwdqw uroh lq hvwdeolvklqj wkh lqyhvwphqw srolf| ri dq lq0
vxudqfh frpsdq|1 Wkh dvvhwv ri wkh frpsdq| frqvlvw ri wkh dffxpxodwhg ixqgv ri
wkh srolf|kroghuv dqg wkh fdslwdo dqg uhwdlqhg surwv ri wkh vkduhkroghuv1 Wkhvh duh
pdlqo| lqyhvwhg lq qdqfldo dvvhwv1
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ixqgv lqyhvwhg lq wkh glhuhqw dvvhw fodvvhv vxfk dv vkduhv/ surshuw|/ {hg lqwhuhvw
dqg fdvk1 Wkh lqyhvwphqw srolf| pxvw dovr vshfli| wkh pdwxulw| whup ri dq| {hg
lqwhuhvw lqyhvwphqwv dqg wkh fxuuhqf| ri dq| lqyhvwphqwv1
Wkh lqyhvwphqwv pxvw eh pdgh wdnlqj lqwr dffrxqw wkh srolf| oldelolwlhv ri wkh
lqvxudqfh frpsdq|1 Wklv uhtxluhv d surmhfwlrq ri ixwxuh fodlpv sd|phqwv/ h{shqvh
sd|phqwv dqg suhplxp uhfhlswv1
Wkh surw ri wkh frpsdq| zloo uh hfw fkdqjhv lq erwk wkh ydoxh ri wkh dvvhwv
dqg wkh ydoxh ri wkh srolf| oldelolwlhv1
Dq lqyhvwphqw srolf| dgrswhg e| vrph lqvxudqfh frpsdqlhv/ sduwlfxoduo| iru
dqqxlwlhv dqg rwkhu srolflhv zlwk {hg dqg jxdudqwhhg sd|phqwv/ lv d pdwfklqj lq0
yhvwphqw vwudwhj|1 Li wkh fdvk rzv rq wkh dvvhwv iurp pdwxulqj lqyhvwphqwv dqg
4;7
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lqyhvwphqw lqfrph duh ghwhuplqhg vr wkdw wkh| rffxu dw wkh vdph wlph dqg iru wkh
vdph dprxqw dv wkh h{shfwhg ixwxuh fodlpv dqg h{shqvhv ohvv suhplxpv lq wkh srolf|
oldelolw| fdvk rzv/ wkhq wkh dvvhwv dqg oldelolwlhv duh frqvlghuhg wr eh pdwfkhg1
Lq sudfwlfh lqyhvwphqwv wkdw pdwfk wkh orqj whup fdvk rzv ri dq lqvxudqfh
frpsdqlhv oldelolw| fdvk rzv duh qrw uhdglo| dydlodeoh1 Lq wkhvh fdvhv dq lqyhvw0
phqw vwudwhj| ri lppxql}dwlrq lv xvhg1 Lppxql}dwlrq vhohfwv lqyhvwphqwv vr wkdw wkh
fkdqjh lq wkh ydoxh ri wkh dvvhwv iru d vpdoo fkdqjh ri lqwhuhvw udwhv zloo htxdo wkh
fkdqjh lq wkh ydoxh ri wkh srolf| oldelolwlhv iru wkh vdph vpdoo fkdqjh lq lqwhuhvw udwhv1
Wkh ghwhuplqdwlrq ri wkh lqyhvwphqw srolf| wr pdwfk ru lppxql}h srolf| old0
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;18
Frqfoxvlrqv
Wklv fkdswhu kdv lqwurgxfhg wkh pdlq irupv ri olih lqvxudqfh srolf| lqfoxglqj wkh
wudglwlrqdo zkroh ri olih dqg hqgrzphqw srolflhv/ whup lqvxudqfh/ dqqxlwlhv dqg wkh
xqexqgohg frqwudfwv vxfk dv lqyhvwphqw dffrxqw dqg xqlyhuvdo olih srolflhv1
Wkh dfwxduldo whfkqltxhv iru ghwhuplqlqj suhplxp udwhv/ srolf| oldelolwlhv dqg
uxlq suredelolwlhv iru d whup lqvxudqfh zhuh lqwurgxfhg1 Lvvxhv vxfk dv surw ordglqjv
dqg lqyhvwphqw vwudwhj| zhuh eulh | phqwlrqhg1
;19
H{ ;14 \rx zloo qhhg wr orrn dw wkh sursrvdo irup wr vhh zkdw lqirupdwlrq lv uh0
txhvwhg1 Suhplxp udwhv duh riwhq lqfoxghg zlwk lqvxudqfh rhuv pdgh e| gluhfw pdu0
nhwlqj1
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h dg ' &o ' h d& A E% & n o
' h d% n & f % n & n mf : %o
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,%n& _%n&
'
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H{ ;16 Wkh h{shfwhg suhvhqw ydoxh lv ghwhuplqhg xvlqj wkh irupxod
7
?3
[
&n E& R% ^%n&
&'f
zlwk V@433/333/ dq lqwhuhvw udwh ri 8( s1d1 dqg wkh rwkhu ydoxhv vkrzq lq wkh wdeoh
ehorz1 Wkh Sure froxpq jlyhv wkh ydoxhv iru & R% ^%n&
4;8
Age
qx
40
41
42
43
44
0.00174
0.00190
0.00209
0.00230
0.00254
0
1
2
3
4
PV
Prob
95238.10 0.00174
90702.95 0.00190
86383.76 0.00208
82270.25 0.00229
78352.62 0.00252
Wkh h{shfwhg suhvhqw ydoxh lv <361531

Wr fdofxodwh wkh vwdqgdug ghyldwlrq zh uvw fdofxodwh wkh yduldqfh1 Wr gr wklv zh
fdofxodwh wkh h{shfwhg ydoxh ri wkh vtxduh ri wkh suhvhqw ydoxh dqg wkhq vxewudfw r
wkh vtxduh ri wkh h{shfwhg ydoxh l1h1

T @oE T ' . T 2 . d T o2
Zh rewdlq wkh iroorzlqj uhvxowv
Wkh yduldqfh lv
Age
qx
40
41
42
43
44
k
0.00174
0.00190
0.00209
0.00230
0.00254
0
1
2
3
4
Prob
0.00174
0.00190
0.00208
0.00229
0.00252
PV^2
9070294785
8227024748
7462153966
6768393620
6139132535
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qx
40
41
42
43
44
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0.00174
0.00190
0.00209
0.00230
0.00254
0
1
2
3
4
PV
1.000000
0.952381
0.907029
0.863838
0.822702
kp20
1.000000
0.998260
0.996363
0.994281
0.991994
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41
42
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0.00
-374.37
-258.30
-155.25
-67.89
0.00
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41
42
43
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value of
policy
liability
0.00
35.44
56.69
60.03
42.50
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Month
Premiums
January
$112,234
February
$60,345
March
$54,780
April
$115,200
May
$80,900
June
$150,755
July
$16,340
August
$50,234
September $112,600
October
$90,765
November $112,400
December $212,000
Unearned
Fraction
as 24ths
1
3
5
7
9
11
13
15
17
19
21
23
Total
Unearned
Premium
$4,676
$7,543
$11,413
$33,600
$30,338
$69,096
$8,851
$31,396
$79,758
$71,856
$98,350
$203,167
$650,043
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0
1
2
3
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1996
1997
1998
1999
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302168
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Age
Resignation
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
0.16650
0.16020
0.15390
0.14760
0.14130
0.13500
0.12870
0.12240
0.11610
0.10980
0.10350
0.09720
0.09090
0.08460
0.07830
0.07200
0.06795
0.06390
0.05985
0.05580
0.05175
0.04770
0.04365
0.03960
0.03555
0.03150
0.02745
0.02340
0.01935
0.01530
0.01125
0.00900
0.00675
0.00450
0.00225
0.00000
0.00000
0.00000
0.00000
0.00000
0.00000
0.00000
0.00000
0.00000
0.00000
0.00000
Death and
Disability
0.00090
0.00089
0.00083
0.00075
0.00067
0.00063
0.00063
0.00064
0.00066
0.00068
0.00072
0.00077
0.00082
0.00087
0.00093
0.00101
0.00110
0.00121
0.00132
0.00146
0.00163
0.00183
0.00205
0.00231
0.00262
0.00297
0.00338
0.00385
0.00439
0.00501
0.00572
0.00655
0.00751
0.00860
0.00983
0.01123
0.01282
0.01462
0.01665
0.01895
0.02154
0.02443
0.02784
0.03185
0.03659
0.04215
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|
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lqwhuhvw lqyhvwphqwv dqg fdvk1 Krzhyhu wkh uhwxuqv rq vkduhpdunhw lqyhvwphqwv duh
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d qhjdwlyh uhwxuq +zkhuh |rx dfwxdoo| orvh zhdowk, lv pxfk kljkhu zlwk vkduhpdunhw
lqyhvwphqwv1
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fduh1
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lq wkh sdvw1
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lq ghwdlo lq ghprjudsk|1
4318
Frqfoxvlrqv
Wklv fkdswhu kdv eulh | rxwolqhg wkh w|shv ri uhwluhphqw dqg khdowk fduh ehqhwv
surylghg dqg wkh pdlq dfwxduldo whfkqltxhv xvhg wr dvvhvv wkh ydoxh ri wkhvh ehqh0
wv1 Wkh frvwv ri uhwluhphqw lqfrph surylvlrqv dqg djhg fduh duh lqfuhdvlqj dv wkh
srsxodwlrq djhv dqg wkh dvvhvvphqw ri wkh frvwv dqg wkh qdqflqj ri wkhvh frvwv lv d
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4319
56<
H{ 4314 Surmhfwhg vdodu| dw djh 98

Dc fffeeDfffe
' Dc fffeH
' Dc fff SfebSe.
' 2c .H
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ru
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ru
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B
fSbD
'
B
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| '
Equivalent
Salary
Annual
Growth Rate Effective
(Continuous) Growth Rate
1.00%
1.01%
2.00%
2.02%
3.00%
3.05%
4.00%
4.08%
5.00%
5.13%
6.00%
6.18%
7.00%
7.25%
8.00%
8.33%
9.00%
9.42%
10.00%
10.52%
Time to
double
salary
(years)
69.31
34.66
23.10
17.33
13.86
11.55
9.90
8.66
7.70
6.93
H{ 4316 H{shfwhg ixwxuh vdodu| dw djh 98 iru d 53 |hdu rog rq '68/333

2
Dc fff i T eD ffe n eD ff
2
' Dc fff i T EHf22D
' Dc fff SfS2.
' 22c 2D
573
H{ 4317 Wkh iroorzlqj wdeoh vkrzv wkh h{shfwhg qxpehu zkr ohdyh wkh ixqg gxh wr
zlwkgudzdo +u{,/ wkh h{shfwhg qxpehu zkr ohdyh gxh wr ghdwk ru glvdelolw| +g{,/ wkh
h{shfwhg qxpehu lq wkh ixqg +o{,/ wkh h{shfwhg qxpehu ehwzhhq djh { dqg {.4 +O{,/
wkh qxpehu ri ixwxuh |hduv phpehuvkls ri wkh o{ phpehuv djhg { +W{, dqg wkh h{shfwhg
qxpehu ri |hduv phpehuvkls d{@W{2o{1
Age
rx
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
dx
1665.00
1333.83
1074.96
871.43
710.48
582.43
479.94
397.42
330.58
276.14
231.54
194.78
164.31
138.90
117.57
99.54
87.08
76.24
66.76
58.43
51.09
44.58
38.77
33.57
28.87
24.61
20.70
17.10
13.76
10.62
7.65
6.02
4.44
2.92
1.44
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
lx
Lx
Tx
ax
9.00 10000.00 9163.00 80672.81
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4.43 5904.01 5466.08 57410.04
3.37 5028.15 4671.23 51943.96
2.72 4314.31 4021.73 47272.73
2.35 3729.16 3488.01 43251.00
2.08 3246.86 3047.12 39762.99
1.88 2847.37 2681.14 36715.87
1.71 2514.91 2375.99 34034.73
1.61 2237.06 2120.49 31658.74
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1.48 1807.59 1724.70 27632.50
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1.40 1382.51 1332.05 22894.17
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1.47 1115.40 1081.29 19170.55
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15.78
16.21
16.56
16.82
17.04
17.19
17.27
17.29
17.24
17.11
16.91
16.63
16.27
15.83
15.32
14.73
14.08
13.36
12.58
11.77
10.93
10.07
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8.29
7.39
6.49
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4.69
3.78
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21
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24
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26
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28
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30
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32
33
34
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36
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40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64

Expected
Present
Value of 1%
of Salary (as
a percent of
Salary)
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5.47
5.77
6.09
6.42
6.77
7.13
7.51
7.89
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