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ACTUARIAL THEORY

ACTUARIAL THEORY
NOTES FOR STUDENTS ON THE SUBJECT-MATTER REQUIRED IN THE SECOND EXAMINATIONS OF THE INSTITUTE OF ACTUARIES AND THE FACULTY OF ACTUARIES IN SCOTLAND, WITH NUMEROUS PRACTICAL EXAMPLES AND EXERCISES

BY WILLIAM

A.

ROBERTSON

Fellow of the Faculty of Actuaries in Scotland

FREDERICK
Member of
the Society of

A.

ROSS

Accountants in Edinburgh ; Fellow of the Faculty of Actuaries in Scotland

WITH A PREFATORY NOTE

BY THOMAS

G.

ACKLAND

Fellow of the Institute of Actuaries ; Hon. Fellow of the Faculty of Actuaries in Scotland

OLIVER AND BOYD


EDINBURGH: TWEEDDALE COURT LONDON: 10 PATERNOSTER ROW, E.C.
1907

JV2-(,13M

PREFATORY NOTE
The
work consulted me, about two years of compiling and publishing a volume, much on the lines of Graduated Exercises and Examples, issued by Mr G. F. Hardy and myself in 1889, which work, owing to the material advance in actuarial science and in assurance practice since that date, has now become insufficient foA the full needs of actuarial students. Being in entire agreement with the authors as to the demand for such a work, brought up to date, I encouraged them in their project, and now welcome the result of their labours.
joint authors of this
since,

as

to the

desirability

The

authors have

kindly given
;

me an
it is its

opportunity of

perusing a proof of this volume


their

and

evident that they


training
actuarial

have devoted much care and labour to


large

production, and that

and

successful

experience

in

students has wisely guided

them

in the preparation of the

work, which appears to

me

to form a

most useful and illuminstudents, both in their

ating commentary upon the admirable Institute Text Books.

A fairly large experience of actuarial


two
deficiencies

preliminary studies and in the examination room, has shown


frequently manifest in their work
;

me
the

first,

and independent thought, and a too slavish dependence upon the demonstrations and conclusions set out in the approved text books and, secondly, a considerable failure in the power to apply, in practice, the results deduced theoretically; these two deficiencies being closely associated with one
lack of original
;

another.

have no doubt that the present work, by

its

elucidatory notes, alternative demonstrations, and illustrative

examples (which deal not only with the fundamental bases of our Science, but also with its later practical developments), will prove most useful to students, by stimulating original thought

and research, and thus enabling them to secure a firmer both of the Theory and Practice of Actuarial Science.

grip,

THOMAS
Qctoher 1907,

G.

ACKLAND,

Fellow of the Institute of Actuaries, Hon. Fellow of the Faculty of Actuaries in Scotland,

INTRODUCTION
preparing for the Second Examinations of the of Actuaries and of the Faculty of Actuaries in Scotland have, to assist them at this stage of their studies, the Text Booh of the Institute and Mr George King's Theory of Finance, combined with the Graduated Exercises and Examples of Messrs Ackland and Hardy. But there is good reason for believing that, with the extension of the purely actuarial part of the examinations, these works are no longer sufficient to enable even a careful student to take his examination with confidence. To supply a lack so important is therefore the intention of the authors in compiling this book for students ; of whom even those preparing for the later examinations will find some parts of it not unworthy of study. As explained below, however, it is not a substitute for, but merely a supplement to, the works already mentioned, which, it must be urged, there is no intention to disparage in any way. Encouragement to proceed has come to the authors from various directions from those whom they have had the privilege of assisting in their preparation for examinations, from their contemporaries in the profession, and, above all, from Mr Thomas G. Ackland, whose Prefatory Note they value very highly, as well as his kindly advice on many points. Strictly speaking, the book is a compilation of notes on numerous points which are not disposed of in the text books so thoroughly as present-day exigencies require. No claim is made to originality, for that were futile the matter consists of extracts from contributions to the Journal of the Institute and other professional records, or of explanations and elaborations of problems and statements contained in the text books. The effort throughout has been to simplify the obscure and to introduce only the essential. In the authors opinion, no student can hope to become proficient if he confines himself to reading the various books it is necessary that he should deduce every formula for himself at least so often that he shall be confident that his own result will correspond with that of the text book, and confidence is It may be essential in the working out of actuarial problems. true that in such work memory is all important ; the true use of memory, however, will be found, not in learning results by
Institute
: :

Students

viii

INTRODUCTION
methods
ot

heart, but rather in the application of the proper deduction, and this will only come by practice.

inspection of the contents of the book will show that based upon The Theory of Finance and the Institute of' These fundamental works must Actuaries' Text Booh, Part II. of course be read side by side with this ; otherwise it will in Ample references are made throughgreat part lose its force. out to enable the student to follow with a minimum of trouble. The authors have been accustomed, both in studying and in teaching the subject of interest and annuities- certain, to the use of Mr King's book rather than the Text Book, Part I. But the student will find it advantageous also to follow closely the demonstrations and practical applications given by Mr Todhunter in the latter work. No attempt has been made to deal with the purely mathematical side of the work. The three chapters at the close of the Text Book, Part II., and the subject of the calculus scarcely come within the scope of a work such as this. The examples are taken for the most part from the examination papers of the Institute and the Faculty ; and the answers, which follow immediately after the respective questions, have been prepared with care. The student should, of course, work answers to these and other examples independently, though not until the subject-matter of the books has been thoroughly grasped and mastered. It will frequently happen that the answer obtained by him will vary from that given ; in which case it will be a useful exercise to prove the two identical, or, if they are clearly not so, to find where and how the difference arises. The authors will be glad if any errors which are discovered are pointed out to them. It should be mentioned that, following the Text Book, they have preferred the more familiar to the more officially t qx correct Q x Further, in the discussion of policy-values they have used the symbols ^V^ and XJ n t x to represent the ordinary
it is
\

An

and special reserves after n years for whole-life policies with premiums limited to t years. Otherwise they conform to
Institute notation.

Their grateful thanks are due to Mr John H. Imrie, M.A., F.F.A., and Mr Thomas Frazer, jun., F.F.A., who have read the proofs, and made many valuable suggestions.

W.
Edinbuegh, October
1907.

A.

ROBERTSON.
ROSS.

F. A.

TABLE OF CONTENTS
Prefatory Note by T. G. Ackland
Authors' Introduction

........
CHAPTER
Interest (Pages
I
1 to 9)

PAGE

THEORY OF FINANCE

1. 2. 3. 4.

Nominal and

effective rates of interest.

Force of interest
.

Amount
Number

of

at the

Discount.

Force of discount

of years in which

interest
5.

Equated time of payment

Examples

..... ........ ...... ........


end of a
fractional part of a year

money

will

double

itself at

compound
4

5 7

CHAPTER

II
to 39)

Annuities-Certain (Pages 10

1.

Amount and

value of an annuity-due

.10
.10
.

2.

Value of an annuity-due payable at fractional from those of the conversion of the interest
intervals the

intervals different
. .

3.

Values of an annuity and a perpetuity payable at fractional

same as those of the conversion of the


intervals
. .

interest
.

10

4.
5. 6. 7.

Formulas connecting (m + ri) with (m)


Value of fines for renewal of leases
.

Redemption of a loan by means of an annuity-certain

The same, where the accumulative rate of


remunerative
is

.......
.

.14 .14 .15


18

interest differs

from the

x
S.

CONTENTS
PAGE

General rule for finding the value of any series of payments, where the accumulative rate of interest differs from the remunerative .
.

...
.
.

19

9.

Approximation to the value of an annuity at a rate of interest intermediate between given rates
.

.19
.

10.

Value of a deferred annuity, where the rate of

interest during the

period of deferment differs from the rate thereafter


11

20

Annual premium

for

a deferred annuity-due
.
.

12.
13.

Sinking-fund assurances

Purchase-price of an annuity-certain

Examples

.....-
.

.20 .21 .22


24

CHAPTER

III

Varying Annuities (Pages


Fundamental principles figurate numbers
.

40 to 48)

1.

in
.

the construction of a
.

scheme of
.

2.

Proof by induction of the value of a ^\\ Proof by general reasoning of the values of

.40 .41
.

3.

a^i^rr

4.

Values of varying annuities by

Examples

........
finite differences
.

and a 1^|
.

42

.44
45

CHAPTER IV
Loans Repayable by Instalments (Pages 49

1.

Definitions

2.

Makeham's formula
Formulas

repayable with interest at rate j.


3.

for finding the rate yielded

Examples

........ ........
for finding the value, at rate
.

to 63)

49

i,

of a loan,
.

by a loan

.49 .49
02

CHAPTER V
Interest Tables (Pages 64
to 66)

1.

Formation of a table of (1+i)" Formation of a table of u" Formation of a table of P-?


.

2.

3.

..... ......
.
.

.64
64

64

CONTENTS

xi

INSTITUTE OF ACTUARIES'

TEXT BOOK PART


CHAPTER
The Mortality Table
1.
I

II.

{Pages 67 to 70)
PAGE

The Mortality Table


Examples

.......
CHAPTER
II
to 86)

67

Probabilities of Life {Pages 71


1

List of important probabilities

deduced

in Text

Booh, Chapter

II.

71

2. 3.

Value of

JV--W

72

4.

Expected deaths and expected claims Force of mortality

Examples

....
CHAPTER
III
to 91)
. . . .

72
72 79

Expectations of Life {Pages 87


1.

Definitions

2.

Value of $ by Lubbock's formula

Examples

........ ........
CHAPTER IV
suit select tables
.

87

.87
90

Probabilities of Survivorship {Pages 92 to 101)

1.

Value of

Q^
for

92 92 93
t

2.
3.
4.

Formula
Value of

Q* adapted to

QJ^
years after the death of (y)
t

Probability that (x) will die within

93
93

5. 6.

Probability that {x) will be alive Probability that


(a;)

years after the death of ( y)


rth

will

succeeding that in

be alive at the end of the which ( y) dies

year
94

xn
7.

CONTENTS
PAGE

Value of e Value of

y
8.
ej]

x
i

94
95

.^jj 95

9.

Value of

Q^
for

10.

Formula

Q*

adapted to

11.

Values of $,[, and e\ m

12. Probabilities of

Examples

......
death of two
lives within

....
suit select tables

97 97

varying terms

97

CHAPTER V
Statistical Applications of the Mortality Table

(Pages 102 to 112)


102
104

1.

2.
3. 4.

Average age at death of stationary population Average present age of existing population
.

Average future

lifetime of existing population

104 105 105 106

Average age at death of existing population


Distinction between problems in sections 1

5.

and 4
.

Examples

CHAPTER

VI

Formulas or De Moivre, Gompertz, and Makeham, for the Law of Mortality (Pages 113 to 119)
Values of

1.

/*

gression
2.
3.

Formation of mortality table under Gompertz's law


Proof that
\

ll y

4.

Makeham's Examples

first

....... .......
e^ and a x
if

column of

in

geometrical pro
113 114 115
115

Q-l y

1 xy

under Gompertz's law

and second modifications of Gompertz's law

118

CHAPTER

VII
to 177)

Annuities and Assurances (Pages 120

1.

Discussion of formuk, a.

2.

Identity in result of Barrett's

columns
3.

........
, .

= vpjl + a. +1 )

.120
121
121

and Davies's forms of commutation

Proof that

A^

> 4

and that

^P

> Vf x

CONTENTS
4.

xiii

PAQE

Value of

in

terms of any two of the three functions a

and P
5.

123

Various formulas for

-;

123
in

6.

Values of

A^ and P^
P(m)

terms of temporary annuities

124
124

7.

Value of

8.

Value of A-wxyz
Extension
of

125
,,

9.

formula,

Awxyz

(m)

10.

Value of an annuity-due accumulating at


time of
(x)
.
.

^1

v + Ly

to

In

.(2

2L

and
126

(to)

11.

Value of same, but temporary

12.

Value of an annuity-due accumulating at persons are dead


Value of a temporary assurance on and(y) jointly survive Value of
(x),

.......
interest until all of I

.....
.
. . .

interest during life-

126
127

13.

....

128

increasing so long as (x)


.

129 129

14.

a..^
.

15.

Value of an annuity to (a;), the first payment to be made at the end of the <th year succeeding the year in which (y) dies

16.

Value of an annuity for t years certain after the death of (y) and for the remainder of the life of (x)
Value of an annuity payable so long as (x) lives with (y), and for n years after the death of (y), but no payment to be made after m years from the present time, m being greater than n
.

....
P^,
.

129

130

17.

131 131

18. 19.

Value of

Value of

a^-^ a,.^
.

132

20.
21.
22.

Formation of mortality table, given table of


Values of x ,

.132
.

Axy

and axy under De Moivre's hypothesis


.
.

133

Values of temporary and varying with each life Values of


Values of

deferred last-survivor annuities, the term

23.

24.

AL A i_

L
)(

and

P
(

^^
)(

....
.
.

.135
135

i_ and

Pi_

i_

.136
.

(an\)(xm\)

(an|)(xm|)
.

25.
26.

Problems connected with national insurance

136 138

Forms of various
Formation of

benefits,

assuming that money yields no


. . .
.

interest
.

27.
28.

Notation of select tables

select mortality tables

29.

Damaged

lives

..... ........

.140
141

142

CONTENTS
30.

Single

premium to permit of (re) effecting, n years hence without fresh medical examination, a whole-life assurance by annual
premiums
143

31.

Annual premium

for a short-term assurance upon the assumption that all healthy lives withdraw at the end of the first year

32.

Annual premium for a " Half Premium" policy upon the assumption that all healthy lives withdraw at the end of the halfpremium term
Addition to the annual premium for the insurance of (x) against (y), in order that (x) may, in the event of surviving (y), have the option to effect a new whole-life assurance by annual premiums without fresh medical examination .

....... .......

144

148

33.

146

34.

Annual premium for a policy under which the sum assured payable by instalments over a period of n years

is

147

35.

Annual premium for an endowment assurance where the instalments are to commence at death or maturity, and to be payable for n years with continuance thereafter so long as (x) survives Annual premium for a whole-life policy, the sum assured to be retained, and interest thereon at rate j paid, for n years
after the death of (x)

148

36.

148 148 150 150

37.

Annual premium
Value of Value of
P, xyn\

for

a double-endowment assurance

38. 39.

Pxyn\

40.

Annual premium
Value of

deferred n years
41.

Examples

...... F^ .......
for

an annuity

to the last survivor of (x)

and (y)
151

152
153

CHAPTER

VIII

Conversion Tables for Single and Annual Assurance

Premiums (Pages 178

to 189)

Construction of single-premium conversion table

178
.

2.
3.

Construction of annual-premium conversion table

17S

Construction of conversion table from single to annual premium


Application of conversion tables

4.

5.
6.

Values of

A^j

and

P^^

....
tables

180
181 1S1

by conversion

Inverse application of conversion tables

182

CONTENTS
7. 8.

General applicability of conversion tables

Construction of conversion tables for continuous functions

Examples

.......
,

PAGE 183
18-1

1S5

CHAPTER IX
Annuities and Premiums Payable Fractionally throughout the Year {Pages 190 to 207)
m) and Values of

1.

a
.

2.

Value of

aW

more exactly

3.

Value of a(\ assuming uniform distribution of deaths

4.

xvi

CONTENTS
PAGE

5.

and

6.

Value of

A^,

by the

integral calculus

211, 212

7.

Value of Value of

A^ by the integral calculus


px in terms
of &x
(x)
, .

213

8.

213
213

9.

Distinctions between

Px ?x

and

^P,

Examples

214

CHAPTER

XI
to 227)

Complete Annuities {Pages 219


Value of A

1.

assuming uniform distribution of deaths


1

219
221

2.

Value of

a^"

',

assuming uniform distribution of deaths

3.

Value of & x without assuming uniform distribution of deaths


,

221

4.

Value of

a*-),

without assuming uniform distribution of deaths

223
224

5.

Values of a-, and xn\

Examples

....,
d<->

xn\

'

'

'

'

224

CHAPTER

XII

Joint-Life Annuities {Pages 228 to 239)

1.

Value of axyz-

m under Gompertz's law


>

228

2.

Value of axyz-

(m)

under Makeham's
facilitate

first

formula

229

3.

Formation of tables to

the calculation of the preceding


first

229
231

4.

Another value of axyz-

(m)

under Makeham's

formula

5.

Effect of a constant addition to the force of mortality Effect of increasing the constant

232

6.

in

Makeham's
first

first

formula

233 233

7.

Value of axyz-

(m)

under Makeham's
.

formula

8.

Value of ax:x+i:x+t

Examples

...
. .
.

(m)

under Makeham's second formula

234
236

CONTENTS
CHAPTER
XIII
to 266)

Contingent, on Survivorship, Assurances (Pages 240

1.

Formula

for

A* adapted

to suit select tables

2.

Mortality tables to be used for calculation of contingent assurances

3.

Values of

A^. A*, and |.A^

....... ....
.....
....
joint-life

4.

Another value of L A*

5.

Values of deferred contingent assurances


Application of Davies's and

6.

De Morgan's columns to calculation of A*

commutation

7.

Value of

AJ.^
PJ.^
in the
.

8.

Value of

9.

Value of an assurance payable


t

event of

(x)

dying within

years after the death of (y)

10.

Value of A*
Values of

11.

A2
1

2
,

A3

A 1 A^
,

and

A
3

12.

Value of
Values of

P^
P^, P^,
i

13.

PJ,,,

P -.
:

P~ :z

and

P- :f
s

14.

Application of Simpson's Rule to calculation of

A*

and

15.

Values of

A___l__
\an,\l\xm\):r

and

P
\an\l \xm\) :i

16.

Value of Value of Value of Value of


Values of

AlA 2^

17.

18.

19.

A^ A^
A^
and

20.

A^

by the

integral calculus

21

and

22.

Value of A* under Gompertz's law jry

CONTENTS
23

and

24.

Values of A* and A* xy %yz

formula
25.

.......

'

\ub)

under Makeham's

first

251, 252

Value of
Value of

x\jz

(m)l

abc

<

(n)

under the same

252 253

26.

AJ.^
.

Examples

254

CHAPTER XIV
Reversionary Annuities (Pages 267
to 287)

1.

Distinctions

between various reversionary annuities


for
if

267 the premium

2.

Annual premium

an endowment assurance to
(

(x),

to be doubled
3.

y) should die before (x) within the

term

268 26S

Proportions of price of

payable by

{x)

and

(y)

4.

Value of a last-survivor annuity on half at the first death


Proof that

....
(x)

and

( y) to be reduced

by
268

5.

2^(1 to
.

l+j^+'-i p y ) = 2V
x
y

(1

+ %+t )

269

6.

Mortality tables annuities

be
.

used for calculation of reversionary


.
.

269

Formation of commutation columns


annuities

.....
.... .... .... ....

for calculation of reversionary

270
271

Value of

Value of
10.

%)
|d$

271

Value of Value

272

11.

of,
|

%>
y x
\

273 274

12.

Value of Va
Value of ar

13.

(an\Xxm\)

274
275 275

14.

Value of a -\ Vh

15.

On endowment
Examples

.....

assurance instalment policies

276

CONTENTS
CHAPTER XV
Compound Survivorship Annuities and Assurances
{Pages 288
to 294)

xix

PAGE
1.

Values of

flj,],,

|.

and
I

A^
i

288
2S9

2.

Values of PaLL, Pa 2

and P 3
1

3.

Interpretation of the

symbols

fl-

I'lfj'j

(TO)

2/m
1

a'

':ll M'

A&
Examples

and a x

290

1:8

291

CHAPTER XVI
Commutation Columns, Varying Benefits, and Returns of Premiums (Pages 295 to 338)
1.

Formulas with " benefit of survivorship "


Values of (v) x , (h),, (tA), (IA),,

....
(1^
.

295

2.

(v^,

(v^A)x
.

(V^^W^WC^kl-^CIA)^
3.

296 297

Mr Lidstone's
Use of

approximate formula
.

for (IB),,.
.

4.

Dx

.298
.

5.
6.

Other values of

Error to be avoided in calculating benefits with return of pre-

miums
7.

" Contingent Debt " policies

8.

Annual premiums
policies

........ ...... ........


for
policies
.
. .

H^,

(vA)i-, (v^o),, and

(v-A^

298

299
300

uniform and compound reversionary bonus


301

9.

" Minimum Premium "

306

10.

Annual premium

for

an endowment

able with simple interest


11.

.....
;

premiums received return308

Same

premiums returnable with compound


for a deferred

interest

309 310

12.

Annual premium

annuity with same condition

xx
13.

CONTENTS
Annual premium
for

an endowment ; premiums limited and return-

able with simple interest


14.

Annual premium
returnable.

for

.......
a deferred assurance
; . . .
.

.....
interest
.

PAGE

311

premiums received
311

15.

Value of an annuity with guarantee that the excess of premiums over the amount of the annuity payments will be paid at
death
. .

.314
315

16.

Annual premium

for an endowment; premiums payable during the joint lifetime of the assurant and another, and returnable
;

17.
18.

Same

premiums returnable with simple


returnable with
for

Same premiums
;

compound

interest

.315 .316

19.

Annual premium
life,

a deferred assurance ; premiums during the period of deferment dependent on the survivance of a second

and returnable

20. Single

and annual premiums for a premiums received returnable

last-survivor deferred annuity

21.

Approximation to annual premiums for benefits with return

Examples

........
CHAPTER XVII
Successive Lives {Pages 339 to 341)

.....
.

.316
317 318 318

Examples

339

CHAPTER

XVIII
to 413)

Policy- Values (Pages 342

1.

The prospective and

retrospective

2.

Valuation by select tables

....
i
.

methods of valuation

342
345
345

3.

Proof that n

Vx + P, = (,+, x w+1 x' ,,V) ^ix-\-n x x+n

4.

Investigation of the profit or loss from mortality

5.

Relation between reserve- values at the beginning and the end of the policy-year

......
profit or loss

346

347 349

6.

Example of investigation of the


Proof by general reasoning that

from mortality

7.

-A l-A
L

350

CONTENTS
8.

xxi
FAGS
351

Comparison between the hypothetical and net-premium methods


of valuation
Effect on policy-values of an increase in mortality

.....
if

9.

351

10. 11.

Comparison between policy-values by


Reserves required for policies upon

different tables of mortality

353 356 358 359 360

lives subject to extra mortality

12. Effect 13. Effect


14.

on reserves of changes

in the rates of mortality

on premiums and reserves

% < ax+1
m times a year

Negative policy-values
with premiums payable

15. Policy-values
16.

361

Value of ,V, +

362 362
364
365

17.

Value of . t V(>
Value of M+ ,V_

18.

19.

Value of n+ ,Vj Value of Tl+t.T VX ,,.

20.

366 367
d,uu and n+f.r

21.

Value of n+:r
Values of n+f.r

22. 23. 24. 25.

Ux

UW
x

367 368 369

Reserve for an endowment with premiums returnable

Same Same

premiums returnable with simple


with compound interest

interest

370
371

26.
27.

Reserve for a deferred assurance with premiums returnable

Same; premiums during the

period of deferment dependent on the survivance of a second life, and returnable

372

28 and 29. Comparison of values of B .,V., ^V.^,


30. Reserves for policies under special

and^V^.

374, 375

schemes

376

81.
32. 33. 34.

Reserve

for whole-life assurance with increasing


for

Same

endowment assurance

....
premiums
.

377 377
378 378

Reserve for a " Contingent Debt " policy

Reserve for a double-endowment assurance

35. 86.

Reserve for a deferred annuity purchased by single

Same

premium returnable

.....

premium

379

379

CONTENTS
37.

Reserves for whole-life and endowment assurance policies with uniform reversionary bonus

....
.

PAGE

380
381

38.

Same

with compound reversionary bonus

39. 40. 41. 42. 43.


44.

Reserve for a " Minimum Premium " policy


Surrender-values

Paid-up policies

...... ......
.
.

382 3S3 384 3S5 385

Paid-up policy under a contract with premiums returnable Paid-up policy under a last-survivor assurance

Guaranteed paid-up

policies

under whole-life

limited-payment
385 387

assurance and endowment assurance


45.

Alteration of policy from whole-life to

endowment assurance

46.

Application of bonus to limit future premiums or to alter policy from whole-life to endowment assurance

390
391

Examples

'

CHAPTER XIX
Life Interests and Reversions {Pages 414
to 422)

1.

Value of complete

life

interest
interest

414 415
1

2.

Value of temporary

life

3.

Life interest to be purchased

by payment of

416
417 41S

4.

Value of reversionary

life

interest
.

5. 6.

Value of absolute reversion

Value of contingent reversion

419
421
421

7.

Methods of book-keeping

Examples

.....
CHAPTER XX

in connection with reversions

Sickness Benefits (Pages 423 and 424)

Examples

423

CONTENTS
CHAPTER XXI
Construction of Tables {Pages 425
to 431)

PAGE
1.

Use of a

table of log D^. at rate


,

;'

to

check a similar table at rate/


.

42 j

2.

Formation of a table of A^

.425

3.

Formation of a table of

Px

.426
.426
.427 .427

4.

Formation of a table of
Formation of a table of

A^
Vx
.

5.

6.

Formation of a table of

^^
.V x r
t

7.

Formation of a table of

.428
429

Examples

ACTUARIAL THEORY
THEORY OF FINANCE
CHAPTER
Interest
1.

The

first

matter requiring attention

is

the question of the

difference

between the nominal and

effective rates of interest.

In explanation of Article 12, it may be pointed out that, where is made at 5 per cent, (for example), the interest is, in the ordinary case, payable half-yearly. Now the theory of compound interest is that interest earns interest, and therefore
a

loan

the interest paid at the end of six months earns interest to the

end of the year.


cent. loan.

In this

way the
is

interest

actually earned

is

over 5 per cent., though the loan


1-025, for the interest then paid

always nominally a 5 per The amount of a unit at the end of six months is
is

-025.

Starting then on the

months with 1-025 of principal we have the interest thereon for the second six months 1-025 x '025, and the amount of principal and interest at the end of that time will be
second
six

1-025 x 1-025

= (l-025) 2 =
1
is

1-050625,

which
cent.

is

therefore the
1

actual interest on

By

end of a year, and the -050625 or 5, Is. 3d. per similar reasoning, the general formula (14) follows:

amount of

at the

for that period

j(m)

{(l

where i is the nominal rate of interest convertible m times a year, and t(m) is the corresponding effective rate of interest.

From the above we arrive at the following statements The Nominal Rate of Interest is the rate per annum at which interest is quoted, no matter how often within the year that
:

interest

is

convertible.

ACTUARIAL THEORY

[chap.

i.

The Effective Rate of Interest is the total interest realised by the investment of a unit for a year. Now interest may be convertible half-yearly, quarterly, monthly, And these intervals may be or at the close of any fixed intervals. reduced in length, until at last we have interest convertible at infinitely short periods, i.e., momently. In this case, in formula (14),

we

write

for

m >and

8 for
i
;

and we have But


eS

f
I

A
(

+
of

S\ m
~Z"
)

\
t

(S
1-1

being infinitely great.


\m
)

by the theory
and we have

logarithms

in the limit

becomes

in/

and

log c (l

i)

It takes the place of the 8 is called the Force of Interest. nominal rate of interest only when interest is convertible momently. We therefore define the Force of Interest as the nominal yearly rate of interest when interest is convertible momently, or the annual rate per unit at which a sum of money is increasing by interest at any moment of time.

2.

To

find the

amount of
is

at the

end of the pth part of a

year where interest

convertible q times a year.

The amount
1

of

the

unit

at

the end of a year will be


1

\9 + =
i

(1

+ W).

But by Article 16 the amount of


is (1

at

the end of the^>th part of a year at rate


at rate
j(s)

+i)f

and therefore

is (1

i<i>)P

)p
is

3.

Articles

17-21.

Discount

defined

as

the

difference

between a sum due at the end of a given term and the present
value thereof.

Discount assumes three forms according as the three following methods


:

it is

calculated by

Commercial Discount. In trade transactions, as in discountthe discount is calculated like simple interest at the quoted rate for the currency of the bill. That is to say, the discount is ni for each unit of the bill, n usually being fractional.
(a)

ing a

bill,

If n

were large, then the present value of the

bill

to be

handed

chap,

i.]

THEORY OF FINANCE
seller,

over to the
is

B(l -

ni),

might be negative, which manifestly

absurd.

(b) Simple Discount. The present value of a bill, B, due at the end of n years, where n may be fractional or integral, is
.

:,

assuming simple

interest.
its

The

discount, or
is

by

definition

the difference between

B and

present value,
*

therefore

B
1

_ B (l + ni \

+ ni,
bill,

(c)

Compound Discount.

Again, the
interest

present value of a

B,

due at the end of n years, where n as before


integral,
is

may be

fractional or
is

by compound

-,

_,

and the discount

accordingly,

B -

-^

B-f 1

The formula
nirz

for simple discount

may be
V-

written in the form


1

l+m'

.,

and that

for

compound discount <(l+i) n l J

){l+iy

>.,

^-

from both of which it will be seen that discount is really interest for the whole period on the present value of the sum, not, as is assumed in commercial discount, on the sum itself. Discount may, in similar manner to interest, be convertible at any fixed intervals, and as is shown in Article 22, the value of 1 at the end of a year, where discount at nominal rate d is converted

(d
1

\
)

m
.

Now,
is,

as before, the intervals

may

be made infinitely short, that momently, and we have


1

discount

may be

convertible

where
is

u is written for v,

and

8 for d.

J
infinitely great (1
J

In the limit

when m

e- $, whence

and

= e-S = log v = -log (i+7)


e

Here, then, S
for the

is

called the Force of Discount.

It

is

substituted

nominal rate of discount when it is converted momently, and we may define it as the nominal rate of discount when


ACTUARIAL THEORY
is

[chap.

i.

discount
of time.

which a sum of money

converted momently, or the annual rate per unit at is decreasing by discount at any moment

4.

In Article 26
will

it is

in

which money

assumed, in finding the number of years double itself, that interest is convertible once

By a similar method it might be shown that, if interest were convertible m times a year, the number of ?thly periods in which money would double itself would, by the first formula, be
a year.
69 r-,

and to

find

from

this the

number of

years,

it is

necessary to

m
divide

by m, and we have therefore the number of years,


69

the periods of conversion


time.
It is obvious,

making no alteration in the length of however, that the length of time will be

shorter the oftener interest is converted, and therefore it is necessary in this formula to use the effective rate of interest always. Thus
:

i)~ 8C))n

iKf
i.

(1

where

i(

>

is

the effective rate corresponding to nominal rate

From

this

we

get n

= -_

69

approximately.
n

By the second and more exact formula,


the other hand, the same error
is

i.e.,

=
i

+ -35 on
if

not found.

We

have

interest

be convertible

times a year, the

number

of mthly periods

= -j- +

'35.

Dividing by m, as before,

we

get the

number

of years

J-


chap.
i.J

THEORY OF FINANCE
693
i

If,

however, we use the effective rate H m ) we have the number of

years
J

Km)

-35.

These two formulas


n

=
=

693 ^l

-35
111

A and

v
'

693

j(m)

'35

give results almost equal for ordinary rates of interest and periods of conversion, and this is a further proof of the superiority of the

second formula over the without loss of accuracy.

nominal rate may be used however, necessary to note that the addition to be made to the result of dividing by the nominal
first,

as the

It

is,

rate

is

of

35 and not -35 as in the case where interest

is

payable yearly.
5.
n, as

With regard to the equated time of payment, the proof that found from
>i

wi

Sx
is

+ >2n2+ + S.2 +

+S r +S r

?i

too great,

is

as follows

The Arithmetic Mean

of Sj quantities each iA in amount, and

n S 2 quantities each v i in amount, etc., and S r quantities each v nr in amount, is equal to the total of the quantities divided by the

number

of quantities, or

S 1 p"i + S 2 D' a +
t

Sj

S.4-

+S T +S r

v"-r

while their Geometric Mean is equal to the product of quantities to the root of the number of quantities, or
S 1 i 1 +S a +ii

all

the

+S r 7t r

iq

S!+S2 +-

+8,

Now,

as

is

quantities

is

shown below, the Arithmetic Mean of any set of (pwk greater than their Geometric Mean. Therefore

S,t)i

+ S 2"2 + Sj + S 2 + + S2
u m 2+

or

(S 1 i."i

+S > v +S r +S r u"-)>
r i>%

Si7ii+ 2,l2
t

+
.

"

'
.

'

s i+ 2+

.-+S7

nr + Sr-

S1 i 1 +Sa n+-

+S r it r
'

(Sj + S 2 +-

+S r

+^+

'

+ar

ACTUARIAL THEORY

[chap.

i.

That is to say, the present value of S x due at the end of n x years, S 2 due at the end of n 2 years, etc., and S r due at the end of +S r ) n r years, is greater than the present value of (Sj + S 2 +

due at the end of


S 1 w 1 + S 2 Wq+ s i + S2 +
years (or n years).

+S
+S
''

nr

"

'

"

Therefore

Vi + S
Sj
is

2 2 + + S2 +

+ S rn r + Sr

greater than the correct equated time of payment.

Proof that the Arithmetic

Mean

of n positive

quantities

is

greater than their Geometric Mean.

The Arithmetic Mean

of the n quantities

a, b, c,

Ic,

is

a+b+c+
n
while their Geometric

+k

Mean

is

{abc

k) n

Now,

in

place of each

of the greatest and least of these

quantities, say a antiti

and

k,

put

It

may be

easily

proved that

("47 >

ak,

and therefore the

result has

been to increase the

Geometric Mean while the Arithmetic Mean obviously remains


as before, since

+k =
,

+ ^k
a

+k -
now
the greatest

In place of each of the two quantities which are

put their Arithmetic Mean as before. The result is again to increase the Geometric Mean of the n quantities, while their Arithmetic Mean remains the same. This process may be repeated until the quantities are all, as nearly as possible, of equal

and the

least,

value, in

which case the Geometric Mean

is

equal to the Arith-

metic Mean, for


[r.r.r,

to

c factors)" J
,

(r n ) n
K
'

+ r + ;+
n

to n

terms

But we have seen that the Arithmetic Mean remains the same throughout, while the Geometric Mean has been increased at each step until it equals the Arithmetic Mean. Consequently the first


CHAP.
I.]

THEORY OF FINANCE

Geometric Mean (of the n original quantities) must be less than the Geometric Mean (of the n equalised quantities), that is, less than the Arithmetic Mean of the n original quantities, and we have
final

{abc

k) n

<

EXAMPLES
1.

A sum

of

500 payable
8s. lid.

purchased for 239,


the investment.

certainly at the end of 20 years is Find the rate of interest realised by

Here we have
239-446

Hence

u 20

Resorting to the use of logs,


,

= 500 u 20 = -478892. we get

g "

=
= =

log -478892

whence and

v
i

20 -96386
-0375.

The
2.

rate realised

is

therefore 3J per cent.


:

Verify the following figures

Nominal Rate.


ACTUARIAL THEORY
present value of
[chap.
I.

250 due

at the

end of twelve years, interest

4 per cent, convertible quarterly?

Answers:

(a)
(b)

100 x

(1-0225) 1 *

= 136,

lis. nearly.

250 x Tj^La

= l55

>

ls

3d nearJ y-

There are two sums of money, A and B, due at the end (a) Find p the equated time of of n and m years respectively, If this equated time of payment be extended to payment. (6) r years, to what sum will the amount due fall to be increased? Interest to be at rate i.
4.

()

By

the approximate formula,


nA

we have

+ ?B

P
(b)

~A~+lT

Let C be the addition to be made to of payment be deferred to r.

A+B

if

the time

inen
and

A+B+C
ri)

A
re

B
(i+7"
B(l - mi) approximately,

"(l+iy ~ (i+o

(A + B + C)(l -

= A(l - ni) +
Ai(r

whence

n)
1

Bi(r
ri

- m)
'-

approximately.

5. The premium income of an Insurance Office throughout the year as follows


:

is

distributed

Premiums due

in

chap.

i.J

THEORY OF FINANCE
+ (6000xll|) + (1 100 xl|) + (1250x2V)+ 1000 + 1100+1250+ + 600~0 = 7-768 months approximately.

Here we have
"

_ ~

(1000 x ~

-|)

"

If a sum of money at a given rate of interest accumulate times its original amount in n years, and to p' times its p original amount in ri years, show that ri = n log p.
6.

to

the terms of the question

CHAPTER
1.

II

Annuities- Certain
The amount
i

of an annuity-due of
is

per

annum
:

for n years,

interest at rate

convertible yearly,

as follows

(l-M) +

=
The

(l V

+ i)s'
71

(l+0 2 + (i + 3 + or S-1. 71+1


| |

+(1+2")

value of the same annuity-due


a-,
n\

is

as follows

= =

+ +u
i;

-(-

+J)-

(1+1)0, or

1+c

2.

The

value of an annuity-due of

per
2

annum

for n years,
is

payable p times a year, interest at rate found as follows


:

convertible q times,
(Tip

l {l + (l+i
,

p
V

q J_

2q 2?

- 1)8 ^ -v

+(l+

r+

..

+(l+

.)-

(1 V

<i

p
1

- (1 +

-^
<1

!L

- (1
+

</

-('!)

I i

i)

That is, the value of an annuity-due is equal to the value of an ordinary annuity of this nature with all the payments advanced by
of a year, which
is

obviously correct.

P
3.

Formula (13) may be written


.

in the

form

-( +T
;


chap,
ii.]

THEORY OF FINANCE
it is

11

from which
lent of an or

more

easily seen that

an annuity for n years, both


is

payable and with interest convertible q times a year,


annuity of
write

the equiva-

for nq periods, calculated at interest

we may

a,
n\

(q)

a q
1

at rate

i
(

mi\

If

be the

effective rate of interest,


{<,)

we have

l-(l+i)-
q{(l+i)"-l}
l-(l+t)- i
I

g{(l+0 8 -l}

q{(\+if -

1}

The

following explanation of this formula


:

may be

offered in

supplement of that given in Article 26

If

the q payments of

each, payable at the end of each qth part of the year, were to
this single

be superseded by one payment at the end of the year,

pavment must be made equal


the year of
all

to the accumulation to the

end of

the q payments of

each

that

is,

equal to

-{i + (i +
i
i

y+

(i

+(i +

9
i)

-i

(l+O -l
fl

We

therefore have the

value of an annuity of

per annum,

payable q times a year in instalments of


value of an annuity of
i

each, equal to the

1 q{(l+^y -l}


ACTUARIAL THEORY

12

[chap.

II.

payable once a year, or in symbols


a_,

J =

a,

9 {(i+,y-i} In formula (13) as modified at the beginning of this section, if n be increased indefinitely the annuity is changed to a perpetuity, and the term involving n in the numerator disappears we have
;

l
i_

(
(

1 l
<?

a, a.,

* at

* rate

'\
i 8
I

r-

1
as the value of a perpetuity at nominal rate of interest
i,

perpetuity

payable and interest convertible q times a year. The value of such a perpetuity may also be found as follows

The

value of the
i

first

instalment is

1 v

qJ

of the second

1 /
(

\ ~2
I

and so

on.

We
,

therefore have

W{(

,+
t)"
+
(

t)"'

t)"

"*}

t)"*
+

1-1
1

That

this value

is

correct

may be shown
it

thus

If

be

invested at this rate of interest

will

provide

at the

end of
if it

each

of a year (which
at rate

is

the same thing as saying that,


it

be invested

per gthly period,

will yield

-L at the
q

chap,

ii.]

THEORY OF FINANCE
period),
will

13

end of each such


simple
proportion
is

and therefore,
yield

if

-^-

be invested, by

it

at

the end of each period,

which

the perpetuity
in

we

desire.
let

Similarly
indefinitely,

formula (13a),

p = q and
then have
1
j

let

n be increased

and

the annuity becomes a perpetuity, the

term

involving n vanishing as before.


am
<)

We

where
year.

ite)

is

the effective rate of interest convertible q times a

This perpetuity
first

may

also

be valued thus

!
instalment
is

(l+ili))

l
'

The of the second


:

value of the

-9

(1 +i<))

,and so

<T
on.

We therefore

have

>

= 1/(1 + wrf
1

(i

+ iw)"

,J

+ (i + i

(B

(J

/}

"7
1

(1 +,-<))

-l-(l+i<a>)
1

i
(1 +<>)"
is

-1

the value of a perpetuity at effective rate of This, then, times a interest (>, perpetuity payable and interest convertible 5 at this rate of year, and may be explained thus : If 1 be invested
interest, it will yield at the

end of each will

of a year
1 1

{(l+zW)' -1}, end of each

and therefore

^
{(l+,-( 5 ))

produce

at the

T -l}

such period, and

{(l+iW) s -l}

ACTUARIAL THEORY

14

[chap.

ii.

will

produce

at the

end of each period, which

is

the perpetuity

required.
4.

The

following equations should be carefully noted

(l+i) m+ "

(1+J) m x (1+0"
,t-

m+n]

a m|

+ (l+z>.y + vm a-

Tables.

These formulas are of importance in connection with Interest It may be desired to obtain the value in respect of (m + n) intervals, where the values in the tables are tabulated in respect of intervals up to m only.
5.

The

value of future fines for the renewal of a lease,

or, in

Scotland, of future duplicands of feu-duty, and the substitution for

them

of an equal annual
:

payment

in perpetuity

may be

considered

as follows

Suppose F the duplicand due now and


<th year from now.

at the
all

end of every

Then the present


<

value of

the payments of

in perpetuity

is

F(l +!> + d 2( +

d 3(

ad

inf.)

= F

r^r<

Now

let

P be

the annual payment to be found which will be


value of
all

substituted for the periodical payments of F.

Then the present


first

the payments of P, assuming the

to

be due now,

is

(l +

+ v2 + v3 +

adinf.)

= P

_L
1

= pi+i
I

J!

the present values of these two series of payments must be equal to one another, and we therefore have

Now

P^1

= F
1
-=

vl

whence

P = F

-v'

-F-iL

chap,

ii.]

THEORY OF FINANCE
in
is

15

But we see that the annual sum payable


which a sum of

advance for

years

payable now will purchase


'

^
Our
result
is

(1-M>-

'
.

l+l-u

d F1-d'

thus confirmed by general reasoning.


t

Suppose now the first payment of the duplicand be due hence the present value of all the payments is then
;

years

F(v t + v-

+v^ +

ad

inf.)

= F = F

1-D*
1

(i+O*

And the present value of all the annual payments of P, the being assumed to be payable a year hence, is
P( u + 2 + l,s +
.
.

first

ad

inf.)

- P-i
i

We

therefore have in a similar

way
l

as before

PI=F,
i

(1

+ if -

(i+iy-i

Now the annual payment which requires to be accumulate to the sum F due at the end of t years is

set

aside

to

F =F-(l+.-y-i s1

this result also

being arrived at by general reasoning.

tion of a
is

The schedule given in Article 39 illustrating the redempsum by equal payments including principal and interest very instructive. It is shown how the capital contained in the
6.
is

mth payment of the annuity


the
capital

-m +

i.

We also
is

know
and

that

contained

in

the

first

payment

in the

"

16

ACTUARIAL THEORY
is

[chap.

ir.

second

K
Vj

(1 +i),

because the interest on the

first

repayment

of capital has been released and must be utilised to increase the


capital contained in the second

payment.

Similarly in the third


in the

instalment

the

capital

is

instalment the capital

is

That

For

K (l+t)s
n\

(1-M')m-1

K =
(1
ct
7i
I

(1

+ i)

2
,

and generally
1
.

mth

+i) m

v n-m+i

js

easily proved.

'-

By

the
t

first

way

of looking at the matter, the repayments of

capital in

years amount to

a_
n|

( \

-i

vn

~f

!) '

K
ft|

(a-. V
rt|

- a,.) = K
n-tV

K
a
i|

a, n-t\

And by

the second the total capital repaid in

years

is

71

These two expressions are

identical, for

K n=
*
7t
|

-K
a*l

71

re

Vi

=
1

K {l+(l+i)+ +(l + n
71
|

-1
}

( K

t!

+
\

...

+ Vn - +
'

1) '

K
|

= If K

K a
7l|

-*l

Again, the capital returned in the

first

payment
is

is

Jj",in

the second

a- 1
,

and so on, and

in the last it

v.

Now

chap, n.]

THEORY OF FINANCE
value
of

17
first

the
v

present
v 71

the

capital

in

the
v"

payment

is

=
in

a
K

vn

1
,

of that in the second

a
K

v 71

'1

K
a,

vn + 1 '

of that

the

last

vn

a,
n\

K a

ru+l.

Therefore

the

total

n\

value of

all

the capital repaid in the n instalments

is

vn + 1

This expression is of use in ascertaining the value to be paid for an annuity-certain allowing for income-tax, when tax is deducted from the whole annual payments without regard being had to the
proportions of capital contained therein.
It is

obvious that, for an

annuity of

1
,

for n years, a purchaser in these circumstances should

not pay
at
t

a but

should deduct the value of income-tax on capital


.

per unit, or tnv n+1

Thus the net


is

price paid for the annuity

will

be a lnv n + l

This result

necessarily only approximate,

an adjustment should now be made for the reduction of interest following on the reduction of capital invested, and for the consequent increase of capital returned in the successive payments of
as

the annuity.

In making up a schedule such as that given in Article 39, it should be carefully noticed that it is only necessary to work out The first value in this column is the figures in column (3).

The succeeding
'SI

values are obtained

by continued

multipli-

by (1 + 1). The figures in all the other columns are obtained from those in column (3). In forming the schedule in this way, however, a periodical check should be applied, the figure in column
cation
(3) opposite

being

(1

+t) m_1.

When

the annuity

is is

assumed that interest


the annuity.

payable q times a year, it should be convertible at the periods of payment of


in respect of

The schedule should then be formed

an annuity for nq intervals at rate of interest


the formula previously found, namely

bearing in mind

a =
n|

aml q
i

at rate of interest


ACTUARIAL THEORY
7.

18

[chap.

ii.

Jn the circumstances

investor has lent money, repayable

given rate of interest, say z, sinking fund returned to him annually at a lower rate only, say
it

mentioned in Article 40, where an by an annuity and yielding a but where he is able to accumulate the
i'

be seen that for an advance of 1, the borrower must pay interest amounting to i per annum, and also the sinking fund at
will

rate

i'

to replace the advance of

or

In

other

words,

**l
1
is

the value

of

an

annuity

of

and by proportion

s'
1

+ tY-. n\
To

is

the value of an annuity of

per annum.

find in such a case the


t

amount of

capital outstanding at the

end of
If

years.

was the original advance, the annual payment being

'si
i'

the sinking fund will have accumulated at

to

K
ii.
i

the borrower be asked to repay the capital outstanding for the convenience of the lender, he should pay only
in
t

3'ears.

Now,

if

the balance outstanding after deduction of the accumulation of


17"

sinking fund, that

is,

s'.
'I

s,

If, on the contrary, it be to the borrower's convenience that he should repay the balance of capital, the lender must receive such

sum

as will enable

him

to purchase an annuity of

+ '

ni
the

for

the remainder of the term,

that

is,

K|
i',

\a
is

value of the annuity being calculated at rate returned by investments elsewhere.


to
if

as that

the rate

The third case may, however, arise where both parties desire end the contract, and in such circumstances it will be sufficient
the lender get such a

sum

as will enable

him

to set

up a

similar


chap, n.]

THEORY OF FINANCE
That
is,

19

contract for the remainder of the terra.

he should get
period

the value of an annuity of

Kf

+ -

for the unexpired

on the same terms as the original annuity was calculated. We saw that the value of an annuity of 1 for the whole n years was
1

-',

Hence we get the value of an annuity of

-\

for

(n-t) years as

( V

+ _j_\

'

s-Jl+ts

j^L_.

8.

The general

rule given in Article 43 for finding the present

value of a series of payments of any amounts, to be

made

at

any

times, the value to be so calculated as to yield the purchaser the

remunerative rate,
accumulative rate,
nature.

i,

on his whole investment throughout the

longest of the periods, n years, and to return


i',

him

his capital at the


it is

should be most carefully noted, as

in-

valuable in finding the present value of varying annuities of this


It is sufficient to

that the present value

know the first part of the rule namely, may be found by multiplying the amount
;

accumulated at rate

'

to the

end of the n years of the

series of

payments by

50
it
is

9. In Article

shown how

to approximate to the rate of

interest

by means of

Finite

Differences, given the value of the

By the same means an approximation may be made to the value of an annuity at a rate intermediate between the rates in a given table of values.
annuity and the term.

The general formula may be


h T

stated in the form

I'nx+h

Unx

;1

b +

1(4
^,

&Unx+

'

'

where the values

at intervals of x in the rate of interest are given.

For example, if tables of values at 3 per cent., 3| per cent., 4 per cent., etc., be given, and it is desired to find the value at, say, 3J per cent, we have
a (3j%)

a (3%)

S Aa (3%).

--

a\:j

20

ACTUARIAL THEORY
For a term of 20 years, = 14-87748 + f(- -66508) + fx -04301 0(8jx) = 14-87748 --99762 + -01613 = 13-89599
10.

[chap.

ii.

With reference
i

to Article 65,

a, it

should be noted that the


t

value of an annuity-certain for n years deferred


at rate

years, interest

during the

first

years and at rate

thereafter, can

be

conveniently expressed only in the form

(l+i)'
It

.,,

l-(l+i)" v JJ
.

TO

J should not be written in any modification of the formula


t]

id! |

= a a t\ n+t\
t

11.

To
is

find the

annual premium payable in advance for


first
t

years

required to provide an annuity-certain for n years, the


of which
to

payment

be made at the end of

years.
is

The

value of the benefit to be obtained

vt

'

,.

The

value of the payments to be

made
is
1

to secure this benefit

(P being the required annual premium)

?(l+v + v 2 +

...

-l-i'*- )

= Pa-,

Now

the value of the benefit must equal the value of the


for
it,

payments made

whence we have

Pa
t\

=
=

(-1 fl_
n\

and

If the

benefit side

premium be payable half-yearly, we have = w t-1 a and the payment side


,

as before the

=iM i+ ir+(>
a where
interest
is

ir--+(>+ir"}

at rate


chap,
ii.]

THEORY OF FINANCE
p 2
c'

21

-1

Therefore

=
1

a
'lL
.

2(-l|

u^zti being calculated at rate


rate
i,

and the

other

functions

at

12.

Sinking-Fund Assurances are of importance,

as

they are more

frequently in use than formerly was the case.


to provide

sums required

for the

are employed redemption of debenture issues at


capital

They

their

due date, to return at the expiry of a lease the

sum

paid for property held on leasehold, and, in short, to secure the

payment of a sum of whatever nature at the end of a term certain. The present value of such a sum, that is, the single premium
to secure
it, is

vn

Putting

for

the annua]

premium
is

to secure

this

benefit,

the present value of the premiums

whence
and
If the

P-,(l+rt

ri )

= =

vn

P-,
I

1+a^n
a year,

premium be payable p times


\-2

we have the payment

side equal to
P<p> [

|[-(-r
where
a
7'J)

\-i

+
(

i+

r-i

/, (

i+

\-(p-D

i
+
a

p(p>

=
calculated at rate

JTjfl

r.)

p
is

From

this

we

get
p(3>)

ml

Vn
1

p
1

+ a1ip~l\
?l

a simple application of the formulas being assumed to remain constant already obtained, interest throughout the whole terra of n years. It is, however, the case that the rate of interest has shown a tendency to decline for many

We

have so

far

made but

22
years,

ACTUARIAL THEORY

[chap.

ii.

though of late this tendency appears to have received a It effect. check, which however is probably of only temporary be prudent to make allowance for such a fall, will in any event and we must seek formulas to give effect to this consideration. Suppose the rate of 3 per cent, to hold for 10 years, thereafter falling
cent,
is

per
10)
is

cent, every 10 years

till

minimum

of 2 per

reached.

Then the
v
(H)

value of
.

due at the end of (10 + m)

years (m

<

l>

(3J)

At the end of (20 + m) years (m


10

<
x

10), the value

is

V)
At the end of (60 +
in

io

V
is
'

m) years the value


10

in

"m
where

x v

x v

10

10

")

'<>

x v

10

V
m

has any value.


of the annual premiums where the

The present value

sum

is

due at the end of (10 + m) years (m

<
a

10),

is

P (a fi|M) +
and
Similar
values

"(Si)

m|(3i))

10

P =
a i0| of

w)

x v

(Si)

w
"(Si)

m
a
m|
is
(3i)

P where the sum

due at the end of

+ m), (40 + m), and (50 + m) years, m in each case being less than 10, may be found. Finally, when the sum is due at the end of (60 + m) years, m being of any value, we have for the value of the annual premiums
(20

+ m),

(30

u /a t
1

ibl(34)

+ \h)

10

io|(3j)

J. +

10

10

"(s "(3
v
10
10

iol(3)

4. + 10

'

m w vm

10

10

10

V}) Vi)

Vd^h^)at

And, the value of the benefit being as found above, we may


once determine the value of P.

13. To find the value of an annuity-certain of 1 for n years paying the purchaser a desired rate of interest and securing by a Sinking Fund policy the return of his capital with one year's interest at the end of the year following the last payment of the

annuity.

A
of (P

purchaser would pay

for
is

an annuity-due

for (n

+ 1)

years

d),

where P

the premium payable in advance

chap, n.]

THEORY OF FINANCE

23

charged by an office for a Sinking Fund policy of (n + 1) years term, and d is the interest in advance on 1 at the rate desired. For an annuity for n years of (P^rj-r + d) he would therefore pay
1

(P.-^ttt +

*0> an<^ f r

an annu ity of
1

for n years

he would pay

P
.-TT,

+ +

1.

Again, for the annuity of (P


the policy effected
policy will be for r '

d) for n years,

we saw

that

was

for

1,

and therefore
,,

for an annuity of 1 the


will

and the annual premium

be

P
P ^n + d
'

We
(1)

have now to see

What

(2)

How
;

the total capital invested is each annual payment is divided between interest and
;

premium and (3) Whether the


year's interest at the

policy returns the capital invested with one

end of

(re

+ 1)

years.

(1)

The
But

value paid for the annuity


in addition the purchaser

is,

as above,

n+U

must pay the first premium on the Sinking Fund policy, which is

P,T+T] P
=r

+d

Therefore the total capital invested

is

(2)

Each annual payment


is

is

1,

whereof there
Interest on

d
of capital
.

p pit+ii

And premium on

policy

P__. + d +i|

Together

24

ACTUARIAL THEORY
The
capital invested
is,

[chap.

ii.

(3)

as before,

-,

One

year's interest thereon

^
1

<

Together, making up the amount payable under the policy

....
-,

P^rr,

+d

If
d,

be a net premium, and calculated at the same rate as

then the price paid for the annuity,


,

1, is

equal to

the value of an

+i| annuity-certain for n years.

For, since

P+i| =
=-=

(1+0*
1

( l+i\a
.

Tl

& r^r

-d

+ l|

P-rr.+d +i|

a-^
a-

= P-^.+cf +i|
And
~
,

"+H
1

= a^-. -

EXAMPLES
1.

If

an annuity-certain

is

payable twice a year, interest coneffective rate of interest


?

vertible four times a year,

and the

is

i,

what

is

the amount of the annuity in n years


to be applied
is

The general formula

(>

iJ
)'

p
('


CHA1>
-

"]

THEORY OF FINANCE

25

where j

is

the nominal rate of interest convertible q times a year.

But by the terms of the question


q

+ J-Y = (1+i)

where

= 4.

Also p

2.

Therefore
*

we have
1 (1

+iy -

2(1+0* -1

2.

convertible

Find the amount per annum payable momently, interest momently, for n years, corresponding to a yearly
for n years, interest convertible yearly.

payment of a
Let
of

be the amount per annum required.

Then the

value

for n years will

be

~~ e n^ ,

which must be equated to


is,

the value of the payments of

a,

that

to a

i-

We

therefore have

K
whence
3.

l_ e -m
5

l-(l + i)-
(l
:

K =
1

'-

to

x
1

--

An

annuity-due of

per

annum

is

be allowed to accumulate

payment has doubled itself. Assuming that this occurs at the end of an integral number of years exactly, find what is then the amount of the annuity. Prove the result by general reasoning.
until the first

If n
itself,

be the number of years

it

takes the

first

payment

to double

we have

the amount of the annuity-due at the end of that

time equal to

(l+i) + (l+) 2 +

+(l+)*

= (1+0
= (1+0
since (1

(1

+ Q" i

2-1

+ i) n =

1+i
the value of a perpetuity-due of 1 per annum, and our proved to be correct. For, the first payment having accumulated to 2, of this 1 may be paid away and the remaining
This
is

result

is

easily

1 accumulated for n years further, while the second and succeeding payments will accumulate to 2 in succession, yielding 1 per annum

26
to

ACTUARIAL THEORY

[chap.

ii.

lated,

be paid away and 1 per annum to be re-invested and accumuand so on, ad infinitum all which is obviously the value of a
;

perpetuity-due.
4.

Find the value of an annuity-certain of


3s. 2d.

payable half-

yearly for 48 years and 48 days at 3,

per cent, interest,


T-345027.

given log 1-01579

-006804 and log -22132

We must assume here that interest is convertible half-yearly, and then remembering that where both annuity is payable and
interest convertible

times

a year

a_ =

a p

np\

at

rate

of

interest

we have

+
a
(2)
lstJ

J_
2

"(-01579)

_W,

-01579

96

To

evaluate v

+H
,

we have

log

+ -

865

=-.

(96+^) ( + |L)
_ 96 +
(

loffW

S)

lo S

1-01579

" -( 96 + 3l)

x 006804
-

= =
Therefore
a
( 2)

T-345027
log -22132

4S+

m
365|

1-

-22132

-03158
24-657.
is

=
5.

Each payment of
It is

a perpetuity

divisible equally

among

five

arranged that, instead of the perpetuity being shared as at present, four of the funds should for a fixed number of years
funds.

the

each in succession, receive the annual payments in full, and that fifth fund should be entitled to the perpetuity in full

thereafter.


chap,
ii.]

THEOBY OF FINANCE

27
fifth

Find the number of years which must elapse before the fund comes into possession.

deferred

which the fifth fund is procuring and the benefit it is forgoing is a perpetuity, and these two must be equal.
benefit
t

Here the

is

a perpetuity

years,

fifth

part of a

Hence

vl

r-

and
6.

-r^ log v

years, the annual

Find the value at 3 per cent, of an annuity-certain for 30 payment to be reduced by one-half after the end of each period of 10 years. Given v10 at 3 per cent. = -74409.

Here the value of the annuity may be written


a

a
iol

+ T',10 "iol +

t,20a
iol

v Now
and
Therefore
a

a
t-io

l-"10
:

1-

'74409
-03
^-5

8 _ n 8-530

iol

= -74409x8-530 = va^ = -74409x6-347 =


_
10;

6-347

4-723

=
=

S-530

+ -V
2

x 6-347

x 4-723 4

12-884.
life

7.

shareholder in a

company holds 2000 of its paid-up

capital,

the dividends on which are increased 10 per cent, every quinquennial valuation. Supposing a valuation to have just taken
place and the dividends for the next five years to be fixed at

100

per annum, what

is

the value of his interest in the undertaking


?

upon a 5 per

cent, basis

The annual payment


five

for the first five years

is

00, for the next

100x1-1,

for
all

the next five lOOx(l-l) 2 , and so on.


these payments
is

The

present value of

100a- + u5 100(l-l)aF1 + i)i100(l-l) 2a rj +

= =

100

S]

{l

+ r3(M) + (M) +
2

100a-:
II
is

-^(M)
equal to 3134-547.

which at 5 per cent,


28
8.

ACTUARIAL THEORY
for

[chap.

ii.

Calculate the price to be charged for an annuity-certain of

25

30

years,

assuming 4 per cent, interest for the

first

10 years, decreasing thereafter by A per cent, per annum each period of 10 years. (Use the Tables given at the end of the

Theory of Finance.}

We

have
a

+ V(4%) ai0|(3i%) + V%)"(3K) aiO|(3%) 8-11090 + (-675564 x 8-31661) + (675564 x -708919 x 8-53020) = 8-11090 + 5-61840 + 4-08528

10

10

10

fl

i0|(4%)

and

= 25xa=
=

17-81458 445-3645

445,

7s. 3d. nearly.

9. In connection with a feu-duty of 20 per annum, a duplicand payable every 21 years, the next being due 7 years hence. Find the present value at 4 per cent, of all future duplicands and the equivalent addition to the feu-duty if all duplicands be
is

dispensed with.

Given
value of

v3

= -88900,
ad

u4

= -85480.
is

The present
20(i> 7

all

future duplicands

+ u 28 + d49 +
7

inf.)

v = 201

u 21

Now
and

j'

d 21

= =

i^xt*
(v-f

= -88900 = -43883.

x -85480

=-75992,

Therefore the value of the duplicands

"2 - 20 x " 20x I--43883 = 27-083.


-75

This
If,

may be
side

looked on as the benefit.

then, the annual addition to the feu-duty be P,

we have the

payment

=
Equating the two
sides,

P^
=

= 25P.

25

whence

we have P = 27-083, P = 1-083.


1,
Is.

8d.

THEORY OF FINANCE
value of a certain property

29

is 20, and this per cent. The property is subject to a feu-duty of 8 a .year, but the feu-duty payable at the end of every 21st year from the present time is to be, not 8, but the full annual value of the property at that time. Give a formula for the present value of the feu-duty.

10.

The annual

increases each year

by

The value of the annual payment of 8


obviously

in

perpetuitv

is

r-

But every 21st year the 8


on
this

is

not receivable, and the deduction

account

is

therefore

8(a + * 2 + 88 +
~ 1

ad

inf.)

_ 21

Instead of the 8, there is receivable the full annual value of the property, at the end of every 21st year, and the present value of this is

20(l-01) 21 21

+ 20(l-01) 4

+20(l-01) 63 t.63+
-01)211)21

ad

inf.

20(1
Therefore the formula
full

1 -(l-01)2ii,2i

value of the feu-duty


(1-01)2^21
(l-01)2t> 2

is

expressed by the

411.

-8

^+20 l~"pi ^ ""1 -

Construct a schedule showing the repayment of a loan of


for 4 years

1750 by means of an annuity-certain


yearly at 5 per cent, interest.

payable half-

HalfYear.

30
12.

ACTUARIAL THEORY
in 7 years at 3 per cent. J

[chap.

II.

Construct a similar schedule of the repayment of a loan of

1300


chap,
ii.]

THEORY OF FINANCE
(c)

31

The

total

principal

repaid after the twentieth

payment

= = = =
14.

lnnnn 10000

10000
a-,
40]

x a,
20|

10000 - 365-557 x

~ 67397
"

02

10000 4022-595.

5977-405

Given a at 4 per

cent.

15-6221, and

at the

same

rate

8-1109, find the capital included in the 15th

payment of

the former annuity.

The

capital included in the 15th

payment of
v
:

a.

_ j,25 -15+1 =
the value of which
is

\l

found as follows

l_io

32

ACTUARIAL THEORY
office

[chap. h.

of the same amount as the


3 per cent.

was receiving,

for

5 years at

= 1000(_L_ + 05)(l+ar ' V


10|

647-330

(3%)

16.

26-87037,

Given that the amount of an annuity-certain of 1 and that the present value of the same annuity

is
is

14-87748, find the rate of interest.

Using the formula


1
.

_L
s
1

a,

we have
In the present example
~~

a,
n\

n\

14-87748
-067216
-03.

26-87037

= =
17.

- -037216

, 10s. payable yearly, and a composition of payable at the end of the 10th and every 20th year thereafter, are to be redeemed by an annuity payable half-yearly for 30 years. Find the amount of the annuity, taking interest at 4 per cent.

A perpetuity of 7

10s.

Here

it

will

be convenient
is

to find separate expressions for the


is

value of the old benefit which


of the consideration which

being given up and for the value its place, equating the two thereafter to ascertain the amount of the annuity.
taking

The

Benefit

Side

= =

7-5

j-L + (u 10 + u 30 + d 50 +

a d inf.)\

,./l 7 5
'

(t + t^o)
\

- 7-5(25 + :^
-543613/

=
Now,
if

196-8205.

P be the

half-yearly payment, the

Payment Side

= P
interest being

x 34-7609
at the periods of

assumed

to

be convertible

payment

of the annuity.


chap,
ii.]

THEORY OF FINANCE
Px
and
,

33

Equating, we have
34-7609

196-8205

196-8205 P = 377609

= =

5-662.

5,

13s. 3d. nearly.

18. If a sum of 1,000,000 be borrowed at 4 per cent, interest, payable annually, and 60,000 be applied each year towards paying the interest and reducing the principal, in what time will the loan be finally discharged ?

Here we have 1,000,000 = 60,000

a,
n\

where n

is

unknown.

To

find n

we proceed

as follows

6al

34
21.

ACTUARIAL THEORY
An
is

[chap.

ii.

25 years,
interest

annuity of 80, payable in half-yearly instalments for bought for 1400. Required the half-yearly rate of
is

which

made on

the investment.

Here we have 1400 = 40 a,


\

50|

Hence

a,
50

= =

35.
1J

Rate of interest
22.
it

per cent, very nearly.


is

Find the rate of interest at which a


3

calculated

when
:

16-938, given annuity values for the

same term

as follows

per cent.

17-413
16-482 15-622

31 per cent.
4
per cent.

Using formula (43) of

this chapter in the

Theory of Finance,

we have
AnK

- -931+ -0355

=
whence
23.
i

-0025, approximately,

-03

+p =

-0325, or 3 \ per cent.

From the

tables given at the end of the Theory

calculate

the value at 3J per cent, of

of Finance, an annuity-certain for

20 years.

The formula

to be used

is

i/i-i
where

Aa
\p/
)

and

A2 a 6
\

represent the successive differences of a


(3%),

a ^or a P el'id f 20 years. an<^ a (i/) (U7V

The
24.

true value of a, at 3J per cent,

is

14-539.

From the

tables given at the


at

calculate the

amount

end of the Theory of Finance, 7\ per cent, of an annuity-certain for

25 years payable half-yearly, interest convertible half-yearly.

chap,

ii.]

THEORY OF FINANCE
to follow
is

35

The formula

A(A-i)
where
f
,S

A ar^

and and
S

A**
(HX)

m)

represent

the successive

differences

(3J%)'

for a

P eriod of 50 years.
3|-

The

true value of \ s

at

per cent,

is

68-032.

quite give the true value of the

Neither in this question nor in the previous one will the formula function, as second differences

are assumed to be constant.

25.

spectively

Assuming one rate of interest throughout, obtain proand retrospectively the value of a Capital-Redemption
1

Policy of

taken out n years ago

for a period of

annual

premium of P_, and prove the

identity

of

years at an the two

expressions.

Before attempting this question, the student should know something of prospective and retrospective policy-values, though he will come more in contact with them when discussing lifepolicies at a later period.

When

a capital-redemption policy

is is

the benefit to be ultimately received

entered upon, the value of exactly equal to the value

of the series of premiums to be paid therefor. As time goes on and the date of payment approaches, the value of the capital sum obviously increases, while on the other hand the premiums to be paid are fewer and their value consequently decreases. Thus the value of the benefit now exceeds the value of the premiums still to be paid. For this difference the office must keep a sum in hand which is called the " policy-value." The policy- value has here been looked at from the " prospective " point of view. But again, after the policy has been in force for a number of years, the premiums which the office has received have been invested and accumulated (at the rate of interest assumed in the calculations). These accumulations constitute the value of the policy, which has here been discussed from a " retrospective " point

of view. In the case in the above question the value of the benefit at

36

ACTUARIAL THEORY
is

[chap.

ii.

the commencement of the contract

l ;

and the value of the


-f-

premiums

is

P-,(l

+a
*

),
^
I

whence

P-,

ai

After n years the value of the benefit is increased to '-, while the value of the premiums is reduced to P-;(l +a -). There" t-n-ly t\ y fore prospectively for the value of the policy we have

Again, the
P-pj(l

n premiums already paid have accumulated to +i)s, and therefore retrospectively

These two expressions are


(|

identical, for
V

(-11-1

'

1 n l+a-t-ii
_l_

-71-1/
TC

r<

r (i+0"{q+o-^L (l + a
x

}-{(i+o-^,)xi y

n
-I

-i|

(1+Q{(1 + )*-!}

= P-(l-M>_
26. Calculate the net level annual premium for a capitalredemption assurance of 100 payable at the expiration of 50 years, assuming 3| per cent, interest for the first 10 years, 3 per cent, for the next 20 years, and 1\ per cent, thereafter.

The

Benefit Side

100 x

^ ^
x
10
20|

s
v

The Payment Side


10 = D/ PC^KSiZ) + "

X a
CB%;

+ " x
x
20

"<! x a 20 U 2i%))

20

Therefore
nrv 100 x
1

%%)

x
\
.

20

V)
/ 10

WX)
20

iO|(3J%)

10 / + 1"(8}T)
,

X a

20|(3%))

+ \ V(SW

V>

X a

20|(2J%))

100 x -7089188 x -5536758 x -6102710

8-6076866 23-954
25-743

+ -7089188(15-3237994 +

-5536758 x 15-9788911)

= =

-931
18s. 8d. nearly.

chap,

ii.]

THEORY OF FINANCE

37

27. Find the annual premium per cent, for a Leasehold Assurance to mature at the end of 30 years,
(a)
(b)

assuming 3 per cent, interest throughout assuming 3 per cent, for the first 20 years and 2i per
thereafter.

cent.

Answers

(a)
(6)

2,

0s.
2s.

lOd. per cent.


8d. per cent.

2,

desired to have a policy providing 1000 at the end The policy is to be by annual premiums under a special system which provides for the premium being doubled at the end of 5 years. Calculate at 3 per cent, interest the premium
is

28. It

of 30 years.

payable during the

first

5 years.

Here we may

state the Benefit Side as

1000o 30

411-987,

and the Payment Side as

P{(l+^,) + 5(l+^,)}
= Px

or

{2(1

+-)-(!+*_)}

35-660.

Equating the Benefit Side to the Payment Side, we get

Px
whence

35-660

411-987,

P = =

11-553

11, lis. Id. nearly.

29. Express in the simplest form for applying to Interest Tables the annual premium required to provide 1000 at the end of Zn years, the premium to be reduced by one-half from the beginning of each n years.

The

simplest formula for this

premium
1000
"In
| I

is

1' 3

"
11

a + a + 2a Zn
Then the premium
for the first n years

^ >&
H
is

4P, for the second

n years 2P, and for the remainder of the period P.


30. Calculate the reserve required at the end of 30 years under a Leasehold Assurance policy with a premium of 10 (a) assuming 21 per cent, throughout (6) assuming 3^ per cent,
;

10 years, decreasing thereafter by \ per cent, per period of 10 years.


for

annum each

38
(a)

ACTUARIAL THEORY
The
reserve required
1
is

[chap.

11.

(by the retrospective method)


1
)

(%l( 2i %)is

450

'

(6)
'

The

reserve here

10

K*uiAn

l)(l- 3 ) 10 (1-0275)10 +

,_^

i) (i.0275yo

31.

insurance

office

calculates

its

Leasehold

Assurance

premiums
of the

and allows as the surrender value of a yearly-premium policy the premiums paid, with the exception
at 3 per cent, interest,

accumulated at 3 per cent, interest, less a deduction of Given u 20 at 3 per cent. = -55368, find (a) The annual premium required to provide a Leasehold Assurance policy for 100 payable at the end of 20 years (b) The surrender value allowed by the office for such a policy at the end of 10 years.
first,

10 per cent.

()

chap,

ii.]

THEORY OF FINANCE

39

being the annual rate per unit at which the funds are increasing by interest at any moment of time, assuming that the increase or decrease in the funds is uniform throughout the year.

represents the effective rate of interest or the rate

of interest actually realised by the


33.

company during the


is

year.
is let

An

estate, the clear

annual value of which


7 years

800,

by

a college at a rent of

300 per annum on


end of

a lease for 20 years, which

may be renewed
money.

at the

on payment of a sum of

Interest being reckoned at 6 per cent.,

what sum should

the tenant pay on renewing his lease ? Given log 106 log 4-688385 = -6710233, and log 3-118042 = -4938820.

= 2-0253059,

The lease has 13 years to run; the tenant wishes the term extended to 20 years. Therefore, if he is to continue at the same annual rent, he must pay the difference between the full annual value and the rent for the period of extension, or
500 13 |a

=
7l

500( %|

-
i>

lT| )

= = Now
log(l-06)- 13

CAA /l 500

20

- u 13 \

500
i

= -13 log 1-06 = - 13 x -0253059 = --3289767

And

log(l-06)- 20

= T -6710233 = log -4688385 = - 20 x -0253059 = - -5061180 = T -4938820 = log -3118042

Therefore

500 13 |

=
=

4688385- -3118042
500 x
1308-619.
is

The sum

to

be paid by the tenant

thus 1308, 12s. 5d. nearly.

CHAPTER

III

Varying Annuities
1.

In the scheme of figurate numbers


is

it

is

to

be noted that
first (to

the mth term of any order

equal to the

sum

of the

1)

terms of the preceding order. Again, from the consideration that the terms of the (r-l)th order are the first differences of the terms of the rth, those of the (r 2)th are the second differences, and so on, and those of the first are the (r- l)th differences of the terms of the rth order, and from the formula
um

u1

(w ~ 1 )(w " + (m-l)A + 9


1

2)

A Bl

+ (-!)( -2)
I

(m-r+l) ^_ hi

we have

t-- = m| r
|

*__.
1
[

+ * (m-l)At-- + ("'-!)(>*' l|r|


2

2) A2<

__
1

1 I

(to

-1)

(to

-2)

(to-

r+l) Ar _i
l| f|

P^T
(all

higher differences vanishing)


1

_/ ~
l

T\T\

m4- ( + Cm-1M-) t y T\^T\ +


i

)( CT
jjf

2)

a. h\^T\ +
f

(to-1)(to-2)-

(-r+l)
Mil
first

|7^T
But the first terms of all orders except the Therefore term of the first order is 1
.

are zero, and the

first

(TO-l)(m-2)
m| r|

(m-r+l)

r-

chap, hi.]

THEORY OF FINANCE
value of a-,

41

A proof by induction of the We must premise that


2.

is

as follows

<Vm = va^T)7^\ +
which may
of and
/,

^-^,,-tti +

+""- lfl

n^ii

easily

be proved by expressing a-

in simplest terms

and rearranging so

as to obtain the right-hand side of

the above equation.

Then we have

Vm

-v n

"

42
ft

ACTUARIAL THEORY"
<i)

[chap. hi.

|r-ll

n+\\T\
',

VlT+il "

+ ^|f+ll _
,

nlT\>
"ii

in

^xi

-v

'

^\

~\

+ (1 + 1)

^ H*r

(fl

a
*i

fg

-^ s+Ti^)-(
<

ff

^T|frr

+^^2|

r n| -

+ ^^3|^+

+^"

"n-

JL { <_
j
|_

u| r-l|

_ + o /| _ - <+l| r|

- 0 <
r|

+l| r+l|

(o-!-i-o"<
8

| r|

+l|

i) r+lK

n| r|

which follows
for a, n
|

the

same

law

as

the

expression

we assumed

,, r
|

and which has been obtained therefrom by assuming

nothing but the truth of the equation above premised. Therefore if the expression holds for the rth order it also holds for the (r+l)th. But we have seen that it holds for the third order,
therefore
on, until
it

holds for the fourth

therefore for the fifth

and so
general

we

reach

the rth order,

when we have

the

expression

a
n
|

*(-!)
|r-l|

(n-r + 2)

|r
i

3.

The

following

may

serve as an alternative explanation of the

value of an annuity of the rth order as found by general reasoning

a.

Suppose one is entitled to a perpetuity of the (r l)th order, but prefers not to spend the payments as they fall due.

Instead, they are invested,

and the interest on the investments

chap, in.]

THEORY OP FINANCE

43

is spent. Now for the first (r - 2) years nothing is received and nothing can be invested. At the end of the (r- l)th year a payment of t ^ is received, which is invested, and yields in a

alone

year interest of it-^^, or itthe end of the rth year.

This amount

is

spent at

But, further, at the end of the rth year a payment of J


received,

r\ r
,,

is
1|

which

is

invested along with the previous

and

the interest received at the end of the (r+l)th year


z

is

(* v

r-l\

Ti

T
1|

+ '-; ;,)j r\r-iy

or '<

ti > r+llrj'

since the with

term of any order is equal

to the

sum of the
i I-

terms of the preceding order.


the end of the (r + l)th year.

This amount of

first
is

(m -

spent at

The payment
year, J
i(t. v

of

r+l| t -\\

receivable

at

this

time

is

also

invested and the whole interest received at the end of the (r


-, r+l| r
|

r+l| r-l|'

-,)

or

i I

_
,

+ 2)th

r+2|r|

is

spent. r

This process goes on in perpetuity. annuity being spent is i a,

But we notice that the

We therefore

have
a
qo
i I

r- 1|

=
=

ia i col

r
j

and
If,

a-.-,

J^lzzll

however, the payments receivable cease at the end of we have an annuity for n years, and in this case we must take account of the payments of the annuity of the (r - l)th order which have been held back and not spent. The sum of these at
n years,

the end of n years


(t ^ r-l| r-l|

is

i-|r-l|

which

is

of course equal to ^

r+llr-l|

+t ^

")

n\r-l/

w+l|r|

-,

thus see that the value of an annuity for n years of the (r-l)th order is equal to the value of i times an annuity for n
years of the rth order plus the value of a payment of t years hence.

We

due

In symbols
a
| r 1

= ia
| r\

+
11

vn

whence

-,

-,

nlr ~

+l| v n(

,-,

-;
r\

5liiJ

44
4.

ACTUARIAL THEORY
As explained in
any varying annuity, and

[chap. hi.

Article 25, Finite Differences are of great use


it

in finding the value of

is

here also that

the use of the values of annuities according to the several orders of figurate numbers comes in. For it will be observed that, in
stating u v u
as the
,

uv

etc., in

terms of k x and
in Theory

its

successive differences,

the coefficients of the differences follow precisely the same laws

scheme of orders shown

of Finance, Article

3.

Thus we have
SKj

+ =

V 2U2
1

+
1

V SU $

a,,u. 1 n 1

+ Vn U^ + + a Am. + a- A 2 k, + n g

'

'

+a n
u.

r
|

Ar ~V

where the rth and higher


vanish.
If the series
o Mj

differences of the series j,

p uv

etc.,

be a perpetuity, we have, as

is

shown,

u 2m 2

= a- u, oo|l|i

-ad inf. + vsus + o-.-AV + + a__A?<, + ml8| 2


oo
i

+ - -A r ~V1
M

where the rth and higher differences vanish

=
From

w. "4-

Am.
t

A 2m, -r^J-

A'- 1 ^

this

we may
vhi 2

get a formula for the value of the series of

payments u v u v u^
v M,

un

as follows

3m

+
.

vn u

ft +

+
+

+ +

*,)

-('

n;

This will be found useful where the differences are not numerous, and the number of terms unknown.

As an example, suppose it is required to find the value of the annuity whose payments are 1, 5, 11, 109.

Here

ux

1,

Amj
un

4,

A-u 1

= 2,

and

109

u1

+(-l)Aii 1 + ("zlKlZ^A**,

= l+4(-l) + (/i-l)(-2) = n2 + n - 1
whence
ra=10.

chap, in.]

THEORY OF FINANCE
wX i

45

Also

131,

m 12 = 155,

A n = 24,

Aht n

= A\ = 2.

Therefore

w+5n 2 +lli.8+
/l

+109r 10 2\

../131

24

2\

EXAMPLES
20-year sinking-fund policy is effected on an increasing premiums, beginning at 100 per annum and rising by 3 each year till the end of the term. At the end of the fourth year it is proposed to commute further payments. Determine their value on a 3 per cent, basis.
1.

scale of

The premium due at the beginning of the 5th year is 112, will increase by 3 per annum for each of the succeeding 15 years. Now, assuming for the moment that the premiums will be payable at the end and not the beginning of each year, we have
which
their value equal to

112

^I| + 3a Ia|2|

at the beginning of each year)

Adjusting this expression (since the premiums are actualty payable by multiplying it by (1 + i), we
to

have the commutation price of the future premiums equal

(1+0(112^ +

3^)
a i

112a-, +3^51 (1+0(1 16|

16i> 16 \
/

1-03(112 x 12-56110 + 3
1-03(1406-8432

12-56110- 16 x-623167\
-03

12-56110-9-97067
3

03

= =
2.

1-03 (1406-8432

+ 259-043)

1715-863.
if

Prove that

a
11
1

denote the value of a varying annuity of j


I

jo
r

the rth order for n years then (1

+ if a

is

equal to the
in

sum

of

the
of
v.

first

(n-r+l) terms

of the expansion of (l-e)-

powers

46

ACTUARIAL THEORY
Remembering that
t

[chap. hi.

(m-l)(m-2)
r,

(m-r+l) _
(I K
l

lr-1
and that where
^

m-l r-1
l

m <
T

t = m\r\
T

0, '

we have

+tYa ' n\r\


n\r\>

' y

l|r|

2|r|

S|r|
.

T
.

= (i+Or C. 1 cr . 1 ^+ r cr _ 1 ^ + i + =
(

+.. 1 cr _ 1 -)
. .

+ iy/,r + ri
I,

,r

+i

+ fc+l}v+2 +
|2
.
.

+(-!) ("-2)|n-r|r-l

2-1

.].
J

+rj)+
is

K^I)^ +
sum

+
first

r(r+l)-

(-!),,,-,

which
of (1
3.
first

the

of the

(rc-r+1) terms of the expansion

w)"'' in

powers of

i>.

three payments are

Find at 4 per cent, the value of the annuity of which the 40, 45, and 52 respectively, and the

last 325.

The
For
this,

first

step necessary

is

to find

the term of the annuity.

we
un

use the formula

ux

0-l)(rc-2) + (n-l)Aih + A2Mi +


since

In this case

= 40 + 5(rc-l) + (-l)(n-2), Hence rfi + 2 - 288 = (+18)(*-16) =


325

Awx = 5 and A 2 Kj = 2

n=16. Now, proceeding to find the value of the annuity, we have a = 40 a_ + 5 a + 2 a 2


, ,

16|

16|

16| 3

= =
4.

(40 x 11-652)
1538-558.

+ (5

x 77-744) + (2x341-879)

What

is

ments are 1322480?

16, 26, 58, 124, etc., the

the value at 5 per cent, of the annuity whose paysum of all the payments being

Here

it is

necessary to find

n,

the term, from the formula


,

w(-l)

n(n-

1)(tz- 2) .


chap, in.]

THEORY OF FINANCE
to apply the formula of varying annuities

47

Then proceed
a

= u,u + Au,a-~ +
is

A'-mo-,--

Ahr.a

The

value required

287998-936, as follows
10

:
40| 4
|

16 a

40|1

+ n
|

+ 22 T 40| 2
,

a
40| 3
|

+ T

12 a

= (16x17-159) + (10x229-545) + (22 x 2374-991) + (12 x 19431-595) = 274-544 + 2295-450 + 52249-802 + 233179-140 =
5.

287998-936.

Find the present value of an annuity of the ?-th order, to yield i per annum on the whole capital for the entire term of the annuity, the capital to be replaced by means of a sinking fund accumulating at the rate j per annum.
interest at the rate

Here we must resort to the general rule given in Article 43a of Chapter II. that the present value of any series of payments, n remaining constant, may be found "by multiplying the amount, accumulated at rate j to the end of the n years, of the series of
payments by J v :
1

."

s -, n|

Now
rate J i
is

the amount of an annuity of the rth order accumulated at


s'

and we therefore have the value of an annuity of


"
I

the rth order under the conditions laid


s

down

as

".J
n\

where

n r
|

and s' are taken


?i
| |

at rate

/'.

Find the value of an annuity-certain for 20 years whose 20, the value to be so payments are 1, 2, 3 calculated as to yield the purchaser 5 per cent, on his whole
6.

several

investment throughout the whole of the 20 years and to return him his capital at 3 per cent.

Applying the rule cited


,?

in the preceding example,


20| I]

we have

(3%)
,

+ A 20l - 05

2] (3%)

%;(3X)

48
since the

ACTUARIAL THEORY
amount of the annuity
at 3 per cent. to

[chap. hi.

the end of

20

years

is

(%|r] + %|Ji)

26-87037
1

+ 229-01248

1-34352

=
7.

109-187.

42,000 has been made with the following Annual instalments of principal for 20 years, the first being 4000, the second 3800, the third 3600, and so on interest at the rate of 4 per cent, being paid annually on the outstanding amounts. Immediately after payment of the fifth instalment, it is arranged to repay the balance of the advance with a premium, the lenders being able to re-invest at only 3 per cent. Show how the premium should be computed.
loan of
condition as to repayment
:

The value of the

capital at 3 per cent,

is

and of the

interest

on the outstanding amounts of capital

04(24000*-,

myj

- 3000a lT|

m%) + 200^- (3%)).


is

Therefore the whole value of the outstanding loan

3960al5| T|

- 320al5| 21 (3%) + 8fl l5| (3%)


is

31 (.'

And

the

premium required
320

396

%H(3%)-

%|2](3%)

+ 8a1 1 T|3

3%)-

24000

CHAPTER
1.

IV

Loans Repayable by Instalments


ments,
In connection with the discussion of loans repayable by instalit is important to remember that the symbol C stands for the

capital actually returnable

of any discount or
further, that

by the borrower, that is, taking account premium on the par value of the loan, and
this definition of C,

j is dependent on which the annual payment of points must be clearly borne


nature.
2.

being the ratio

interest bears to C.
in

These two

mind

in all questions of this

The

following wording, differing slightly from that of

Mr

King,

may be

useful to explain the general formula for the value

of a loan, repayable
interest in the

by instalments meantime at rate j,

at stated periods of time, with so as to yield the purchaser a

given rate of interest, i. Had the borrower contracted to pay interest at rate i per annum on the capital C, then the required value of the loan would have necessarily been C, since, interest at rate z being payable at the end of each year, with C repayable, the investor would have

The value of the capital at i on the purchase price. being K, the value at rate i of the interest, on the basis assumed, would have been (C - K), which then is the value of the annual payments of interest, if these were made at rate i. But, in
realised rate
rate
i

point of fact, the annual payments of interest are

made
is

at rate j,

and therefore by simple

proportion

their

value

-4-

(C - K).

Adding to the present value of the interest the present value of the capital as already noted, namely K, we have the whole value
of the loan equal to

K + -4i

(C - K).

3.

by a loan purchased
j

In the converse problem to find the rate of interest yielded at a given price, we have the equation

_ Jv^~

)
}

whence

may be found

as explained in Articles

11 and 12.

50

ACTUARIAL THEORY
Mr Ralph Todhunter
has given (/

[CHAP. TV.

LA.

xxxiii.

356) a very

by bond bought at a premium. In the explanation accompanying the formula, he suggests that the premium might be dealt with in practice bv writing down the book-value out of each dividend by an equal proportionate part of the premium, the remainder of Taking the case of a bond, the dividend being treated as interest. repayable at par at the end of n years, interest meantime at rate j, purchased at a premium of p per unit, Mr Todhunter gives us the
useful formula for approximating to the rate of interest yielded

following schedule

Year.

chap.

iv.J

THEORY OF FINANCE
by
this formula will as a rule
;

51

be sufficiently close for but if greater accuracy be desired, the rate of interest thus found may be used to obtain K in the formula
result

The

practical purposes

"jj

A ^r-s K.

when

a very close approximation would be obtained.

be applied as a

Todhunter, however, points out that his formula should only final result when n and j are not large. The reason for this will be readily understood from the following
:

Mr

Using Makeham's formula, we have

_ j(C-K)

A-K
Mr

or in the

example submitted by

Todhunter

+p - v n

where

v n is

calculated at rate
i(l

i.

Hence
and
pi

- v n )+pi =
v

j'(l

-v n )

= [/-i)(l -

n
)

j-i = ^{l-ci+o-"}- 1
_
=
pi

ym

j^

^
\3~
1

TV

~-IT +
l

H
n \
.

n+ 1

n-

Neglecting higher powers of


.

than the
ra i

first,

we have

/,

l.\ + l.N

whence

~s Zrc

i>

which

is

Mr

Todhunter's formula as given above.

52

ACTUARIAL THEORY

EXAMPLES
1. A bond for 775, 15s. 10d., repayable at par in five years, and bearing interest at 3f per cent, payable half-yearly (first payment six months hence), is bought at a price (750) to yield Draw up a schedule the investor 4J per cent, on his investment. showing the amounts that must be added to capital each half-year so as to gradually write up the sum invested to the redemption

value.

The schedule

will

be as follows


THEORY OF FINANCE
five

chap,

rv.]

53
municipality
is
it

3.

The

per

cent,

stock of a colonial

redeemable at par
in order to

in 20 years.

What can

a purchaser give for

make

4 per cent, on his investment ?

Using Makeham's formula,

A = K + 4we have

(C - K)
i

K =

100i>

(4

%)

j =

-05,

-04,

and C

100.

Therefore

=
4.

113-590.

Two
per

loans were granted 10 years ago

(a)

20,000
(6)

at

4| per

repayable by 60 equal instalments which include both principal and interest


cent,

annum

nominal,

half-yearly

20,000

nominal, repayable by 60 equal halfyearly payments of principal, interest being also paid on the balance from time to time remaining outstanding. Find in each
at 4 per cent, per

annum

case the amount of the payment due to-day, and show the amounts of principal and interest included in the payment. Find also the

sum

for

which each loan may be redeemed to-day, assuming

interest at 3^ per cent, per


First, as to

annum

nominal.

the payments due to-day

(a) In this case the periodical


is

payment
x

is
4i

always the same, and


is

equal to

20000
6C|

whereof

20000
60|

...

principal,

...

and the

.,

(2|%)

remainder, or

20000.,
(1

- vn

>

J,

is

interest.

(U)

The payment due now

consists of (1)

20000

of principal

and (2) interest on the balance of principal outstanding at the


beginning of the twentieth half-year, that
is

(20000

-19)
is

-0225.

Thus the whole payment due

20000 j-^

(l

^h

-0225

54

ACTUARIAL THEORY
Secondly, as to the redemption price
(a)

[chap.

iv.

As the amount paid

to

redeem the loan can only be

invested at 3J per cent., the future half-yearly payments must be valued at that rate, that is, the price is

20000

HZ
(6)

(21%)

,,
^

l+a

maix)
instalments

60!

The
1

value
a-Tg.

of

the
of

future

of

capital

is

20000 x

"wo-iX? y 60
r/
is

and

the

future

payments

of

interest

^60 redemption price

,.,.,- 20000( x-0225a--10}%) wi 1


r

go

x-0225ffl iffi - 7 .,.,A


4 <>i 2

(i|%)y

Therefore

the

20000
plus the
5.

{(i + S

- 225

Vo,n%)4

225

<^<uo}

payment due

to-day.

6 per cent, debenture of 100, redeemable at par in


is

20 years,

sold for 107, 10s.

How

would you approximate to

the rate of interest realised by the purchaser, given that to obtain 5 per cent, he would have paid 112, 9s. 3d. ?

Since

purchaser,

we are given we can find

the value of the value of

A
K

to return 5 per cent, to the from the equation

112-463

= K + ^(100 -K) 05
37-685

For

K(f-l) = 120-112-463
and

But
therefore

K = K =

100

(5%)

*L = "37685. (5/0

Now the question is to find the rate of interest when the purchase price is 107, 10s.

We

have

C~K
j J

A-K
is,

or substituting 37-685 for


2

(that
" 6

approximating with 5 per cent.)

62-315

69^815

-0536
is

from which we see that 5 per cent, being about 5| per cent.

too low, the true rate

chap.

iv.J

THEORY OF FINANCE

55

6. A bond of 100, bearing interest at the rate of 4 per cent, per annum, payable half-yearly, and redeemable at the expiration of 30 years at a premium of 10 per cent., is bought for 11-1. Find approximately the rate of interest realised by the investor,

having given a at If per cent.


In the formula
half-yearly interest,
i

=
,

36-964.

C =j

and j

for this question denote

=
1

-02 x

~
l
'

= ~, C =

110,

E=

110i>>,

and

A =

114.

SinCC

j)

60

^75

Therefore trying If per


'

- 36 964 v = -35313 cent., we have 02 110-38-8443


1-1

~ = =

114-38-8443

'1

x -94678

-01721.
rate of interest or
is

Hence the approximate yearly


(101721) 2 1

-03472,

3-472 per cent.

7.

A bond

half-yearly,

for 1000, bearing interest at 5 per cent, payable and repayable at par in 30 years, is purchased for

1250.

What

rate of interest does the investment yield to the

purchaser ?

As

before,

we have

.C-K

A-K
where

We

be well to treat then have


it

will

and j

as interest for a half-j'ear.

025
Trying
d 60 first at 2

1000- 1000 1250- 1000


get

i>8

a 80

per cent,

we

AOK 1000 -304-782

1250-304-782

-0184.

56

ACTUARIAL THEORY
is

[chap.

iv.

Seeing that 2 per cent,

too large,

we

try again with If per cent,

and get
i

nnf -025
.

1000-353-130 1250-353-130

-0180.

Now

in the result.

a reduction of \ per cent, makes a change of -04 per cent, Therefore to get the true rate we have 2 - x

=
= =

1-84
-19

- ^lr
25

whence
and

x
i

-0181.
is

This being the half-yearly rate, the effective yearly rate


(1-0181)
8.
2

-0365,

or

3-65 per cent.

Towards the

close of

1905 the Japanese Government issued

a four per cent, loan at 90 per cent., repayable at par on 1st

coupons for a January and 1st July each year, with first payment on 1st July 1906. Allowing for discount on the instalments the issue-price may be taken as 89J on 1st January Find the rate of interest realised. 1906.
(or in certain circumstances earlier),

January 1931

half-year's interest payable 1st

.C-K
.

Q9
"

100-

100 v m

89-5-1 00 v

= =

(taking u 50 at 2 per cent. (taking u


60

at

2-1

per cent.

= =

-29094) -0235

-32873) -0237

whence approximately the half-yearly rate is -0236 and the effective rate is (1-0236) 2 - 1 = -04776 = about 4, 15s. 6d. per cent.
9. A debenture of 100, redeemable at 110 on 1st July 1915, and bearing interest at the rate of 4| per cent, per annum, payable half-yearly on 1st January and 1st July in each year, is purchased on 1st April 1905 for 109. How would you calculate the yield to

the purchaser

Here

per half-year.

must be considered as the rate yielded to the purchaser At 1st July 1905 the value of the capital will be

chap,

iv.]

THEORY OF FINANCE
As
that date
is

57
half

110 x v, and of the interest 2-25(1 +a-7-,.\


a period forward

we must

discount these values for that time, and

we get

the equation

109(l+i)i=110^ + 2-25(l + - ). |w
i

must now be approximated

to,

and

this result

being the half1.

yearly rate
It is

obtain the effective yearly rate from (1 +ifprobably better, however, to proceed in the same

we

way

as

in

our other examples.

Then,
110(1

being the half-yearly rate as

before,

we have
0225
1

+t>- 110 v2 i
to,

~ "FT*

109-110j>2 *
and the yearly rate found

As

before,

may be approximated

from the

result. result.

The formulas produce the same


10.

100, bearing interest at 6 per cent, per and redeemable at par at the end of 40 years from the date of issue, was issued at par 30 years ago, the present market value being 115.

bond

for

annum payable

half-yearly,

(a)

at the
(b)

Find the rate of market price.

interest yielded to a purchaser

now buying

Find the rate of interest obtained by the original holder when his profit on sale is taken into account.
(c) If it were proposed to convert the bond into one for 125 bearing 3 per cent, interest, redeemable at par in 30 years, what gain or loss would there be to the holder of the bond on

conversion

?
.

()

= J*

C-K

JTR

nQ " 3

100-100t> 115-100,20

Trying 2 per

cent.,

'

06x

100-67-297 115-67-297

03

x 32-703 47-703

2-0567 per cent.

58

ACTUARIAL THEORY
Also trying 2 per cent.,
1

100-64-082 115-64-082

03x35-9 18
50-918

=
and

2-1162 per cent.

2-25 gives 2-1162


2 gives 2-0567.

Thus a

difference of -25 gives a difference of -0595. 2

Therefore

+x =

2-0567

chap,

iv.]

THEORY OF FINANCE
i

59

Where

-04192, as found in (a)

A =
= =

.aqf;

36

465+

OT2^ 125

- 36 465 )
'

36-465

+ 73-920
4d. to the holder

110-385.

Thus there is a loss of 4-615, or, say, 4, 12s. of the bond on conversion on the terms given.
11.

foreign corporation issues a loan of 390,000 4 per cent,


:

bonds, repayable by annual drawings as follows

10,000 at the end of 5 years, 11,000 at the end of 6 years, 12,000 at the end of 7 years, and so on, till the whole is repaid. The issue-price being 94| per cent., what rate of interest is paid by the
corporation
?

Here
is

it is

necessary to find the term

when the

last

instalment

paid.

We

have
390

10

+ 11 + 12+

+{10 + (-l)}

20 + fra-l)

whence n

20.
is

Therefore the value of the instalments of capital

iooo^io^+WUsing now the formula


z

= j

A lv

CK -
-

and trying 4 per

cent.,

we have K =
Also

196943-6, as found belov

C = 390000

60
12.

ACTUARIAL THEORY
Having given the value of a
cent.
at

[chap.

iv.

4 per cent.

13-0079

and at 5 per
interest yielded

12-4622,

by an annuity

for

are successively 20, 19, 18, etc.,

approximately the rate of 20 years, in which the payments when purchased for 150.
find
first

The
only,

successive terms of this annuity involve


its

differences

and consequently

value

may be

stated in the symbols

20a

nr\ ~ %i2i

Now

at 4| per cent.

a-- = 13-0079,
v

= \-ia- = 1- -585355 =

-414645

and

,__ 2o| 2

^- W
-045
20| 1
20|
|

13-0079

8-2929

-045

Therefore

20a_ _--,- = 260-158-104-778 = 155-380 2

Again, at 5 per cent. a.

= =

12-4622.

so

_ ; a_ = 1_ -623110 = -37689
|

Therefore

IQa^^-a-,- =

249-244-98-488

150-756
of 4-624 in
fall

We

see that a rise of -005 in the rate

means a

fall

the price, and to bring the price from 155-380 to 150 (a


5-380) the rate of interest must be increased

of

by

005x5-380
4-624

005g2

Therefore approximately at the price of 150 the rate of interest realised is 5-082 per cent.

13.

yielded

Apply Todhunter's formula to determine the rate of interest by a terminable 6 per cent, debenture, repayable at par at

the end of 20 years, purchased for 119, 10s.


chap.
iv.J

THEORY OF FINANCE

61

Here we use the formula

=
1

'

+ -s P
Ofi 06

195

-~2Q'

01
l

+ gx-195

= =
14.

-04558

4, lis. 2d. per cent.

5 per cent, from an Assurance

Twenty years ago a Local Board borrowed 100,000 at Company, such loan being repayable

by 30 equal annual payments, including principal and interest. The Board now offers 3f per cent, debentures, repayable at par
60 years hence, but now issued at 90, in equitable fulfilment of the contract with the Assurance Company. What amount in debentures should the

Company

accept

The annual payment made under


loan
is
,

the contract of the original


still

and there are 10 such payments


is

to

be made. be

30l (5%)

If the Company commuted at the

to forgo the receipt of these they should

rate of interest presently ruling in the market,


in

and the proceeds should be employed


at 90.

buying the new debentures

To find the rate of interest now may take the rate yielded by these
have

obtainable on investments

we

debentures as

fair.

Thus we

.C-K
where j =-0375, C = 100,
cent.

A = 90,

and

K = 100i>60

at,

say,

4 per

= 8231
0375(100-8-231)

90-8-231

-0421 approximately.

62

ACTUARIAL THEORY
The value
of the 10 annual payments outstanding
'

[chap.

iv.

is

therefore
will

100000
'

a
30|

x ii,) and tne amount or debentures this sum lu % zl /o)


i

,_

(5%)

purchase at the price of 90

is

100000

X d
9

"mIto

10|(4 21%)

'

100000 x 8-02677 15-3724o x -9


58,016, 19s. lid. nearly.

58016-994

15. A Company has an issue of 6 per cent, debentures maturing after 5 years, which are quoted at a price which yields 4 per cent., and it proposes to redeem them by issuing 5 per cent, debentures for the same nominal amount in lieu. Show how to find the number of years for which the 5 per cent, debentures should run so that the holders would still realise 4 per cent, on

their investment.

In the general formula

A = K + i-(C-K)
j

when C = 1, we have

A=

1-(1-K)(l

-)
06\

Under the present arrangement of

6 per cent, debentures

A =
On

Wi-ix^-S)
1

-Hi^

the proposed altered basis of 5 per cent, debentures

-( i

-w(

-S)

=
Equating these two
l
I

+ -01o-,

+ -01a-

l(4#)

o/ ,

+ -02a_ 6
|

(4%)

oi(i-;
%)

)= -02(1-4,)

CHAP.

IV.]

CHAPTER V
Interest Tables
1.

In Articles 16 and 17

is

discussed the formation of a table of

log (1

+ i) n

The column

of values thus formed

may be used

further

to get the values of (1

sponding to the logs. a periodical check is not sufficient. Each value must be separately checked. This may best be done by taking independently the logs of the table last found and comparing the results with the
original logs.

taking the natural numbers correAs this is not done by a Continued Process,

+ i) n by

2. If a column of (1 + i) n has been formed, a column of v n may be obtained from it by the use of a table of reciprocals. By taking the reciprocals of the values thus found the original table of (1 + i) n should be reproduced, and a check put upon the work. Again, a column of log v n might be formed in the same way as a table of log (1 +i) n (in this case there is no need to start at the end of the table as for forming a table of v n directly) and the natural numbers corresponding would be the values of v n , each of which requires to be checked as before.

In view of what has been said about Leasehold Assurances it be well to discuss methods of forming a table of annual premiums for such. It is necessary to note that as the premiums are due at the beginning of the year, we have to deal with
3.

will

annuities-due throughout.
First,

we have

P_

and hence

log P__


P.

v.]

THEORY OF FINANCE
we
from which P

65
obtain

value in the latter of these from the value in the former,


log:

may be

obtained at once.

The

following schedule shows the process

Term
71.

Again,

we have

66

ACTUARIAL THEORY

[chap. v.

It is on this relationship that Orchard's Conversion Tables for annual premiums are founded. By them if one enters with the the result is P They are fully discussed in given value of a
,

Chapter VIII. of the Text Book, Part II., and are only mentioned here to show their use in forming a table of P

In

all

the above methods

it

interest holds throughout the

has been assumed that one rate of term of the assurance^ but it is not

implied that this assumption always holds good.

INSTITUTE OF ACTUARIES' TEXT BOOK PART II.


CHAPTER
I

The Mortality Table


1.

Mortality Table

is

defined in this Chapter as an instrument


probabilities of life
final

by means of which are measured the


probabilities of death.

In

its

and the form a mortality table sets

forth the history of the experience

and the number dying columns.


Text Book,

If

by means of the number living we refer to page 494 of the


:

we

find the following figures

Age.

68

ACTUARIAL THEORY

[chap.

i.

results

mortality table does not give absolute but only relative ov average in other words, it is not intended to be inferred from
;

these figures that 127,283 children were in reality found who were all born at the same moment of time, that 14,358 died before
attaining age one, that 3,962 actually attained age one but died

before attaining age two, and so on. the radix is selected to represent the
initial age,

An

arbitrary figure called

number of

entrants at the

and the figures submitted are only on the average, and relative to one another. Were we asked to form a mortality table representing the experience of Edinburgh during the calendar year 1906, it would not be sufficient to give us merely the deaths that occurred in Edinburgh during that calendar year; arranged according to year of age. The summation of these deaths would have no relation whatever to the / persons out of which the d deaths actually occurred, nor again would the (/ d ) persons have any relation to the /, persons out of which the d x deaths occurred, and so on. It is possible that the deaths column so supplied us might adopt a quite irregular form, for it naturally depends on the number living at each age out of which the deaths occurred. For example, the deaths between twenty and twenty-one might be twice as numerous as those between twenty-one and twenty-two, owing to the fact that the number living between twenty and twenty-one happened to be fully twice as numerous as those living between twenty-one and twenty-two. Again, it would not be sufficient that it be added to our data that the number born in each calendar year for many years past had been equal to the annual deaths. The migration element would require to be kept before us, since people might be emigrating and immigrating in different numbers and at entirely
different ages.

Before a mortality table can be formed in the way here disit is essential that the population be proved to be in every way stationary that is, that the annual births be equal to the deaths, that the births all take place on the same day of the year, say 1st January, and that there be no emigration or
cussed,
;

immigration.

chap,

i.]

TEXT BOOK PART

II.

EXAMPLES
1.

Prove that

mx =

ry

(a

(a

^3

lifL

l!lL

We

have by Text Boole formula

(9)

%
whence

70
3.

ACTUARIAL THEORY
Given the following particulars
x

[chap.

i.

Q%

20
21

-00572 -00608 -00643 -00668


-00691

22 23 24
find

how many of 10,000 people living at age twenty die during each year of age up to twenty-five.
Here we
are given
/

20

from Text Book formula

and q 20 and hence we may find d 20 since Also from Text Book (5), l 2Q x q 20 = d 20
, ,
. ,

formula (1), /2 i = ^20 ~~ ^n> anc^ being given q v we may similarly find d 21 , and so on for d.2V d 23 and d., v In the example, rf 20 = 57, d 21 = 60, (/.,o = 64, rf 23 = 66, and <i, 4 =67.
4.

Find, out of 30,000 persons living at age thirty-five, the


are
777

number who
77735

still

alive at
?

each age up to forty, being given


77;

= -00865,
Here the

36

= -00889,
step
is

= -00914, s7
p a5
,

3S

= -00942, m 39 = -00975.
from
tw
36 ,

first

to find

;j 3i3 ,

etc.,

30 ,

etc.

By

Text Book formula (8)


2-777

P,

2+777
2

- -00865

hence

P" = =
-99090,

+ -00865 =
-99030.
I

-99139

Also,

t> 36

= -99115, p 37 =

p 3S = -99062,
(4),

?j 39

Now, from Text Book formula


therefore
^36

we have

= / ,

and

CHAPTER

II

Probabilities of Life
1.

It is

very important that the student should have at his


all

finger-ends the values of

probabilities in

which two

lives

may

be involved, and for that purpose he should practise, till he attains complete proficiency, writing down the values of the following, giving in addition the symbols, where these are possible. The answers should be carefully compared with those given in the
Text Book.

The
1. 2.

probability that

(x) will survive n years. (x)

3. 4. 5. 6. 7. 8.

both survive n years. nor {y) will survive n years. At least one of the lives (,r) and (j/) will survive n years. (x) will survive n years and (j/) die within n years.
will

and (^)

Neither

(x)

Exactly one of the lives At least one of the lives

(x) (x)

and and

( if)

will survive n years.


will fail within n years.

( 7/)

Both

(x)

and (^)

will die in the rath year

from the present

time.
9.

The

first

death will happen in the


will

rath

year from the present


rath

time.
10.

The second death


present time.

happen

in the

year from the

of the two lives will fail in the nth year. Neither of the two lives will fail in the nth year. 13. One at least of the two lives will fail in the nth year.
11.
12.

One only

14.

(.i)

will survive n years

and Q/)

will survive (n
it is

1) years.

With regard
written
:

to the last of these,

useful to note that,

besides the form given in the Text Book, this probability

may be

, p x g'l n-1* y

p *x

-p ,. n-l'x+1

x -l .p y

= 1px x n-1' x+l:y .b


,

72
2.

ACTUARIAL THEORY
To
find the probability that r at least of

[chap.

ii.

lives will survive

n j-ears.

An

alternative proof of the formula

p % l xyz
is

L =
(m)

Zr

n +Z)

as follows

exactly

This probability is equal to the sum of the probabilities that r, exactly (r+l), exactly (r + 2), and so on ad inf., will
(though,

survive n years
abilities will

when

+k >

m, the individual prob-

have no value).
(14),
(m)

But by Text Book formula


n

we have

P
xyz

(i+zy+i
Z'+i
!

Hence
7s
)

Zr + 2
(l+Z)'-+3

xys

(m)

(1+zy+i ^ (1+Z) '+ 2


Z>j-

T
|
"

(i

+ zy+H
z>-

Z
(i

+ z)
Z

Z2
(l

+ z) 2

/
i

\-i

(i

+ z)'-+iv
Z''

+z

~ (l+zy
3. In expansion of Text Booh, Articles 34 and 35, it may be asked what are the expected deaths and expected claims respec-

tively

amongst

joint-life policies

on

(x)

and

(j/)

for

each.

The expected deaths

are m(cj +(/), and the expected claims


it

Km(l -p
might

).

In the former of these expressions, however,

fairly be argued that it is incompetent to take account of a second death on any one policy in the year, as the lives are not traced be3'ond the first death.

But in last-survivor
expected deaths
are as
).

policies

this

does

not
while

hold,

and

the

before

m (q + q),
if

the

expected

claims are Lm(q x q

In contingent insurances payable

(x)

die before
,

(j/),

the

expected deaths
claims are

may be
(1

considered to be
).

mq

and the expected

Kmq

^q

4. It is most necessary that a clear perception should be obtained of the nature of the force of mortality, and the following

chap,

ii.]

TEXT BOOK PART


it

II.

73

explanation

is offered in the belief that attainment of that object.

will assist towards the

On

page 495 of the Text Book


This
is

will

be found a table of a
'

x'

the

rate of mortality.

the probability that a person aged x


it
is

will die within a year,

and

deduced from the elementary

equation q
It

__?.
X

must, however, be evident on consideration that the rate of mortality is not constant between ages x and (.r+1), then

suddenly rising to q nor constant between ages (tf+1) and x+l (.r+2), then suddenly rising to g and so on. The probability
;
,

that a person of any age will die within a year obviously depends upon the number who are alive at that age (whether the age may

be expressed by an integer or
after that particular age.

not),

and the deaths within one year

Now it is frequently necessary in actuarial work to have the probability that a person aged x will die at a particular moment. The function, however, that is tabulated is the force of mortality
at

age .r, which is clearly defined in Text Book, Article 38, as " the proportion of persons of that age who would die in a year, if

the intensity of mortality remained constant for a year, and if the number of persons under observation also remained constant, the places of those who die being constantly occupied by fresh lives."
It

may be

useful at this point to introduce an illustration to

idea clear. Let us consider the speed or the " force " of a railway train. This is generally measured by the distance covered in the course of an hour, e.g., the speed is 40 miles
assist in

making the

an hour. Any other function if tabulated would convey but little meaning. For the same reason the force of mortality is always measured as within one year. Suppose now we wish to measure the rate at which a train is travelling at any particular point. We might ascertain precisely the distance covered during the following minute, when simple proportion would give us the distance covered in an hour. It is obvious, however, that a minute is too long a period within which to measure that, in fact, the rate at which the train was travelling
;

may have
result

varied considerably

within

that

interval.

better

would be obtained were we to measure the distance covered during the following second, and resort as before to simple proportion.

In other words, the smaller the interval of time within

74

ACTUARIAL THEORY

[chap.

ii.

which we measure, the more accurately shall we be able to gauge point. the rate at which the train is travelling at any particular that the It will be noticed that our answer gives us the distance which train would cover during one hour, were the speed at infinitely small interval of the train was travelling during the measurement to remain constant for an hour. When now we come to measure the force of mortality at any
of that age x, we might work out the probability that a person the result by 365, we age will die within one day. Multiplying should get an approximation to the force of mortality. In symbols

i-r+
X X
i
fx,

= 365

385

-,

approximately.

day, however, is too long a period within which to measure. better result would be obtained were we to reduce the interval This would give us to one hour.

-IX +
.

=
fj,

24x365

24 x 365
j

approximately.
X

smaller the interval within which we measure, the more Hence we say that accurate will be our result.

The

X X

X+t

where

approaches the limit


t

0. 0,

When
t,

approaches the limit Fx


is
i
J-

we have

dl

=1X

~\~ Z

-IX

and

the infinitely small increase in x,

written dx.
dl
X

We therefore have

P*~
dl

T~dx~ X
of
I

where
It

dx

is

the

first differential coefficient

with respect to

x.

mortality

may be pointed among lives

out here that the value of the force of


assured varies between zero and infinity.

is nearly zero in the case of lives of age at entry .r who have just passed the medical examination for life assurance. It is infinitely great when we come towards the end of the mortality table, say when there is only one person alive, and that one about In the last year it rises from a fraction less than unity to to die.

The value

chap,

ii.]

TEXT BOOK PART


It

II.

To

infinity.

may be noted
I

that the rate of mortality can never

exceed unity.
If the

column

followed a mathematical law,


dl

it

would be a

simple matter to evaluate

~,

and hence
/

/j.

The

several formulas

that have been suggested for


VI.

will

be discussed later in Chapter


I

Meantime we must take

it

that the column

does not follow

a mathematical law, and be content to obtain an approximate

formula for a

At

this point

Differences.

interpolation

we find it useful to resort to the method of Central The ordinary formula of Finite Differences for between two of a number of given values of a
,,

function
u

is

x+t

=
the

t\u

l(t-l)
-A
1

A-u T +
,

^o

-A

t(t-l)(t-2) A3 ^A 1 A3 +
,

'

where

all

known
t

values but one are on the same side of the


is

unknown

and 1. In a supposed to lie between we choose values of the function which are distributed more nearly equally on each side of the required value. We have the following
value, for

scheme for Central Differences

x-1

Also,

76

ACTUARIAL THEORY
Then
x+t

[chap.

it.

since

x-1

x-1

lo

x+1

neglecting differences beyond the second, and substituting for

uX-1 and aX-1 their values as found above,


, , '

we have

j_ X+t

= =

(u V

-aX +U) + (t+l)(ax -U) + (Dlbx 2 x' - X' v / V o

+ tax +
the

Adopting
writing
I

now
s

notation

of the

mortality

table,

and

for u

we have
I

X+t

,=

+tax +

whence
from which we

-5^
t

=
when
t

i
*

get, in the limit

approaches

0,

dl

X
<

dx
a

x-1

+ ax+1
,

chap,

ii.]

TEXT BOOK PART


*J
c/a-

II.

77

Al ,
*

(blk** + (^- 1 )^2 6

2)

a3

when
a
1

approaches the limit


a:

= An -^A 2 n + ^ s w = Au - TrA' ^ approximately.


.

0,

a:

Hence, since in
du

this

approximation third and higher differences

are held to vanish, and therefore second differences are constant,

^ = Anx - iA 2 dx

?(

approximately,
i

= Aux - I (An -Auai-l' ,) - ^ = l(Aux + Aux _J u u 1


a:

approximately.

From

this

we get

as before

dl

1^-1, X~l +
g
1

dx~

~~

and

*-l - x+1
7
{

This formula provides a good working approximation to the value of the force of mortality in almost all cases. Again arguing from the same formula as the preceding result was obtained from, we may obtain a general formula for /x^.

We

have successively
-7-*= -4-( A/ --^ 2/ +IAH u T r* = -4- dx v 7 x x * I I X X
. . .

= =
fi

d)

(stopping at

first

differences)

%
-d
---(</,

- _L
X

-d

(stopping at second differences)

= ?,+ K9,-i|0

? x (l+l)-ix

|9,

(stopping at third differences)

78

ACTUARIAL THEORY

[chap.

ii.

9,(

+^+i+i)-i|?^ + t + r)+2|?,a + T)-ix


(stopping at fourth differences)

|?,

And generally ^ = ^(1 + 1+1 + 1 + 4+.

|?,(l

+ l + f + #+.

+,]?.&+*+*+
+*|9(t+

)-.|?^+l+-

)-

etc

The proof that the central death-rate is equal to the value of the force of mortality at an age half a year older is as follows
:

Making the usual assumption of a uniform distribution of deaths throughout each year of age, we have
(I V x-1

-I) = dx-1 x'


,

^ ^ -

and

Qx -lx+1 ) = dx
But
2(7 ^
x

-/ .) x+Y

whence

also

chap,

ii.]

TEXT BOOK PART

II.

79

EXAMPLES
1. Write down formulas for all the possible combinations of the probability of dying in or surviving a year among three lives, and

prove the truth of your answer.

live
live

80

ACTUARIAL THEORY
till

[chap. u.

that a person aged forty will survive


seventy-five
?

the attainment of age

hs.
(

_
;

hb
'50

'50
'25

^25 '40

40
SO

~
= =

7~"
'25
:

?5

hd
/

_ ~

25^25:

v 50*/

'26

50 '40

'40

93044 - c1 -27516 x 82277


-31117

4. An annuity society is formed in which members may secure an annuity of m at age x + n by payment of a single sum at age x.

members aged x start the society and / new members of the same age join each subsequent year, find how many members will be entitled to rank for annuities at the end of n + t years and the corresponding amount payable.
If k

Of

entering

now

will survive at the


/

end of n+t

years,

and therefore of k entering now k


of n

JE+'izi
X

wjH

survive at the end


/
.

+1

years.

Again, of

entering one year hence

will

survive at the end ef n

years from now, and of I entering one year


;

hence

x+n+
X

will survive

and so on

for succeeding years.

Thus the
entitled to
,

total

number surviving
be

at the

end oi n + t years and

rank

h+n+t j +
,

Each of these gets an annuity of m, and therefore the amount of annuities in force will be
m>K+tPx +
l

xxx
for annuities will
I

j( x+n+t-l

+
,

x+n+t-2

+
,

:c+?l

-j-J
X

total

L+t-lPx + n+t-lP.

+.P,)}

5. Obtain from the Text Book mortality table the numerical values of the probability that out of three lives 30, 35, and 40

(1)

One, at

least, will die in

the 10th year.

(2)

Not more than two

will fail in the 10th year.

(3) All will die within

20 years.

chap,

ii.]

TEXT BOOK PART


symbols
is

II.

81

(1) This probability in


1

-(l-9l930)(l- 9 l?3 5 )(l- 9 l940)

89685A

86137A

82277^

85213 81176 _ 88879 X 89685 86137 * 82277


03274.
(2) This
is

the probability that


is

all

three will not die in the

10th year, and

equal to
*

~ _

9l?30
39
'30

X v

!>l?35

X v

9 1940

44
'85

*49
'40

=
=
\y)
1

- - x , x

806 89685

924 86137

1101 82277

-9999987.

20530 :35 :40

=
I '30

(*

~"

20^3o) V-

~ 20P35) V- ~ 20P40)
MO ~ ^60 ~~l '40

_ ~ ^30 ~ 4o v

^35 ~ ^55 v
I '35

16890 19571 X ,,. 89685 86137

23435 82277

-01219.

6. There are X persons living aged x, and the number of combinations of them taken 3 together is 35. What is the

probability that, at the end of n years, the

number of combinations

of the survivors taken 3 together, will be at least 10?

By inspection one may see that the number of combinations of seven persons taken 3 together is 35, and of five taken 3 together
is

10.

Thus the question

is

to find the probability that at least

five

persons out of seven of age x will survive n years.


Zr
IS)
p. XXXXXXX 71

Now
Therefore,

"

(1+Z)*-

Z5

(1+Z) 5 = Z5-5ZS + 15Z''


F

82
7.

ACTUARIAL THEORY
Find the probability
life,

[chap. n.

designated

that, out of five lives A, will die in the year and be the

all
first

aged

x,

one

to die.

This
(1)

may happen alone may

in several different ways, die in the year, the other four surviving to

the end of the year.

The

probability of this event happening

is

(2)

and one other may die in the year (A

first),

and the
is

other three survive to the end of the year.

This probability

(3)

and two others (A

first),

the probability being

(4)

and three others (A

first),

(5) All

(A

first),

K<0 6

The

total probability therefore is

i x(p x

Y + AKix)Kp x) + AK%)
s

+&Wp +W
x

(p x ?

+ K%)%+(.ixf}-(pxf] = M(p*+<0 5 -(pJ 5 } = w-(px y}


8.

Find expressions

for the following probabilities


x,

That out of 25 persons aged


(a)
(b)
(c)
(<i)

Exactly 5 will die in a year.

Not more than

5 will die in a year.

5 designated individuals and no

more

will die in a year.

5 designated individuals at least will die in a year.

(a)

The
This
1,

probability
(6)
is

may be chosen in 25 C6 is C ). 2b b {q x J{p x


the

ways, and therefore the

sum
2,

of the probabilities that none, exactly


3,

exactly

exactly

exactly

4,

and exactly 5

will

die,

and

is

therefore equal to
x
20

(p x

r + vMp t + nWivT

c,(O 3

22

chap. h.J
(c)

TEXT BOOK PART


The

II.

83

5 can only be chosen in one way, and therefore the probability is (q )\p ) 20 (d) It is no matter what happens to the remaining 20, and
.

therefore the probability

is

simply (q

5 )
.

have each 1,000,000 assured office A, by 10,000 each; B, by 1000 of 1000 each. Assuming all the ages equal, and the rate of mortality to be 2 per cent, per annum, give an expression for the probability in each case that the claims will amount in one year to 30,000 at
9.

Two

offices

100

policies

of

least.

In the case of
occur.

office

A, in order that not

less

than 30,000
either 0,
1,

of claims should be made, not less than 3 deaths in 100 must

In other words, the deaths must not

number

or

2.

The

probability required

is

therefore
/49_ys

//49y

/49\"

"lU/
or

+wo AbOj
life's

_1_

50

+ 100

/J_V\
\50)

Uo/

the probability of one

surviving being, according to data,


1

m
98
if

w and

49

of

its

dying

^.

In office B, the deaths must number not less than 30 in 1000^ 30,000 at least is to be claimed and the probability of this happening is, similarly to the above,
;

r/49\iooo

\V507

/49\99 + Cl +1 o p 50 V507
1
,

/49\i/j\29-|
'

"

'

+ iooo^ BO ;

^50;

the probabilities of surviving and dying being as above.


10. At the beginning of a year there are 100 policies in force, each for 100, and each payable on the death of the survivor of two lives, the ages in each case being thirty-six and fifty-five Calculate (1) the expected mortality in the year respectively and (2) the expected claims in the year given jo 36 = -991, and
:

Pi,

= -930.
(1)

The expected mortality is 100(<786 + (765 )=100(-009 + -020) = The expected


claims are
?66 )

2-9.

(2)

10000(?36 x

= 10000 (-009

x -020)

1-8.

84
1 1
.

ACTUARIAL THEORY
Show approximately

[chap. n.

that the force of mortality at age x


x,

is

greater than the probability of dying in the year after age

when

number dying in the year number so dying after age x.


the

after age x

1 is

greater than the

**.>
approximately as
x-l
X

<%

cha p14.

i'.

TEXT BOOKPART
that,

II.

85

Show

approximately colog p
clg
e

=
fj,

+^(q

3 )
.

Px =-Ig Px
e

Also

,,

= ^ + ^- + ^-+ = m approximately

(O

(O

etc

(!)

9,

+
3

etc.

.(2)

Stopping at the term involving (9


colog

and deducting

(2)

from (1)

A -^ = ^_|_ andcologA = n + jstiy


x+i

15.

Show how

to obtain

an approximation to

//.

Here the ordinary approximate formula

//,

J~1
~*

x+1
fails
X

us

for if

we wrote The
/

fn

5f2_

we could

assign no mean-

la;]

ing to

/,,,,.

persons aged x are select, and come under

observation at that age for the first time, and consequently we know nothing of the persons of age x 1, of whom they are the
survivors.

We

must accordingly seek another approximation.

Ld Jm
= ~
If
it, '

T A/m-^
(
[*]
r

2/

m+

-J

A8/

W,,
/.

) approximately.
etc., '
If, '

then we take the column L


successively A/ J
1, 2, 3, etc.,
[xy
,,

,, fcc]>

I,

, [x]+l>

H+
,

, 2'

and difference
further, these '

we obtain

A : /[ry A 3 /[xy
r

,,

,,

etc.

be divided by

respectively,

and the sum of the odd


result, divided

terms deducted from the sum of the even, the

by

will give us

an approximation to

/x

86

ACTUARIAL THEORY
Or we may proceed
1
dl..

[chap.

ii.

thus

dlos

I,

dx

= ~

rflogj

(M

being the modulus of common logarithms and equal to -4342945).

~M

dx

- ^(Alog10 /

-. w -|Anog M + l-A31og M
lo
;

10

)approx.

Following a method similar to that indicated above we obtain another approximation to the value of y.
.

CHAPTER

III

Expectations of Life
1.

The

definitions of

the following

functions

and
is

the

dis-

tinctions

between them should be

carefully noted.

The

Complete Expectation of Life at any age

the average

future lifetime of each person of that age.

The Curtate Expectation of Life at any age is the average number of complete years which will be lived by each person of
that age.

The expectation
tion of
life, is

also

of life, or more properly the complete expectasometimes called the " mean after-lifetime " the
;

"average after-lifetime"; the "mean duration of life"; or the " average duration of life."

The most probable after-lifetime at any age is the difference between that age and the year of age in which the life will most probably fail, that is, the year in which most deaths
occur.

The
that
is,

Vie Probable at any age


to

and the year of age

is the difference between that age which there is an even chance of living, the year in which the number living is reduced to

one half the original.


2.

find a

In Text Book, Article 24, Lubbock's formula is applied bo more exact expression for e than e + i. The deduction of r

XX"
t

the formula itself

may be

presented as follows

To

find the

sum

of the series

+ 1 + 2 +

T
to the

T
may

+'h + u 1 + L + u i +

l+
t

'

end of the mortality

table, the values ultimately disappear-

ing whatever function u

represent.

88

ACTUARIAL THEORY

[chap. hi.

We

have then

- 0+

1a

+ iii_

^
_ l)

Ai

.pi

L* Uo+

1(1
u^u.+ lAu, + 1A1_
etc. etc.

1(1 -l)(l^Vj

2)

/AX+ -iAJ

Z A 3 Mo+

And summing
t-i

these
t

S + -g" A

"o

T2T

A2a

<

HT A3
i

"

since coefficient of A?<

= 1(1+2+.
coefficient of

+73I ) = lzi) =

td

A2 w
+ 22+
"

i<

12

'

('-

}-^(l + 2+.
_
2 1 "T2T
*

+TTT)

(t-l)*(2f-l) _ /-J.
12i! 2

and so on.
Similarly

2 =
2(

"1

tel

+
+

-1

A% 2

-l

I2

FA Kl +
2

-l f^
/2

2Jl-
and so on.

< 2

-^ A

JW A\+ ^A3 ....


2


lp.

in.]

TEXT BOOK PART


these summations,

II.

89

Now summing
"o

we get

+ "i + w 2+-

+ u i + u i+l + "i+l +
t

<(/

+ MJ + M2+

)+ --(Au + An + Au,+
1

t-l,
t

fi-l, 2 (A
12<
1

+ A2 m 1 + A2 k2 + + A3 1 + A32 +

1
l"

+
= '(o + i

'i-^ (A3 Wo
<

)2

etc.

+ "2+

)--2-"o+ l2T A?'o -

-35- A2 "o+

etc.

Subtracting u from both sides we have


u
2_
t

+n2 +
t

+wi + ui+l + ui+l+


t t

t( Ul

+ u2 +

t-l

-1 _ + -j2fAu
t

-^-A

etc.

For the application of


expectation of
If
life,

this

formula

to

the case of the complete


:

we may proceed

as follows

we were

to say

i =

t
X

(/

*+iH+ 2+/*+3 +
that

'

we should be wrong
complete years lived. better result from

in

we take account

of no more than

We
/

should therefore obtain a somewhat

K = 2V( *+jH +1 x
The same
only of complete half-years lived
result only

H hH 2++

error in principle appears, however, for


;

we take account

and we

shall obtain a correct

from

where

is

smaller than any assignable value.

90

ACTUARIAL THEORY We now


use the

[chap. in.

summation formula, and say


.

i
*

=L(t(l+i +t l
ir\K X
e *

w +.
i
12/ 2

.)

'

+
: /

A/
*

tzlm
24/

121

r x

+ etc.l
I

= =

+*
2i

+
is

(where

infinitely small) e

+ h + j\r

A/. ^ T

-i

7 A2/_

r^

+
II.

But in discussing the showed that


dl

force of mortality in Chapter

we

A/ -

-|A 2 Z

approximately.

Therefore
1

dl

K =

e*

+^+

TW

approximately
rff

i - ^+2 _
.

a!

, 1

'

,., j:+1

24/

The

process by which e

was obtained was perfectly general,

and we may similarly write


e
ij/

xy

U +U, 12

and generally
,8

xyz

. .

(m)

=exyz

...1
. . .

u, u pi r% + rv + r ~ +

-to
12

to

terms

(m)

EXAMPLES
Given the following mortality table, deduce, in respect of a aged eighty-two, (a) the curtate expectation of life, (6) the vie probable, (c) the age at which it is most probable that he will die. Find also the average age at death of the 129 lives, aged
1.

life

ninety-five.

TEXT BOOK PART


X

II.

91

CHAPTER

IV

Probabilities of Survivorship
1.

In Text Book, Article

3,

is

derived from formula (1) by

giving to n successively every integral value from unity upwards.


It

may be
1

derived by a similar process from formula (2)

d
7 n-l\^xy

Here then Q*
xy


chap.

iv.J

TEXT BOOK PART


, y-1

II.

93
p x 1
,

since e

,(l+e x+1 p x y-l> ,,


:

) y'

and

, -1

y*-

fl+ex

y+l-/

,,)

Q mi =4(l-p(l+c^ ) + p(l+ex:y+Uj _,,)\ ^ x+ln/ 2


1
'

' y*-

3.

By the

use of Tcri Sooi formula (2)


(x~)
,

we may

also very easily


(?/)

arrive at the probability that

will die before

or within
:

years after the death of Q/),

i.e

formula (14), as follows

We

have

Q -= =
1
.

(1

,p

+*
1

+t+-i y+-i

n _ J 4{ P* +
t)
t

*+'
/

vd Z ~ x+t+ro-l y+n-j

x y

/J +
X
(

J/

= (!-A) + AQiTts, = l-A( 1 -Qxi:P


4.
t

To

find the

more

restricted probability that (x) will die within


(?/),

years after the death of

we have the required

probability

2dy+tt-lA x+n-h -Ix+n+t-y (7 )

Tt
y
a:

""'

t/+7t-l

x+n-k _

x+t
i

y-\-n-l

x+n-j-t-%

iix y
^x-y
tt

"
:

ii, y x+t
)
:

x^~x+t y

(1-Qy-A(l-Q_L
x+t
y

Ql _ _Q1
^x
:

x+f.y

1 1)

^-xy
;

which

is

obviously correct
(?/)

for, if

we take the

probability that (x)

will die before

from the probability that


-

(x) will die

before

(j/)

or within

years aftei ,
t

we

are left with the probability that (x)


(jf).

will die within

years after the death of

5.

death of

is

(.i) will be alive t years after the found as follows Taking the th year, the probability of (j/) dying therein d y of (x) being alive at the end of , and the probability

The

allied probability that


:

(jy) is

94
t

ACTUARIAL THEORY
rath

[chap.

iv.

yeavs after the middle of the

year (since
is

(y)'s

death

will

occur at the middle of the year on the average)

*+"+*-*
x

Hence

the required probability

2d ^
i

J
i

= ,pQ
This probability
die before
(?/)

as above.

is

the same as the probability that (x) will not


t

or within

years after Q/)'s death, since


x+f.y

= i-{i- p.(i-QjL
t

)}

x+t :y

~ x

yjt))

6. The preceding probability must be clearly distinguished from the probability that (x) will be alive at the end of the tth year succeeding that in which (jj) dies, which may be found thus

Taking the nth year, the probability that (^)


is

will die therein

v +n ~
}

and the probability that


I

(x) will live to the

end of the

tth after the rath year

is

x+n+
.

The

total probability required

must therefore be

"

"+V
y
(/

1
,

^^ =
, .

u.,P

iP ~
,

P)

(2 7? *P aA .-' x+t x n-1* n p y


e

2 1 x+t x n 1p) np yJ
,

0r

= v x\ x+t:y-l _ ( x+t n v Fy-1 = PjP.+|( 1+e. + t+i :)-,+:,}


:

7.

We may J

find

an alternative formula for

y\x

as follows

Taking the rath year, the probability of (_!/) dying therein is ,P - /J,), and (x)'s expectation of living to the end of that

year and of each year after amounts to

LPx + n+ lPx + n +2Px +

= nPj~ l+ex+J-


chap.
iv.J

TEXT BOOK PART


(,r)

II.

95
is

The

expectation of
n Px (n-iP y

therefore

after (y), should (y) die in the nth year, and the total expectation nP l +e
y

X
r>

x+J>

ei\x
y

= 2nrx\.n-l*py - p)(l+ex+nJ ( yJ^~


, ti L
,

).

That

this expression is identical with that in the formula

ei y]x

= Sn paA - n 1p) (1 y*
L

may be shown
\Px(. l

as follows

n Py)

= lPx(. l -lPy) + 2Px( l -2Py) + 3Px(. l -3Py)+


'

'

'

^lPx% + 2Px(ly + l\%) + i Px( Cly + l\% + 2\1y') +

'

=%(A + A + P.+

'

+ 2 |?
^%' x\n-\" y
8. In finding e %*

X
!/

3?'x(

1+e:C+ 3)+-

y'^~

x+n'

=- we have,
x:y(t\)

as

shown

in the Text Book,to divide


t

the expectation.
alone, to the

Then the expectation


i

for

years depends on (x)


(x)'s living

and

is

equal to

Thereafter, in order that


(t/)

end of the (t+ l)th year may count,


;

must
(t

live to

the end

of one year
count,

that

(x)'s living to

the end of the


;

+ 2)th
so on.

year

may
have

must ( y)

live to the

end of two years

and

We

therefore
e

__
x:y(f\)

" \Cx
|

x+t+l y+l

x+t + 2 j/+2
/ I

'

x
1 .
I

I 4-1 x+t+l y+1 x+t + 2 g+2

T
4-

_
\t

+ tPx ex+t:y
,

=
9.

- p

(e
,

Coming

to the probability that (x) will die first of the three

96
lives (x),

ACTUARIAL THEORY
(y),

[chap.

iv.

and

(z),

we may proceed

in the

same manner

as

in

the case of two

lives.

O = ^xyz
1

s+tt-1
I

y+n-h
L

z+n-j
I

_ y "
_

x+n-1

x+n

~7
a?

y+n

y-J-7i

z+w-1
12
*

+n

2/
2/

"S\_ ( x+n-1 y+n-l z+n-1

x+n y+n-l z+n-1


x y
z

~tv
.

1 y z

m~
x y
z

x+n-1 y+n-l z+n


x
y
z

__

x+n y+n-l z+n

I
,

a+w-l
,

Jy+w.
/

, g+w,-l

x+n Iy+n Iz+n-1


x y
i
,

m
i
z

_>.

J
/

i
,

* i
i

x y
2

J
<?

40

a;

y-1

-1
1

x-

y-1

C
a; : ?/

z
_j

x-l:y :z-l

Py-\:z-l

Px-liy-1
6

Py-l

P*-l:-l

a;:y

;g-l

s-1

:y

-:,. smce

-^

x+n-1 y+n-l z+n-1


r. ii
v.

" v

x+n y+n z+n\


f
ii

ui-) v
'

-i

The formula given in the Text Book exceeding it by

differs

from the above,

(\
12 ^

x--v-l:z-l

x-l:y-l:z

x-l:y:z-l

Vl:-1

Px-l:y-l

Px-l:z-l
x:y-\
:z
a:

: 1/

:g-l

x-l:y:z\

which, however,

is

a very small quantity


chap,
iv.]

TEXT BOOK PART

II.

97

10.
tables,

To adapt we have

the expression given above for use with select

-P^ l+eX+ l:y + l: )-P X 1+ex+ l:y. :+ l)+Pyl


z

(.

+ ex

v+1 z+1 )}
:

ShlCe

1 .:,-l:,-l=/'.:,_i .-lC +.+!::.)'


:

^
find

11.

simpler

solution of the

problem to
Text Book
1

the

value

of
If,

e\

than that given in the


e1

may be

suggested.

in the equation
yz\x
|

= 2n r x x p
values

q \ntyz
i

it

be assumed

that, for '

all

of

n, '

I
|

a1 1

yz

= Q1 x ^-yz
at once

i
|

(see q yz < *

Articles 7

and 8 Text Book, Chap. XV.), we have


e1 yz\x
I

= 2n r x Q 1 p ^yz = Q 1 eyz x ^yz


|
J

\n 1 yz

Q (ex - exyz) J ^yz^


1

Also
e
*\

= e = Q 1 (ex - exyz' - (exz - exyz-' ) ) > ^yz^ = (l-Q 1 )^x ~exyz)~(exz -exyz' ) J \ ^ ^yz J ^ = (ex - exz) - Q Hex - exyz) J J ^ ^~yz^
1

Or we may proceed
e
2

thus
x

vz\x

=2px|o nr
n"x\\n
1z

In* vz
'

\n

yz'

= =
12.

1 -eyz\x z\x
\ ]

(e *

) xz J

Q \ex - exyz ) ^~yz^


J
:

The

following should be carefully noted.

ITiere are

two formulas
T-xy

for q 3 xy
*x

*y

*xy

and

q = *xy

qx x a 7 ?y

We may

express in similar forms the probability that two

98
children, ten

ACTUARIAL THEORY
and
fifteen years

[chap.

iv.

old respectively, will


viz.
:

both die

before attaining age twenty-one,

and

|u9io

x |o? 1 5
is

The

probability that one at least will so die


1

-( 1 -|n9ioX 1 -| 6 '?i5)fifty,

Now

to obtain the probability that both the children will die

before twenty-one in the lifetime of their mother aged

we

have analogously
1

11

9 10

60

+
1

9 15

50

M 69ii0:15'

50

"*"

0^10

15

60

X 5^16
1

56-'

and

lll9

1 1 0: 5 o

X
6
|

9i5:50
is

The

probability that one at least will so die


1

- 111? 5oX
:

-Ie<? 1*5:50)

EXAMPLES
married couples, the husbands being all aged x 1. Out of I and the wives aged y, show how the number of husbands who become widowers in the n\h year may be ascertained.

The number
/

of husbands becoming widowers in the wth year


,
I

is

X n-l\

(7 1 xy

X },( p - nty'^n-l'x + n Lp x J p)( ) -<^n-iry d I _, *


, , ,

x
I

We
is

do not cancel
is

in the

numerator with

in the denominator, >


latter

since the former

taken from actual experience, while the

taken from a table which represents suitably the mortality of

the lives concerned.


2.

If the probability that (x) will die before (z)


(x)

is

-1996
(s) is -1610;

both

(J/)

and

O)
(,y)

0)
:

is

"2990
(s) is -2602;

both 0) and

find the values of the following probabilities


(1) (2)

That the survivor of (x) and (y) will die before (s). That (x) will die before (z), (y) having died first.

chap,

iv.]

TEXT BOOK PART


Ql.
**xy:z

II.

99

(1) '
*

= Q2

+Q2 ^xyz^^xyz

11

= Ql _Q1 + V _Q1 %* ^j ,Q1 W

(2)

Q^
1

= = = =

-1996- -1610 + -2990- -2602


-0386 -0774

+ -0388

-0386

3.

Find the probabilities that, in the

tth

year from the present

time,
(a)

(6)
(c)

aged x will die, having survived a life now aged y by at least m years, and a life aged s by at least n years. The last survivor of three lives (x), (y), and (s) will die.

A life now

A life
To

(z) will die,

leaving (x) and (y) surviving.

(a)

fulfil the conditions, (x) must die in the fth year, (y) on the average before the middle of the (t - m)ih year, and () on the average before the middle of the (t - re)th year respectively.

The

probability
'x+t-l
I

is

y+t-m-j
/

z~ z+t-n-j
I

-j-i|9, + -i|9 v + .-i|9,--i|?, -t-i|?,-t-i|? H


l
ir

+ t-ll^xyz
(c)

t^
4.

lzJ x
x

J+!zl
y

(x) (_y)

Find expressions for the probabilities that of three and (z), (x) will die

lives

(1) In the

same year
t

as (s),

whether

first,

second, or third of

the lives.
(2)

At

least

years after

(j/),

and

at least

years before

(s).

100
(1) This probability

ACTUARIAL THEORY
is

[chap.

iv.

equal to the sura for

all

values of n of the
nth.

probability that both (x) and (s) will die in the


^n-1*
as

year

n* x'^-n-l'
-

n'

Z-*

(2) If
(,r)

( ,P + n l xz n-1 1 x X p P \n-\xz
1

n*

pz -

nl x

p X n-1*p) z'
n

_l
'

Oc " *""
(ra

x~l

_
'"

g-l

Px -X

P2 _j

die in the

+ +
/

l)th year, then to fulfil the conditions

(#) must on the average have died before the middle of the (?i + l)th year, and (z) must live on the average till the

middle of the (n + 2t+ l)th year.


is

The

probability required

therefore

2 x+n+t x
I

y
I

y+n+i
y

z+n+it+j
I

V
X 2(Pz^x+( tPx

x+t+n

1x+t
:

y~ y+n+$
I

z+it+n+j
/

z+2t

z+2t

5.

Required

(.r)'s

expectation of

life

ten years after the death

of a

life

presently aged y.

From
required

the whole expectation of


life

life

of

(.r),

part during the


is

of ( y) and for ten years after. therefore


e

we must deduct the The expectation


e

x~

y(W\)

x~

e
<

x~ wPx{ex+10~
e

x+10:yJ>

loPx^x+lO ~

x+10

y)

Or we may proceed
only
if
(,r)

otherwise.

The (ra+10)th year

will count

survive

ability of its

and if (y) die within n years. The probbeing reckoned is therefore (1 - p ) +10 f>j and the
it,

sum

of this

expression

for

all

values

of n

is

the expectation

required
V

n-^yJn+lO-^x

V)Px^{
e

V>PJ< x+10

~ nPy'nPx+10 ~ ea;+10 y)
:

6.

Write down in respect of the (t+ l)th year the probability

indicated by each of the following symbols:


(c) V
>

(a)

Q2

(6)

2
,

3 , **-xyz'

(d) V J

Q -, ^x-.yz'
1

(e) V >

QI ^xy.z

(/) KJ J

QJ_
<xy<:z

CHAP.

IV.]

TEXT BOOKPART
I
l l

II.

101

a)
x
y
z

dx+lK x+A
d

h+t+d y+t+h'
l

K. z+*+&

^
c)

TTT
x
y

*+

^y ~
l

y+t +i

^ +t+i + (h - K

+i+i ) v+

+v

TTT
x y

x+t( y

y + t+i )(.h-K+t+i)

^ TTT
x
y z

x+t{ y +t +i

h+t+i

( y

~ ty+t+Jh+t+i

f^

TTl x y

d h+t+i^x+t+i y+t

Vt-*+* <*+)

7.

Show

that

_zi_LJ!

r i1
/""

,.

Pj.+1-J

PP^im ately.

^xy

[Iy I x
I

J
I

" Q

x+t^x+t y+t

TT

/ ^+<

Vm

27~

approximately.

x +t-\

y+t

dt

x+t+l y+t

P*-i
since
e

Jo"T

dt

CHAPTER V
Statistical Applications of the Mortality Table

The intricate problems relating to population be simplified by the following explanations.

in this chapter

may

1. In Text Book, Article 14, we are told "the average age death of a stationary population, kept up by births alone,
-jS.

at
is

T =

e ,"
g

which

is

explained as follows

The d persons who die between and 1 are on the average \ year old at death, that is, amongst them they have lived \d g
years.

The rfj persons who die between 1 and 2 are on the average 1^ years, etc. The d2 persons who die between 2 and 3 are on the average
2^ years,
etc.

Therefore, the d
altogether, lived
at

+ d +dz +
1

etc.
4-

persons

who

die have, taken

d + d 1 + |d,
is

etc. years,

and the average age


etc.

death of each
-|d

therefore

+ |dj + i, + etc. d + d1 + d + etc.


-

L + Lj + L 2 +
l

Zo
0

=
To
upwards,

find the average age at death of those

who

are aged x and

we have by
_

a similar process such average age


(*+iK+(*+fK +1 +(*+*K +i +

^ + 4+1 + ^+2+
=
v

L* +L *+i + L*+2+T
X

a:

chap.

v.J

TEXT BOOK PART

II.

103

Again, similarly, the average age at death of those within the n years after age x is

who

die

+ dx+i +

+ dx+n-i

~
since

+
,

K+K+1+TTJx %+n

- +(-^K + .rrjx+n x

x+
-

Tx - Tx+ n - nlx+n
.

hd+$d++ a+1 (K+K + i+K + ,+


a;

(w ^

_i)rf -y

x+ti-1

-rc(d ^
a:

s+ti
,

+d*++l +dx+n+2 +
,
,

) I

= T -Tz+n. -wZx+ti

We

are

now

in a position to state the solution to the

in Text Book, Article 14, as to the effect at the

problem end of n years,

on the average age at death of an otherwise stationary population,


disturbed by " an annual influx of

persons aged x."

The

total years lived

population are (id

+ %d x + ^d2 +

by those that have died out of the original and the total years at ),

death lived by the immigrants are

f((*+iK+(*+!K +1 +(d

+(*+-iH + ._
is

Also the whole number of deaths of both

+ d1 + d2 +.

+ l(dx + dx+1 +
at death of each

+dx+n _ 1)
dies
is

and therefore the average age


\d

who

+ id2 +
(d

+ i-{(* + i)d, + (*+-|)*, +1 +


.

+(* + -iH + . 1
1)

+ d 1 + d2 +.

)+

L(dx + dx+l +

+dx+n _
)\

Ta + Ul -I

^ )x + CT

-T

^ -nl

L + (lx -Ix+n' ) v
'

104
2.

ACTUARIAL THEORY

[chap.

v.

18 to 20,

Passing to the problems discussed in Text Book, Articles we may find the average present age of the existing
:

population as follows

There are
There are

L
L
x

persons living between persons living between

and
1

1,

and they have and they have and they have


etc.)

lived on the average \ year each.

and

2,

lived on the average 1^ years each.

There are

L2

persons living between 2 and

3,

lived on the average 2 years each, etc.

Therefore the total years lived amount to and the average lived by each person is

(|-L

+ f-Lj + -|L2 +

^Ln + |L1+ |L2 +Lo + Lj + L^

= jT + T + T 2 +. T
1 -

Xa

Similarly the average present age of the population

who

are

aged x and upwards


(

is

+ i)L, + (* + t)L. +1 + (a + 4)L


it
X
~T

+i|+

+T

+T
~

3.

Again, to find the average future lifetime of the existing

population,

we must
is

first

note that the

average future lifetime


future
a,

of

persons r
i.e.,

Tx

Hence the average &


persons,
is

lifetime

of

Lx
the

persons,

IQX + 1X+1 )
years.

average future lifetime of each of these

K T + T + i)> L persons is

and

therefore

KT. + T. +1 )
LX
Now
and
1
1

the average future lifetime of


will

L
L2

persons living between

be

(T + Tj), and of Lj

2
3

,,

M T i + T2)' and

of

2(^2 + ^3), and so on.


CHAP. V.]

TEXT BOOK PART


II.

105

Therefore the average future lifetime of each of the whole


existing population will be

i(T + T

+ KT +T9 ) + KT 9 + T,)+. L + L, + L 2 + |T + T + T 2 +. Tn
1

Y
Similarly the average future lifetime of the existing population

who

are aged x and upwards

may be shown

Y
to

be

-=?.
X

4.

Now
if

if

the average present age of the existing population

is

Y
?p-j

and

their average future lifetime

Y
is

ttt,

it is

obvious that

the average age at death of the


-rp-

existing

population will be

2Y 2
;

and for those of the existing population who are aged x and

2Y
upwards the average age at death
will

be x

ttt^X

5 The distinction drawn in Text Book, Article

21,

may be

shown thus

In the case of the stationary population which

is

recruited each

year by births,

we have for the average age %d + %d 1 + %d2 +

at

death

+ d 1 + d2 + T = 2
/

In the case of the existing population


Number
living.
(i)

we have
of each.
(3)

as follows

Average age at death

(2)

0-1

Ln

1-2

KT\ + T2 ) +

2-3
etc. etc.

KT

+ T 3)

etc.

106

ACTUARIAL THEORY

[chap.

v.

Multiplying the number living at each age by the average age and dividing the sum of these products by the total population, we have for the average age at death
at death of each of the group,

of the existing population

L + fL + |L +-KT + T ) + HT + T ) + HT + T 8)+... L +L +L + L + L1 + L 2 +... jT + T + T g + = T n + T1+ T 2 +. + T T Xo + Y T To


-

2Y_o

T
In the case of
population and,
e we have the average age at death of the assuming that there are / annual births, this

average age
multiply the

is

the same

every year.

In the case of -=-^


A
o

2Y

we

number at present living in each age group by the average age at death of the group, and by this process obtain the average age at death of the present members of the community.
Applying the same process to those of the present population aged x and upwards we have for their average age at death
(*

+ i)L.+ (* + )L^ 1+ (* + f)L, +g+ L,+ L. + i +L. +2

...

yr,

+-

+ T, +1 +T
i

+1
2

+ ..
;

h+h + + h +

chap, v.]

TEXT BOOK PART


is

II.

107

Since the population

stationary, the deaths in


is
1

any one year

must equal the

births, that
l

= d + d + d.2 + ds +
p^ p v p 2 p s
,
,

We

are also given

etc.,

and therefore since

h = h x Pi
l 2

= l2

X P-2

etc.

we can

ly, /. l v etc. assumption of a uniform births and deaths, the total population numbers

successively obtain

Now making

the

distribution of

=
2.

+ i i+h+ i3+

power desires to maintain a standing army of is compulsory on all males attaining the age of twenty. How would you apply a table, showing the mortality amongst males, to ascertain the annual number of recruits required to maintain the army at its proper
military

1,000,000 men.

Five years' service

strength

By the table, an entry at age twenty of / males will support a population between twenty and twenty-five of T 90 - T-. By
simple proportion we find the number of recruits of age twenty necessary to support an army of 1,000,000 men of ages twenty to

twenty-nve to be

1000000 = =
* 20

20 .

* 25

This formula naturally only takes account of the numbers in It further does not allow for the necessary time of peace. selection by medical examination of the recruits, nor for the effect
thereof on mortality.
3. In a stationary community supported by 5000 annual births, each member, on attaining the age of twenty, makes a payment of 20, and contributes 1 at the end of each succeeding year until, and inclusive of, the sixtieth birthday receiving thereafter an In respect of annuity of 15, payable at the end of each year. each contributor who dies before receiving the first payment of 15, a payment of 5 is made. Find expressions for (a) the number of contributors, (6) the annual receipts, (c) the total yearly annuity-payment, and (d) the annual death claims.
;

108

ACTUARIAL THEORY
(a)

[chap.

v.

The number of The annual

contributors

is

(T
k

20

T60).

(6)

receipts are

^0_(20/20 + ln
(c)

+ Z22 +

+lm) =
is

^(20Z

20

+ N'20 -

N' 60 )

The
l

total yearly

annuity-payment
l

r- xl5(l61 + le2 +
o

5000

6a

+
are

T +L-i) = -r-xl5N 60
,

5000
o

,_.

(d)

The annual death claims


5000

K ,l J 1 -7 x5(d20 + d21 + d22 +

J +</ 60 )
N

S/I = -7 x5(/20

5000

-y
7

4.

Explain clearly the difference between -J and -=-2

2Y

What

does

T x -T x+n
X

represenL?

A community otherwise stationary is subject for n years to an annual increase from immigration at age x to the extent of 10 per Show how to ascertain cent, of the number who attain that age. the effect of this immigration upon the average age at death at the end of n years. What practical consideration would vitiate
your result
?

T 2

is

the average age at death of each of

persons born in a

stationary community, while as explained in Text Book, Article 21

of this chapter,

2Y
-j-^

is

the average age at death of the present

members of this community.

T -T -
X

"
is

the average

number

of years lived

by each of
1 2.

persons between ages x and (x

+ n).

See Text Book, Article

To get the average age


munity, put

at death in the above described

com-

=
is

in the formula in Text Book, Article 14.

The
reason

result

vitiated as
in

shown
births

in Text Book, Article 16, by

of no

increase

following on the

increase in

population being taken into account.

chap, v.]

TEXT BOOK PART

II.

109

5. In a population of 1,000,000, hitherto stationary, the birthrate begins to increase at the rate of 1 per cent, per annum.

What

is the population at the end of three years, assuming a uniform distribution of births and deaths throughout the year ?

supported by

According to the mortality table, a population of T must be l births, and therefore a population of 1,000,000
l Q

must be supported by

births.

At the end of a period of three


the increase in the birth-rate
is

years, the population

due to

h x

^[{(l-01)B-l}L +
=
l

(1-01)2-

}Ll

-01L 2

1000Q0

(-030301L + -02011^

+ -01Lo)

Hence the

total population is

1000000

+ ^(303011^ + 201001^ +

100001.2)

6.

In a certain

community the number of annual


in

been observed to decrease approximately


gression.
It is

births has a geometrical pro-

desired to introduce a pension scheme, pensions

to

commence

at

age

sixty-five,

the contribution being from age


of births this year being
k,

twenty to age
find

fifty-five.

The number

expressions for the immediate numbers of pensioners and

contributors.

Let
in

be the

common

ratio of the geometrical progression

which the annual births are decreasing.

Then

it

follows that

the births n years ago were rn k.

Assuming that the births take place uniformly throughout the calendar year, that the figures are required at the close of the calendar year, and that there is no disturbance from immigration or emigration, we have the number of immediate pensioners

i-(^L66 + ^L 60 + ^L67 +.
and the number of contributors
* (r*>L 20
'0

+ r2iL 21+ ^L22 +

+ r^L 54).

110

ACTUARIAL THEORY

[chap.

v.

7. A system of free education is introduced into a community, embracing all children from the age of five to thirteen inclusive.

The present number

of such children

is

A, but the birth-rate in

the community, previously stationary, has been increasing during the last four years at 1 per cent, per annum. What would you
estimate to be the number of children under education at the end of twenty years, and how many children will have passed out

during the period

Assuming

that, during the period the population

a table of mortality was formed showing the column of

was stationary, L and the


is

column of T, we may proceed


In the
first

as follows

year of the system the number under education

A
In the second year

/ L5

+ L6+ L 7+
"

+ L ]3 \
'

A f^C 1
\

01 )

+ L6 + LT + T -T
^-5

+ L us\
J

In the third year

A { ML2D! + ^(W+
*

L r+

"

hA
I

'14

and so
will

on,

till

at

the end of the twentieth year the number

be

L B (l-01)i + L B (l-0iy + L T (l-01)"+. T6 - T w

+L,(l-0iyi 1
J

The number

that will have passed out during the twenty years,

having attained the age of fourteen, will be

A?4i-{l0 + (l-01) + (l-01) +


8.

+(l-01)i"|

In a pension society

it is

a condition that if a
is

member

dies
If

after

years from entry his

widow

entitled to an annuity.

on the average there enter the society in the course of the year k new members aged x, each with a wife aged y, how many widows entitled to draw annuities will there be at the end of the
rath

year of the society's existence

The widows between (y + m) and (y + m + 1) years of age are on the average each (y + m + J), and that they may be entitled to annuities their husbands must have died between (x + m) and (x + m + Similarly the husbands of the widows whose average J). age is (y + m + -f ) must have died between (x + m) and (x + m + f


chap,
if
v.]

TEXT BOOK PART

II.

Ill

their widows are to get annuities, and so on for (n - m) terms. Therefore the number of widows entitled to draw annuities is
s+m+i*-

x y

x+m

x+m+i'

"*"

'y+m+V-'x+m~

"-

.e+m +

y+n-i^ x+m

x+n-y

=
An

k( p x M?U x m\n-m
I

e-i e") m\n-m


y

xy'

alternative

method of

arriving at the

same

result

is

to

deduct from the number of females who are alive and who have become entitled to annuities by the survivance of their husbands for the necessary m years the number of females who are alive and whose husbands are still alive. The result is obviously the number of widows who are entitled to draw annuities. Following out this plan we get

\
<*

y+m+h x+m

y+m+% x+m
' "

y+n-b x+m'

J+m+J x+m+i + y+m+f x+m+? +

'

'y+n-$

x+n-y
J"

=
9.

if p x m\n-m ey Mrc-i
I

a:

I) n - m xy'

as above.

railway

staff

in

stationary

condition

is

recruited

annually by 500 entrants at age twenty,


contribute to a pension fund. of retiring on pension,
sixty-five.

who

are

required to

At age sixty they have the option and retirement is compulsory at age Assuming that there are no secessions other than by

death, and that one-half of those

who reach age


age

sixty retire at

that age, the others remaining


for
:

till

sixty-five, give expressions

(1) (2) (3)

The The The

total

total

number of present contributors. number of present pensioners. total number of future years' service with which

existing contributors will be credited.


(1)

The

total

number of present
.

contributors

is

^{(L20 + L 21+

+L )-K^o + L +64
01

+ LM)}

=
=

500, ~{(T -T
S0

66

)-i(T 60 -Te6 )}

^{T

20

-KT

60

+ T 65)}

112
(2)

ACTUARIAL THEORY
The
'20

[chap. v.

total

number of present pensioners


'

is

^{K LC0+ L61+

+L64) + ( L

66

+ L00+

)}
I

20

^xKT

60

+ T65 )

(The total of present contributors and present pensioners makes up the whole population of age twenty and upwards. This is obviously correct, and goes to prove our results.)
(3)

J(T 20 + T 21 ) represents the

total future lifetime of the

L20

persons living between twenty and twenty-one.

number of years, however, \ (T 60 + T 65 ) is lived after retirement. Hence iCTao + T^) - i(T 60 + T 65 ) represents the number of future years'
this

Of

service in respect of the

L20

persons living between twenty and

twenty-one.
Similarly |(T 21 + T 22 ) \ (T 60 + T 66 ) future years' service in respect of the

represents the

number of

L 21

persons living between

twenty-one and twenty-two.

We

shall obtain similar expressions for

L 22 L 23
,

etc., to

L59

that for the last being \ (T 69

+ T60 ) - \ (T60 + Tw).


between sixty and sixty-one

Further, for

the

JL60

persons

who have not retired the number of future years' service is - T 65 }. Also for the L persons between sixty-one il^C^Mjo + IV) 61
and sixty -two years of age the expression is \ {J(T 61 + T 62 ) and so on, till finally for L 64 it is \ {J(T 64 + T 6S ) - T 65 }.

T65

The

total

number

of future years' service with which existing


is

contributors will be credited

therefore

{(Y20 " \o) - 20(T6o + T05 ) + i(Y, -

Y65 - 5T 66 )}.

CHAPTER
for the
1.

VI

Formulas of De Moivre, Gompertz, and Makeham,

Law

of Mortality

Under the supposition named at the beginning of Text 7, viz., that the numbers living at successive ages are in geometrical progression, it may be shown as follows that " there would be no assignable limit to the duration of human
Book, Article
life,

and the values of annuities would be equal

at all ages."

Let k be the radix of the table, and r the rate at which the Then the fractional. is decreasing, and therefore numbers living at successive ages will be k, kt, kv2, nr3, etc., to
population
infinity.

At any age x we have the

force of mortality
dl
X

F*~

__
i

die

dKr*

Kf dx

Krx

xr* log r e r
x,

= - log
which
is

independent of the value of

and therefore constant


any age x

at

all ages.

Also the complete expectation of


1

life at

r
Kr^+tdt
o
J

-.1 Kr x
J
1

r*dt

log/

114
e
is

ACTUARIAL THEORY
x

[chap.

vi.

therefore also constant at


is

all

ages

and thus the

first

part

of the statement

proved.

Anticipating by a little the theory of annuities, the annuity value under the supposition
a

we have

for

chap,

vi.]

TEXT BOOK PART


wholly determined.

II.

15

log k
table
3.

may be may be

found, and from the three constants

now known

the

may be shown

In the case of a mortality table following Gompertz's law that


I,? *%y
\t

it

Q ^xy
1

x 1,7 t 'xy
\

was suggested in the notes on Chapter might be used as an approximation in any mortality table.
a relation which,
it

IV.,

x yJ o

By Gompertz's law J r

1
-5=I

/""
/

.1 , x+t y+t
, ,

Bc x +'dt

rX cx

r
l

00

+
c*

cy

x yJ

x+t y +t

'

If"
Q. ^-xy

&T&TT\ * y
c* c x 4. cy cx Cx

x+t y+ i (.f 'x+t

'

J dt 'y+t')

+ cV
f*

Als

\t?ly

IjJ^ 'M+th+t^+t* x y'


c*+~cy

nj
,

'

x+t y+t

&x+t +

y+t

yt

Q 1 ><l,9 ^-xy *xy


t
j

4.

From

consideration of the actual

figures

in the Carlisle,

Seventeen Offices, and Government Annuitants' Tables, Makeham deduced the principle of his first modification of Gompertz's law, namely, that " the probabilities of living, increased or diminished by a certain constant ratio, form a series whose logs are in geometrical If, then, Gomperlz's law is defined in the statement progression."
that the logarithms of the probabilities of living are in geometrical
progression,

Makeham's modification thereof


first

is

covered by the

statement that the

differences of the said logarithms are in

geometrical progression with common ratio c, which is shown to be true by the process followed in Text Book, Article 19. It may be noted in passing that Mr King is perhaps not

116
strictly correct in

ACTUARIAL THEORY

[chap. VI.

suggesting that Gompertz had foreseen Make-

ham's modification, but had not arrived at formulas to express it, for, as Makeham points out, he would in that case have expressed himself thus " It is possible that death may be the consequence of one or other of two generally coexisting causes," and so on. Examination of mortality tables based on the experience of assured lives convinced Makeham that while his modification of the law accounted for the facts very closely from about age thirtytwo onwards, the agreement was not so close at the early ages, and he proposed to have recourse to a complementary series during this The want of agreement with the portion of the mortality table. observed facts is due to the fact that the great proportion of the lives under observation at these early ages have recently been medically examined in other words, it is due to the unequal effect of selection. The following table gives the rates of mortality of the H MF
:

experience (1) as graduated by Makeham's law, and (2) as adjusted without reference lo any formula. It will be noticed that
at this

portion of the table

Makeham's law considerably

over-

estimates the rates of mortality.

Age.


chap,

TEXT BOOK PART

vi.]

II.

117

The same difficulty presents itself in applying the formula to the graduation of annuity statistics, where the mortality is disturbed for too long a period of the table by the introduction of

new entrants. The French

experience, both of assured lives and annuitants, was graduated by Makeham's law. The formula was not, however, applied below age twenty-five, the rates of mortality at these ages (which were made identical in the two experiences) being obtained by assuming that q could be represented by the following
x

algebraical expression

qx

= A + B x + C.t2 + D.r 3 + E.r* + Fr> + Gxe

A, B, C,

etc.,

being obtained from seven equations depending on

the unadjusted data.

One
that

curious point connected with

the value
is
.

experiences

Makeham's law is the fact logc as deduced from different mortality very nearly identical. The following examples
of

may be

given

Seventeen Offices

118

ACTUARIAL THEORY

[chap.

vi.

method

lacks the neatness of application to joint-life contingencies

possessed by the well-known first modification, proved to be of more than theoretical interest.

and has never


It
I

may
is

simply
of
the

be stated

that
2
,

under

the

second
find that

modification

form ks^g^'uf

whence we

p = A + FLz + Bc*.

EXAMPLES
1.

Find, on

of deaths

De Moivre's hypothesis, the most probable number among 1000 persons aged thirty.

The most probable number of deaths may be found by determining the greatest term in the series (p 30 + <7 30 ) 100CI
-

But by De Moivre's hypothesis p 30

= ^1 =

^~^

and

9so

5Q-

Therefore we require the greatest term in the expansion of


^55 \56

J_yoo.

56/
(n

Now the
And

)th

term
(re

the

rath

term x
the
rath

1000-ra +
n

55

therefore the
so long as or or

+ l)th term 1000 - n + 1


56re

> > < <

term

55 1001
17ft.

That is, the 18th term is the greatest. But the 18th term involves 17 deaths
probable number of deaths
2.
is

therefore the most

17.

mortality

Prove that upon De Moivre's hypothesis the is equal to the rate of mortality at all ages.
1

force

of

dl
~dlc

**

~T
x 1 1

= ~

d(8&-x)
di

86^

..

h yp thesis )

86 -a:

chap.

vi.J

TEXT BOOK PART

II.

119

3.

If the force of mortality varies inversely as the

of

life,

deduce the forms of

XX
and
e

complement

1
(o

-x
k

Let

[l

=
0)

X
d log I r_ dx
\

But
Therefore
log a

a r* =
I

u,
'

dx dx
a:)

"-/.
=
whence
Also
l

x k log (oj iu

(a>

- )*
-2-'<&

.'

But

a-.r-Q * fr V
I

^-t (o-.r)*

^ = "
e
*

-( M -aA
(a;

<)''+!

(co-.r)*
1
(<o

Therefore

- ayn- 1
, .

- a;) 1

A+l
4.

Obtain an expression for the force of mortality when the


is

law of mortality

expressed by the equation


I

s ksx iox

Since
log

x
I

= ksPu^gf = logA + alogs + ^logw + Clogg

But

***

Now

let

and

Then

dx~ = -(log j + 2o; log w + c* logc - log s = A - 2 log w = H - log c log g = B = A + Hz + Bc* /*,

d log

logg)

CHAPTER
Annuities
1.

VII

and Assurances

By

Text Book formula (3)

vp

(1

+a
fl

,)

whence

(i+*X =
From

^( 1

+i)

the equation stated in this manner

much

that

is

useful

may
by

be learned.
If a x be invested at age x in the purchase of a life annuity,

the end of one year the purchase-money will have accumulated to Now if the annuitant has survived, he will be aged (1 + i) a
.

(x+1), and will be entitled to the


immediately.
(1

+a

).

first payment of the annuity The value of the annuity will therefore be The excess of (1+a ) over (l+i)a is, by the

equation above, q (1 + o-x+ -,)> which is the loss to the granter of the annuity for each survivor, and therefore the total loss in respect of the survivors of lx entrants at age x is I ). q (1+a

Again, if the annuitant dies during the first year the whole of the accumulation, that is (l+z')a, will be set free. The total

amount
d
(1

set free
.

by the deaths among

entrants at age x will be

+i)a

It is

assumed that the mortality actually experienced


it

be that shown by the table adopted, and proved that I ..a (1+a ,,) --= d (1 +i)a
will

may

easily be

Expressing Text Book formula (3) in slightly altered form, we have

l(l+i)ax = ' x^

,,(l+aX+V ,,) a+iv

From

this it

may be
d

seen
die during the year, the accumulations of

(1) That, unless

chap,

vii.]

TEXT BOOK PART


l

II.

121

the purchase-monies of
annuities

entrants will not be sufficient to meet the

payable to the survivors.

This confirms

Mr

King's

always presuppose a sufficient number of such benefits to form an average; so that the contributions for those that never mature may be available

remarks in Article 4 that

"we must

meet the deficiency become payable."


to to

in the contributions for those that actually

(2) That, when an annuitant dies, the reserve released is not be considered profit to the office, since the amount released has to be applied to make good the deficiency under the contracts of

those

who

survive.

2.

The following simple proof shows the

identity in result of

Barrett's

and Davies's forms of commutation columns.

According

to Barrett,

who used

the initial form,

B-

+i

A*+l +As + + AX B (!+)" +1 + = ( 1+0


.

V,+
l

(1

+ )-',

(l+i)<v x

DX
_

NX
DX
who used
the terminal form.

according to Davies,

3.
life

In Text Booh, Article 25,


is

it

is

shown that the value of a

than the value of an annuity-certain for the term of the curtate expectation, and it may similarly be shown that the value of an assurance of 1 payable at the moment of death
annuity
less

122

ACTUARIAL THEORY
1

[chap.

vii.

greater than the value of complete expectation.


is

due

at the

end of the term of the

A. = l-rf(l+J > 1 -d(l +ai),

since a

<

a,
e

x\

,.1+e

>
in the year of death.

i\

ex +K

where

is

the time lived by (x)

Therefore
or

(l+i)*
e v x

> v^
since

AX >
it

AX = A(l+i) K / X^
there be d

being the

time before the end of the year, at which death occurs.

Or we may prove
eaual to
v,

thus
,

Let

quantities each

each 2 , d

each v 3 , and so on.

The arithmetic
is

mean

of these dX

a"

, x+1
,

a"

L x+2

+
d

quantities *

dx+

<*.+!

x+2 +

= AX
and their geometric mean
is
i +!+** **+** x +l+ ad x+^

x+ d x+l +d x+2+= 1+ *

But the arithmetic mean of any number of positive quantities which are not all equal is always greater than their geometric mean, as proved on page 6.
Therefore

A.

>

1+ '

and

CHAP.

VII

TEXT BOOK PART

II.

123
1

premium payable

in advance required to provide

at the

end

of the term-certain of the complete expectation of


4.

life.

If we are given find


i,

any two of the three functions a

and Px

we can
(1) V /

the rate at which they are calculated.


a;

Given a and

Ax

By

Text Book formula (22) A^

=
=

ia
?

whence
and
(2)

(l

+ i)A
i

ia

1-A. a + A X X
dA = jjr
X

Given A^ and Px

By

Text Book formula (37) P^

whence

(l+i)Tx (l-AJ =
and

i\ A
P x (1 - AX' ) V - P (1-A)

(3)

Given P x and a x

By J

Text Book formula v (38) '

+a
1 1

whence

(1

+ i) ?x (1 + aj =
1

- ias

and

*.+u i +J

of the equations given in Text Book, Article 39, every can be adapted to the case of endowment assurances in
5.

The form

instance.

Axn\ =

V
1

(.

l+ax:^ia

x:^T\

x:^Tl

1+i

ii

o - a x:n-l\ be found a

All through

^.^ni

is

substituted for

a,,

and

it will

124
useful

ACTUARIAL THEORY
exercise
is

[chap.

vii.

to

reason these

equations

out
30,

for

endowment
to 44, for

assurances as

done in Text Booh, Articles

and 41

whole-life assurances.
6. In connection with Text Book formula (41), noted that
it

should be

+ Dx+1 +D X+2J T
xn\

+D

'-L-"
,


TEXT BOOK PART
Text Book, Article '
88, '

chap,

vii.]

II.

125
is

8.

In

A wxyz

(m)

-,

described as an

assurance on the last r survivors of in lives, by which is meant that it is an assurance payable at the end of the year in which
at least r lives cease to survive,
i.e.,

the

year in which occurs


the probability that

the death of the

(m-r+l)th
L =
(

person.

Now

the

(in

r + l)th death
i(7

will occur in the reth year is


rt-1

7i- 1[

wxyz

(m)
2L

p wxyz
Ti-1

L.

(m)

p wxyz
*i

L). (my
(m)

Therefore

2"(

(m)

p wxyz
73

(m)

L - p irayz

Tjfl+Sy"

M-2u
iuei/z
. . .

ra

p
71

im)

wxyz

(m)

= v(\+a
imi/z
.

t)-a.
.
.

(m)

wxyz

(m)

But

affain

A
,

1
(m)

2r
Ti-1
J

1-

wxyz

(m)

2tc{Z'-rZ''+i+ !<!lii Z'+-

where each power of Z represents the sum of the form o ,,, the number < being the same ,
1

of certain probabilities
as the

71

-1

u-xyz

(t)'

index of the particular power of Z involved. We may therefore extend the meaning of Z for use with assurances; so that Z r may signify the sum of the values of the assurances on r joint
lives for all the
lives.

combinations of r lives that can be

made

out of

in

We

shall

then have

A wxyz
Taking
1 A wxyz =

1
. . .

= Z'-rZ

+i

r J?+V

Z'+Z-

(m)
;

as

examples

Z - Z 2 + Z 3 - Z4
V.

_ (A +
,

A+A+A)-(A wx +A +A +A +A +A)
x y
z> ^
icy
ir;

xy

xz

yz>

+ (A toti/ V

+A was +A

ii'>/-

+ A xj/2' - A >/z )

= Z 2 - 2Z 3 + 3Z 4

A _s =

-( A . + A .y+ A .+ A , + A + " KKxy + Kxz + Kyz +


z
3

V
KJ + 3 Kxyz

-3Z
it-J-i/

= fA V
*

+A
A

if

+A

!/z

A
J;

!/-

) y

3A

= Z4 =

126

ACTUARIAL THEORY

[chap.

vii.

9. The Text Book skeleton formula (57) can be applied to temporary benefits and deferred benefits, by altering the meaning ofZ.

Thus we may say


I

n wxyz

*
. . .

(m)

= Zr-rZr+i +
sum
of

r(r+ -^-^
1")
J,

Z'+S-

where Z r

signifies

the

the

values of
all

the

temporary

annuities on r joint lives for n years, for


r lives that can be

the combinations of

made out

of

m
r

lives.

Or again
where Z r

|A

A=Z
sum
all

-rZr + l +

^t ~ Z'+-

signifies the

of the values of the assurances deferred

n years on r joint lives for be made out of m lives.

the combinations of r lives that can

10. To find the present value at rate i of the amount at rate j of an annuity-due of 1 per annum to accumulate during the lifetime of 0).

The following is perhaps a clearer demonstration than that given in Text Book, Article 98.
If (x) die in the
first
1

year the amount of accumulated annuity

payable

is

(1

+j) = (1 + />IT

If (x) die in the second year the

amount payable

is

{(i+i) 2 +(i+i)} =

(i+v
amount

And
payable

so on,
is

and generally

if (x)

die in the fth year the

(1 +J)s-^.
is

The present value


of
(x)'s

to be taken at rate

i,

and the probability

d
death in the
tth

year

is

*+'

-.

Therefore the present

value of the
tih

amount

to be paid in the event of (x)'s death in the

year

is

vHl+jYK JJ

(l+jj-l d^ x
.1

-t
I


chap,
vii.]

TEXT BOOK PART

II.

127

Hence

A =

<=U

-V(1 + j) Qjlzl fs+izl

'

where A' *

is

calculated at rate J, which

is

such that
l

=
1

+ J'

For an alternative solution we have

+ 3 {(i

+j) +

(i

2 +i) +

(i

+i)

}^
2

(i

+j)

(-5

j+1
z

+2

'

+ (i +i)

+1

^ +2

a;

(i+j)M x+ (i +Jy-M x+1 + (i +j?M x+i +.

DX
11.

To

find the present value

at
1

rate

of the amount at
for n years to

rate

of a temporary annuity-due of

per

annum

accumulate during the lifetime of {), the accumulations to be payable only in the event of (x)'s death within that period. As in the previous problem, the present value of the amount to be paid in the event of (x)'s death in the tth year is

v\\+j)
Hence

(l+i)

-!^
+/?-!
rf
--

A = 2(=1

v f (l

, + j)

(1

d t+l _, d

1 +,; f

is

1+J,
.

'-(A*^ xn\
J,

xn\

-)
such that
=
1

where

A is calculated at rate
,

which

arn

i+y = f~+
Z

i
-.

T +J

128

ACTUARIAL THEORY
According to the alternative method

[chap.

vii.

A = ,(i+i)f +4(i+i) + (i+i)


X

}%+X

+"{(i +i) +

(i

+i)

++(!

+M %^
a;

(1

+i)

(^
+
. .

^
?

^^ij + (1 +./)*( =i
x
a;

^'j

+(1+jQ
2

'+-

(1

+j)(M x -

M^J + (1 +j) (M* +1 - M, + J +.+(! jjjy, - M^ + J


D
problem from the last is to find the present amount at rate^' of an annuity-due of 1 per to be allowed to accumulate until all of / persons

12.

different
i

value at rate

of the
is

annum which
are dead.

at rate,/

This means that each payment is to be allowed to accumulate up to the limit of life, and the whole must be discounted from that time at rate i. Therefore

A =

_. x

w+jy-'+it+iV+jr-'- +

L-iQ+A

VI

i) 01-x

iiV J + i) (1+0
where
a'
X
is

calculated at rate J j.

For the value of a temporary annuity-due which is to be allowed to accumulate to the end of the term under similar conditions, we have

A =

w+jy+^+jy-^i

+*, +n -i( 1+.a

-\i + i)
=

x -

r
a
'

+ a'x:n^i\) w ^ ere

x -^zi\

*s

calculated at rate j.

chap,

vii.]

TEXT BOOK PART


find Lhe value of a

II.

129

13.

To

temporary assurance for n years


1

on the

life

of

(x),

annum
1
is

so long as (x)

commencing at 1 and increasing by and (tj) are jointly alive.

per

According

to the terms of the contract it will be noticed that payable in any case provided (x) dies between ages x and

x+

n.

lhe

value of this portion

is

therefore

1*1

x+n
.

This

sum assured of

1 falls to be increased by 1 provided (y) lives one year and (x) dies between ages x + 1 and ,t + n. The value of

this

second

portion r

is

therefore
rath,

p rv

M M x+ - M ^ D
,

5^.

And

so on

for
(if)

every year until the


lives n

the last increase taking place if


-

years and (x) dies between ages x


]VI

+ n-1 and x + n,

the value thereof being

*+*-* -M 2.
x

Therefore the whole value of the assurance

is

A = ^- /(M x ^ Y)
I

]VI

)+p "y\ x+n'


,

(]VI

x+1

1VI

]VI

)+ x+n'
1
j

+ n-l 1 y\ x+n-1 p (M _,
,

) x+n J

of Text Book, Article 99, is payable so long but not more than / years after the death of (jf). Now as to the first t years, it is obvious that (j/) does not come into consideration at all but, in order that a payment may be made on (.c)'s surviving the (< + l)th year, it is necessary that (jj) should have lived at least one year, and similarly for following years. The value of the whole annuity is therefore
14.
as (x)
lives,
;

The annuity

vl

.+l

+r

x+2

+
I

+VH*+t

Vt+ll

+
x +t+ l
l

x +t+ l

y+

l+

vt+2l
x

+W

+2 +

---

11 x

Hx+t
x

vl

+ v2l*+t + Jy+2+ V+l


x+t y

= =

*ri+

vt

a tPx

x+f.y

a __|f(a
x

Dx

*+'

fl

) x+f.y'

15.

To

find the value of

an annuity to

(.t),

the

first

payment
I

130
to be

ACTUARIAL THEORY
made
(jy)

[chap.

vii.

at the

end of the tth

ear succeeding the year in

which

dies.

The value of
from a
a
life

this annuity could

be obtained by deducting

the foregoing annuity, for this would give the value of


(x) less

annuity to

lives jointly
(x) live

with

so long.

that of an annuity payable so long as (x) and for t years after the death of (y), should (?/) The difference is obviously the value of the

desired annuity.

Thus

ax a

=; ax:y(t\)

-{a
x-\-t /

- -+< (

aa
\

- -^T^x+t
X

x+f.y)

Or we may proceed
a

as follows

1 = 2-"-VJtn=l
Z

V'<
Z

|, *+
/i ^
,

y,n+t

K-fn-1
Z
!/

-I
!/+"

J+n+t
Z

>

z+i+<J
,

X
, x+n+t

dic+< y y+n-1 ,

y+n
,

t;

n+1

x +n+t+l

+
'

x+t

+ + t

^^ A
2

+(

+ *Vv+

H^-V.*^...}

a;

- (Vx +t

><Py

+ V \Px+t

* iPy

+ *V +

X sP +

)}

16.

To

find the value of


(tj),

after the death of

an annuity payable and thereafter so long

for

years certain

as a life presently

aged

(sc)

may

live.

chap,

vii.]

TEXT BOOK PART


first
t

II.

131

The value of the


the year of death

payments of
first

this annuity is that of


is

annuity-certain of which the

payment
(1

made

at the

an end of

of

( y),

or

+ a-^rn)-

"The value of the

subsequent payments
first

is

payment

is

made
(;/),

year of death of

(.t), of which the end of the tth year succeeding the and of which the value as found above is

that of an annuity to

at the

D X+t
J)
x

v +|- "x+f.y-1 ( "i+( *4-i Jfl


:

The whole value

is

therefore

A ,( 1 +ir i +
l)

1,

(V-V.:v)

To find the value of an annuity payable so long as (x) with (jj) and for n years after the death of (/), but in any event no payment to be made after m years from the present time, in being greater than n.
17.
lives

The value of
x+l

this annuity is

x+2
I

'

x+n l + V "+ 2 I x+n+2 y+1 + ...+ V m Ix+m Iy+m-n


I

x
,

V n+1
,

x+n+l Iy+l
,

X y

a-+ xn\
18.

D+*<.
_,_

J)

x+n y:m-n\
:

To

find the value of

an annuity payable so long

as the

survivor of (^) and (z) lives with (.r) and for t years after the death of (x), should the survivor of (y) and (s) live so long.

Following Text Book, Article 99, we have

=
*(.*])

~~

y.Mj\)

+ a z:x(.t\)~ ayz:~x~(J\)
y_

%- -rrK+ ~V D ~V+
v y
z

-a ~x:y+t' x: +( )

+ a*--Tr( a, + t- ax:; +t )

-ayz +

v+t:s+t

Dyg

(a
^

y+f-z+t

-nx-.y+f.z+tJ ^

132

ACTUARIAL THEORY

[chap.

VII.

1 9. To find the value of an annuity payable so long as (x) lives with the survivor of {y) and {), and for t years after the survivor's death should {) live so long.

x:yz{t\)

x:y(t\)

+ a x:z(t\)

ax:yz(t\)

= .- -^^x+t-^+f.y)
X

D x+t
J)
x

( V"i+l

a .+|- a.+:i) "x+t

~a + x

D x+t

a T5-( .+-

fl

+:)

D
X

T^ Y)

V. ^

x+t

a;+(:y
1

x+t:z

+ x+t

20. If

we

are given a table of

P
a:

at a certain rate of interest

we may deduce the

mortality table.
:

The process

is

as set forth

in the following schedule

Age
X

(1)

chap,

vii.]

TEXT BOOK PART


fix

II.

133
I
.

As usual we
is

a radix or initial value of

the log of which

(8), whence by continued addition of the successive values in (7) those in (8) are found. The values in (9) are the natural numbers corresponding to the logs in (8). Here we may repeat what is said in Text Book, Chapter III., Article 18, viz., "The values in the column of I so formed will X

placed at the head of

'

'

not be the same as in the corresponding column from which the given table (of PJ was originally calculated, unless the radix we

choose

is

the same as in that table

values will be the same, and that

before remarked, the column


living,

between the As does not give absolute numbers


;

but the
all

ratios
is

is

that

required.

but only relative numbers." It may be mentioned that an easy way of obtaining Text Book formula (72) is from formula (70). Thus by formula (70) we have

(1+0 a,
x-tl

But by Text Book formula (39)


1 *

" P +d X
P_,,+<*
x+1

and therefore
1

1+ Vi

Substituting these two results in formula (70)

we have

Px

a+0(p^ + o(pTa-i
X

21.

By

the use of the theory of varying annuities {Theory of

Finance, Chapter III.) the values of the functions Oj

A^, and a^

on

De

Moivre's hypothesis

may
+

very easily be found.


v(n-

l)

2 ?>

(ra-2)

+(-)

[=

134

ACTUARIAL THEORY
(-!)(!u TC )

CHAP.

VII.

- (a^ -

nv n )

-0+W
+
?H

n (T

z")a

Again, from the reasoning in Text Boole, Article 108, we may form a mortality table for joint lives as follows
:

Ages.

chap,

vii.]

TEXT BOOK PART

II.

135

22. In Text Book, Article 115, we have the value of a temporary annuity on two lives, the term varying with each life. Similarly

we may have
which
it is

a deferred

annuity on two

lives,

the

period for

deferred varying with each


till

life.

annuity payable

the survivor of two lives,


is

For example, the aged six and eleven

respectively, attains majority


|l5

6+|l0 il-|l0%:ll

And by
aged

analogy the annuity payable to the survivor of two lives, and eleven respectively, but deferred till each or the survivor has attained majority, is
six

isl^

+ ioCn-islVii
such an annuity
if in
is

The general formula


n\

for

\a
I

\n + m\"x n\lux a

or

n\

+ m\ a x - m| a ax
I

< if m >

n
re.

23. Again, the assurance payable if either of two lives, aged


six

and eleven respectively,


i !

dies before attaining majority,


1

is

- + -J^- A 16:5| A (6:15|)(ll:l0|) = A T D "''67TT


1 l
1
:

10|

6 :11

and

for the

annual premium we shall have


A
1

D 16:21
F)
6
:

'eill'ilOp

16 :6|
11

P* -m * (<3:15|)(11:10|)

a
:

11

i6I

+ T)io-21 a i6
6:11

5J

Generally
*_1
l

a+m x+m
:

ax'

m| ^r
,

a+m n-m\
:

P. 1

-i., -;.

=
axm\

a+m n-m\
:

if

m <

a+m:x+m
]}
ax

A^

-.

"+=+? A-4

D a+:+
axn\

if

m>

Y)

'

ax

136

ACTUARIAL THEORY

[chap.

vii.

24. Also the assurance payable if both lives, (six) and (eleven),
die before attaining majority
is

Ai _

(6:16|)(11 :10|)

= A 1 -+A 1 T 11:10| 6:15|

A
A

1
:

(6 :15|)(11 :10|)

Al
6:

41
"

16 :21
i-

Ml"

ll:10|

'6

ll

10|

n 16:51

11

The annual premium

for this benefit is

Ai _
Pl _
1

_
16:
:

_ =
a
(0
:

(6:16|)(11:10|)

S;15|)(11:10])
16|) (11
:

D 16:21
i0|)

~D 6

M
16
:

11

Al
6 :15|

"^

ll
11 :10|

21

'6:li:10|

n
6
:

a i

16
11

6:15|

+ a il
,

_a
:10|

_
e
:

16 :21

11

10]

H
6
:

16
11

Generally

A
Pi_ i_ =
(<m|)(mP

a
A
1

+ Aia

-A'^

+:+,

A4
,
.

2
aa;

ovt|

^+

^a+mrz+m a 2 2 -, - aa3m\ a+m:?t-m| xm\ 23


i

if

m <

_
|

1_ _
xm\

an

AJ >ax'n\
Pj _

a+n x+n
J)

A *+:-|
1

or

=
ara~|

it

m >

a+n x+n
:

xni\

axn\

J)

x+n :m-n\
ax

25.

The
at

insurance.
living

following are problems connected with national Given a stationary population where the numbers each age correspond with the figures in some known

table of mortality, find


(a)
1

The amount that


death of each
in the

will require to

be subscribed to provide

at the

member
first

of the community.

The deaths

year are (d

(d
1

second
third

+d +d +. +d + d^ +
.

+d u _ )=--l +d u _ )^ ^
1

(d
2

+ ds +

d
4

+ ..

+ du _

and

so on.

137

chap,

vii.]

TEXT BOOK PART


benefit
is

II.

The present value of the

therefore

C A= =
1

vl

+
l

v
;

k(

+ v%++ ao)
1

=
If each

oOo

+ A o)-

single jjremium irrespective of age,

the benefit

community is to contribute the same we must divide the value of by the population. The total population is
of the
/

member

+ *, + /,+

(l+e

).

Therefore the single premium that each must contribute

is

W
(6)

c o)

eo

The fund that


1

will

require
to every

to be

subscribed to pay an
of the community.

annuity-due of

per

annum
l

member

K'

ll
x(.

1+

= -

o( l
1

+ a o) + ho- + i) + hv

ad

+
.

4- I

A +
l

l
/

A +
2
1

= \{Qo+k + h+=

)-K'

iA x

(l+e )-^o(l+o)}
)

(l+z)/ (l+c )-/ (l+fl


i

(c)

The fund that


1

will require

to

be subscribed to pay an
of the

annum to every member no payments to be made at and after age y. The expression for this may be stated thus
annuity-due of
per
y,"1

community

Id+a)-^'

l(l+a)

is, we deduct from the fund required in respect of the whole community that portion of it which is not required in respect of those who are at present aged y and upwards, and from the result

that

ACTUARIAL THEORY

138

[chap.

vii.

we deduct

the value of the deferred annuities payable after attainment of age y to those who at present are of younger age. The expression may be reduced as follows
:

(i
_

+o

1
{

+ e o) -

^ + <a
8

-{*,(i

+,)-',q+ ,)}

v
Vl

y\

(d)

The fund which

will require to

old age pension of 1

per annum,

first

be subscribed to provide an payment on attainment of

age_y.

The value of this fund


problem, that
is

is

merely the

last

term in the preceding

+ lO VVyPo( 1 + ay) =
(e)
Z..5-j
!/|

x
y

la.
I

each

member

The annual premium, equal at all ages, Lo be subscribed by of the community to provide 1 at each death.

(a)

This premium will be obtained by dividing the fund of problem by the expression found in problem (6), since the benefit side is

i,

IK,

and the payment side

is

Px2

(1

+ a).

annual premium equal at all ages, payable up to (J") The but not including age y, to provide an old age pension of 1 per annum, first payment on attaining age y.
This premium will be obtained by dividing the expression in

problem

(d)

by that

in

problem

(c).

These problems are discussed by Mr R. P. Hardy in a paper on " Collective Assurance " (J. I. A., xxx. 79), where the formulas
are given.

26. It

is

interesting

to

notice

the

forms taken by various

benefits on the assumption that

money

yields no interest.

'.

vii.]

TEXT BOOK PART


v

II.

139

If

= 0,

= 1, and

l1 +! U+^+3+
2 /

,+i

+ U +/+ +

Also

,_,

U+U+U+n\

,t

And
Again

in
?i|

ie x

A* =

vd

+v 2d

*1

+ c3
,

(/

*+ 2

140

ACTUARIAL THEORY
P^ =
1

[chap. vu.

-,

n-l\

1- n px 1 l+e -j

P( iA xJ ) Kn
\

AX ii-^ l+a
71
I

111

P_ =

l+e A sw|

T+a x
l

ii-Il

l+ex :^Tl
Further
(I A)

<+
d
a;

^+i + 3

+2

+-

+2dx+1 ,,+3ds+2 +

27. Select tables

of mortality supply us with the rates of

mortality
grasp.

experienced in each year

from

entry
is

amongst the
not
difficult to

entrants at each particular age.

The notation

For example,
is

the rate of mortality experienced in the

first

year of

insurance
q
is

among among

those

who who

enter at age

x,

the rate of mortality experienced in the second year of


those

insurance
</

enter at age

x,

and generally

is

the

rate

of mortality experienced in the (<+l)th

year of insurance

among

those

who

enter at age

x.

appended to the various symbols is formed by putting the age at which the life enters in square brackets, and adding the particular number of years after entry outside these brackets.
suffix

The

It is

not usual to give for the several ages at entry the rates of

mortality experienced during each year of insurance up to the


limit of life
;

but only for a limited

number

of years

(re),

after


TEXT .BOOKPART

141

CHAP.

VII.]

II.

which the rates are joined to what has been called the "ultimate" experience. This ultimate table shows the rates of mortality amongst those who have been insured for n or more years, the assumption being that the mortality at age x + n is the same for all of that age whether they entered at x or younger ages This period of n years is not always assumed to be of the same
length.

For example, in Dr Sprague's Select Table (H

years, while in the British Offices Life Tables, 1893

(O m
x,

) it is five

it

is

taken at ten years.

The numbers

living, in respect of

age at entry
:

after the

several years of duration are expressed as follows

W
d
ix]'

Wl'
d

'

kx]+2''

[x]+n-l'

x+n'

x+n+1'

The deaths

similarly are denoted

by
, y x+n'

ix]+i>

m+2'-

d, [a:]+>l-l>

dx+n+1''
v.

For the annuity commutation columns we have


\x]

[xY

[x]+l
l

[x]+l'
'

x+n
'

x+n'

W= D M + D M+ + D M + +
*
(x]

+ [x]+n - 1

x+n +

i+n+1

Also the assurance commutation columns are


[xf

M+l
'

M+l

x+n

x+n'
"""

[x]

~ CM + CM+1 + CM+2 +

[x]+n-l

x+n +

x+n+1

28. It will be useful to discuss here the formation of select

mortality

tables.

If

we

refer

to

the
:

tables

we

find

mortality table in the following form

Age
at

Entry
[*]

142

ACTUARIAL THEORY

[chap.

vii.

The most obvious way to form such a mortality table is to assume the same radix at each age at entry. Successive multiplication by the probabilities of living will then give us a complete
table of mortality for each age at entry, since
{x]

P[x\

Wi'
n
X
'

Wi x p m+i
/.+.

Wa'
X P.+fc-l

and generally where


l

>

m X PW X P M+
this

P M+ -i X

X P*+n+l X

But by

method we should have an independent

mortality

and the extent of the monetary A better plan is, tables following thereon would be prohibitive. after forming the table for the first age at entry as above to the by working along the first line and down the column I
table for each age at entry,
limit of
life,

to

form the remaining tables for the succeeding ages


along
their

at

entry by working backwards


I

respective

lines.

Thus since

P [*+l] + 9l-l
Therefore
I

X+71 + 1

= =

x+n+l

r[a;+l]+-l

Also

I ,, [l+l]+ -2

ta;+1]+ 't -

and

so on.

[ai+l]+n-2

But

x+n+l

is

already J

calculated

in

the

ultimate

column,

therefore

^ +I]+B _i
l,

may be found by
\ x+1 y
^

successively

x+1]+n _ 2 ,

p [x+1]+ _ ll and n tne same way, commencing


I,

dividing by

with

x+n+2'

we may work back J

to

,, [e+2/
,

and so on

for the

other ages at entry.

The advantage of this method of formation of " ultimate " monetary values is necessary.
29.

is

that only one set

Now

out of

select lives at age at entry x,

will

be

alive at the

end of n years.

But according to the method by which


I

we have
attained

constructed our table


/

x+n
,

is

also the

number

alive at

the end of n years out of


x.

mixed

lives

who were

alive at age
I,
,

It follows

therefore that the difference between

TEXT BOOK PART


number of damaged
in

II.

143
/

and
if

is

the

lives included in the


/

Again,
lives

from the deaths


deduct
I
,

each year of age amongst the


in

mixed

we
the

the

deaths

the

corresponding

years

amongst

select
(/
:

lives

[x]

amongst the
is

we have the deaths in each year of age b J damaged lives. The mortality experience )

as follows

Age.

144

ACTUARIAL THEORY

chap.

vir.

For the annual premium for should have


rp ^
[2I+

years for such a benefit

we

- p[x+n']-' [x )+n in

M
(P

[x)+n

- P

[1]

ml/ n
I

It is to be noted that this annual premium can only be accepted along with the annual premium for an ordinary policy running during the n years otherwise by withdrawing at any time the assured would exercise against the office issuing the policy an
;

option for which allowance has not been


31.

made

in the calculation.

To

find the annual

premium

upon the assumption that end of the first year.

all

for a short-term insurance the healthy lives withdraw at the

The
arises

necessity for taking


fact that the

from the

such an option into consideration annual premium for a short-term

insurance frequently diminishes with an increase in the age, the original date of termination of the contract remaining unchanged.

Thus, in symbols,

it

p!_
xn\

>

P J_

x+1

may happen > P J_


Ti-1
is

that

x+2:n-2\

> ^

etc c

1 > Pj+-1 :1| ^

The reason

for this

that the decrease in the term of the

insurance has a greater effect in reducing the premium than the increase in the age has in raising it. The following table (based

on the

O tNM]

Table at 3^ per cent.)

illustrates the point.

Short-Term Insurance Premiums per unit assured.

Age.

chap,

vii.]

TEXT BOOK PART


be seen that

II.

145
etc.

Here
so on.

it

will

P^ > P^- >


office

> P^-,

and

It follows, therefore, that an seven years, runs an appreciable

issuing policies, say for

are

the lives which end of the first year may drop their policies and effect new ones for the remaining six years at a lower rate. The value of this risk is ascertained in the problem before us.
risk, in that all
still

select at the

If

persons enter at age


at the

x,

die within the

first

year,

and i I+11 withdraw


to

end of the year.


year J
is
I,

Therefore the number


1,

enter on

the

second

[X]

+1
,

[3+1]

,,.

Out of

these, '

w+i;

ix+n
2

die within

alive

-d
alive
>

the second y ear leavm S die within the third year,


-

W~k+u+i
leaving

Wi"Wn+J

and so on

Therefore the benefit side

^M + ^M+l -^+l]) + ^M+2vd[x]


r , r ,
,

rf

[x+l] +1 )

+ p "(dM+ .-i-

rf
[

. + i ]+ .- 8 )

i]

+ v 2 d[]+! + v sd[g]+2 + +",, [x]+n-l


,
r
,

[x]

i]

^+

1]

+ 1 +hx]

+*'Wi ]+ ._,

M M- M M +
And
P'l
[*]l
/
>,

^,+11-^+1]+.-!

the payment side

_
"' w + <i]+i-Wi]) + ^i]+2-Wi]+ + --- +p (W.-i-^+n+.-J )
1 1)

[I]

p'l

_/ _ fx]
N

N -N fj]+n _
[X]

[x+1]
;

"

[j+l]+n-l \
^lx]
'

146

ACTUARIAL THEORY
solving
r*i

[chap.

vii.

Whence on equating and

F1
If n

_ =
"'

~ M w+ J - ( M + n ~ M + N M - N M+ J-( N , +1] - N , + "(


(

[*

[,

i]

+m -i)

i]

+ ,-i)

be greater than the

number of years during which the


M. -M.[+l] ,
[]

effect of selection is

assumed
p' r
1 _ Ml

to persist, this formula reduces to

N ri -N,\x+l]
[X]

_,_

32.
(see

To

Text Book,
all

that

premium for a " Half Premium " Policy Chapter XVI., Article 37), on the assumption the healthy lives withdraw at the end of i years, the halffind the annual

premium term.
If
l
[x]

persons enter at age


t

x,

d
[x]

[x]+l

[xW _ x
Z,

die

in the first
I
,

years respectively, and at the end of the tth year


(t

withdraw, leaving to enter the

l")th

year

I,

out

of

whom

.,

-d,

die in the

(t

l)th year and L ,,,,,- L

enter the

(i

+ 2)th = +

year,

and so on.

Benefit side

i[x]
1'

vd,

+ v2d.

+n'drll

(<W - <W + M M- M + q
<+1
[
I,
,

< +2

(<W +

<Wl) +

Payment

side

= P -=

+ vl,

+ J'*" 1

Zf

Whence on equating and


p =

solving

N +N

Mw - M -y+i]
iy

- 2N

33. To find the addition that must be made to the annual premium for a contingent insurance policy, payable in the event

of (x) dying before

(i/),

in order that (x)

may,

in the event of

chap,

vii.]

TEXT BOOK PART

II.

147

surviving (y), have the option to effect a new whole-life assurance by annual premiums without fresh medical examination.
It will

will

be

alive at the

will fall

be convenient to assume that, should (x) survive (j/), he end of the year of death of (g) when the option to be exercised. Then in respect of the nth year the
is

value of the option

nP[x]\n-lP[g}~ nP[y])\"[x]+n~

a [x+ny [x]+n

To get

complete value of the option this expression should from 1 onwards and the annual option premium required will be found by dividing the result
at the

be summed

for each value of n

tion of

approximate result would be obtained by taking the expecta(3/), say n years, and applying the formula for the problem discussed in paragraph 30, page 143.
34.

An

To

find the annual

premium

for a policy

sum

assured, instead of being payable in

under which the one sum at death, is

payable by instalments over a period of n years.

Here the
due of

benefit to be received at death of (x)

is

an annuityif

per h
1

annum

for n years certain, or


1

~
n

Therefore

the

annual premium for an assurance of


of

be P

that for an assurance

^E
n

will

be Px

-^i.

further development of this policy consists in the guarantee

that the instalments will be continued, even after the n years,

during the lifetime of some nominated beneficiary.


this

The value

of

extended portion of the benefit


for
it

is

(a

-a

-=f) and the

premium
of
(,r)

and
(x),

(j/).

should be made payable during the joint lifetime The reason for this is that on the death of Q/), if

before

the benefit

continue at the same rate as before, (x)

and insure at a cise an option against the company.

much reduced and if the premium may throw up the policy lower premium if in good health, and thus exeris

very

We
&/)

therefore

fix

the annual

premium

at
a,
i

a -a
a

n \

148

ACTUARIAL THEORY

[chap.

vii.

with the agreement that, in the event of Q/)'s dying before


a-:

(x) it

will

be reduced to P -^.
*

n
is

35.

cognate problem

to find the annual

endowment assurance where the instalments

are to

premium for an commence at

death or maturity and to be payable for a fixed period with continuance thereafter so long as the life assured survives. A definite number of payments is guaranteed, so that, in the event of death
before maturity or within n years thereafter, the income would be payable for the minimum period agreed upon. On the principles

above indicated the annual premium


a,

is

n\

1 1
-

xm
\

m+n-l\ a

\a

36. To find the annual premium for a whole-life policy, it being a condition that the office retain the sum assured for n years after death of (x) and pay interest thereon for that period
at rate j.
will
is
{

office must settle upon the rate which it is to assume it and then the problem earn upon its investments, say i simply to find the annual premium for a sum assured of 4The payments of the annuity here will obviously (J i) a^- }.
;

The

make up the rate of interest from annual premium will therefore be

toj per unit as required.

The

37.

To

find
i.e.,

the annual
a
2.

premium

for
1

a double-endowment a

assurance,

term assurance of

coupled with

pure

endowment of

p _

Ai- + xn\
i

2Ai xn\

A-i + AL xnj xn\


1

+ ax:n-l\
X-j-n
,

+ ax :n-\\
,

MX - M
p
xn\
,

+2D
,

3J+71
,

Nx-l -N x+n-1
xn\ x
:
:

n-l\
~, 1

l+ax

7i

from which the premium may most conveniently be calculated. A peculiarity of double-endowment assurances is that, unlike whole-life assurances and endowment assurances, the premium


TEXT BOOK PART

CHAP.

VII.]

II.

149

generally decreases with

an increase in the age, as observed from the rates in the following table
:

may be

3 per

cent.

Double- Endowment Premiums

Annual Premiums

required for 100 payable in the event of death within the term, or 200 payable in the event of the term being survived.

Age.

' '

150
38.

ACTUARIAL THEORY
To
have
find the annual

[chap.

vii.

premium

for a joint-life

endowment

assurance.

We

Pryn = -i
^

+
xy

7 xy:n-l\

and axy:n-l\
,

Dx+n-i^y+n-i
J)

x+n-1 y+n-1
:

xy
/

axy

D x + n -'
J)

+-i
I

x+n-1 y+n-1
:

Havinff found the value of a ^"

.n/

n-1

from

this formula, 3
7

which

is

perhaps the most convenient


obtain
-,. PTim
|

for the purpose,

we ma} very

easily

for
(J.

method of approximating to the value of the annual premium a joint-life endowment assurance is suggested by Mr Lidstone I A., xxxiii. 354), viz.,

Pxyn =
|

P- + P--Pyn\ n\
xn\

where
1

is

the

premium payable

in advance

which

will repay

in

re

years certain. J
little

This formula ffives values for

Pxyn\ which -,

are generally a

too small, but with practice allowance for

the difference
39.

may be made.

survivor

To find the annual premium required to provide a lastendowment assurance on (x) and (jf), payable at the end
;

of

re

years or previous death

that

the death of the survivor of


place within n years, or (2) at

an assurance payable (1) at and (?/), if that event takes the end of n years, if one or both
is,
(.r)

be then

alive.

Benefit side

= A

= A + A
,

-,

-,

Payment J

side

= Pxyn ,(1 + a V xyn\\ xy


Pxyn\^ + ;(l
a

r n-l\

.)

T-,+a y:n-l\ x:n-l\ x: n-1 ~y:n-l\


1

-,

-" a -) xy.n-ly xy\n-l\ J

Hence

Pxyn\

chap,

vii.]

TEXT BOOK PART


P

II.

151

Therefore

=
wl

l-d(l+axy:n-i ,) v \l l+ axy n~
:

1|

1 1

-d
r,

from which it will be seen that the simplest way of obtaining P will be to enter conversion tables (see next chapter) with

the value of

a - = a + xy:n-\\ x:-l|
=-.

y-n-l\

-,

- a xy:ii-l\

40.

To

find the

survivor of (x) and

(?/),

annual premium for an annuity to the deferred for n years.


this annuity is
n\
i

last

The present value of


u|
I

a = ij

ax +

n\

a
y

\a n\ xy

which we
If the

shall call the benefit side.

premiums are

to continue
is

till

the annuity

is

entered

upon, their present value

Px
which
is

a = xy

-, -A Pfa xn + a yn\ axyny ^


.

called the

payment

side.

Equating the benefit side to the payment side and solving


P,

for

we have
p _
n\
I

-r

+ n\ ay - n + a -; - a
I

\a
\

xy

-;

There

is

a certain amount of risk


till

involved in making the


;

premium payable
die, say, in the

the annuity

is

entered upon

for should (x)

(i+l)ih year, the value of the benefit to (#) at the end of that year is _ _-,\ a an(l ne could purchase such t+1
,

an annuity under a new contract at an


n-t-i a i/+(+l n--l|
1 |

annual

premium of
premium

a
:

y+t+i

Now

it

is

quite possible that this latter

might be
contract.

less

than the premium

payable under the original


the
office

It follows therefore that

might be the

loser

in not receiving P, the


status

premium quoted, throughout the whole

assumed in the

calculation.

152

ACTUARIAL THEORY

[chap.

vii.

The alternative plan is to make the premium payable during the joint lives only, under which
p
\a n\ x

+ n \ay - n
|

xy

Here again a risk is involved, for one of the lives, say (x), may be dying when the contract is entered into, and the office would thus be granting to (j/) an annuity deferred n years at a totally inadequate premium.

The
some

latter plan

is,

satisfactory

evidence

however, probably the better, provided as to the health of (x) and (#) is

obtained.
41.

To

find
i.e.,

the annual

premium

for

a joint-life temporary

assurance,

payable

if either

of the two lives (x) and (y) should

die within n years.

The

benefit side

Al *V n
r
r
|

vd

+ v2 + xy^' d x+1 :y+\^

+ v ndi+n - 1 + T<
:

'xy'

xy

and the payment side


I

xy
Ixy'nl

vl

a;+l

y+1

+
I

+
xy

V%

x+n-1 y+n-l
:

Equating these two expressions and solving we get

pi
ixj'n\

vd
I

xy

v 2d

x+1
,

y+1

+
. .

vn d
1 l

x+n-1 y+n-1
,

+ xy
Vl

vl x+1 :y+l

+v
'

n~

x-\-n-l .y-\-n-\

,,._,_,
'

v
I

x+l:y+l
X.
1)1

xy

x+l:y+l

+vHx+2:y+Z + -1-...-U

'

'

+l U lx+n:y+n
1 /

7;Ti.

x+n-1: y+n-1

= vIt

mjn

xyn\

may be mentioned

that the value of


1

Pj-L-

is

very nearly

the equivalent of (P 1 -,

+ P
at

-,),

the

sum of
cent.,

the

term assurance Thus

premiums

for the lives singly, so

long as n remains small.

by Dr Sprague's Tables
cent.,

3^ per

P_L_

_.

1-4:73 per

whereas 2P 1

jj

1-482 per cent., a difference of only -009


chap,

vii.]

TEXT BOOK PART

II.

153

per cent.

Other examples should be worked which may be explained thus


:

to illustrate this fact,

Wn\ ~

'xi/

n\

-, xyn\

Ai-+ xn\
Ai__
a.

Ai-,- Al-,
yn
|

XT/ ?i

Ai-,
i/7i
,
|

xn\

Al-,
xy

xyn

.
|

xyn

a
is

xyn

Now

if

n be small the value of A, xyn\

also small, for '

it

is

improbable that both (,r) and (y) will die within a few years, and accordingly the last term of this expression may be ignored.
Again,
lives, 3

lives will

n be small the value of the term annuity on the joint be very nearly equal to the term annuity on each of the Accordingly or in other words a = a = a -, nearly. J J xyn xn\ yn\
if
;
| ;

pi
'^'"l

Ai

_!tl

xn\

-,

Ai-, _Hd very nearly J }

a-, yn\
,

1 = Pxn\ + Pi -, yn\

very nearly. J J
effect

It is to

be noted that the two adjustments are of opposite


the ignoring of the term

on
1

the

result,

Ain
"^
<

xy n\

increasing the
-, xyn\

premium, and the substituting of a-, and a -; xn\ yn\ the premium.
'

for a

reducing

EXAMPLES
1.

Prove that

is

always greater than

DX =

154

ACTUARIAL THEORY

[chap.

vii.

Or again, since the present value of 1 payable at the of the year of death of (x) is clearly less than 1, we have

end

A* = Hence

M
:

d*

<

DX > M X
2.

Express in terms of the

D
for

and

columns and the rate of

discount, the annual


(1)
(2)

premiums

An endowment

assurance to mature in n years.

A whole-life

assurance,

premiums limited
first

to n payments.
inter-

Subtract the second from the pretation of the result,

and give a verbal

D_

The premium

for (1)

is

^-V.-i
(

d
and
for (2)

m
x+ X

N x~l ,-Nx+n-1 ^
,

The

difference

is

which

is

the annual premium

x+n-l
required to provide an annuity-due during the lifetime of (x) after n years, consisting of d, the interest in advance on 1, payment of

which in the case of (2) is deferred from the end of the rath year to the end of the year of death of as would happen under (1) During the ra years the benefits are identical. (x).

3.

Find the rate of


(a) a
(b)
^
^

interest, given

=13-257 and
X

=-19304

a =13-164 and

PX =-04147

(c) v
'

AX =-19414

and PX =-00927
;

Approximately

(a) 6 per cent.

(b)

3 per cent.

(c) 4

per cent.

4.

Find the value of

having given P

= -01662,

= 17-155,

and;; =-99229.

chap,

vii.]

TEXT BOOK PART


A
,,

II.

155

We

have

= l-d(l+a

,)

= l-d~Z
VP*

ia

Px

the given values of


to

The only unknown quantity in this expression is i, which from P and a we ascertain to be practically equal =-30847, '04. Substituting: this value for i we get A
,
,

Required the cost of a deferred annuity, of which the first is to be made at the end of four years, and which is then to continue for twenty years certain and thereafter for so long as a life presently aged x may live.
5.

payment

The first part of the annuity is an annuity-due for twenty years certain deferred four years, and the second is an annuitydue on (x) deferred twenty-four years. The cost is therefore

Al+asp + wl*.
=
,

(S1

~ a w) +

N z+23

-Q-

6.

Give an algebraical proof that

1-A "
d

156

ACTUARIAL THEORY

[chap.

vii.

/. Give the formula for a whole-of-life assurance on (x) by three payments, the first to be made immediately, the second to be half the amount of the first and to be made at the end of three

years,

and the third to be half the amount of the second and be made at the end of seven years.

to

The

benefit side

M
^=-^

The payment

side

= P

DX

whence

P =

M
D , + *D + + *D, +
, 7

8.

Investigate a formula for the annual

premium payable during

an assurance on the life of (.r), the sum assured not to be paid in any event for twenty years from the date of the policy.
life

for

The

benefit divides itself into two parts.

If (x) should die

within twenty years the


period and
its

value

is

i>

sum assured is payable at the end of that 20 (l p ). The other part is an assurance
i

on

(a:)

deferred twenty years,

Therefore the benefit side

is

equal to

The payment

side

= P(l + a
tfl(l

).

Hence

p)+ +a

9.

has an income of J per


unit
;

annum

at

P per

and investments

will yield

he can insure his after i per unit


death

life

his

decease.

How much

of his income must he spend in premiums,


his

in order that his representatives after

may

enjoy a

perpetual income derived from the policy, exactly equal to the

balance

Assume that the income

is

payable at the beginning of

each year.

Let S be the sum

for

which

must insure

his

life.

Then

SP

is

the amount of his income which he spends in premiums,

the balance of his income being (J at the

SP

).

The income (payable


be derived from the

beginning of the year) which

will

chap,

vii.]

TEXT BOOK PART

II.

157

proceeds of the policy will be Sd, d being the interest in advance corresponding to i. We now have the equation

J-SPX =
whence
and
S

Sd
J J p*

= =

SP

,,20

10.

In consideration of a yearly
offers a life

premium of
a
z:20|

an assurance

aged x a policy securing a sum of 1 payable twenty years, if (x) be then alive, and a sum of S payable fifteen years after the end of the year of death of (.r) if this event take place during the twenty years. Find the value of S.

company

at the expiration of

The value of the premiums


n 20

to be received
1)20

is

xa

\
And

20|

the value of the benefit granted

is

D * + 20+
Hence
and
Si' 15

S 1!i (M-

, + 20)

DX
(M x

M
^

L0 .)
'

20

D -D

M X - M x+20 ^

a;+20

11.

Investigate the change in the

value

of q

produced by

assuming an increase in the rate of interest to represent an Illustrate from the case where a increase in the rate of mortality. x
is extracted from the 4 per cent, table and assumed to represent the 3 per cent, value of a table showing higher rates of mortality.

We

must

first

obtain q in terms of values of a^ and accordingly

we have

=1-0 =1

158

ACTUARIAL THEORY

[chap.

VII.

Here, then, we get increased rates of mortality by taking a and


a
at a higher rate of interest while
i

remains the lower


a'
*

rate,

(l+i)a'

and we may write


rate j

q'

-t;

+ a x+l
'

where

and a x

+1
,

are

at

(>

i).

To obtain the
have

old rate of mortality from a similar formula

we

(i+iK 1 +d x+1

and

>

qx

fl_^*\
1

A_^A
and 4 per cent, we have
r

+o' 3+1
3 per cent,

Taking the example of


the increase in q
at 4 per cent.
,

i.e..

- q

-=

ow ^

+ a+1

where

a'

and a

,
,

are

12. Calculate

from the values given below the net annual


:

premiums
(a)
(6)
(c)
(d^)

at age thirty for the following policies

Whole-life assurance, premiums payable throughout

life.

Whole-life assurance, premiums limited to ten payments,

(e)
(/*)

Ten Ten Ten Ten


X

years'

years' pure
years' years'

temporary assurance. endowment,

endowment

assurance.

double-endowment assurance.

chap,

vii.]

TEXT BOOK PART

II.

159

a)
'

b)

^o = 1^1 = -017902 N 30 805450 M 3Q 14419 N 30- N 40 805450-481936 ~


""

14419 _ u * 40 ' u 323514 ~


'

c)

M -M J
80
4

N so-N 40

14419-12164 _ ^255_ _ UUDa u 805450-481936 "~ 323514 ~


26201 323514

D 40
ho ~
)

N 40
"40

-080989

M4 + D40

-006970

-080989

-087959

CO

^sji-MiO+l^io = -087959 + -080989 - -168948

13. What is the annual premium at 3 per cent, for a temporary insurance for three years on a life aged thirty ? Given Z = 92529,

/.= 92079,

==

Zi

91472,

M = 90763.

pi
30:31
"

'

^X+^+^BB + Si + ^w
'ao

= =
14.

-97087 --96469

-00618

Given P x and

Aaar

show how

to find at rate of interest

the

annual premiums for


(a) Joint-life (6) Last-survivor

Assurance on two lives aged Assurance on the same.

x.

O) > '

pXX

1+rt XX
(LA
XX

Id
(b) V
/

P- = XX

A1+fl-

2A X -A X
1

+ "2a -a

160

ACTUARIAL THEORY
'

[chap.

vii.

and

chap,

vii.]

TEXT BOOK PART

II.

161
is

In deducing the annual premium the above

the benefit side.

Payment
if it is

side

P(l

+_?-)

desired to

status.

make the premium level throughout the whole certain risk, however, attaches to the issue of the policy

on such a footing. If one of the lives, say (x), die early, the remainder of the benefit could be obtained by the survivors, (y) and (s), provided they are in good health, at a smaller premium than P as found from the above. In such a case the office would not receive the stipulated premium throughout the whole of the status assumed in the calculation. To get over the difficulty we

may
(1)

of

all

Make the premium payable only during the joint existence three lives, whence payment side = P(l+a _^-\

(2)

premium may be accepted which


first

is

to be reduced

by

half on the

death.
side

Payment >

P{l+-?r (axyz - v
t

Ki+a xyz 9
1

^"H. 9 y >

(3) Probably the best way is to issue two policies, each for \, one of which will be payable on the first death, the premium

being ^ Pf^T

ioi

'

an(* *^ e ot ^ er payable at the second death, with


xyz

premium 1
17.

-J

Pi,.
|

10

Find the annual premium for an assurance of 100 payable

as follows
(a)

at the death of the first of two lives and 50 at the death of the second, the premium to be reduced by one half from the date of first renewal after the death of the first life.

50

the death of the first of three lives, the be reduced by one-third 33, 6s. 8d. at the second death, with a similar reduction in the premium and the remaining 33, 6s. 8d. on the death of the last survivor.
(b)

33,

6s. 8d. at

premium then

to

(a)

The

benefit

is

obviously 50(A

+ A

).

The premium
life (x)
life

to

irrespective of the life (y) (^) irrespective of the life


is

be paid depends as to one -half on the and as to the other half on the
(x).

The

value of the payment

side

therefore

P{Ki+<g+t(i+,,)} = P{i+IK+<v>}-

162

ACTUARIAL THEORY
Or
again, the
(,r)

[chap.

vii.

lives of

survivor.

payment and (if) and That is,


side

side
as

to one-half

depends as to one-half on the joint on the life of the last

Payment

= PQa^ + fa-) = P{1 +

l(

a
y

)}.

Hence

P = 50,

A +A v ^ ,
for this benefit, found in a

(b)

The premium required


is

manner

similar to the above,

33-3

A *-+Ay +A ? l(a +a +a)


expressed in either of the forms

The payment

side

may be

benefit

Find a formula for the annual premium, payable till the is entered upon, for a deferred annuity of 1 to begin to run on either of two lives, presently aged twenty-five and thirty If (30) attain age sixty and respectively, attaining age sixty. (25) be also then alive the annuity will be payable thereafter during the joint lives and the life of the survivor.
18.

Benefit side

30

30 P25

30O55

+ a 60 ~ 65:60)

+ " VsoC 1 - so^Ko + ^as^st 1 - 30P30K0


Payment
side

= P

ffl

a^-^ + v*\ p 9 l - 30 pJ J
l
'

a
1

65

And p _

^ 3oP25:3o( g55 + a60- a 55:60) +


1

S0

30P30( ]
'

-SO^^O + ^SS^C 1
,O

gaj^Kj
iiB)

+ |29 a26 + U a80-|s9

fl

+B S6:8O

80P26(

-lP>)( 1+ |4 a

19. Find the annual premium for an assurance payable at the second death of the four lives (w), (x), (3/), and (s).

Benefit side

= A wxyz
= P
8

Payment

side

(l+o

?)


chap. vu.J

TEXT BOOK PART

II.

163

Therefore equating

A wxyz
wxyz
1 1

wxyz

+awxyz

-d

where

wxyz

a wxy

+aivxz +awyz +axyz -3a wxyz

the event of A,

Find the single premium to assure a perpetuity of 100 in who is aged thirty, dying within ten years, the first payment of the perpetuity to be due at the end of the year in which A dies. Interest is to be taken at 4 per cent, and the mortality is to be assumed to follow De Moivre's hypothesis. Given vw at 4 per cent. = -675564.
20.

By De Moivre's hypothesis the number living at age thirty 86 30 = 56, and one dies every year. Therefore
so:io]

is

+ D2 +

+ V 10

gg
l-i>io

56;

14484

The

single

premium

for the perpetuity is

Ai 30
:

x 100 x

ii? =
i

-14484 x 100 x 26

lOf

= =

376-584

376,

lis. 8d. nearly.

21. On De Moivre's hypothesis as to the law of mortality, find the annual premium at age x to provide an endowment assurance

payable at age x +

or previous death.

p _ _
*"
""

s'l

1+a *:^|

ment of

But on De Moivre's hypothesis where n represents the complelife at age x, we have

164
.

ACTUARIAL THEORY

CHAP vn
-

+ d2 +

+
n

vl

(re

f)vt
'

_Ji +
71

(-<>'

Also

x:t-l\

= "(-l) + A"-2)+n
(*

+f

-1

(^-< +

l)

CHAP.

VII.]

TEXT BOOK PART

II.

165

Give a short sketch of the reasoning which leads to your


figures.

Age
X

166

ACTUARIAL THEORY

[chap.

vii.

an(^ ^> express \x-s]+z' ^[1-41+4'

the probability of a select


five years,

life

aged x at entry being at the end of


(6) In existence,
(c)

(a) In existence, irrespective of the state of his health then,

and

still

a select

life, life.

In existence, and an unhealthy

In the form of tables described, selection is assumed to wear the end of that time the number persons select at age x who are still alive is merged in the of /
off in five years, therefore at

ultimate table and


consideration.

is

expressed by

their health not being in


a:

But the number of


I.

select persons of age

+5

is

by notation
remainder

+sp

therefore
total
/

the
.

number of unhealthy
Accordingly
the

is

the

of the

probabilities

required are
(a)

x+S
l
lx]

'[x+S ]

(6)

M
X+5

[+]

(<0

26. A life office secures every year K new assurers all aged x at entry. At the end of a quinquennium how many of the entrants during that time may be expected to be unhealthy.

Of
five

I,

persons
I
,

who

enter at age x there are alive at the end of


are select and the others unhealthy.

years

of

whom some

But the number of

select lives of age


lives of that

x+5 age

is

L
I

Therefore the
I
.

number of unhealthy
expressions give the
three, two,

is

Similar

number of unhealthy lives at the end of four, and one years. Thus, if the number of entrants each year is K, and if we assume them all to enter at the beginning of the year, we get the number of unhealthy lives at the end of five
years as

J~ \ v-Vj+6

~ l*+W +

( [*]+4

~~

[x+t)

+ Cv]+s ~
kx+i])}

{x+sy

+ (Wa "

h*+i?

+ (Wi ~


chap,
vii.]

TEXT BOOK PART

II.

167
effect

27. A person aged x wishes to be allowed to each for 1000 as follows : (1)
(

ten policies

At age

at the

normal annual premium

for that age.

2)

(*+l)
(* + 2)
etc.
etc. etc.

(3)

(10)
It is

(*

+ 9)

required to find the single premium payable to provide

for this option.

For the second of these policies the premium to be paid in absence of any arrangement would be P , whereas the premium
arranged for
is is

P
[a

+ir

The value of the option on

this

one policy

therefore (P. , \ M+i


Similarly
for

- P _) -gl. [x+iy
r

the
is

third
(P.
,
,

policy the

difference

in

premium
this
is

to

be allowed for

-P
so

,)

and the value of


t ^le

PM+2 Pi>+2i)
single

N
1

"

3
'

n"

^ n(^

on ^01

otner seven policies.

The

premium

to be paid for the option is therefore

100 {( p

,m-V )%
11

11

+ ( pM+2 - p , +2]

)%12+

+ fp

_p

N M+9 L
i

w
28.
(a)

Calculate the following option

premiums

The

single

premium per
five

cent, required to permit of (30)

effecting at the

end of

years a whole-life policy at the normal

annual premium for his then age, without fresh medical examination.

Use the

O tM1

Table at 3i per cent, interest.

(6) The yearly addition per cent, to the short-term insurance premium for seven years required to permit of (40) effecting a

whole-life policy at the end of that period at the normal annual

premium Use the

for his [NM]

then age, without fresh medical examination.

Table at 3 per cent, interest.

168
(a)

ACTUARIAL THEORY
Using the formula given on page 143, we have

[chap.

VII.

100(P

[30]+5

[ssy

(-

a
rf [80]

[30]

5l)
|-

= 100(-02024--01959)(19-793- 4-633) = -985, say 19s. 8d.


(6) Similarly for this

option

premium we have
"[40]

100 ( P

4r- p M71 )(a,[40] lay v


[40]
:

:T) 7
:

(3-445 - 3-377) (18-102

- 6-250)

6-250

=
29.

-129, say 2s. 7d.

Find the annual

office

premium

for a whole-life assurance


first

to (x), the expenses being 8 per cent, of the

and subsequent

premiums with further initial expenses of 2 per cent, on the sum assured and 5 per cent, on the first gross premium.
gross

To get the value to the office of the payment side we must deduct from the value of the gross premium the value of all expenses. Thus, if P be the gross premium, the value of the
payment
side is

P(l

+ a.) -

-08P(1

+ a.) -

-02

- -05P

and

this is equal to the value of the benefit,

Hence

P(l

P{-92(l

+ aj - -08P(1 + aJ - -02 - -05P = A^ + o )--05}=A + -02


c
:c

+-02

92(l+a.) --05
30.

Given the following

office rates for

immediate annuities on

female single lives, aged fifty and sixty respectively, find at these ages the annuity which 500 will purchase, it being a condition that the annuity is to be payable during the joint lives and the lifetime of the survivor, but is to be reduced by one-half after
the
first

death.
Age
last Birthday.


chap.

vii.J

TEXT BOOK PART

II.

169

The annuity required is the sum of two annuities of equal amount on the lives, and if 2P be the amount to be received during the joint lives we have
500

= =

P(a'

60

'

60 )

P(17-5954

+ 13-7142)

Hence

P =
17-5954

+ 13-7142

=
500
the joint
lives, to

15-970, or say 15, 19s. 5d.

will therefore

purchase an annuity of 31, 18s. lOd. during be reduced to 15, 19s. 5d. on the first death.

31. Given tables of office premiums for endowment assurances and double-endowment assurances, show how to employ them to obtain the office premiums for the following benefits
:

(a)

100 payable on
the given age
is

attaining a given age or at previous


6s.

death, together with a guaranteed bonus of 33,

8d. payable

only

if

attained.

(6)

similar benefit, but with a guaranteed bonus of 50.

(a) This is equivalent to a term assurance of 100 coupled with a pure endowment of 133, 6s. 8d., which may be split into an endowment assurance of 66, 13s. 4d. payable on attaining the given age or at previous death and a double-endowment assurance of 33, 6s. 8d. payable on death within the term and 66, 13s. 4d. on attaining the given age. Therefore if P'^ and (DP)'^ be the
,

office premiums per 100 assured for endowment assurances and double-endowment assurances respectively, we obtain the required premium from the formula

l p '^+KDP) Mn
(b)

By

a similar process of analysis

we

find the

premium

for

the second benefit to be

32. From tables of office "Whole of Life" and "Limited Payment" premiums for each age at entry, show how to find the sum assured that could be given at age x for a single payment of S and a future annual payment of P.

170
an(^

ACTUARIAL THEORY
x

[chap. vh.

^'x

'

3e

^e

omce

single and annual

premiums

at

age x per unit assured.

must split the single payment to be made now into P and (S - P) in order to put the payments of P on the basis of an
annual premium.

We

Then

since a single

premium of A'
.

insures

1,

a single premium

of (S - P) insures

rr
X

Also since an annual premium of P'

insures

1,

an annual

premium of P

P
insures pr.
X

Therefore the whole amount insured by a single payment of S- P P S and a future annual payment of P is + -rp.

33. A man aged forty next birthday desires to effect a policy payable at death for 5000. He proposes to make a first payment of 1000. Find the future premium to be charged annually, given tables as in the preceding question.

Let P be the future premium.

Then by our formula above

A' 40

Hence

chap,

vii.]

TEXT BOOK PART


Benefit side

II.

171

Here the

M ^ M ^ + D*
,

And

the Payment side

= Pf^^i
P =

/N

Nr

-^
L

+ _5i

*J^z2)

Whence

M x+n + D * +n Nx-1 + Nx+i -2N x+n-1


XT
*

XT

Using now the figures given we have

__

M30 -

60

+ D 60
50
^f

N 29 + N 34 -2N 69

But

M 30 = M
fl0

t-X 29

-N 30 =

53 5
'

~ 474646-5

8385-7

= N 69 -N 60 =

58526-9 ^Jf -52931-0

3344-9

and

D 60 = N69 - X 60 =
P
502353-5

58526-9-52931-0-5595-9

Therefore

8385-7-3344-9 + 5595-9 + 376007-4-117053-8

=
The premium
thereafter -027944.

-013972.
is

for the first five years

accordingly -013972 and

[NM] Find by the Table, with interest at 3| per cent, throughout, the annual premium per cent, required at age thirty to provide a debenture policy under which 5 per cent, interest payable half-yearly is to be provided on the sum assured for 15 years from the end of the year of death, at the end of which period the sum assured is to be payable.

35.

As explained on page
death
the
is 1

148, the benefit at the

end of the year of

plus an annuity-certain, for the period stipulated, of the

excess of the guaranteed rate of interest over the rate assumed by


office.

In this case the premium will therefore be

-05lnnn L 100P[M] 1+ {

-035

fl

so, (1

U)}

1-788(1
2-099,

+ -0075x23-18585)
say 2,
2s.

172
36.

ACTUARIAL THEORY
Find by the
[NM]

[chap.

vii.

Table, with interest at 3 per cent, annual premium required at age thirty-five to provide an annuity-certain of 100 payable half-yearly for 20 years, the first payment to be made at the end of the year of

throughout, the

death.

half-yearly annuity

Modifying the formula given on page 147 to we have for this premium

suit the case of a

P[35] x 50xa.WmX)

= -02212x50x30-36458 = 33-583, say 33, lis.


37.

8d,

Find by

Mr

Lidstone's formula the annual premiums per

cent, required for the following joint-life


(a)

endowment

assurances.

Lives (30) and (35) for a term of 20 years on the basis


[M]

of the
(6)

Table with interest at 3i per cent.

Lives (20) and (40) for a term of 30 years on the same basis with 3 per cent, interest.
(a)

Following
(.

Mr
i
[30]

Lidstone's formula
:

we have

20]

+ +

~~
[35]
:

20]

20| /

=
=

3-841
4-348,

3-923-3-416
say

4,

7s.

1O0

(W30i +IV3O|= =
2-460
3-366,

P30-,)
7s. 4d.

+ 2-947-2-041
say

3,

38. Write down formulas, with and without commutation symbols, for the annual premium for a joint-life term policy.

Calculate with the help of tables

of logarithms the annual

premium

joint lives of A and B, each aged thirty-six next birthday, at 3 per cent, interest, having given
for a three-year

term policy on the

log

x = 5-9097, log

s7

= 5-9076,

log

3S

= 5-9042, and

log

m = 5-9002.
?

How

would you approximate to such a premium in practice


in

The annual premium

commutation symbols
:

is

M xy -M x+n

y+n

N x-\:y-\ -N x+n-l:y+n-\


chap,
vii.]

II

TEXT BOOK PART


may pass

173

from which we
as follows
:

to a formula without

commutation symbols

M - M x+n _xy
ON x
^

y+n
:

N a;-l:j/-I -N x+n-1
,

y+n-1
-

?/

Nwys - (N x+n-1 ) v
L
,
*

, y+n-1
,

Nx+n
,

^ ) y+n J

N x-l :y~~\ - N x+n-\

y+n~\

N
_
p/
l

N gy N x+n ,-N ^
-

^ y+n.
,

+ "Vs ly+2+ +vlX+ l l l + +"- 1 Jy


+l ',+1
y+

+
,
:

""

x+n K+n

'..

H -iVh>-1

Substituting the ages, etc., required for the second part of the question we have the premium desired as follows

V hl hi
^36 ^36

+V +V

ks
''S7

At

3 per cent.
v
3

= -97087,

+ V ^39 ^39 + V 's8 ^38 also log v = T-9872,


^38 '37

log u 2 =T-9743,

and log

= 1-9615.

In dealing with the logarithms of the numbers living the characteristics may be ignored as they are the same in every case and only determine the position of the decimal place in the corre-

sponding natural number.

Then
log vls1 log

log
l

S6

36

2 log

36

2 x -9097

1-8194

log 65-978

s7

% s /38

= logv +21ogZsr =T-9872 + l-8152 = l-8024 = log 63-445 = log2 + 21og/38 = r-9743 + 1-8084 = 1-7827 = log 60-632 = log 3 + 21ogZ39 =T-9615 +
_
"*87*37+
,,i!<

log 3

1-8004

= 1-7619 = log

57-796

39

Therefore
v
38
/

8S

+ 1 8/89*39
'

__ _

63-445 65-978

+ 60-632 + 57-796 + 63-445 + 60-632

= =
p r

-97087 - -95695
-01392.

In practice, as explained on page 152,


1

we would take
:
|

it

that

|86:S61

_ pi _+pi T 36 3 36 3
"
'
:
|

174

ACTUARIAL THEORY
Using the
figures given,

[chap.

vii.

we

find P'

='00699, and hence


is

the

approximate joint-life short-term premium pares very favourably with the true value.
39.

"01398, which com-

Tables, using 3i per cent, interest, the annual premium for a joint-life short-term assurance for four years, the lives being aged thirty and forty.

Find by the

[NM]

Using the same formula

as before
[30]+l
7 [30]
7

I30:40l:4|

_ =

_ "

[40]+l
[40)

'

'

'
,

+V WhT[40]+4
,,3/
7

i. T

T"

[30]+3 [40]+3

= -96618= -01532.
The
pi
130:401
:

-95086

practical formula is in this case


4|

30 :4|

-+pi _ r 40 :4|
+ -00878

= =
40. aIld

-00663
-01541.

Given

"[44][44]

=12

'

= 13-791, >][44] 391, find the ValUe f

%M =

13-463,
C
1

^^
)

13-006,
diffel _
'

VH44]

fimte

ences, (2)
(1)

by central

differences, stopping at second differences.

For a finite-difference formula we have

a [x+n][y]

a "{xm + 5^ [i+B][]

%W
_

T<T
|2

"

'),

(%+10Iy}

fct+6][y]

+ \][yV

Hence
a

=
(3T][44]

a
[34][44]

5\ fl [S9][44]

"

| ( - 1)
|2
'

[84][44y

fl

[44][44]

[39][44]

fl

[34][44])

= = =

+ |(13-006 - 13-463) - ^(12-391 13-463 --274 + -019


13-463
13-208.
(2)

26-012

13-463)

The

central-difference formula to be applied


u

is

+ * a +i +

xfx12

1),
b
o

chap,

vii.]

TEXT BOOK PART

II.

175

Whence
a
[37][44]

= = = =
41.

rt

[S4J[44]

+H

fl

""
[39][44]

~~

"[34][44]-'

2TV a [39][44]

_ ja
[34][44]

"*" fl

[29][44K

13-463

+ f(13-006 - 13-463) - ^(13-006 - 26-926 + 13-463 --274 + -015

13-791)

13-204.

Given

P40

25

= -03625, P 40 ;30 = -0375, P45:2B ='041,


:29-

and

P45:30=- 4225' findP42

p40

=
:

29

176

ACTUARIAL THEORY
Now
2-692 3-117

[chap,

vrr.

3-742

4-692

= = = =

u u

+ 5Ai/ + 10A\ + 10A\

+ 10Au + 45A\ + 120A s u u n +15Au + l05A 2 u + i55Ahi

Differencing successively both sides


425

= 5A

625 = 5A Mo + 35A2m
950

+10AX + 10A3 Mo +110A\


3

= 5Ah + 60A2 k + 335A


-200 325

Again

= 25A

3
i/

+ 100A3
+ 225A3M()
. .

= 25A

And

-125

= 125A

CHAP.

VII.

TEXT BOOK PART

II.

177

Differencing successively both sides of these equations,


425

625 950 200 325

= 5B + 25C + 125D = 5B + 75C + 875D = 5B + 125C + 2375D = 50C + 750D = 50C + 1500D

125 = 750D
whence

D =
C = B =

00016
-0015
-073.

Then

P 41

P42 =

P43 =
P44 = P45 =
By
either

+ -073 + -0015 + -00016 + -146 + -006 + -0013 2-692 + -22 + -0135 + -0045 2-692 + -293 + -024 + -0106 2-692 + -36 + -0375 + -02083
2-692 2-692

= = = = =

2-767 2-846 2-930

3-020
3-117
values.

method we complete the table with the same


P40

CHAPTER

VIII

Conversion Tables for Single and Annual Assurance

Premiums
Conversion tables should be thoroughly understood both in and their use, and to these ends Rothery and Ryan's tables should be carefully examined. For both single- and annual-premium conversion tables, they
1.

their construction

start
it

with the

initial

value

for

the

annuity,

by

differences

of

'01.

Now we may draw


:

and increase up the following

schedule for single-premium values


Annuity

CHAP.

VIII.

TEXT BOOK PART

II.

179

AnnuityValue.
(i)

180

ACTUARIAL THEORY

[chap.

VIII

used to form tables at each rate required, by successive addition


to the proper initial value,
1

d,

+1

where d varies with the


i

rate.

Or
d

again, after the


to each

first

table at rate

is

formed, that at any


of
:

other rate, say j,

..

may be formed by the constant addition value, as may be seen from the following table

Annuity
Value.
(l)

CHAP.

VIII.]

TEXT BOOK PART

II.

181

4.

Conversion tables are of great value in the working out of


is

premiums, whether single or annual, where it to obtain the annuity value than the premium.

frequently easier

For example,

We obtain
If

in the

we

enter

the Conversion Table with

Single-Premium Conversion Table

Annual-Premium
Conversion Table

i-d(i+<g

=ax

+ o.

=
-d

*st:-l|

+ a x:^T\

=P

-.

xy

!-<*(! + %,)

= A ^

TTi"- d
;

=P^
-. a"=P*"'
}

**:-!
a

1
|

-d 1+a i xy:irT\)

= A xyn\

+ axy:^T
+ o; Z1/
1

l-d(l + <^)
1 -

= A Ty
= =

Pz

d ( 1 + a ^:^T])

A-|

+ a^:iT^T|
1

-d=Pz

i-d(l + iirr|)

vn

+ a n-l|

Thus
table

when

we
r

speak

of

entering

the

single

premium
is

with ax:n~\\ we mean that we give to a in the formula


the value ax
.

l-d(l+a)

f;

-T

and the

result

from the table

A^.

If

we entered with

a^

the result would be

A^.^j. we
is

Also by entering the annual-premium table with a-^


to a in the formula

give

1+a

d the value a-, and the result K|


+!

-d

1+a n\
+l|

the annual

premium
years.

for a sinking-fund assurance payable at the

end of
5,

(n

+ 1)

To

find the single

and annual premiums

for

an assurance

182

ACTUARIAL THEORY

[chap. vnr.

payable on the death of the second of four lives

(id),

(x),

(y),

and

(z).

Now
that

A* = l-d(l+a^)

is, the assurance is not payable so long as 3 at least of the 4 lives survive, for 3 at least will cease to survive at the second The formula shows us that to obtain this assurance we death.

enter the

single-premium conversion table with a ~ l


is

wxyz

which by J

formula (58) of Text Book, Chapter VII.,


a
wxy

equal to

wyz

wxz

xyz

-3awxyz
enter the annual-premium

Similarly for the annual

premium we

conversion table with the same annuity, for

Pwxyz =
6.

we

T 1

^ +d

8 r

~d

wxyz

When

premium
the latter
to

value,

happens that we are given the single- or annualand the annuity value is required, we may obtain by entering the ordinary conversion tables inversely, on
it

the same principle as

obtain the natural

number corresponding
find a

any logarithm by entering ordinary log tables inversely. Thus if we know PX at any rate of interest we could J from the formula
#
x

= = +d PX
f

but conversion tables enable us to find

it

at once
-,.

by

inspection.

Again

let it

be required to find a t

xyn\

We
.^rrr

shall

obtain the

value required by entering inversely with

and by Lidstone's

formula (described on page 150).

Als0

P:i+i] = Px:i+I| + F .^+T ~ P5+Ij approximately. r Px:-+li' P!/:S+T|' and P^l] "^ be f0Und b y ente g
{

the

tables directly with a^, a ,

and

a, respectively.

Thus, find by the a


[30I40]:i9T

[M]

table at 3| per cent, the value of

We

find

from the

O tM]

table

that

a^.^ =

12-845,

o^.^
'04052,

= 12-451,

also a^.

13-710 at 3^ per cent., and on entering 3^ per

cent, conversion tables

we have P
[sol

-gi

=-03841, P [i0] .^

P^

=-03416.

chap, vin.]

TEXT BOOK PART


P[30][40]
.

II.

183

Therefore

^ =

"03841

-04052 - -03416
table

-04477.

And

entering the

same

conversion

inversely

we have

a [30][40]:i9j

= H' 725

7. It should be clearly understood that conversion tables are merely a means of saving labour and further that they can be used to find the value of y, whatever y may be, so long as it can be expressed in the form, for single-premium tables,

l-d(l+i)
and
for

annual-premium tables
1

+k

where k is known and d is at a known rate of interest. It must be remarked that k does not need to be an annuity or at any rate
recognisable as such.

Thus

let

L = l-d(l+k)

Thend(l+k) = 1- lt!
X

an d

D x -D '+'
f

,,.

i.D

-D

L, X-\-t

2d X
function

Therefore if we enter the we obtain A 1.


ait

single-premium table with this

Again, let ( P

=
=

Y~Tk
t-

Then

1 *

+d
, +t -i)

M+< Nx-a- N
and
k

(N._ 1

-N, +t _ )-(M, + dN._ -dN !t+t . 1 )


1 I

M X + dN X-l - dN K+E-l
,,
.

M. + rf(N._ 1 -N >+ ,. 1 )

184

ACTUARIAL THEORY
we
obtain

[chap.

viri.

Entering the annual-premium conversion table with the value


of this expression
P^.

8. To form conversion tables for continuous functions we sketch out the following scheme for single premiums
:

first

AnnuityValue.
(l)

CHAP.

VIII.]

TEXT BOOK PART

II.

185

EXAMPLES
1.

Verify by actual calculation the following values of

A,

which correspond to values of a advancing from 10 to 11 by differences of -1, at 3J per cent, interest; and insert correct values in place of those which are incorrect.
a.

186
3.

ACTUARIAL THEORY
single lives,

[chap.

viti.

Given tables of joint-life annuities, the columns D and / and conversion tables, show how, by means of these, you would arrive at a premium for a joint-life endowment assurance on (x) and (_y) payable at the end of 20 years if both be alive, or at the first death before then, half premiums only to be
for

payable for the

first five

years.

The
with a

benefit side

= A m/:20|
equal to

^-..

To obtain the value


,-n

of this

we must enter conversion

tables

which
19
|

is

%~ %
all

= =

xy~

V
1

X lgPy
+i9
I

%+W
*+19
:

y+19

n
xy

g+ 19

Dx
+

y+V

the parts of which

we

obtain from the tables given.

The payment
a
xy
,
:

side

P(l

jgj

+ 6 a^.^)
|

we have found above and


x+b y+b
I

19|

ay 15|
:

Dx

n
K

s+19
J)
x

1+19
/

x+b:y+b->

.e+19

y+19

Hence the value of P may be found.


4.

Use the

tables at the

end of the

Institute Text

Book and

tables of logarithms to find at 4 per cent, the single and annual

premiums for a joint-life endowment assurance on two lives each aged thirty-seven, the sum assured to be payable at the end of
23 years or
first

death preceding.

Here we have

A S7:37:
and P

=
23|

~d

^+

fl

87 :37

22])

37:37:2l

=
"S 7

H^ T
:

37:37:22|

Z ~d
lo g

N0W

N
a
37:37:2^

37

"

iT^
37
:

37

log

N 59:59 = D 37:37 =
=
log

'

40776

9-22491
18285
1-524

= 13-054-1-524 =
this value

11-530

Entering the 4 per cent, single-premium conversion table with

we get

CHAP.

VIII.]

TEXT BOOK PART


1

II.

187

Value corresponding to
Do.

53846
-5

Do.

-03

= =

-01923

-00115

Deduct
37
37
23|

02038

51808
:

11-530

Entering the 4 per cent, annual-premium conversion table with we get

Value corresponding to 11
Do.
-5

=
-03

-04487

Do.

= =

-00333

-00020

Deduct

00353
04134

37

37

2S|

5.

single-

Given P, find the corresponding A by the use of the ordinary and annual-premium conversion tables.

Enter inversely with P the annual-premium conversion table and with the result thereby obtained enter directly the singlepremium conversion table, which will give us the A required.
6. Show how to construct a conversion may be found directly by inspection, P being

table from

which

given.

Since

A =

P we may proceed P+d


:-

to

form the table on the

following system

Annual

Premium
Value.
(i)

log

(2)
(1).
li

-(3)

log-

= ogA.
(3)

(4)

A.

(2)

(5)

logP
log(P + AP)

log(P + d) log(P +

log
.

P P+d P + AP P + AP + P + 2AP P + 2AP + d


(

P + AP
P + 2AP
etc.

AP + <2)

f+d P + AP

l0S
log

P+AP+d
P + 2AP P + 2AP + d
etc.

log(P + 2AP) log(P


etc.

+ 2AP + d)
etc.

etc.

188

ACTUARIAL THEORY

[chap.

viii.

The work must be done method is not continuous.


Again since

in duplicate to ensure accuracy, as the

= -^ =

we may proceed by
;

first

drawing up a table of reciprocals of P, P + AP, P -f 2AP, etc. then multiplying each of these by d on the arithmometer and adding 1 to each result we obtain a table of reciprocals of A from which the successive values of A may be found. As this also is not a continuous method, the work must be done in duplicate or checked by doing all the calculations in reverse order when we should obtain P, P + AP, P + 2AP, etc.
;

7.

If a

single-premium continuous conversion table be entered

inversely with e~ nS,

what does the

result obtained represent?

The equation upon which such

a table

is

founded

is

A = 1-Sd
And
as

we

are to enter the table inversely

we have

1-A
A = e~ nS
.

In the particular case before us,

Therefore

e~ n ^
o
5

which

is

the

value

of

an annuity of
(15).)

for

n years payable

momently with
Finance, Chapter

interest
II.,

convertible momently.

(See

Theory of

Formula

8.

What would
and what does

premium conversion

be the result of entering single- and annualtables, calculated for continuous functions, with

represent

Entering with a we have

A =
=
=

l-8a1

1-eS

e"

chap,

viii.]

TEXT BOOK PART


1
i

II.

189

that

is,

the present value of

payable at the end of n years,

interest being at

per

annum

convertible momently.

Also

P = 4- -8

=
1

-8
1

-e~ nS
-^ 1 --"'>}

-ttM
which
is

year's
i

premium payable by momently

instalments,

interest at rate

convertible momently, for a sinking-fund assurance


8a _^
1

due in n years.
-i1

-8 =

which

premium payable per annum by momently instalments payable at the moment of death. (See Chapters IX. and X.)
is

the

for a whole-life assurance

9.

single

Find by means of Rothery and Ryan's Conversion Tables the premium corresponding to annuity -983, interest 4 per cent.
practical difficulty here
is

The

that the tables start from unity


is less

for the annuity values, while the given annuity

than unity.

But

A = l-d{\+a)
=
i

- d(i + rTo)

Therefore enter the table with the value 1*983


the result.

and add d to

Then the
d at 4 per
Single

single

premium corresponding
.

to annuity
.
.

1-983 at 4 per cent.


cent.
.

= = =

-88526 "03846 -92372

premium corresponding

to

annuity -983

The value of d might be obtained by taking the difference between the single premiums corresponding to annuities 1 and 2
respectively.

CHAPTER IX
Annuities and Premiums Payable Fractionally throughout the Year
1.

following

Formula (1) of this chapter may be arrived at by the method which is somewhat similar to that of Text
3.
o|
i|

Book, Article

Therefore interpolating
,

la
|

tC

k
yyi

m
But
o
*

\1| a m
(
,
I

mm
x

| _2[

+
a

mlla} xl

m
)

/(a
m+\ =
.

- )+

+
(m)

m
+
1

(m'i

Also

= = =

ax

m
2m

a
*

m+\
-k

a
*

- n

2m

2. Formula (5) which applies to the case where be made general as follows
:

m 2 may

chap,

ix.j

TEXT BOOK PART


(x)

II.

191

For each year which


the year of the

completes, the amount to the end of

payments of
m-l

each
m-2

is

^{(i + O*

+(i +

m +

+1}
life

and the value of these payments


j

for the

whole

of (x)

is

m-l

m-2

".-^{P+O^ + P+O* ++!}


the

amount to the end of the year of the payments which he has received is
1) the

Now in respect m periods (r >


m-l

of the year of death, if (x) dies in the rth of

(i + mK

m
J

+ m

m-2
(i
K

ro-r+1

+
'

m +

+(l+) m
in

Taking the summation of

this expression for every value of r

from 2 to m, and dividing the result by

since,
is

on the assumption

of a uniform distribution of deaths, death

equally probable in
as

each of the
at the

parts

of the

year,

we have

the

amount,

end of the year of death, of the payments made during

that year
TO ~ 2 m ~l _ 9 1 _L/!!LlL(i +,)" + ^_^(i +z-) ' v
1

in

+.

+_Ln +,)} J mK )
made during

The value

for the
is

whole of

life

of the payments

the year of death

therefore

A * m /Ezi(i + i) +^_^(i +
and we have
,

m +

(i

+ O ml

m-l

m-2

= .s-{Ci + 0- +(i + 0-

++!}
. .

+ A * I{!Li(i + ;)ir + !^(i + i) + J J m K m \ m K

+ _L(i+i)j
i
J

192

ACTUARIAL THEORV
Expanding the successive powers of
(1

[chap.

ix.

+ i),

but stopping at

first

powers of

in the expansions,

we have

, *

'm

l\ (1
\
.

m
in

i)

1+

m
i)+
J

i)+
j

+
+

H
)

+ &{ x
1

fm-1/,
1
L

m-1
in

m-2/-,

m-1
m

\
i

...

+ l(i + i-M m \ m J

a
*

(/m
1

m-1 A 1 -*'. 1 r - 1 (m-l)(2m-l) i,l i)+J!\-+ ^ 6m 1+2 ml 2

2/
m-1

1 + = 2m

za

+ 2m
:

(m 1-

lV2m 6m 2
tts

1)

m-1
^ 2m

m-1
*

ta

s 2m

(taking
1

= (l+z)~ = 1-i
1
.

approximately)

&

=
If

^+

m-1
~2~ik

m2

6m 2"

then in this formula we give to


a
(2)

the value 2

we have

which

is

formula (5) of the Text Book.

This general formula can be rapidly applied in practice and on the whole gives very good results. If we calculate by it the
annuities of Text Book, Article 28,

we get the

following values.

/? = a =
a 30

20-14127 20-26533

a =
a^ =

10-46974
10-59380

= 20-39002

d60 = 10-71849

3. The argument of Text Book, Article 12, is very involved, and the following is an alternative method of obtaining formula (7), which is founded on the assumption of a uniform distribution

of deaths.


chap,
ix.]

TEXT BOOK PART


1

II.

193

(ml

1 / 1 /
t.

-L -

m
in.

ro-l vl
....

, z+1
,

m
1
ra 1
'*
f
<-

i./
,

?-l ,\

m-2
ra

,\

\ x+1
ro-l
/

V
\
rf

\ x+1
2./
\

+ (/,, + x+1
^
%_/
x+2

m
J

,,+W )+^x+1 1+ mUx + 2 + ,.


\
X
~\

\
I

,, x+ 1

m m

+^J

>

=
+ _5

_^+i

x+2
a:

x jLf(i

+ r) m +(i+o +... +ij


+...

x^|(- ixi+0" +0-2)(l+i)


+ (l+i)|
2^

i_

a X
s

T
8{(1

+
1}

(l+i){(l+i)-l}-i(l + i)
a:

+ m i)

2 {(1 + i)m
is

l} 2

The sum of the expression which


be found as follows
:

the coefficient of

A may
1_

ro-l

m-2

Let
1

2=

(OT-l)(l+2') m

+ (m-2)(l+i) m +...+(l+i)
m-l
...
2^

(l+i)2 = (m-l)(l+i) + (m-2)(l+i) m +


1

+(l+i)m
J_

m-l
(i

2{(i+i)-i}=

+ )-{(i+0+(i+0 m +

+(i+*') m }

= <l+i)-(l+j)m
(l
_1_

^
+ i)m_l
_!_

And

1 +'')"2 = (1+0{(

-(1+')"

{(l+i)-l}2

194

ACTUARIAL THEORY
4.

[chap.

ix.

To

find a

( >.
set
|

Am)
a=t
I

Am)
x

x+t
J_)

(m)

s+J
1

ra

a
*

*+; /

m
2

1>

2ro

ET V^'
a:

"x+t a a _

W-'/i
*+'

2m

a n ^1

_^ri2m
V

D ^' D

5.

To

find

la

that

is,

the yearly annuity whose payments are

T
made
It
is

at the

end of
distinct

etc.,

years respectively.

quite

from i|a (f>,

the

annuity

payable

times

T
a year in instalments of

each at the end of


is

12
,

-,

etc.,

of a year respectively, which

the same as

a[

1/i
t
<B

l+i
t
t

2+1t

\
'

x+.

'

&
etc.

').
etc.

Kr

' ')(,

"

),

etc.

And summing

the portion within brackets,

we have

......igfio. ft-y-U -. 2
*-i
^

chap.

ix.J

TEXT BOOK PART

II.

195

Therefore

,,,:(, x-i,-i D D
x
I

-KM AD jg-y-tD
2
*

,.,.
x

}
)

D D^
Ql 3

D D
a:

<

_
t

a* +
is

-l AD3
2P

(<-l)(2f-l) A^D

+ "'

which
6.

Text Book formula (27).

To

find

_|

axn\ -t

we must sum only J

the

first

n terms of the

expression in brackets and

we have accordingly
1

/D -

2l i

^-j\r-B
(

a pp roximatel y

=
t

ta.

xn\

1 +a xn\.-ax
-,

,,) n-l[l

=
To
(m)
.

!((< - l)a

-\

7.

find

!|a

i^( D + i +D + i + i +D,H + 1+ "-) m *\


,

'

to

(where

AD, =
(m)

D ,-D)
j_
<

<-OT
2< 2

AD D

a,

196

ACTUARIAL THEORY
8.

[chap.

ix.

To

find

i|a

( ->

(m)

()

_ i_ _

Ji2?(V

approximately

(m)

if ^.L5H^
t

DX

'

'

ml

\m
fl

:-J
"wl
J

'

=
To

T {('-KfT+
(

9.

find

(m)
.

m)
~~

m*

2w
1 1

* V

2m

Now

(m)
P^,

-p

<

2m
P

'

_^li(P +d) y *
2m
J 1
J

Again, multiplying each side by

^ (P^ +
P,

d)

V>

we have

f_!^p>^ =

chap,

ix.]

TEXT BOOK PART

II.

197

from which we see that the addition to P to obtain P (m) mentioned X x


in Text Book, Article 42, is for loss of

premium

";

2m
for loss of interest

(mJ
*>

P and
*

2m

d.
*
:

The addition for loss of premium is found as follows The chance of the second instalment of the mthly premium not being
received
is

of the third

etc.,

of the rath

m~
m
,

on the

assumption of uniform distribution of deaths. premium lost in the year of death is


1

Therefore the whole

2 ++ \m m

/I / 1

m - 1\ m-\\

P,

ot-1

m s 1 r (m) t, as above. rx * 2m The loss of interest on the second instalment being postponed

and the annual premium required to insure against -

this loss

is

of m
1

a year
p()
-

is

P d mm
-

<m>

on the third being postponed

m
2

of

year a J

m
_

etc

on the

rath

being "

postponed r r

of a

p(m)

year


**

mm
pC)
,

d.

Therefore the
is

loss

of interest in accepting

an rathly premium
,

.
.

|l+2+
.

f,

,0 +(m-l)| =
.

p(> rx m -

m-1
2m
10.

(m)

Px

d as above.

To

find

P^.
xt\

(m) a n
xt\

a
xt\

m;

2m
1

1 f, I /,
(

D U

"., t r+

ti

H
,

(a. x xt\

*)}

198

ACTUARIAL THEORY

[chap.

ix.

*i{

^T
<m)
art|

p
-i

*>}

since

^ =

il

+ pii

Now P

(T

g = -r4 (m)
irtj

A
*(|

a
*<|

{l_!^i
[

pi
v (
*t\

2m
|

+4
J

at

2?re

v VLi+<o
*l

From

this

we

obtain

Here the
to

loss of

premium

in the event of death of Qc) has only

be insured against for the term of the assurance, since if the life Therefore survives the term no loss of premium will be incurred.
the annual premium to cover this loss r
is

m~
2m
is

_
a*|

PL.
t|

The

addition to cover loss of interest

by the reasoning of

the previous problem r r


(m)

F,
2m
**!

a.

11.

To

find ,P

p(m)

=
"

As
(m)
a*|

Mll

-^^^}
,

P*
v
a*

2m
whence
(m)

'
I

,P

(a;

= P + Vtzl P (mYpi_+<fi ' * V


t as

2m

*(|

chap,

ix.]

TEXT BOOK PART


additions
for

II.

199
are

The

premium and

interest

on the same

principles as already explained.

12.

The mthly premiums we have been

discussing are true

pW
premiums.
r of these

Each instalment

is

and

if the life die after

only J

the remaining (m -

have been paid in any year the office has no claim on But as pointed out in Text Book, Article r). 42, it is sometimes the custom of offices to calculate the premiums in such a way as to make it part of the contract that the unpaid instalments in the year of death shall be deducted from the sum assured that is, in effect, that they shall all be paid. In such a case the rathly premiums are merely instalments of an annual premium which must be paid in full. We must therefore ignore,
;

in

the

expressions

already found, the

corrections

for

loss

of

premium.

We

shall
p[m]
*

then have

_ p
'

m-\ p[m) ^
2m
x

being put in square brackets to denote these "instalment" premiums.

Or we may proceed from the beginning


conditions stated,
1 2
.

as before

on the

m^

ro-1

(1

+jjm++.

+V m

A a = -JUl + (l-d)m+(l-d)m + = -l\m-d( + +7ii

+(1-0
)/ J

m"1 m

\m

+ m

where we put

(1

d) m

=1

d approximately

(-=r<)

200

ACTUARIAL THEORY
Now
p[m]
x

[chap.

IX.

_
"

Ax
a [m]

x\

2m

Zm
Hence

,[m]

2?n

Similarly

we

shall write

and

,P'

m~
I

1
T>

[ml

EXAMPLES
1
.

Show

that a x

+^ - ^

approximately.

By

Text Book formula (2)

(l+i)*+l

Ki+rT +

ul -/a,
^

-J{2

+ 2(1 + 0* -1(1 + 0'*} + Ki+0 -i


?'

Neglecting higher powers of


< 2 >

than the

first

< =x( 2 + 2 + i-0+Ki -*0


a+i

chap.

ix.J

TEXT BOOK PART


:

II.

201

2.

Given the following formulas


(a)

A^ = v(\+a )-a x

= fa, + (1+0 A. v iva (c) A 09 a] = i-*(i+<g = .-(l+OA,; ( e ) ,


(b) 1

transform them from yearly to mthly intervals and give a verbal interpretation of each result.

W C=""^- + F)
/
.

/ n i

(m) \

ma

(m)

On

the analogy of Text Book, Chapter VII., Article 30,


:

we have

the explanation as follows

The

difference

between the value of an annuity payable by


of each wthly interval of a year upon
at the

instalments of

at the end

which

(x) enters

and that of a similar annuity payable


is

end

of each

such interval which he completes

the value of

in

payable at the end of that wthly interval upon which he enters

but which he does not complete


assurance of

which again

is

the value of an
in

payable at the
(m)
,

end of that wthly interval

which

(x) dies.

But the value of the former annuity

is v

m(

hax

and
J

of the latter a

and of the assurance

Am m
x
x

and we therefore

have

\m

K
(b)
1

= "( + a, )' ma,


m)

= m{(l+i)^-l}a< + (l+0A<
If
1

m)

See Text Book, Chapter VII., Article 41.


at effective rate
i

be invested now

it

will yield at the

end of each

of a year

202
{(1

ACTUARIAL THEORY
1} of interest so

[chap.

ix.

+i) m -

long as

(x) lives,

rathly interval in

which

(x) dies

we

shall

and at the end of that have an instalment of


1,

interest as above together with the original

Ki+0-i} + i =
But the value of an annuity of
the value of a similar annuity of

(!+).
is

m
{(1

per interval
T_

Therefore
l^

+z) m -

1} is m{(l

+i) m - l}a^\
these

And

the value of the assurance

is (1

+ i) m Ax

Now

two

together

make up

the whole value of the


1

1 originally

invested and
(

we have accordingly
(c)

=
vm

*{(1

+t) - l}aj" +(1

+ i)A \

A<

m)

-m{(l + i)-l}v m a

I,'
1

For the explanation of


(

this, see

page 209 following.


<>)

(d)

a ;'= i- m{ (i + ^-i}^(l +

fl

See Text Book, Chapter VII., Article 43, for explanation.


.
,

(e) v J

(m)

a -\
Te.i;<

(ro)

/ 1
\77J

ha

(m)\

JA

(m)

This

is

explained in

Z?oo&, Articles

13 and 14 of this chapter.

3.

yearly)
years.

Find the present value of an annuity to (x) (payable halfcommencing at 1, the payments to be doubled every 10

This annuity

is

equivalent to an annuity of
1

commencing
of age of age
the

now +10;
;

plus an annuity of

commencing on attainment of age

a:

x + 20

commencing on attainment plus an annuity of 4 commencing on attainment


plus an annuity of 2

x + 30 '

and so

on.

Therefore, taking cP 3 to
X

aX + i-, &'

we have

whole value

chap,
4.

ix.]

TEXT BOOK PART

II.

203

yearly

Use the Text Book table at 3^ per cent, to find the halfpremium to secure at age thirty-five a double-endowment assurance payable at the end of 1 years or previous death.

Here we may write


P(2)
i

A^+A.1
a , a?!

M
*-

M
45

+2D
^

x-1
3

x+n-l'

x+n'

J_
2
1

M ,-M

+ 2D45

(N S4 -N M)-'2o(D 3i

-DJ

T (474131 - 260247) - -25(25839 - 16570)


1

9806-7769 + 2x16570

35177 211567

08313.

5.

years, payable half-yearly,

Prove that the value of a temporary annuity-due to is approximately ^a. + a^){

(x) for

-=

--m~
*l

2m

V
V

D t+,t \ D )
-

Ir
2m\
2m
l
^
y ^

'

D DX
,

-v

= _L/(OT+ l) am| +(OT _l)Ca- -l + -^5U v 7 xn\ ^


>\
i

Dx

/J

= 5 {(m+l)a.| + (-l)rxn\' -} -i ' / \


2jw

Hence

in the particular case


(2 >

i( 3a

"raTf

+ "^ "

)
j ,7]

6.

years, payable half-yearly,

Prove that the value of a temporary annuity to (z) for n is approximately ^(3a^ + a 7])m

204

ACTUARIAL THEORY
a V
X = d*>--Z?:cP "x+n

[chap.

ix.

D D

( x

D x+n ^

)--jr(. X

ax+n

+ )

approximately

V.

a;.

'
|

xny

the ordinary approximate addition to a yearly 7. Using annuity to make it payable m times a year, prove that for an assurance of 1 on (x) the premium payable m times a year

m\
W
\

a +-7i

OT+1 TO + 1

The premium payable at the beginning of each ?th part of a year for a whole-of-life assurance on (x) is

W
m
1 1

W
1

da,

1
1

- aa *

(m)

-1 2m
;t

m
(m)
a.

(m)

ra

2m

m1 ^
a,
(m)

(I

i)

m+
2m

since

a1

a
*

m+1 -=
2m

chap.

ix.J

TEXT BOOK PART


cent.

II.

205

8.

Given P^ at 3 per

-01930, find the corresponding

half-yearly and quarterly premiums.

Since

(m)

"- 1 2m (p.+o

Therefore

P (2)
01930

l-i(-01930 + -02913)
01930

1-

-01211

1930 98789

-01954
p(2)

and the half-yearly premium ^-

=
P

-00977.

Also

PW =

01930

1-

-01816

1930 98184

=
and the quarterly premium

-01966

pW

jj =

"00492.

9. An industrial assurance office grants whole-life policies by weekly premiums of 2d. Find what sum assured can be granted at age x, if the agent introducing the business is allowed as commission the whole of the office premiums for the first 13 weeks and 20 per cent, on them thereafter, and the office expenses amount to 20 per cent, on the premiums from the commencement. Assume that premiums, commission, expenses, and claims are on the average paid in the middle of the year, and that the year contains 52 weeks.

206

ACTUARIAL THEORY
The premium
of 2d. a

[chap.

ix.

weeks = 8s. 8d. = 43 of 1. It is assumed to be payable in the middle of the year on the average, and therefore the value of the premiums is

week

for 52

= -43xi(a +a) =
Of the premium
ance.
-43

approximately

N +^D D

for expenses has to

20 per cent, for commission and 20 per cent, be allowed for the whole period of the assurThis being 40 per cent, of the premium, its value is

173

-.

In addition to this 20 per cent, for commission,

a further 80 per cent, (making together the whole premium) has

be allowed for the first thirteen weeks, and this being payable on the average in the middle of the year, according to assumption,
to
its

value

is

-086

-|i
X

Thus the value of the net premium received by the


43
*
'

-173

'

XX
-

office is

'

- -086 -gfci

If

S be the sum assured to be allowed,

its

value

is

M^l+t)*
X

And, payment and benefit being equal in present value we get


3

26(N. + jD,)-086D,

+t

M.(l+0*
10. Given a table of temporary life annuities, show how you would find approximately the value of an annuity on (x) payable yearly for 21A years, the first payment of 1 being due 2 J years

hence.

In commutation symbols

since an immediate annuity-due for 21^ years

means a payment

chap.

ix.J

TEXT BOOK PART

II.

207

of

1 at the beginning of each year for 21 years, with a payment of i at the end of 20| years.

Now
=

D, +

D x+n + B x+H + D, +4i + + D x + D , +8 + D +


3

+ T> x+Wh + |D B+B +


,

+
,

+
,

D +
,
:t

ffl+ 2

D,+

g8

+
,

D, +M

~2~

a PP rox

= (D, +1 + D x+2 + D i+3+

+D

a:+23

)-(D^ +1+ iD i+2)

" N ,- N 2 3-^ D , +1 + ( D , + l + D , +2 )}
Converting the expression into annuities, we have
2ir*:2iJT
I

a..

x:~23\

^( a x:T\

"*:])

is

This shows us to be correct, for the annuity under consideration one for 23 years but with no payment for a year and a half.

11. If the force of mortality (x v

be constant from age x to age


cm

+ n), show '


< x

that a

ym\

may be J

expressed in the form -; where r logc

and y-\-m ^> x + n.


u,

Let

u,

j/+i

=
-,

etc.

y+in = - log
,

r.

d log

Then

dy

= log r S
= J^logr + log* = = =
fa*
r 'G
'r*

y y

Py

>
=
*'

)
c*

and
But

d'

where ur

c.

_ a -:
ml

| I

v* ,p ', d/
,

fm
<ft

o 1

c -

logc

CHAPTER X
Assurances Payable at any other Moment than the End of the Year of Death
1.

The general problem discussed


1

is

to find

the present

value of

payable at the end of that rath

part of a year in

which

(x) dies.

First,

we may make the assumption


it

of the uniform distribution


tth,

of deaths over each year.

Taking any year, say the

and
(x)

dividing

into

equal parts,
is

we

say that the

chance of

dying in any one of these

equal to

of the chance of his

dying within that year.


of the year,
1
is

If then (x) die within the first mth part payable at the end thereof, which is equivalent

m-l
payable at the end of the year. Similarly if (x) die mth part, 1 is payable at the end thereof, which is m-2 equivalent to (1 + z) m payable at the end of the year, and so on. Therefore, should (x) die in the tth year, the value at the end thereof of 1, payable at the end of that rcth part of the year in which he dies, is equal to
to (1 in the second

+ 1) m

m-l

m-2

Me
m{(l+i) m Similarly for
1}

say that an assurance of

every year up to the limit of life ; and we may 1 payable at the end of that with part
is

of a year in which (x) dies


-

equivalent to an assurance of

payable at the end of the year of death, or in symbols

m{(l+i)-l}

chap. x.J

TEXT BOOK PART


(m) A x = 2/(-1 .ox ix
I

II.

209

_1_

m{(l+i) m -l}

= A
where j
If
.

A
m
times a
i.

is

the nominal rate of interest convertible

year corresponding to effective rate

we make m

infinite,

we have

A X = Ax x
2.

-r-

Again,

means that on the average

will

be payable

of a year after death, and on our original assumption death will

occur on the average at the middle of the year.

Therefore on
after

the average

will

be payable

(-S-

+ 77

year

the

commencement of the year of


Therefore
(m)

death.

,(i + sr) d + x

+ l+

^
,

+i+

(i+0 V2

(1-J-)

'"'-

vd

+vH

"

= (l+i)V 2
And when m
is infinite

2m )A

3. Now, making no assumption as to the we may, on the analogy of A = v - iva


x
,

distribution of deaths,

ar

say that

<-

m>

um

_ wm {(1 + i )m _

}/">

We may
at the

reason this out as follows. If 1 were payable certainly end of the first mth part of a year its value would

210
i

ACTUARIAL THEORY
vm
.

[chap. x.

be

But as
(x) dies
j_

it is

not payable

till

the end of that rath part in

which

we must deduct
every

the value of an annuity of the


(x)

interest on v m for
i_

mth part which


1

completes.
&.

Now

{(1

+i) m -

1} is
JL

the interest on
JL

for the

mth part of
JL

year, and

therefore v m {(l+i) m

-1}

is

the interest on v m for that period. the

Again a

is

'

the value
?nth part.

of

annuity which pays

at the

end of every
provide
t!

Therefore the value of the annuity to


at

m {(l +i) m -

1}

the

end of every

such

period

is

mvm {(l +i)m - \}a\

Hence A^' = vm -mvm {(l + j) - \}a^\


vm

When m

is

infinite

1,

and m{(l +i) m -

1}

=8

therefore

A =
4.

8a"

Care must be taken in adapting these formulas to the case


assurances.

of

endowment

We have
-,

A^ + A 1

and on the assumption of a uniform distribution of deaths

A^ =
(

art)

A%x J-+
X7i

A-i
Eft
I

and

A^
(
rc?a

= A^fl + nd-il + A I ' xn\ ^


X7Z-

Also

-, Axn\ = A xn\
-.

-=

-. + Aam

and

I -, -, Axn\ = Axn (1 + i)i + A xn\


*-

'

Again, without any such assumption

A**l = V,
And

vm

- mv m {iv. + i) m (1 /
'

}
)

x:n-\

ml

-i

- So"

;.


chap. x.J
6.

TEXT BOOK PART

II.

211

The proof of

Text Book, Article 16,

may be shown more

clearly.

A =
~

T
X

v*l

^ax+t ^dt

*
Uo
1

* +i

V
,

x+t

dt

dl

--ty.*-**
Now
by the method of integration by parts

\p
and

dx
dx

S
]

n#* r
r<

-ht dx d r -pdX -r q p* dx dx
dx
J o
r ,0

Hence

jQ

^dt = -** - jf
dl
.

dv t

,,

W
t)

dv*

/CO

= I1

..V

log

dt

in

x+t

dt

And

A, =

-\(-lx + z(yi x+tdl\

= l-Sd. X

We may
Since

also proceed thus

dD x+t _
,

<fo*+*Z

x+t

dt

dt

&+t_?+L + l
dt

dl

dtp+t
dt

*+<

= - VX+Hx+t'1x+t + lx+tVX+n0 S V
-

D,>. +t + s)

212

ACTUARIAL THEORY

[chap. x

We

have

/-to

=
that
is

TT"/ D /

D X+t,uX+t + S D *+' r D /n
L
rft
/
a:

/-co

/ft

As + So"
1

and therefore

AX =

- Sa

6.

easily

Formula (14) may be deduced as follows, probably more than by the method of the Text Book.
/oo
,Pt
o

dt

Therefore, differentiating both sic ng sides with respect to x


da.
/<

/d/
\ ax J

dx x

Jo
I

d.p

d _xl
I

But

t*X _

dx
1

dx
dl ^, X+t

dl
j

dx

x +*

dx

x+tlJ'x+t

+ lx+t lxlJ x
-

Therefore

da -pS

'(
/GO

-
,

,Vp
fOO

dl

"Jo

'

Jo

'

x+t
C

dt

=
And
,

a a

-r

a a A X = 'XX -

da
j dx
5

chap, x.]

TEXT BOOK PART


a

II.

213

7. Similarly

=
X7l\

fn
I
I C\

vf

pXdt

Therefore

-^ = dx
=
=

P v'(-^)dt \ dx /
fn
v* (u,
Q

Vas

r \ L dt a p x+l ) x
,

fn

fn

^l

V \P dt
X

-j

vt

tP^.X+t dt

a-.-A*-,

And
8.

-, A xn = xn\
1

u r xaam. m
,

xn

'

gx
(20)
is

The following method of deducing formula

perhaps

preferable to that indicated in the Text Book.


e

r
I

n dt
x

Jo'

Therefore, differentiating both sides,


'

dx

.i/r.,/.)
dx\J
(

>d

s:m
/-oo

)dt

'dt

/-co

Hence

=
=

l>x

]o
e
X

#,* ~ ] tP.^+t*
1
de
'

u,

And

a r* = i-(l + -P) dx) e \ X

= -|-{l-i(^_a-^ +1 )}
X

approximately.

9.

The following three annual premiums should be noted


is

("JP

the annual

premium payable once

a year required to

. ,

214

ACTUARIAL THEORY
1

[chap. x.

provide an assurance of

payable at the

moment

of death and

accordingly

is

equal to

is

the annual

premium payable by momently


1

instalments

to provide an assurance of

at the

end of the year of death and

A
is

equal to

a
X

0'P

is

the annual

premium payable by momently

instalments
is

to provide an assurance of 1 at the

moment

of death and

equal to

EXAMPLES
1.

endowment assurance Provision is to be made The


benefit side

Find the weekly premium required to provide a doubleto {) payable at the end of n years. for the immediate payment of claims.

)(l+0*+2D x-\-n (M x -Rl x-\-n'^ ' >


_,_

DX
As
to the

premiums,

it

is

tributions to assume that they are best represented

usual in the case of weekly conby a continuous

annuity, since the interval

is

so short.

The payment

side will

thus be

Pxa-,

P(a

-vn

p a

D
where P
is

the total contribution per

annum

(M Hence

(N

-N

5(1+0* + 2D ^ ^ ) + i(D -D ^ )
_,

The

contribution to be paid at the beginning of each

week

is

therefore

52


TEXT BOOK PART

x.J

II.

215
the value

2.

of

A gQ
.

Use the Text Book table by three methods.

at 3 per cent, to find

0)

A 0:fiii SO
:

"

50

20|

f\
SO

(14462-9409)1-015 + 16605/ -(taking (1+,-)*= 36949


,
,

i\

-58821.
(

_J /

M so- M 5o){ + D
n SO

60

A
30:20T

= =
0)

0^62^9X^+^6605
36949
-58819.
l

A so :2

-o]

=
a

%
=

We may

put

30

H
20(

Nao- N5o + KD 30 -D 60 )
n 30
(735104 - 230450) + ^(36949 - 16605) 36949
13-933.
1

=
Therefore

A^.^ =
=

- -02956 x 13-933

-58814.
for the single

3.

Find the necessary formulas


:

premiums

for

the following benefits


(a)
(b)

An An

assurance payable

2 years after the death of (x).

assurance payable at the end of 12 years from entry,

provided (x) has died at any time within the 12 years.


(a)

The required

single

premium

is v 12

For

one or other of the following formulas may be taken,

\
or

= A.(l+0*
i

A X = Ax x

-s-

AX =

- Sd

216
(6)

ACTUARIAL THEORY
For this assurance we have

[chap.

x.

4.
first

Show

that,

by a mortality

table which follows

Makeham's

modification of Gompertz's law,


a' c
is

A =
of

logs a

+(/x +log*)n'

where
1

calculated

at

rate

interest j,

such

that

If"
~x+t
x J
1
/<*>

dt

v*

x+t

\dt {- l ogs-(\ogg log^^+'jf

T
x

x J

logs

vtl dt *+t

~T
a;

io

gg

y(
/

+(

-logs^+^ + log^a'^
since
fj,

= - log * (log g
c) c1

log c)^

and therefore - (log g log


a'^,

fjt,

+ log *.
is

being calculated at the required rate j which


c

such that

i+j
5.

~~

i+r

Prove that

(6)

-f(/a)=-ZA

(a)

dN
_
-J-2-N
dT> -=-?

(D) 2

chap, x.]

TEXT BOOK PART

II.

217

Now

JLTb Tb
SJ
\cte J o \dx

dt

rrD X+t\dt
,

x+t

dt

=
and

-D X

D
a

-D^ +
"

S),

(see

page 211).

Therefore

d*

"a* =

-(D)2 + ND(u +8)

(DJ 2

,^'v,'

'

This

may be

simply found also from the relation

_ A = r ai *
u.

~.
dx

da

(b)

(la) =

la+al
a:

= /{(". +S)ax -ll-iuax J l^a; xr x = -1(1 -8a) X^ X' =


'

6.

Prove that

218

ACTUARIAL THEORY
J d

[chap. x.

MX
DX
dx

rj-\
*

dA %
dx

'

- dD dU. D * _J1-M x -j-* dx


dx
'

(D) 2
8)

-#;+MD><+

7.

constant ( = If the force of mortality be


._

c),

prove by direct

integration that

Ax =

~T~S'

Let

= -logs =
=
I

i*

=
x

p.x+t'

d log
Since r "

dx
*

- d log
then
j

=
log

-log*,

dx
l

and integrating,

%
I

= =

x log
ks
x

+ log k

Now

A,= x/ X
_,

'^/:x+t dt
..

))

_LJ

*&*+'( -log*)

t)'i'(-log*) dt

Jo

-logs log vs - logs - log s- log u


c c

+S

CHAPTER XI
Complete Annuities
1.

On

the assumption of a uniform distribution of deaths, the

value, at the

to the yearly annuity to

beginning of the year of death, of the correction make it complete is as shown in Text

Book, Article

5,

lv r +2v r
From
Article
large.
3,

1
+3v r +

Ja

+ rVr

this is seen clearly the point discussed in


viz.,

Text Boole,
is

that the correction given by formula (1)


capital

too

The average

payment
.

is

.1(1

+2+3+
1

+r)

r(r+l)

r+1

i when

is infinite.

of death, the
JL

But to arrive at the value at the commencement of the year earlier and smaller payments are multiplied by
JL -1

values (, v T , r-1 r-2 r


(u 7 , v r
,

T
,

etc.)

which

are

greater

than

the

values
are

multiplied.

etc.) by which the later and larger payments Thus the true correction is less than |i)i.
,

Now

let
\

v T + 2v T
2

i.

A
+3v r +

+rv T
Z.

v^s

T + 2vT +

3_

it!
r

+(r-l> r +rv

220

ACTUARIAL THEORY
s(l-vT) =
vr vr
1

+v r +v r +
j--r
r

+fl r

-ru

-v v
j--n;

*{(l+i)''-l} =
1

-WT
iv(l

+i) r I

rv

{(1

+')'-!}

iv(l

+i) r
{(1

{(1+0' -I} 8
year of death
is

+0'-l}

Therefore the value of the correction at the beginning of the

iv(l+i) r

T
And
at the

end of the year of death


i(l+i) T
1

r*{(l+0' -1}2

{(l+iy-l\

Making

r infinite

we have
j_
S2

as the correction
l_

S"
result to a

Multiplying this by

A
a

and adding the

we have

/*
a;^g2

1\
g 8

a;

'Z

a,+ a
I

A A ,i2-

=
since

+A

-7s-

A = A

-~-

approximately.

chap,
2.

xi.]

TEXT BOOK PART

II.

221

to alter the interval of time

In the case of annuities payable m times a year we have only from a year to the mXh part of a year,
1 to

and the payment from

If

then we break up the mih part


as the correction

of a year into r parts as before,


1

we have
_3_
.

If

2_
,mr

+ 3^mr +

+rv

w,

which

is

precisely analogous to the correction in the case of the

yearly annuity.

We

have merely to
1}.

alter

the rate of interest

from

to {(1

+ i)m -

Accordingly, at the end of the rath part


is

of the year in which death occurs, the value of the correction


2_ 1
i
_

r {(l+i)-l}(l+Qr 2 {(l+i) mr

-|

ml
But when
1

JL

-l} 2

r{(l+i)

L mr

~l}
l

is

made

infinitely

great, (1

+ i) mr
/

is

unity,
-i-

and
1

r {(l

+ j)mr _

is

log (1

+ i) =

-Is

And writing iw

for

(1

+ m

we have

as the correction Jo
1
|

1_

'()

S2

Therefore
(m)

= =

(m)
x

A (m) +A* ^(m) 32


-r A ^(m)
;

(m)
i

-8 5~~

since

(m) A = A

^P

approximately.

deaths, and 3. Making no assumption as to distribution of the taking r very great and approaching infinity, we have as year for a value of the correction in respect of the (re+l)th

yearly annuity

222

ACTUARIAL THEORY

[chap.

xi.

+f (M. + .+!^-M c+1l+1 )}

Now

= =

_,_

M x+n-\ ^ A
i

M x+n + AM s+ti +^s x 2 r


_,_

^ A2M ,+.+
I+
etc.

'

"

etc.

etc.

/r

c-^-o
Therefore

2 =

rM^ + ^AM^
+?l,

2 2

A'M

+(i+

where

AMi+ ,
if

= M, + , +1 - M

etc.

Hence

we

stop at second differences the correction

is

^-{ (rM
=
(making
1

+
,

^AM
1

_,

-^p=^A2M
r2

)-M xl ]
\
'

/
x
*

rr( DV

r M <c+ +-AM *+ --TS-r A M *+ -M.J ^ z+m+i/ 1272r


,

-l-

r infinitely great)

correction to o

Giving to n every value from we have


X
I

to

to

- x and adding the

M
D
re

ax

%+

AM,

12

D
a;


TEXT BOOK PART

chap,

xi.]

II.

223

4.

Again, in the case of annuities payable

times a year,

we

have only to alter the interval of time from a year to the mth
part of a year and the

payment from

to

If then

we break

up the

/
(

k+ IN)th

mthly interval into

r parts,

being very
is

great and approaching infinity, the value of the correction

if CM

,*-M
+ -(M

J_

_fc_

i) +

(M^Jti -M_LJ
,

_*

_s) +

.fc.r-l-M

M-l)},

otD^V

*++ro

2r

^+ m +m

12r 2

*++

x+n +^r)

by a process

similar to the above,

where

AM
Now making
ml)
^ x

jj

,,j;+i

m
r infinite

mm
-

ic,

etc.

we have
^

as the value

*+ n +

x+n +-lT

x+n+

X+n+ m

and giving to (n

-\

every value from

upwards we have as

the value of the total correction

But

M x+
l
,

Mh
x
x

( v

M
K

x +l
,

M
-

) x'

approximately *

M aH -M
i

therefore

(M ^ m
n
m

x+1

M) &

x:l\

Hence

a.

+ 2^ A *

12m2

^1

224

ACTUARIAL THEORY
Or by
a better approximation

[chap. xi.

M
and

+m
-

dM +~ m
i

dx

dM
=

dx

-r a

Dx
(a).)

(See Chapter X. of these notes, Example 6

M x+ - M
i

Therefore

=
X
(m)

t* x

j and a

<m)

+ 5 A - 12m2 ^2 *
:

It

P*

5.

We may
:

obtain expressions for complete temporary annuities

as follows

-1

= = =

a - vn p a

K
a
as o

+ Ki

0*a j - ^p,K +m + i(i +


(m)
,

0^ J

%+Ki + O^-,
(m)

a m|
,

.(m)

w"i-^a; a <c+n p

^ + -2^(
1

TJ-j

+ 2^( 1 +

^ 4A-|

as the greater accuracy of the

These approximations are close enough for practical purposes, more refined formulas is to a certain extent inoperative on account of the subtractive portion in the above formulas.

EXAMPLES
1. A life annuity of P, payable by half-yearly instalments, was purchased at age x. After n years (a half-year's payment having just been made) it is desired to make the annuity payable by quarterly instalments in future and with a proportion to date of death. To what sum must the annuity be reduced if the alteration be given effect to ?

chap, xi.]

TEXT BOOK PART


that
>

II.

225

Remembering
ax
(m)

af = f + A^l +

i)h,

and

that

+ ~^~> we have

m-

the value of the annuity as at present

constituted
v*

x+nJ

be the annual payment in future under the conditions required, the value of the future payments
If

Hence, equating

and

K =

PG

+ ",+,)

yearly, find

will purchase an annuity of 5-026 payable the corresponding annuity also payable yearly but with a proportion to the date of death, using 3 per cent, interest.
2.

Given that 100

Here

=
= =

5-026

L
+ ^(1+0*

19-897.
a,

And

dx

= <W{l-<l+^)}(l+4-)
taking (1+z)*

= 1+1

= = =

19-897+|(l - -02913 x 20-897)(l-015)


19-897
20-096.

+ -199

Therefore 100 purchases a complete annuity of

100
20-096

4-976.

3. A man aged 70 has 250, which he decides to invest in an annuity. What annuity, payable quarterly in advance and with a proportion to date of death, can be allowed to him, given a n = 7-299 and d at 3 per cent. = -02913, and assuming a loading of 10 per cent, to be added to the pure value ?

226

ACTUARIAL THEORY
It is

[chap.

xi.

necessary to find the value of

a^

in the

first

place.

Now

&f =

af>

+ A- A,(l + i)i by formula

(2)

Therefore

3$ =

?0

+ 1 + J{ 1 - d(l + aj

(1

+ i)i
x 8-299)1-015
-

7-299

+ -625 + -125(1- -02913


1

((1 +i)i being taken as

1-015)

= 7-924 + -096
=
8-020.

of an annuity of

Adding the loading of 10 per cent, we get 8-822 as the price 1. Therefore 250 will purchase an annuity of
=28-338.
annuity, payable quarterly in advance and with a proporof death, which can be purchased is therefore

250
8-822

The
tion

to date
6s. 9d.

28,
4.

Show

that

A =1

-id approximately.
1

We

have

A =
(1+?')A

- ia

l+i

whence But

= l-ia

(l+i) = (l+i)i(l+i)i

=
Therefore
(1

(1

i)i( 1

approximately.

+ i)U/l +
+ i)iAx =
1

\ = 1_
ia
x

and

(1

- -1(1 + i)U

*"a *

is

A^ =

i&

approximately.

TEXT BOOK PART


1

II.

227

5.

Show

that a

=
=

v 2m

approximately.
1 1

.(m)

A + -^ 2m + 7T- x 2m
x

TO

2J

2m
8a
x

a x

2m

= all v im a

jr

since 8 = d approximately.

approximately,

since

v im

(1

- dy

- - approximately.

CHAPTER

XII

Joint-Life Annuities
1. In a table in which Gompertz's mentally

Law

holds

we have

funda-

u and
/

= =

Be*
kg*
g
(

whence
and

p
a

=
=

-*)

2s'

= 20*^*+ )(' -1)


(putting
<?

+ cy =

cw )

Su'gc'V-i)
Sw'

Similarly

o a
"to

where
cP

c*

+ cv + c* =

cw ,

and generally
terms

a xyz'

(m)

where

+ cy + cz +

to

cw .

Now,
then
that
is,

if c*

c*

c*

+
.

to in terms to

cw,
,

Bc

a:

+ Bc!' + Bc2 +
ft

terms

= Bcw =
[i
.

p +

+u +

to! terms

From this we see that in the case of a table following Gompertz's Law we can find the values of joint-life annuities, provided we have a table of the force of mortality and of annuities
for single
lives.
firSt
If,

for example,

we wish

to find the value of


'

30:40:5O'

We

btain

SUch that

/*, = /*80 + '*40 +

60

Xh

at the given rate of interest is the value required.

CHAP. xn.J

230

ACTUARIAL THEORY

[chap.

xir.

from which we see that the value of w-x is the same for all values of x and y where the difference between x and y is constant. In other words, the addition to be made to the younger age to find the equivalent equal age is constant where {y - .r) is constant. We might therefore form such a table as the following
:

y-x

CHAP. XII .]
4. Still

TEXT BOOK PART


Gompertz's law we have as before
a
xy

II.

231
first

considering a table subject to Makeham's

modi-

fication of

=
=

2u
2t)

( ,

t'
t

p xy

cI

+ c,)( t'- 1 )
_1 )

(putting cf + cv

cw )

2uV V (c
c

t*w

=
where
a'

a'

w
/,
''

is

calculated at such a rate

that

1+j

=
.1
-

l+i

..

Similarly

= 2uss*gV-i>
g

where e w
such that

c^

+
;

+
=

c2

and the annuity


.

is

calculated at a rate

1+j
where c w

+1
.

Generally axyzJ

(m)

= +

a'

w
to
I

c"

cv

+
;'

cs

m
=

terms, and the annuity

is

gm - 1
;

calculated at a rate J such that

1+7
still

1+z

r-

The problem may be


axyz-

stated
~2

more generally.
-

(m)

a v tsmtb -(c

+c +c z +
ll

to to terms)(c'-l)

putting

c*

+ &+
2'
a'

cz

to

m terms =

rcw

'

i-f

p www-

(r)

(r)
}

calculated at a rate of interest J such that /

\+j

sm
^

~T
;

In practice it would be most convenient to make r=l, as, under this second method, tables of annuity values have to be calculated at special rates depending on the number of joint lives, and these special tables will of course be most easily prepared for
single-life

annuities.

table of c
/*

for all values of


is

x must also

be prepared, as a table of

in this connection

inconvenient.

232
5.

ACTUARIAL THEORY

[chap. xh.

constant

increase

in

the

force

of

mortality

under
rate of

Makeham's law has the


interest.

effect

of an increase in the

For

if in
/*

the expression

= - log*- (log g

log c)c*

a constant - log r, where r is a positive fraction and consequently log r is also positive, we have

we add

p'
z

= - (log s + logr)- (log g


/'

log cy?

whence simply

= hx rx gcX = rx lX
=
r \P
X

tP'z

Also the value of an annuity on


a' _,, s

(r) in
x

the

new

table

is

~2v* p'

x(i)

tPx t*x
xQ)

where a
1

is

calculated at a special rate

+j

+
r

..

From

this

we

see that

11
:

j which

is

such that
is

\+j

<

i. It positive fraction ; and consequently j that an increase of 01 in the force of mortality

>

\+i may be mentioned

since r

equivalent to a rise of

is very nearly per cent, in the rate of interest.

Further, in any table, as indicated on page 211,


1

dD
dx
increased to

dlosD
dx
jx

^
Now
in a table

DX
where
jj,

is

-logr

rflo S

D'_

dx
Also in a table where
S is

increased to

- logr

dlogD"

Therefore

dx~^ dlogW __ =
dx
D'
X

^+
dx

- lo g0

dlosD"

= D"X
=
a"
.

for all values of

and

chap,

xii.]

TEXT BOOK PART

II

233

to the

Thus a constant addition to the force of mortality is equivalent same constant addition to the force of interest. From this
practical assumption
is is

fact the

made

that a constant addition,

say "01, to the rate of mortality


addition,
1

equivalent to the same constant


is

per cent., to the rate of interest.


a!

Though
normal,

by the extra mortality table

equal to a

by the

it does not follow that the annual premiums are also equal.

corresponding single and

For


ACTUARIAL THEORY
Or, to take a particular case,
a
wxyz

234

[chap. xn.

=(a+a+a+a)-(awx +awy +awz +axy +a w


*

z'

xz

+ayz' )

)+ (awxy +av)xz +awyz +axyz J awxyz ^

Here we must determine separately by the above


values of
all

rule the the joint-life annuities involved and hence find the
it is

value of the annuity in question, for


that the rule applies.

only to joint-life annuities

8. As already pointed out in the notes on Chapter Makeham's second modification of Gompertz's law, the

VI., under

expression

for the force of mortality takes the

form

u
'

= A + Hz + Bc*

whence simply
and
t

= ksW2gX
= = =
s*w ixt+t ^" s
**

vx r

_1)

also

v t^x+d
t

:+ w 2*(z+d)+*V 'V-i)

Therefore

v r x x+d
:

*2

w 2((2 + i)+2(Vc
a:
(

a;

+c:l:+d)(c( -i)

Now

putting

cx

+ cx + d =
cz ~x

2c 2

we have
and

+
1

c^

z-x = lg0+^)-%2
log c

=
where
(x
d'

d'

depends on
x
p
,

d,

the difference between the ages of (x) and

+ d).
Also

Hence

= = =

s - d'
*2*
2 W!(2*-2<*'+<+2* 2V-l)
ff

s '2t

w 2t .Zz+lP a2t? (J - \) w2t(d-2d')


zz
(

t-t

w2U,d-2d')

But

2e p
~2a)t

w 'tt{d-2d')

a'

chap,

xii.]

TEXT BOOK PART


j such
that

II.

23;

where

a' ^ is calculated at a rate

Again

..,,, M x :x+d x+e


:

= =
=

A -2<(3z+d+c)+3tVcW + &
fc

''+c

+Vc

-i) '

And

putting

3e 2
c'~ x

cx

+ cx + d + cx + e
"

we have
and

+c +c
3

s-* = logQ+C+cQ-IogS
logc

=
where
rf'

d'
e

depends on d and

the differences between the ages.


3c w 2t(,3z-3d'+d+e)+Bt' o
2

Hence M

a:

x+a x+e
:

= =

sSt

2
(c

-i)

t* zzz

w 2t(d+e-3d')

and where
'

a'

is

calculated at rate j which


1 1

is

such that

+j
:

w %d+c - 3d') l+i


(m)

Generally J

x:x +d x+e
:

where a zzz

is

calculated at rate^' which


iQ2(d+e+~~
'

is

such that

to

(m-1) terms -md')

l+j
and
t
7/

l+i
d

lofffl + c

+c +
e

-.

to

terms')

- log
2

logc

joint-life annuities

be seen that, under this second modification, tables of would be required calculated at special rates of interest depending on the number of lives and on the differIt will
all

ences between the youngest and


is

other lives.

table of c

also necessary.

236

ACTUARIAL THEORY

[chap. xh.

EXAMPLES
1

Obtain an approximation to a

m n by
.

the Carlisle Table

at 3^ per cent.
(a)

Simpson's

rule.

70:75

=
= =

3 731
"

a
^50: 82

S2-411

3 562
-

"50:83
50 82-411
:

3 369
"

Orfl

50: 70: 75

3 483
'

(&) Price's correction.

50:70:76

= =

fl

50:82-' 05

3-562 --05

=
(c)

3-512

Milne's correction.

60

70

=
:

75

50

82-5
'

= =
2.

3 562

+ 3 369 )
'

3-466

Use Simpson's
3TTWTT3
.

rule to find

by the

HM

Table at Z\ per

cent,

the value of a

S5:67:.73

"

35

67

73

35

67

35

73

67

73

35

67

73

Tofinda36:67:73 wehave
"67:73

4 - 20

alld a

35:78

3 997
'

35:79

therefore

36:78 a73

= =

3 765
'

3-864

__
oD

Hence
Oi

17-325
17-921

to

+ 7-471 + 5-512-6-993-5-238-4-020 + 3-864

chap,

xii.]

TEXT BOOK PART

II.

237

3.

3 per cent., and of

Find from the Text Book table the values of a ^ at aL 43:48:59 A^,^, - at 3i per cent.
a 43 Aa
fl
. :

43

48

M
:

59

=
=
=

48

a,,

43

B 59

48

. :

c 69

- 3a 43

48

59
~~

45-7S

45-78

53-69

53-69

S4-83

54'83

52-11

52-11

52-11

11-915 6-190
1

+ 9-284 + 8-901 -23910

= A 3T7407T4 =
"
31:40:44

rf

1+ VT4oT44)
"31:40" a 31:44~ a 40:44
!

a31
a
31

+a40 +a 44~
+
fl

+fl!

Sl:40:44

40

44

~ a36-40

36-40

~" rt

39-33

39-33

~~

42-lS 42-18
:

^39-56

39-56:39-56

= =
31
:

18-235
21-001

+ 16-103 + 14-997 -

13-936 - 13-185 - 12-409

+ 11-196

40

44

1- -03382x22-001
=
4.

-25593

State

how you would


.

apply Simpson's rule to obtain the

value of a

M:illM

From
it

a consideration of the statements in Text Book, Article


it

6,

will

appear that
:

as the following o

would be incorrect to adopt such a method . is Find w such that aw a ,. then a 47:60 80:to:15|
; '

the value required.


It is

necessary to

split

up the temporary annuity

into

its

two

parts,

and we then have


45
:

62

76

S0:47:60:15|

~*

30:47:60

f)
30
:

45:62:75
47
:

60
,

Then
and we

find

to

such that a w

a,,
47
:

and 60

w' such that a

vS

62

_., 75'

shall

have
""

ff

30:47:60:15|

SO

u-

U 30
1")

/ l

45 :w'

47 '60

5. Show that doubling the force of mortality is equivalent to taking two lives of equal age in the expectation of life, the life

annuity, and the assurance.

238

chap,

xii.]

TEXT BOOK PART


cx

II.

239

Similarly

a
a

=
mJ

(logg logc)cV+ x '2vVt(c - l)g c


t

V -i)gV-i)

Hence

&

dx

<f

am dy

7.

Given in the case of a table following Makeham's


log
I

rule that

log k

+ (x + 1)

log

+ <f+

log

g
that the

show what modifications must be introduced


equation

in order

may

apply to select tables without

loss

of the property

of uniform seniority.

To obtain an expression we must


for
all

for log
,

write log k and log

each year of duration.


durations.
lo E
l

g g since these will vary progressively Log * and c will remain constant for
,

instead of log k and log

We m +t
l
[x]

then have

and

lo S

whence log {P[x]

= = =
=

log k

+ (a: + t) log s + c^+t log^ o + ^log* + c loggo


{
a;

lag g

log

[x]+t
f

- log

^
s)

(log k

- log k + tlog o

+ c* (c

log g - log
t (

go )

Similarly log

(P[y]

(log

^ - log kQ + < log *) + cv (c* log g - log go )


l

Therefore
Io S

Aw

(putting 2cTO

= = =

2 ( lo 8' k
d"

~ loS k +

lo S *)

+ (^ + ct (c )
+ 2cw (c<

lo

& ~ lo S <)
go )

cv)

2 (log k
t

- log k + 1 log o

s)

log g - log
(

Therefore further a [x][y]

= So^,,,, =
-P[w][i]

[w][]

where
Similarly also

c^

c'J

=
.

2cw

Mfe]w
<^

(m)

[roM , e]

(m)
.

where
It

31

c^

to
""

terms

= mcw

may

similarly be proved that

a [x]+r:[y]+r:[z]+r-

(m)

[w]+r:[w]+r:[w]+r.

(m)

where the same relation holds.

"

CHAPTER

XIII

Contingent, or Survivorship, Assurances


1.
it

We may

shall

easily transform Text Book formula (1) so that be suitable for application to select tables.

^m
But aai-lii/ ,

=42
,

,\

up , (1 *x-l r^

) + aa;:i/+l'' and
,

x:j/-l

=
)

w (1 + a%+\;y' *%:y-l^
,

Therefore

A^ =

J { A^

+ ^(1 + a,

f+1

- ^(1 + >+1

Hence

A MW " A

HAWM +^w (l+aM:M+1 )-^M(l + w+1:M


=
1

)}

Again, since

- d(\

+a

),

we may put the formula


given
tables

in a

form

for

finding the

value

of A*,

of

joint -life

annuities.

Ky =
2.

iU -

*(*

+ %) + %(! +

a,

s+ l)

- *Pj} + ,+!
annuities

)>

In calculating the

necessary joint-life

or

the

suitable
17,
it

commutation columns

as described in Text Book, Article

is not at all essential that both (,r) and (/) be taken from same mortality experience. The two lives are of quite different classes, and the risk will be most accurately calculated by taking their mortality from different tables. The standard

the

basis at the
in

present time

is

to take the

table for

(if)

who

the position of an annuitant or life-tenant, and the O is table for (x) who comes into property on the death of (y),

and desires to insure against his dying before that event.* Tables of A 1 and P 1 on this basis have been calculated by J mj xy
* See,

Life Tables, 1898;

however, the word of caution on pp. vi. and vii. of British "Select Tables, Whole-Life Assurances Males.

Offices'

chap, xm.]

TEXT BOOK PART

II.

241

Messrs Baker and Raisin. Further, it is wrong to calculate the from an aggregate table, for (x) is usually the younger life, and in such a case his mortality would be underestimated, while that of (y), the older, would be overestimated, both
values
errors operating against the office.

3.

Text Book formula (7)


2 A xy =

may be shown
,|q Ti-1 *xy
I

simply thus

2tj

= =

2( jo Ml-1
|

?x

ti-1

,|oM ?xy'
I

1v n

7i-l

I
I

1 , qx - 2uTi-1 o xy l *x
I

= Ax Again

Ai
xy

A*y =
2

2jj m

71-1

in
|

JX1/

= =

2(

1(7
|

lfl-1)

*>7i-l

'*/

71-1

*:ry'

Stj^C

^Tt-l

,1(71
J

,1(7 71-1 ^an/


|

+ 7t-l ixy) Jff 1 f


|

A
!/

Axy +

Ai
xy

All the 7e.rf Book formulas (9)

may be

similarly deduced, but

by summing from

to n only.

Thus

A' =
ft

a^/

2?u A

,i(i
ft-1
|

J xy

= 2%r

jo -

jo

=
4.

\n

A xy -I\n A 1 xy
i

An alternative
1 1 l

formula for

A^ may be

found as follows

\n

Axy = Axy -v nn pxy A~ a:+7t:y+7i

^Wftiy+ft-l,

s+ ft-l:y+ft \

ti^A +:+

pj+ii _ 1

p^.j

= 1(, A -.l^tl+ii^iil) / \
-tf

ft

XJ/

*y-l

*x-l

242

ACTUARIAL THEORY

[chap. xin.

5. The Text Book formulas (8) may best be obtained by deducting the corresponding values in (9) from the whole benefits.

Thus

|A 2
I

xy

2 = Axy -

I
|

Axy
2
|
I

= (Ax -Ai )-(l % A x v V %y' =


6.
life

\n

AM
xy J

Ax - n\ Axy |
1
I I

The application of Davies's and De Morgan's types of jointcommutation symbols respectively to the case of A^ may be
in

shown more clearly than following manner


:

Text Book, Articles 14 and 15, in the

We

have

Axy =
1

-rT
I I

'Zv t

dx+t-l
,

,, , y+t-i

Now

under Davies's form, where x


x+t-l y+t-i
__

>

y,

we may
y+t-l

write this

D xy
YiiX+tfl
v
l

x+t-l

x+u^

y+V

2D xy
7

4-7

x+t-l y+t-l

x+t-l y+t

x+t y+t-l

-7

x+t

y+P

2D xy
t

,(N - , x 1
>

y-

)-(N x ,+N x-1 :y' 2D xy


,

y-l

+N xys

Also where y
'

>
q

x we have

S/oV+ X l

x+ t-l

+t-l

x+t-l

+t~

x+t y +t-l~ x+t

y+^

2D xy
(N x-1
,
>
:

y-l

-N x '.y-l' + (N x-1 y -N xy/ ) J


^
,
:

2D xy
Under De Morgan's form we
x+y
St)
2
(.

shall write

x +t-lh)+t-l

+ lx+t-l iy+t~

x+t

y+t-l~ lx+t

y+t)

2D xy
(N ^
, x-1: y-l

-N xy' + w4(N
) ^

se-1

:i/

-N %;y-l'

,)

2D

chap, xni.]
7.

TEXT BOOK PART


Ai
vd
-.

II.

243

To

find

-=:.

x:y(t\)

Al

+ v2dx + l +
,

+v dx+ t-1
l

4.

+' V+i
I
I,

x+t+1 y+lj
x y

u(

I /

vd

,1

+ 2

~7

<i

x
A

x+t

Al

Dx+t
x

In practice the following approximation is sometimes used for finding A *.^ Find * sucn tnat e = e +<, and then write
:

1 -gr x:y(tl)

Al
xz

8.

To get the annual premium


P 1 =r =
x:y(tl)
=

in this approximation

we should

write

AL

1+axz
true

value

To

find

the

of
ov (*)

A l.m
out.

either

w
for

1 -=r Px:y(t\) we have the

divisor of

1+ ^:^j

1+

asthe re rf Book P ints


-

Ai
(a) If

we take P*.^ =
in

x:m)
,

i+ax:y(T\)

an option
For
if

is

given which

is

not allowed

the

calculation.

(y) die early, Qe)

may be
a less

able to secure an equivalent benefit at his then age for


that payable under this contract.
rath

premium than
that Pj^-.n

Thus
it

if
is

(y) die, say, at the

end of the

year where n

is

small,

possible

<

P*."7^V

minor option may


the last
year's

also

be

exercised in respect

of the

fact that

premium

covers on the average only six months' insurance.


(V)

On

the other hand,

if

we make P 1

=r.

. Ax:y W
1 ,

a risk of

xy is being run. For if (y) be on his deathbed and die one payment of premium, the office is granting a /-years term assurance for a quite inadequate single premium. The former method is probably the better.

another kind

after but

9.

To

find the value of


t

an assurance payable only


(y).

in the event

of (x) dying within

years after the death of

244

ACTUARIAL THEORY
The value of the assurance

[chap.

xiii.

x y

x y

Vdx

ly

+i +

M
+
.

X+ l

y+n+

l^U-I ty+t-j + V^+t


I

y + t+i

x y

~T~ x
x

%+t

* + t y +i

+ v2d*+t+i ly + H +

T~ly x+t

- A1 - - A
=
1

+
1
.

x+t
x

A
:

Ax:y(t\) - Axy
is

This result

obviously correct

for the desired assurance

is

equivalent to an assurance payable should (x) die before (y) or within t years after the death of (y), less the assurance payable

should (x) die before

(y).

10

A1 = ' xyz

S"

x+n-l
I

y+n-j e+n-j
I
I

9u x+n-l~ x+n y+n-1 lv

r~

%
y
I

y+n

z+7t-l~f" z+n

m
z /

(i i x+n ' 1 y+ n - 1 z+n-1 t-l s}"(


x y
I I z I

x+n y+n-1 z+7t-l


x y z
I /

+ +
,

x+n-l y+n-1 z+n


x y
,

x+n-l y+n 2+Ti-l


,

x+n-l y+n z+n


x
y
z

m j m ii m
2

I x+n y+n-1 z+n

in
x y
x

x+n y+n z+n-1


y z
-)

x y

ill
x y
z

x+n y+n z+

m m

i,i,,

(A
4 V
*

JHziAlzJ

a
|

x-l:y-l:z

fl

:y-l:s ^.^zlitii^

Vl:-1
a
,

Px-l:y-l '
\
\

Py-1

P-U-l

ag;:i/:z-l

s-1 :y:z

chap, xih.]

TEXT BOOK PART


K

II.

245

since

^VH x+n-l y+n-1 z+n-1

IIIz x y

x+n y+n z+n \

IJJ. x y z

Formula (21) of the Text Book exceeds the above

result

by

_ x:y-l:z-l _ x-\:y-\:z _ ax-l:y:zPy-l:z-l


a

a
\

:y-l:z

Px-l:y-l

Px-l:z-l

Py-i

+
which, however,
is

x-.y.z-l
l

x-l: y:z\

a small quantity.
also
1

The above expression may

be written in the form


!

A lyz = HA^-P^l+, +l!J ,J + p,(H-i! +1:f )+p,(l+ flc:>:f+1 ) ,


- "P^C 1
Since
fl

+ Vl y+lJ - ^J 1 + Vl
:

.+l)
1

+ Vj} + %
etC
-

,+i .+i)}
:

,:,-i :,-i

= ^:-.,-,(

+V:

:)

In this form the expression

may be

applied to select tables.

11.

To prove Text Book formulas


d ^ _ 2d x + n ~ 1
/

(22) to (27) inclusive

we have

j\2
**
1

y
I

y+n-j

z+n-j
I

_ "

d y7i +-!

Az+rc-

_y

j,

dic+n-1

I jz+ti- 1

Az+7t-$

11z %

IIIz x y

= Ai -Ai xz xyz
^2

_ gt
'

,7t

+-!
(

y+n-j
I

z+n-j
z

II
.

z+n-j
z

y+n-j
I

\,n

dx+n
,

/ / -I t y+n-j
,
,

+
,

z+n-j _ q
,

.1, A y+n-j z+n- j \


,

11z y

A a^ +A az -2Ai
1
1

aa/3


246

ACTUARIAL THEORY
A.8 xyz

[chap.

xiii.

_
~

Vj,ti

d x+n-1
i

-Iy+n-j x +
I

'

-Iz+n-j
,
,

_.

2i,n

+"-! _
x

2j)

*+"-!
x

4-

2i

dx+n-1
I

xi 1,1,
y

V+n-h - Yv n x+n-1

z+n-j

V+n- l
I

z+n-j
I z

= Ax - Ai - Ai + Ai xy xz xyz
Al
*
:

V;t

x+n-l l y+n-*
4

z+m-$
/
z

z+?t-$
/

y
I

y+ft- 1
v

V
I
.

+
,

y+n-j
,

z+

I
't

Y,M x+n-\ ( y+n-j + z+n-j lv


,

r~\~r1

y+n-j z+m-A

= A xy +A* -A xyz xz
1

(It v

should be noted that therefore


z+n-j f x+n-1
z
1 1 = Axyz +Axyz

Ax = A x - A3 yz xyz'
1
:
,

Y-,71

y+n-j
j/

y+n-1
y

x+n-j\
a;

Axy:z

%,)!

^ Jd ^ z+n-j x+n-1 _y__y+n:: j


l ,

-I

dy+rc-1
,

/
a;

-/x+n-j A
)

z
I

y
,

y
,
,

yM +"-
,

,/d
(

+-!
,

i z

+
,

dy+n-1
,

d d ,/ 1 y+n- j _ y+n-1 x+n -j _ x+n- ,/,

x y

n
y

i = A1 + Ai - Ai - A xyz xz yz xyz

12.

To

find

2 Pxy

p2

A x -A xy
1

In granting such an assurance by annual premiums, (y) must be medically examined as well as (x). For were (z/) in bad health

and about

to

die,

the
,

office

assurance to (x) for v /

2 Pxy' which

is less

would be granting than P


.

a whole-life

chap,

xiii.]

TEXT BOOK PART

II.

247

13. To find the annual premiums corresponding to the assurances in Text Book formulas (22) to (27) inclusive. In obtaining the statuses for annual premiums, care

must be

exercised that premiums are not taken into account beyond the period when they certainly cease to be payable by reason either of the benefit being paid or of the chance of its payment having passed.

p2

f
1
2

A2 xyz

1+a xz
must be medically examined.
A2
"U"

Here both

(x)

and

{tj)

P2

= ""

1+ax:yz
A3 X1IZ

P3
*n*

= " 1+a X
three lives must be examined.

In these two cases


pi

all

x:yz

_ _ ~

Ai
\

x:yz

1 -^, Px:y(t\y

_ +ax:yz
" since, e '*=>'' '

The same
if
(z)

difficulty arises *

as in the case of

die

early,
^\:y~z>

say

during

the

rth

year,

then

possibly

^xTf.y+t
office.

<

anc* an P tion
is

may

be exercised against the

The

alternative

to

1 make P*:* =

Ai 1+a

ivH.
xyz

with
is

a corresingle

sponding risk of granting the benefit at an

insufficient

premium,
examined.

if (z),

say,

be on

deathbed,

(x)

alone

medically

1
ixy'-.z

= Pxy:z
3

248

ACTUARIAL THEORY
Then
finding

[chap. xnr.

such that a w

Ai
Also

A- = xy'.z
S

Ai
xz

= ayz we may J - = Ai + Ai - Ai x'.yz xz xy xw +Ai -Ai -Ai


yz

write

xyz

xyz

Find
have

w
:

such that a

Axy

z 3

= a and w' 1 = Axz +Ai - Ai - Ai yz xw yw


,

such that a

and we

,.
1

15. To find the single and annual premiums for an assurance payable on the death of the survivor of two children, ten and fifteen years old respectively, provided both die before attaining age twenty-one during the lifetime of their mother, aged fifty.

The
I

single
1

premium

is

11

A 10:50 +|Ai -(i A-i- :50 + T 6 15:50 \| T


6
'10:151

16:21:S6
,

Ai
5

F)
10
:

16:56/

15

50

To

obtain the annual


a
|6
-

premium divide
a
|6

this expression

by
i6
:

i0 ISO

*"

|6

a iB

:60

i0:15:60

+^

6^10:50^

e^ie)
|s

56

16.

To

find

Ai _ ao xy
:

A\.~ = ao'.xy
=

Ai - + AJ --AAr a;xy b'.xy 'aW'.xy


(Ai
**

ax

+Ai -Aiaxy' + )
ay
1

(A} ^

bx

+AJ -AJ ) by bxy'


1

( A
V-

<abi:x~

_L
'abi-.y

>aW :xy>

(Ai
v

ax

+ Ai + AJ + Ai ) ay bx hy'

-(A* +Ai +Ai +AJ v axy aby bxy abx


^

+Ai+Ai) abx
aby'

abxy

dbxy'

From observing the method


be worked
17.
out.
2 Awxyz = Awxyz +Awxyz +A wxyz
2 2 2
1 1

of arriving at this result, any


*
,

similar complicated benefit of the form A-, *

abc

,
:

(tti)

xyz

()

^ may
j

To

find

2 Awxyz

1
1

-Ai ) + (Ai -Ai ) + (A> -A ) ^ wyz V wxyz' \ wxz wxyz' wxy wxyz' = (Ai +Ai +Ai )-3A! > wyz wxz wxy/ wxyz
(Ai
'

'

p.

xm.]

TEXT BOOK PART


find
3 A wxyz

II.

249

18.
3

To

! 2 Awxyz = Aw(xy)z +Awx(yz) + A n w(xzyy


1
1

A
1

(Ai
^
i

-Ai -) + (Ai -A* \ wz wz: xy' wx wx

-) yz'

+ (Ai -Ai -) wy wy: xz'


v

1 1 1 = {Awz -(Awzx +A wzy -Ai )\ ^ wzxy' 1 1 )} + {Ai -(A* + Awxz -Awxyz-' ^ wx wxy
( >

-Awyxz')} = (Ai +Awy +AM-2(Ai +A wxz +A' + 3A wx wz' wys'


+ {Awy -(A v
1
i

wj/a;

+A
v.

-uji/s

>

was/

wa^/z

19.

To

find

4 Awxyz

4 8 Awxyz = Aw -Ai -A* -Awxyz wxyz wxyz

= A w -A} -{(Ai +Ai +Ai )-3Ai } wxyz wxz. wyz' wxyz' wxy
l

>

1 1 1 -{(A* +Awy +Ai)-2(A! +Ai + A wyz' U3A wxyz>} v V wx wxz wz' wxy
*

1 1 = Aw -(A 1 +Ai +Awz 7 + (A wxy +A wxz +Ai )-Ai ) ^ ^ icy wyz' wxyz
1
itfffi

Or

4 Awxyz = Aw -A w xyz = Aw -(A wx +A wy +A ^


1
:

) wz''

J 1 1 )-A wxyz + (A wxy +A tvzz +A wyz-' ^


1

20. Text Book formula (29)


similar to that already

may be

easily obtained in a

manner

shown
I

for formula (14) of

Chapter X.

a
d_

v*.

Jo
a

p tlx dt

v*l

dx

,p

), dt

But

as

shown on page 212 ^jj, =


a

0*.

- fi+ ,)A

Therefore

-r-

dt f A^-^+t) Pxy
t

And

since

u rxa xy

-A xy
1

(3. +1

~ Vi:) approximately

250

ACTUARIAL THEORY
In the same way, since
a
xyz

[chap.

xiii.

= = =

J
I

v'p dt t^xyz
vt (

dx *v

Jo
I
I

\dx*
vHu, ^.r"a;

p7' \p
4

dt
v

-u ,,vp ~x+t)t*xyz
1
aa/z

eft

im r a; a aa/z

-A

and since

d a
fl r

.
xyz
1
ici/2

= aa-f 2 ^
,

j/2

-az-lia/z') approximately rr j
,

we have
which
21.
is Te.ri

u, r s a ki/3

+h(ax-1 :yz -aaj+l ys / ,,. ) ^


v
,
:

2Joo formula (31).


for

We

might obtain the expression


:

in

Text

Book

formula (40) as follows

si =
=

rr/o

'*+''*+'* ~a;+S

TT
C'

'

'

s+e v+i
'

iV

' //

+ d'Tz

\-jyix+t
.

y+t

+t

+^

+t dt )

^it/ rt
""

-+

^ +>-+* + /V< )(

c^

+ c^
in

^
of Gompertz's law, the method

22. Following,

the case

adopted
/.
I.

by Mr

Colenso with

regard to Makeham's

formula in

A., xxxi. 342,

we have

this expression:

*y

x y

Jo

*+t y+t

b^
t-7
I I

rv c
l

J0

,J t x+t y+t
,

dt

= ra') (a! u, v i
=
/j,

being calculated at rate


j,

j '

where

1+1

\+i

:)

a'

{a

being at the same rate


u,

and w being such that

= nx +/x J a ry ). *w

'

II.

chap,

xiii.]

TEXT BOOK PART


rule for
:

251

23.

Under Makeham's

Text

Book

formula (38)

may

also

be obtained as follows

yJ u

~*y - Aa + -fi{? H* +

l
t

y+ t

Bctdt

= A

%+

^ n7
+
"v

"V

Bc* +t+Bc!,+

-r^Aa"y +__(A*y -2Afl*r c* + cv &> d*


cx

+ cv
ti*
-

-A_
c?

+ cy
cv

Acr
*y

(f

+ cv

A *v +

c*

+ cy

log s a , since w'

A=

log s

Also

Axyz
1
. .

(ro)

X
'

(
xyz
.

vH

(m)

_,, ^, x+t:y+t:z+t:

(m) V
,

,(A + Bc*+

)<fc
/

= A

(to)

+
H

J-^ f *+ :,+* :.+,...


aa/s
. . .

(m)

Bc

^
/

(m) y u

= Aa !(?... (m)

c*
a:

+ c + c* + ...
i

'/

to terms
to

Z
a^/2
.

(m)

.Jo

*+* :y+ :*+*... (m)

x (Bc +

+ BcJ/+ + Bc*+* +
(
.

m
,

terms) <ft

^...(m)
....

If"
ca:

+ C + CJ +
!/

to to terms

x 0*.+, + /*+,

+ /*,+ +

to

, .Jo " '*+*:+*:+.. -(m) m terms - m A ) *


i

arc/z

(to)

= Aa
sty*

... (m)

h ^

c1

+ c* + c2 +

to ot terms

f v

Aw

()

- mAa

**

W
. .

c*

c*

+ c* + c2 +

to

terms
to m terms) + c" + <f + + cy + c* + -to m terms
(c
-

mcx cx

... ()

'

252
(putting Kr
c^

ACTUARIAL THEORY
+ cV + c 2 +

[chap.

xiii.

to

m terms = mcw
,

, '

and a xyz

(m)

= awww

~\
. . .

(my

=
ffl(<w

Awww

(m)

qw

log * a & w u ww

(m)

24.

Mr

Colenso in the paper already mentioned deduces the


:

following expressions

A*
1

J:,I

In J "

^/A vHx+t Iy+t J _,


RpX
f
JIn "

+ Bc*+*)dt

x y

x+t v +t

= Adxy +(ux - A)d'xy v


'

(a'

**

being calculated at rate J where j

\+j

l+jj

= AWW +(.X -A)a' WW ^


'

(a'
\

rate ww being at the same


*=>

;',

'

and w such that 'x +u = 2u ) a ry >w'


'

= log s dww + (u,x + log s)d WW O O /


\l

since

A=

- log s. O

Similarly

A
And
1

:cyz

= -logs

www +

C , v

+log*W www o y

generally

Axyz
Mr
Basis

. . . .

(m)

= -log*

www

(m)

+ ( ^r

:c

+log.s")o' o
/

www

,
.

(m)

Colenso gives tables of

-log
1

log

(/j

+log

s),

and

lg,a' 10 www
:

from which values of

A xyz may J

be easily calculated. J

Carlisle

Table of Mortality, rate of interest 3 per cent.

25.

Text Book formula (41)

may be

obtained thus

chap, xhi.]

TEXT BOOK PART


(m)l :abc
.

II.

253

'xyz

()

1
-

xyz ... (m)

J ate ...(.) J n

r vh*+' ^ x+t

: :

y+t z+t !/
:

(m)

.1

a+t b+t :c+t..


:

tn)
v

{mA + B(c*+* +
,

c+'

c*+*

+
x

to

m
z
-\

terms)}*

_ m \n xyz
X
/

.
.

(m)
.

abc

(*)
/""
/

c*

c + cv + c to m terms + cv + c* +... to terms + c + c6 + ...

to

ra

terms

1 'xyz

y'Z
n u

(m)

ahc

(ny

x+f.y+f.z+t

(m)

a+t :b+t:c+t

(n)

{/*,+,

+
s

/*+,

/*,

+
c

to

terms
t0 n terms

+ Pa+t + Pb+t + P
c
x

+t

w + )A
re
.

+ cy + c + to m terms c" + cv + c? + +ca + c b + to (?n + n)


n(c
x
z

_
terms
a
xyzabc
6
. .

(m+n)
.

+ cy + c + ---tom terms) - ra(c + c + to (in + n) <? + cV + c s + + c a + d> +


.
.

to n terms)

terms

x
since

log &

(8xyzabc
.

,
. . .

(m+n)
,

A =

log s.

26. Text Book formula (42) may be obtained directly in a manner which throws light on the ordinary assurance of the same kind proved in Text Book, Article 21. (1) An assurance The benefit may be divided up as follows
:

of death of (x) provided (y) be then of 1 alive, and (2) a temporary assurance for t years to be entered on by (x) at the death of (y). Thus

payable at the

moment

/-co

x y

Azy + In x y
1
I

/-co

vnl

I ix x+n y+n^y+vS

(Ax+ii - v\px+n A x+n+U Ll )dn


,

t<-

v'p _2 = Ai + A xy - -r^ f xy I I

/CO
I

vnl

x+t y J

x+t+n y+n ry+n


I
ix
.

Ax+t+ndn
, .
,

\-

vt
t

Px X iTt:y

254

ACTUARIAL THEORY

[chap.

xm.

EXAMPLES
1.

Find an expression
(x)

for

A A

on the assumption that the

chance of

and (y) dying in the same year may be neglected.


1

For the complete value of

we have the formula

But as the chance of both deaths occurring in the same year may be neglected, we omit the second term in the expression, and we have for the value of A 1 under the conditions specified r
xy

2v n (

\n-\ r x

.p

W
J

p n> ayn 1 y
p *-i=y

p)

- p )

V x-1 ,

This benefit is of use when studying formula (11) of Text Book, Chapter XIV., and its modification in formula (14).
2.

Given the values of single- and

joint-life annuities, find the

annual premium payable during the joint lives of (x) and (z/) for an assurance payable on the death of the last survivor of (,r) and (y), but half the sum assured to be payable on each death if (x)
dies before (y). Do you see

any objection to making the premium payable


?

during the

life

of the last survivor

The
half
is

benefit splits into


is

two parts

where

(x) is the survivor the

assurance

payable on his death, and where (y) is the survivor payable on each death. Therefore the whole value is
2 A2 +|Ai + |Axy 2 xy * xy

= (Ax -Ai) + iAi +i(A -A') * \ * v xy' xy xy'


y

= 1-^(1+^ + ^-1^)

chap, xni.]

TEXT BOOK PART


is

II.

255

As the premium payment side

to be payable throughout the joint lives the

= P(l+o
and

P = to

-d(l ^

+ax +la -laxyJ ) - y ? 1+ami

The objection
life

making the premium payable throughout the


is

of the last survivor

of the contract, then

| payable on his were in good health.


3.

were to die in the early years might be able to secure the benefit of own death at a smaller premium, provided he
that, if (x)
(?/)

Deduce a formula
if a life

payable
lives five

for the annual premium for an assurance aged x dies within the next five years, or if he years and dies after another life now aged y.

The

first

part of the benefit


five

is

A*. .
5

for the second part, if

(jj)

also lives the

years, ' J

we have
.

v ^p r
b

A-^r -=, and xy x+b:y+b'

if (y) dies '

within
is

five years, v 6

(1

p )A
-nc y+b

Therefore the whole benefit

A x:5\ + ^.Pxy A-^Ti 5' x+b


1

+ Bb^x^- 1 - b P y' A x+b eP C Sr ) s


,
,

= Ax -

t 5J x

BAx+b + 5b*xy\ x+b - A-^r .y+b' ,p (A i( x+b -th)


.
.

+
c

JJ

c 5 J" x

A x+b -D 5b 1 xy A x+b ,p
,

= A x - 5 5 1pxy A-? :y+b -^ x+b


Similarly the

payment

side is

P{%

61

+ V \Pxy\+b + V %Px( l - bPy)

VJ

= Pa
a;

A
Hence

P =

-*

1 v b V A x+b:y+5 & xy

Express the value of an annuity-certain for n years, payable quarterly, to begin to run at the death of (x) if he die after (y).
4.

256

ACTUARIAL THEORY
On
the
is

[chap.

xiii.

required contingency happening the value


Ja^-r calculated at rate of interest
is

of the

annuity

Therefore the

value of the annuity at the present time

5. Deduce a formula for the annual premium for an assurance payable on the death of (,r) if (^) has died five years or more before him, the premium to be payable during the currency of

the assurance.

The

benefit here
if

is

assurance payable
(y), that is

equivalent to an assurance on (x), less an he dies before (y) or within five years after

Ax -Al -=r x:y(b\)


The premium
will

be paid throughout the whole of


is

(x)'s life,

and the payment side

equal to

whence

P =

Ax - A
_

-~.

'-"^

6. State a formula for the annual premium for an insurance payable t years after the death of (x), if (?/) has survived him and died before the end of the t years.

Benefit side

tt'fetl"-*
\ N

x+n ~
v.

It
l

V+n-l
ii

Vpn-}

x+n-1
r.

It/
it

v+n+t-j\
*

xy

ry

x:y+t'

The premium
with
(x)

will

be payable so long as
(x)'s

(?/)

survives jointly

and

for

years after

death,

if (xf) lives so long.

Therefore payment side

= P(l+a

.zsjO

Equating the two sides we have

__

xy

1 y

x:y+t'

chap, xrn.]

TEXT BOOK PART

II.

257

7. Give the formula for the single premium for an assurance payable at the death of the last survivor of (x) and ( y), if that occur in the lifetime of (z), or within t years after the death

of

(4

1 {^""TT ( A x+t~ A rt:z)f


i
}

+
_
( j^
1
"-

A
{

.-%f(V:

A ^:,)}

x+t y+t ,j^


xy

D xy

x+t:y+t

-A -A x+t:y+t:z x+t

:y+t :z) f
I

-L.

^l

8.

Find the annual premium


(x),
(.r).

for

death of

unless (^) die within the

an assurance payable at the first n years and in the

lifetime of

benefit we must deduct from the ordinary assurance the value (1) of an assurance payable should (x) die after (y) within n years, and (2) of an assurance payable should (x) die after

To get the

on

(x)

n years,

{jj)

having died within n years.


is

The

benefit side

Ax -{I\n A 2 +(1- n*y'n\\A\ p) v xy = Ax -|\n A+l\n Axy - n\ Ax +v nn*pxy A x+n x = \n Axy +Vnnxy Ax+n p
l

x>

which
(y)

is

correct, being the assurance payable should (x) die before


(x) die after

within n years, or should

n years,

{jj)

having

survived that period.

The payment

side

is

Pfl
<

+axy:n-l\ nn*pa.,) r,+v xy x+n'


I

And P =

\n

Axy +t"n*xy Ax+n p


1
,

\+axy:n~l\ + v nn*xy a x+n p


rr-.
,

Find the annual premium for an assurance on the life of money to be payable at death or on the expiry of n years, provided that in either case two other lives (y) and (z) are then in existence.
9.
(x),

the policy

258

ACTUARIAL THEORY
The
benefit side
is
I

[chap.

xiii.

\n

Axyz +vnn^xyz p
1

And

the payment side

is

xyz:n-l\'

Hence

P =

|ro

+Vn p

^?

Give the formula for the annual premium for a temporary 1 payable in the event of (x) dying before (y) within n years, (s) having died previously.
10.

assurance of

The

benefit side

is

= A^ xyz
1

\n

Axy -I\n Ai xyz


1

will not cease on the death of (z), and therefore does not come into account in settling the currency of the payment side, which accordingly is

The assurance
life

that

pn+o
And P
n
\

Ai -I Ai n xyz xy

11.

Deduce the annual premium


if

the death of (x)


after (s),

for an assurance payable on he attains age x + n and dies before (jf) and the premium to be payable throughout the whole period

of the status.

The
As

benefit side

=
?i

1 1 A xy - n\ Axyz
I

in the previous question the death of (z) will not disturb

the continuance of the assurance, and therefore the be payable so long as (x) and (^) jointly survive.
side
is

premium will The payment

accordingly

P(l+fl

)
vz

and P

|A1
"1
"ti

- |A1 n x
\

\+axy
for

12.

How

would you arrive at the annual premium


last

an

assurance payable at the death of the

survivor of three

chap, xm.]
lives
is

TEXT BOOKPART

II.

259
life

aged 40, 50, and 60 respectively, provided a dead before the happening of the death of

aged

>0

the survivor?
a
i

The

benefit side
side

2 = A = a 20:40:50:60 ^40:50:60

40:50:6 0:20

The payment
Hence

= P(l+a ^ 40
A
60
:

50

^ 60'

P =

A 40

60

40

so

go

20

+
40:60:60:20
40
50 ==

%
: :

50

60

A40
40

+ 20
60
:

A 50
_

20

+ A 60
:

20

A 40
:

50

20

20

~~

20

40

60

20

~
:

50

60

20

50

60

+ 20

40

50

60

20

40

60

60

+ A 40 20

60

60

20

13. A sum of 1 is to be divided among such of the existing children of a widow aged w as may be alive at her death. What is the share of (,r), (a) assuming that there are two children aged

x and y respectively

now

alive

aged
both

x, y,

now alive, (6) assuming that there are three and z respectively ?

(a) If
A,

but

if (y)
(a-)'s

value of

(,r) and (y) are alive at (w)'s death then (x) receives has died previously (x) receives 1. Therefore the share is
1 AA wxy +A2 * wxy 1

= AAi +(Ai -A* ) A V wxy wx wxy-'


1 = Ai -AAwxy wx
->

(JJ)

If all three are alive at death of


alive,

(to),

(x) receives
;

and one other only are then


is

he receives A
1.
)

and

if

A if (x) he alone
;

alive at death of (w), he receives

Therefore his share


)

is

AAi o

+"i(A2 + - * wxyz wxyz


1
1

2 Awxyz' + (A +A V wxyz wxyz-' 1

21

12

= AA wxyz +i(Ai -Ai +Ai -Ai ) * * ^ wxz wxyz wxy wxyz'


1 + (Ai -Awxy -Awxz +Ai ) ^ wx wxyz'
1

1 = Ai -AfA wxy +Ai ) + AAi " ^ wx wxz' wxyz


=>

14.

Given four
and

lives (x), (a), (6),


(x)'s

assurance to yield at
lives (a), (6),

(c)

and (c), find the value of an death 1000 if one and only one of the shall have predeceased him, and 3000 if

260

ACTUARIAL THEORY

[chap. xnr.

two and only two shall have predeceased him. The expression to be reduced to assurances which determine on the first death.

is

The value of the assurance

is

1000A xaoc + 3000A3 xabc


2
.

1 = 1000(Ai +A 1 +A xbc -3Ai ) ^ xaoc-' xac xao


,

+ 3000( A xa + A\ + Ai - 2Ai - 2A 1 - 2A\ + 3Ai ) V xbc xabc J xac xab xb xc


1

3000 (A^ +

Al + A L) - 5000 (A^ + A^ + A\J + 6000 A^

15. Three partners, A, P>, and C, aged respectively 30, 35, and 40, possess a capital of 10,000, and their proportionate interests in the business are 2, 3, and 5 tenths. How would you calculate the premium for an assurance to cover the risk of having to pay out the representatives of the partners who may happen to die first and second ?

The

value of the assurance required

is

2000A i
It

sFTlo

+ 0OA L

-.

aoTIo

+ 5000A i,

^
2fl
1

would be advisable that three separate policies should be by single or annual premiums, one for each part of the above benefit. If, however, one annual-premium policy is essential, the payment side will be
effected, either

P ( 1+a807l57lj) = P ( 1+fl30:S5 + a30:40 + a35:40oil


Hence
I

30: 8 5:4o)

qa

P = 1000
possible

30:35:40

36:30:40
fl!

1-5A

40:30:35

1+as0:35 + a30:40 +

35:40~ 2o 30:35:40

It

is

that

exercised against the


early, say

office in

in the first
viz.

under such a policy an option may be the event of one of the lives dying year. The premium for the remainder of

2000A1
the benefit,
at less

2~ +3000A1 2^i,
+ a31
:

will

probably work out

36

than P as found above.

16.

Give a formula

for

P*
,

the annual

premium

for

an

assurance on (30) payable in the event of his dying within 10


years or before (60).

chap, xm.]

TEXT BOOK PART


is
1

II.

261

The

benefit side
1

= A 30:10|:60 = A ^30

:10|

_4-Al ^ ^30

CO

-Al A 30:60:ioj

The premium will be payable so long as (30) survives jointly with the survivor of 10 years certain and of (60), and for the payment side we have
^on SO
. in, . en :10| :60

SO

10|

:60

30

lofTio '

30
1

ioj

+ a 30
1
i

60

~ a 30

60

ioj)

Therefore

1 = P30 10|
:

=
:

Aso:io|^ A 30:eo -A 30:60:io| -+ 1

60

o
30 :10|

T 30:60 _

30:60:10]
it is

With the premium payable during

a status such as this,

possible for an option to be exercised against the insuring office


in the event of (60) dying within 10 years, say at the end of the

tth year.

For at that date, provided (30)


.

is

in good health, he

may
less

obtain an equivalent benefit for Pg^rr

10 _,,

which might be
it

than the premium found as above.

On

the other hand,

would not do to make the premium payable so long as (30), (60), and 10 years certain survive jointly, unless evidence as to the health of (60) were produced. For if (60) were dying, then (30) would secure a short-term assurance for 10 years for a very inadequate single premium.
17.

value of

Use Mr Colenso's tables (J. A 3i5:72:79 and <->P :T1 :W


,

I.

A., xxxi. 354-6) to find

the

5
since

72

79

= "

lo S fl ~35 72
:

79

0*116

+ lo S *) " 8 5

72

79

=
/" 5 3

-log
u
/

72

V73 71-73: 71-73 + <>35 + l0 S*Kn-73: 71-73: 71-73 + /"-9 = -01020 + -06558 + -11692
.9
:

-19270
3 /*71-73
.

= Now
-log,-71
.

7S:71
(,u

73:n

73

-02930

and

+ log,) = loo- a' iu .. = 10 71-73: 71-73: 71-73


log
10

3-29072
-68205

s6

3-97277

log -00939
]0

262
Therefore

ACTUARIAL THEORY

[chap.

xiii.

i 85

72

79

-02930

+ -00939

=
(

-03869, or 3, 17s. 5d.

very nearly.

"J)P 1
BB

:72:79

r^f^ 2^ K
3B
:

approximately.
79

72

03869
4-053

=
18. Investigate

-00955, or 19s. Id.

very nearly.

an expression for

a , and show what approxi-

mate conclusion law holds.

this leads to

on the assumption that Makeham's

-a

dx

xn

,
\

d = -r-

f
I

dx)

v\p dt tlx

r/ufy
1

)dt

dt
l

= =
On Makeham's
-

'xj

fn
I

v* t p

dt

fn
I

'

t*x r x+t
,

p a

dt

a a

. xn\

A1-, xn\
p. =
( (c (
'Bc x (c t

hypothesis p

1),

and therefore

dx

-a=-'Bcx *l

Jo

-llp xdt H
we
see

Considering the definite integral,


either
(a)

that

it

represents

The value of
;

a temporary annuity with increasing pay-

ments

or

(6) The difference between the values of two uniform annuities, one calculated at the ordinary rate of interest, say i, the other

calculated at rate J such that j

l+j

1+2

chap, xin.]

TEXT BOOK PART


that on

II.

263

19.

Show

Makeham's hypothesis J r
y,

=
the

"v*

31og

- s-S

for
O

all

values
>x
'y

of
''z

x,

and

z,

which

satisfy

equation

lg*

"

Mx + lo g*
^r*%
i^y

Since

>z

iog*

/\+ lc g*
B(2cc -c-c')
Be
2c*

c"

c~

Therefore

Sc*

= =

logs(2c* -c* -c)

log *{ 3c1 -(cx


c*f31ogjj-S)

+ cu + c*)}

C-

+ CV +

C--

^-T^
it

But by Text Book formula (41)

Ti v
ij/z

_ =
'

rX c cx

+ cy + cz
for

A A xy* _

C"

-t' 1

cf

+ cv + c*

logtftf

substituting 1

- Sa^

A^
C

te

!^^log,a-

substituting for Sc*

its

value as found above

= =

cx

+ &> + C
logs
c*(31og s

c*

S)

logy
31og J - 8

264

ACTUARIAL THEORY
20.

[chap, xiii

Find an expression ^
d
di
*u

for

-^
di
-

a
*

dv d
di dv

*v

P dij dv
/CO

tPxv

Jo

tlxy

tv*.p

Jo

tlx

dt

21.

Give a formula

for the fine, to

at the outset, for the option to increase

be paid as a single premium at the end of n years,

without further inquiry as to health, the sum assured by a survivorship policy payable only in the event of (x) dying before (j/).
If,

premium

on the option being exercised at the end of n years, the to be paid is to remain at the rate of P * per unit for

the future, the difference between that

premium and the premium,


be charged,
this

which, looking to the effect

of
f

selection, should
,)
is

(PL.

is

(PL-

-rr-

- P \r

The whole value of


then
,

difference for the period after n years


[]+ [y}+n
:

D MM
If,

(V

M+ :[]+
when
,

pi
is

M[i/]A

yi T

lx]+n:[y]+nJ-

however,

the option

to be exercised, the

to be paid is that for a similar benefit at the then ages,

premium we must
.

substitute for
22.

P*

mlV\

in the above formula the premium r

P [y+n] [x+n]
i

with the proviso that,

select life, (x), desires a contingent insurance against (y) if he be alive at the death of (?/), he shall

have the option of converting his policy, as at the next renewal date, into a whole-life assurance at the ordinary annual premium applicable to his then age without medical examination. Obtain an expression for the net annual charge required for this option.
If the option is

assumed to be exercised
[x]+t~

at the

end of the

tth

year

its

value

is
(

ix+ty\x]+t

chap,

xiii.]

TEXT BOOK PART


its

II.

265
is

and the probability of

having to be exercised then


t-l\%ttP[x]

tfth

Therefore the value at present of the option in respect of the year is


" t - 1 %]tP{xV{x]+t
1

~ P [s+<]) a M+<
t

Summing

this for every value of

and dividing by a

we

obtain the addition to the ordinary


t-l\%ltP[xp-"[x]+t~

premium
lx

to cover the option

+ ty\x]+t

MM
P [s+<]Xa

=
23.

2
<-i|9[i/](

M+< ~
a

M 3 aM

-Fy)

M]

Show how

to find approximately the net annual premium,

on the basis of the

Makeham

graduation of the Carlisle Table,

at 3 per cent, interest, for

an assurance payable in the event of (x) predeceasing (y), (1) (x) only, and (2) both (x) and (y), being resident in a foreign country. It may be assumed that the extra risk is represented in the case of a single life by a constant
addition of -01 to the force of mortality at
all

ages.

A' 1
(1) K)

<>P'i
xy

=
=

+
dt

lv
,

where

A^

j^\p xt p/ x+t
J o

A' 1

xy

+ -01a' xy

both A' 1 and a' xy being calculated at a special rate of interest j xy


such that
;

+j

1-03'

7T,

where -logr =-01.


/"OO

Also

a' xy "

= .

v ( .p' ,P dt t" xt' y


v'r I .P dt 'V' P ,P xt 1 y
<

r
J

xy

found as above.

266

ACTUARIAL THEORY
()p"i
*

[chap.

xiii.

(2)

=
=.

A" 1
i+a
TOO

xy

where

A"^

J^\p'

xt P y ^ x

,.dt

=
both A" 1
1 xy

A"i +-015"
xy
xy

and a" xy being calculated

at rate v;

which

is

such that

CHAPTER XIV
Reversionary Annuities
1.

The temporary

reversionary annuity
I

\n y\x
I

a
to

a
7i

xy'

where (x)'s chance of receiving payments is confined to the first n years, must not be confused with the annuity to (x) after (y) for

upon only in the event of (y) dying n years. To obtain the latter we must deduct from the reversionary annuity, a the reversionary annuity after
life
is

which

to be entered

within the

first

n years should both lives survive that period, v n p

.Its

value will therefore be


(a
*

-a )xy'

vn

p m-rm/V

(a

x+n

ax+niy+n-

) 1

This again
n\

is

different
n\
x

from the deferred reversionary annuity


n\ xy
I

y\x

v n r (1 n px x

- l )a + v nn r xy ay+n\x+ll p n p y' x+n


, , ,

under which, as pointed out in Text Book, Article 5, it is not necessary that both lives should survive the period of deferment.

Another benefit to be distinguished from the foregoing is the annuity to commence on the death of (j/) and continue during the subsequent lifetime of (.r), but in any event to the end of n years certain from the present time. This is a reversionary annuity
on on
n\

after (^), a \, together with a deferred reversionary annuity


;

(x) after Q/), \a n y x


\

then
I

-i y\n\
I

+ %\ a y\x =
I

C-i ^ n\

~ a -i) yn\-'

+ ( \ax - n\\ax\y ) ^n\


for years

Finally, this

is

different

from the annuity-due to run

268

ACTUARIAL THEORY
and
for so

[chap. xiv.

certain after the death of (^), live, the value of which is

much

longer as (x)

may

Afl+a n) + "7=^l = Afl+a n")+C -a


y<

1=^^)

n-1]'

x+n

x+n\y'

2.

To

find the annual

premium

for

an endowment assurance to

payable at age (x + n) or previous death, the premium to be doubled in the event of the death of (j/) before (x) during the
(x)

n years.

We

have benefit side

-, = Axn\

Paymentside = P(l +

=
Whence
The
tih

+ P x )_,,). T zy:n-l\' P(l + 2axin-l\.-a ^)


)
^ ,

P =

2aa;:m-l| axy:n-l\ ^ r,
if (#) die early, say in the his benefit at a premium of

difficulty arises,

however, that
obtain
less

year,
.

(x)

may then

r,

which might be

than 2P as found above, and the


it

would not in this case obtain the premium on which reckoned in making the contract.
office

which the purchase price of a (?/) should be paid by them. Each is entitled to half the annuity during the whole of his life, and to the remaining half for the period succeeding the death of the other life. That is, (x) is entitled to
3.

To

find the proportions in

last-survivor annuity on (x)

and

la A

+ lay\x = ^
I

a la "
x

xy

and

(?/) is

entitled to

la J

+la z
y

%\y

a la
y

xy

Now

laxy +a laxy = x * *

+ay - a xy x
:

= a xy
which is the whole purchase price. Therefore pay (ax - la ) and (a -la ) respectively. x j \ "
xy*
(.r)

and

(y)

must

xy

4.

To
is

find the value of a last-survivor annuity

on

(x)

and (y)

which

to be reduced

by half

at the first death.

chap. xiv.J

TEXT BOOK PART


is
(,r)'s

II.

269

The whole annuity


only during the value is
life

payable during the joint lives, but half after (y), or (y)S life after .v. Therefore
I

xy

+ la 2

j,| j,

+ la x \y = Ma T a ) t2 !l", + ",j
I

which
5.

is

obviously correct.

The

easily

identity proved in Text Book, Article 18, may be very demonstrated by working from expression (1) to expres-

sion (10).

VP

%+v\PX (% + \%)+V\Pz (% +
l

\<ly+ 2

\'l

)+

etC.

I^(l
x y

+t! pI+1+t

VJ+1+etc0

+ !!it^i (1+
x
y

^ +2+

Vv2+etc0

vH
i

d
y

etc.

6.

In

Te.ri

Book,

Article 19, the effect of a change in the


is

pointed out. But similarly two lives may be assumed throughout to be that shown by two separate tables. Thus in
(.r)

mortality to which

subject

is

the

mortality

experience

of

the

the annuity aj

the assumption

may be made
class

that the
(x)

[NM]

Table

shows the mortality of the


[af]

to

which

belongs

and

that of (y).

Then
a

w\w

%]~%]w
Table, and
a.
,r

where
with

a,

is

taken from the

O O

is

calculated

[NM1

mortality for (x) and

the annual
It is to

premium we

mortality for (J). To get shall divide by a. _ found as above.


,

laf]

be noted that

(x)

must be medically examined, but


death
is

(jj)

need not, as the

latter s early

to the advantage of the office.

270
7.

ACTUARIAL THEORY
Commutation columns
for

[chap. xiv.

the

calculation of reversionary

annuities could be formed if necessary.

For

Vl

'+W +a
s+1
yv

^
'

+ vH

^ v+^ +
d
x y

x+

J+

"

"

Following Davies's principle,

xy

Z+1-'

s+2 y+lV
* /
it

ic+2-'

(ra)C

"

+ (m)C
1

L_ +l :y+1

if

>y

(ra)M

xy

D xy
(t)C

or

1+()C +i
1

-1.+
=

...
if

+*

<

(ro)M

xy

(l+i)-*D

D
()C

is
a

the ordinary joint-life commutation value, and the forms of


* and ()M xy are clear from the above.

xy

If the annuity

is

to be entered

upon
,a

at the death of

(if) it

takes the form,


fi
.

vU x+i ,d
,

a
y

tt+i

,+v%l x+S d
.

n
a:

jf+1

s+jj^

,+...

vx

+U x+j y ax+j ,,d ,+v*+H x+j y+l ss+jj ,,d n ,,+


,

Vx l

x y

!_+... ("JC1+WC *iiii a

D xy

if

>

ay

or

(ro)C !

+ (>C* +1

+1

if

<

(ra)M

xy

chap, xiv.]

TEXT BOOK PART

II.

271

Here, again, the method of forming (0C


ciently clear.

and ()M

is

suffi-

If the annuity is to be entered on at the death of {y) with a proportionate payment to the date of death of (x), we have

=
The denominator
will

take

the form

D xy

or

(l+i>-*D xy '
K
.

according as x
take the form

>

or

<
1

and the numerator

in either case will

(ra)C

11/

-JL T + (ro)Ci+l:|+l +

(ro)M "x

xy

where

ro)C

= v*+U

,d /'a

,\

Tables must therefore be formed of this function for every value


of x with every value of y, and the summation of these values

from x upwards where x -y remains constant


as above.

will give

ro

1 )M xy

8.

On

consideration of the argument in


26,

Text Book, Articles

21, 23,

and

we have

clearly

on the analogy of formula (10)

ft

= ^tPxit^Py- tPy^flt = ^Pxit-lPy- tPy)(\+t~^2~) =


a
I

x *

y-\

which
9.

is

Text Book formula (14).

The method of finding the


30,

value of d() given in Text Book,


clear

Article

may be made more

by

a simple graphic

illustration.

L
A
I
i

J
B

Q
I

E
!
l

s
!

etc.
I

272

ACTUARIAL THEORY

[chap. xiv.

Let A, B, C, etc., represent the ends of rathly intervals as from the date of effecting the contract and let P, Q, R, etc., be at the middle of these intervals. Now on the assumption of the deaths being equally distributed throughout each interval, if (^) die, say, in the interval AB, his death will on the average occur at P. Therefore in the case of
;

the formula,
y\x
x

xy

the

first

payment, of
at C,

will

be made at B, and the succeeding

payments

D,

etc.

But in the case of the benefit represented by


that the
first

aW
at

it is

desired

payment of

should be

made

Q, and the

succeeding payments at R, S,
to be employed, it at B, C,
is

etc.

If therefore the formula affl is


1 1

clear that not


will

D,

etc., for this

2m but should be paid amount with interest to the m


v

at

correct dates of

payment Q, R,

S, etc.

If the transaction be effected thus, (x) will receive a

payment

of v 2m

to which, on the conditions of the benefit

oW, he

vW

is

not entitled, in the event of his dying between

B and
this

or

between C and R,

etc.

Making

deduction

for

over-

payment and keeping


distribution of deaths,

to

our previous assumption as to equal


correction as

we have the value of the

shown

in Text Book, Article 30,

further correction
this
is

is

necessary to

and the value of

also approximately

Aw ^ 1m make A
2

approximately. J
the annuity complete,
2

as shown.
sign,

These two corrections are equal in value but opposite in

and we therefore have

finally,
i

i(m)
y\x

j;2mf a (m)
K x

a {m)\ '
xy

10.

To

find

\%

i. y\x
payments of
v 2m

J_]

As

before, let

be made under the annuity m

chap, xiv.]

TEXT BOOK PART

II.

273

a<)

a() at

B, C, D, etc., which will accumulate to

at

Q, R,

S, etc.

the value of this annuity being,


1

v 2m(, a (m)_
^
[

n x

ft

a(m)\ J
xy

Now
of
z>

let

be the end of the n years.


is

At

a payment
is

2m

is

due, but

not to be made, because the annuity

to

cease at the end of n years and the

payment of
outside

to

which

this

would

accumulate
is

by,

say,

falls

that period, and


for

accordingly

not payable.

deduction

similar to that

the whole-of-life reversionary annuity must also be made.

We
2

then have,
gMi
|^|a;
I

2m(| a(m)_|
\-\n

-i-

(m)) ffi \n xy '

v 2mv n c (I p % x^

-i-

- r )- 1 x p n y' 2m

|
\

A^

Besides an addition to

make

the annuity complete in the same

manner

as

for

the whole reversionary annuity

we must add a

proportion for the period between S and E.

Therefore

|jli/|x
I

aW =

-J-

u 2m

^\n x

mf)-i v Sm v n p (1 - p) + -^x\ A 2 V dm)-\ld>' n r x^ n^y' n XV \m 2m


\

11
")

+ /JL XI A 2 +J_t)ffl(l- n)\ =


11. v 2m (

a(m>

iiW) -

/I
(

2m v -

\
)

7t-

vn

(1

- p

To

find

n\

|<i(>.

y]x

We

have

?i|

ia<> y\x

=
= =

ia( m >n\ n\ x

iaW xy
m vnn r xya<x+n:y-\-n p
)
,

v n r a< m ) v n x as+ft
vn

p n r x^

(I

- c )dm) +vn r aW n pxy y+n\x+7i n py' x+n


,

With regard to the

first

portion of this formula, if (x) survive and


first

(^) die within the n years, the

payment of the annuity ajW


after n years,

will

be made at the end of

of a year m

and therefore
S

274

ACTUARIAL THEORY
df-

[chap. xiv.
d<m >

m) dx+n

) x+n

Also in regard to the second part, => r '


y\ xr

j/+n|x+n
,

is

of

the same nature as d(>, which has been already discussed. J

Therefore,
|dV)

n\

y\x

vn

n 1 x^

m) m) p(\- n 1p)d<x+n +v nn r xy ky+n\x+n p y'


, ,

p (1 w-^aA

- p )/flW '+ s-A 71-^3/' a:+w x+n ^ 2?72 J


, I

m +jpxy DSwfaW -ffl(x+my+n' ) K x+n nr


)

In the above formula


-

2m

x +n

would be more exact than

but

all

throush this chapter correction for payment of


of death
is

claims at

moment

ignored.

12.

By

Text Book formula (22) the


is

annual premium for a

reversionary annuity

found to be
a

a
xy

Pa
y\

1+fl

Now

as the lives

the value of a reversionary annuity occasionally decreases grow older, and therefore the annual premium for an

(.r) after (if) may be greater than that for a similar annuity to (ai+1) after (^ + 1). This is a state of matters the reverse of what is usually found in assurance contracts, with the consequence that a level premium to be charged throughout may

annuity to

first and afterwards too great and were the assured to realise this they might drop the policy and get the

be too small at

same benefit
than
this.

for a lighter

premium
)

after a

year's risk is vp q (1

+a

=q

and Pa

few years. The must never be


i

first

less

13. To find the reversionary annuity to two children aged 10 and 15 respectively, which is to commence on the death of their mother aged 50 and to continue till both children have attained

majority.

This is a temporary annuity to (10) after (50) for 11 years, together with a temporary annuity to (15) after (50) for 6 years',

chap, xiv.]

TEXT BOOK PART

II.

275

less a temporary annuity during the joint lives (10) and (15) after the death of (50) for 6 years. That is,
ffl

[ll

S0[l0

lo

5o|l5~

U^ollOUS

=
|li
(10
:

a iO~|li 50:10
1,
:

+ |6 a i5 _
:

lG

_
50:15
lo

iO:15

+ lo a50:10:16

ll|X15

6|)

60 :(10

ii|X15

6|)

14.

To

find a~\-r

xy\ab

(a)
* '

1-7 = a-r-a-r xy\ab ab ab'.xy


abxy
1

xy

= (a+ab +a+a)-(a.+aax +aay + a^ + a,by + axy' ) v ab a x yJ bx


*

(a, ^
\ x

abx

+aaby +aaxy +a,bxy' abxy )-a


. .

(a

+a) + axy yJ

(a
*

+a.)-(a ab .+aax +a ay + a,bx + a,by' ) b' ^

)-aabxy + (a.+a.+a axy +a,bxy' ^ abx aby


,

(b) v '

fl !-=

xy\ ab

= a +a \.a ab xy\a xy\o xy\


I I

(a
*

i|o

],+a I.) +ay\a -axy\a' + (a x\b y\b - a xylb' T v


|
\

'

\,

-{a\,+a\,-axy\ ab' v x ab y\ab


I

(a a + a - a a +a ) ^ a a ax ay a axy'

+ (a,b - a.bx + a,b - a,by - a,b + a,bxy' ) *


(a.-a,+a,a.a,+a,
*-

ab

abx

ab

aby

ab

) abxy'

(a v

+a,)-(a ax +aay + a.bx + a,by + aab' b'


V.
,

+ (aaxy +a,bxy +o.+fl,)-fl, ^ abx aby' abxy


15.

The problem

of

Endowment Assurance Instalment


is

Policies

discussed at page 148

sometimes further complicated by the


If the life assured die before the

introduction of a beneficiary.

is to receive an annuity for life with the guarantee of n payments certain but if, on the other hand, the life assured survive the endowment period, then the annuity guaranteed at that date is for n years certain, and continued beyond the n years to the last survivor of the life assured

date of maturity, the beneficiary

276

ACTUARIAL THEORY
This extra benefit for the
first

[chap. xiv.

and the beneficiary.


is

(m + n -

years

the value of an annuity of


(x) is alive,

to {y),

which however
after, or, in

is

not

payable so long as

nor for n years

symbols,

~V|m+i-l y~\m+n-\

y:x(n\y

And
symbols,

for the period

after
(3/)

reversionary annuity to

after (x) deferred

(m + nV) years, the benefit is a (m + n- 1) years in


;

m+n-\\
is

x\y

The whole
re

extra benefit

therefore

Mm+m-l

\m+n-l

y:x(n\)

m+n-l\

x\y'

D
^

y:m+n-l\

yn\

J)

y+n

:x :m-l|

m+w-l|

x\y'

(See value of

=.

deduced on page 131.)

To get the
j

extra annual premium,


to

we must

divide this function

by a in order
of (^) before
Qc).

guard against an option as already discussed.

This portion of the premium will cease to be payable on the death

EXAMPLES
1. An annuity of 100 per annum, payable until the death of the last survivor of three lives, A, B, and C, aged respectively

20, 30,

and

40, is to be divided equally

their joint lives, afterwards

and ultimately
A's interest.

is

between A and B during between the survivor and C, if living, payable to the last survivor. Find the value of

Given

20

chap. xiv.J

TEXT BOOK PART

II.

277

A's interest

= K:30 + Ho!20:40 + a3oTTo| 2 o


:

a 20

30

+ (i a20

40

~ ^ a 20

SO

4o)

+ (20 ~

fl

20

30

20 40
:

+ 20

30

40^

= a20 - a 20:30 - i a20:40 + i a 20:30:40


To
find the value of a ......

we have

S0:40

13 9872
-

<W
m015
.
.

whence by Milne's modification of Simpson's rule, the age of the oldest life being less than 45, we assume w = 48, and
20:30:40

=
.

"20:48

=
.

Therefore

w - \a w SQ \a^ 40 + \a^ 3Q 40 = 20-2246 - J(16-1739 + 14-5274 - 12-7015)

= 20-2246-8-9999
=
11-2247

Multiplying by 100 we have A's interest


nearly.

= 1122,

9s.

5d.

Find the value of a reversionary annuity payable so long as three at least of the four lives (w), (x), (y), and (s) live after the death of (/).
2.
_3

wxyz

M
a
i

- tPj) dPwxy + t?* a + tPvnjz + lP xyz ~ 3 (Pp)

/]ira

a,l

/|tt

,l /|iei/z

U /|lj/z

3a,| /|wi*

which may be reduced to terms of four, and five lives.

joint-life

annuities on three,

The general formula


,,
|

is

!L

f\wxyz...(m)

2b

(1
K

- L
t

S J tl wxyz.

.. (m)

3.

What

is

and

(z),

100

the value of an annuity during the lives of [x), (y), a year to be paid so long as they are all alive, 80

278
a year after the

ACTUARIAL THEORY
first

[chap. xiv.

death, and

60

a year after the second

death

The value

of the annuity
80(<z
*
I

is

100axyz +
4.

x\yz

+s| +0 z\xy' + 60(a-| + ) v xy\z y\xz


1

a-\

xz\y

a~\

) yz\x'

An

annuity-certain of

for the

term of n years

is

to

be
the

enjoyed by
lives

P and

his heirs during


;

the joint existence of two


to

aged x and y

and

if that joint existence fail before


is

expiration of

years, the annuity

the remainder of the term of n years.


interest.

go to Q and his heirs for Determine the value of Q's

gets a reversionary annuity for the remainder of the term of n years after the failure of the joint lives x and y, but only in the

event of that failure taking place within

years.

Therefore from the reversionary annuity

a.- a
71
[

. xy n
:
\

we must deduct the


lives survive, or

portion thereof after

years

should both

vm

(a

:- a

,)

Q's interest
*

is

therefore
t , ,

)-v mm lpxy^ n-m\.-ax+m :y+m \n-m\,)} a\(a.- a (a lx Ji xy:n\' n\


5. Determine the respective interests of (x), (y), and (s) in an annuity payable so long as at least two of them are alive and to be divided between (x) and (y) equally during their joint lives, and after the death of either in like proportions between (z) and the survivor during what may remain of their joint lives.
;

The whole annuity

is

a xyz

xy

xz

yz

2a xyz
annuity a
(s)

The share

falling to (x) is half of the joint-life

together with half of the annuity to the joint lives (x) and
after the death of
(3/),

or
\

la xy +la y\xz

la xji *

+-},a
*

xi

-la xyz
-

chap. xiv.J

TEXT BOOK PART


falling

II.

2 T9

The share
share
is

to

(y)

is

similar to
to

(' s

The

relative

positions of the

two have merely

be changed.

Therefore (yYs

K,+K|
(s) gets half of the

K
12
*

K~K*

annuity so long as he survives jointly with (x) after {y)'s death, or with (y) after (x)'s death, or

4a s

+ ia j/z

xyz

The three shares together make up the whole annuity

=
6.

% + + V _2V
;

asabove

An

annuity of

is

granted for 15 years to the

last survivor

So long as they are all alive during the first 5 years, the annuity is to be paid to (x) alone and, so long as they are all alive during the second 5 years, to (j) alone. At
(*)> (y),
{z).

of

and

the
to

expiry of 10 years, or at the first death, the annuity is be divided equally between the survivors, and is to go wholly
the last survivor.

to

Express the value of

(y~)'s

interest in the

annuity.

The

value of (^)'s interest

is

5|5V + *
7.

10|5%,+ K| 15
1

M ,+
!/

|l5

*U)+

llitl,

An

annuity of

and

(2) is to
;

be divided equally between


if (x) dies first, (#)

to the last survivor of three lives (x), (y), (x) and (y) during their

joint lives

and

(z) are

to enjoy

it

equally

during their joint lives and the survivor of them is to have the whole but if (y) dies first, (x) is to enjoy the whole during his life, and after his decease the whole annuity goes to (2). Find
;

the value of their respective shares.

The

value of

(x)'s

share
J xy

y\x

a x - la xy *

280

ACTUARIAL THEORY
The value of (y)'s share

[chap. xiv.

= = =
And

la &

xy

+&ax\yz + a\ * xz\y
\

i(axy +ayz -a xyz + 2a - 2a xy s V


y

-2ayz +2axyz' )

y y

-I (axy + ayz -axyz' ) * ^ la i


y-xz
(z)'s
I

the value of

share
I

= =
=
The sum of the

la ^

+ a yz xy\z

l(a 2 v
(a
^
z

yz

-axyz +2az -2axz -2ayz +2axyz' ) -axyz' )


makes up axyz' the whole r
,

- a )- I (a "^ yz xz-'

three shares

annuity. ^

8. Find a formula for the value of a reversionary annuity payable for the remainder of the life of B, after the death of A, the annuity being reducible by one-half should such death not occur for 7 years, and by two-thirds should it not occur for 10 years from the present time.

If

be aged

x,

and

be aged y, we have the value of the

annuity

a a x\y~ 'l'Pxy x+l\y^1~


9.
(a;)

^"lO^VWlO lv+10
death of the three lives the
survivors
;

An
is

annuity of

is

to be paid to (s) so long as he and


first

and

(j/)

are all alive.


to be shared

At the

annuity

equally by the

and, at the

second death, it is to be continued for n years certain to the last survivor of the lives or to his heirs. Express the share of {) in the annuity.
1c{a i
xyz

+ l(ay\xz +a\ )+A- (1+an-\\'> -.)} x\yz' xy.z^


I

-a

*-

= k{l(axz +ayz' + (Ai - A* +Ai ) i*V xz xyz yz


*-

-AMfl + fl )\ xyz'^ -l|-"


Tl

10.
(6)
fl
'2v
j t

There are two formulas


t

for

a
|

viz. (a) 2w*

(1

- p

and
for

_ 1 \q

x
t

p(l + a

).

Give the corresponding formulas

L and prove

their identity.

0)
( )

\z\x

2v \Px( l -tPy)( l -tPz)


X

%\x = 2^-l|^

A( 1 +.+*)

chap, xiv.]

TEXT BOOK PART


0-

II.

281

^W* - tP)
=
2?,

- Pz ) =
t

^P
t

x
t
\

q<

W?,-i + l|^ + ---+


1
,

-ll 7ji)

y.?iiC

+'!P, + i+

+ i+-")

2/u ( .p

x. ,\q(\+a

,,)

11. A father aged 50 wishes to secure to his two children aged 8 and 10 respectively, an annuity of n, to commence at his death and to continue until the younger child, or the elder if he be the survivor, attains the age of 21. Find a formula for the

value of the annuity.


to be secured

Would
is

it

be safe to grant such an annuity


?

by annual premiums
ra

The value of the annuity


(|l3 50|s

|li

50|l0-|li

50| 8 :10)

One

difficulty in

premiums is should be made payable.


If they are
is

connection with accepting payment by annual in determining the period during which the premiums

made payable throughout the whole status, the run of the contract being dropped, and of a new one being effected at a cheaper premium in the event of the early failure of one of the children's lives. In this case to obtain the annual premium we should divide the single premium by
risk
(
If,

+ a50

i2|

ffl

50

10

~~
:

10|

60

10

ioj

on the other hand, the premium


is

is

accepted only duiing

the joint status, there


life,

a risk of either (8) or (10) being a bad

the premium payable being considerably underestimated as a

consequence.

In this case

we should
if all

divide by (1

+ a 50

jo ib])'

It is possible, too,

that even

survive, the annual

premium

for a similar benefit for the

remainder of the term may diminish,


therefore, if possible, be

in spite of the increase in the ages.

A contract
avoided.
12.

by annual premiums should

cent,

interest,

Find, according to the Text Book Table, the value, at 3 per of a contingent annuity for the remainder of

30 years certain from the present time, the annuity to commence

282

ACTUARIAL THEORY
failure of the joint existence of

[chap. XIV.

on the

but only in the

two lives both now aged 30, event of such failure taking place after the expiration of 5 years and before the completion of 10 years.

The formula

to be used
.

is

V \P. 5' 30:30

35

35

-,
1

25|

, 10^30: 30

^40 40
:

20|

_35j_35/
l " ?>

D 30:30 a 25l~ a35:35 + f) 35:35 <>


,

60:60

\ 60:60/
'

-(%l" a40: 40 ^
D
30
:

60

60

T)
40
:

60:60i
40

-( a 25|-35:35)30

5/"

40

^30

40 f ~( a ^"201 20l 30

"'40:40-' 40:4o)

= 1-807- -726 = 1-081


logD g
logD

= 9-42108 = 9-52032
1-90076
"251

lo S lo

D40:40 =

9>31707

sD 30:30 -

9-52032

17-413
15-142
2-271

log 2-271

35622

r-90076

25698
log 1-807

chap, xiv.]

TEXT BOOK PART


\

II.

283

This might be written a-- a and in this form it means an annuity to the last survivor, not payable, however, so long as they both survive within the first n years which is the required annuity expressed in other terms. Our reasoning is thus proved correct.
;

The payment * '

side

= Paxyn
vn
-,

And P =

a
v

- 2a + xy
a

p ax
>y

+K'-v+n

14. Ascertain the

which
to

(x) desires to

his death.

The

annual premium for a reversionary annuity provide for his wife (y) and child (z) after annuity is to be 100 so long as (y) survives, but
(y)'s death.

be reduced to 50 at

The

benefit side consists of

after (x)'s death

survivor of (x)

and and (y)


;

(6)
;

two parts (a) an annuity to (y) an annuity to (z) after the death of the
:

that

is
I

100a

x\y

+ 50o-i xy\z

determining the status for payment of were not subject to reduction on Q/)'s death the premium might be made payable during the joint life of (.r) and the survivor of (y) and (z). But in this case, should (y) die early, the reversionary annuity to (z) might be obtained at a smaller premium than that so found. Again, if the premium were made payable during the joint existence of (x) and (y), and (y) were to die early (she not being subject to medical examination), the contract is practically a reversionary annuity to (z) after (a-) at an insufficient premium. The best plan is, if possible, to have separate contracts for the two portions of the benefit, and have the premium for the former payable during the joint lives of (.r) and (y), and for the latter during the joint lives of (x) and (z).
difficulty arises

in

the premium.

If the annuity

Under a deed of separation, A covenants to pay an annuity annum to his wife B so long as she lives, and the terms of the deed make his estate liable for the annuity after his death.
15.

of

per

He wishes to free his estate from this liability so long as his daughter C survives him, and he applies to an insurance office for a quotation for the annual premium for such a contingent annuity. Find the net annual premium.
The company
will

have to pay the annuity so long as

284
survives jointly with
will cease

ACTUARIAL THEORY
B
on the
if

[chap. xiv.

Therefore

after the death of A, and the premium death of A, B, and C. the ages of A, B, and C are x, y, and z respectively,
first
is

the value of the payments

Kxai = x\yz
and of the premiums

K(ayz -axyz' ) ^
)

P(l+a

whence equating and solving

K(a -a ) -2? ^P =

16. Determine the annual premium for an annuity of s to continue during the lifetime of B aged y, after the death of A, aged x; with the proviso that should A survive the age of

x + n a sum of

is

to be at once paid to B, if then alive, instead

of the annuity.

The

value of the benefit


s\(a l\
y

is

- a )-vn v (a - a tv n r J n p xy y+n x+n )} + yx J n"xy^ y+n


,
,

>

The value

of the
is

premium which

will

run during the joint

existence for n years

P(l+
,{( - ayx )J
(> y
:

>+ '+ (a^

y +n

-ay+n:x+n->) +< ^ )|

+:+
J)

Hence

1+axy:n-l\ r

17. Give the formula, reduced to its simplest form, for the annual premium for an annuity of 1 to a female aged y to be entered on at the death of her husband aged x if that occur within the next 20 years but to be entered on at the end of 20 years if (#) be then alive, whether her husband survive that time
;

or not.

The annuity

is

to

be payable by half-yearly instalments,

and with a proportion

to date of death of the annuitant.


is

The value

of the benefit
4(2)

"x\y

^20 (,J(2) " 20-fW- a;+20|!,+20

_ M)

1 y+W
2

= K"f - *) =
if

''V^OfU - *?U V+ J - K j
:

20

+i

Vj}
J
}

^y %) + V2 20^{%+20( 1 - *) + V \+20 a(2) = a + \ for both single and joint lives.


~

1 ,+20 + i + i^+SoC +

chap. xiv.J

TEXT BOOK PART


is

II.

285

The

value of the payments

whence P may be found by equating the two

sides.

18. Write down an expression for the net premium payable by a husband aged 40, to provide an annuity of 1 to his wife aged 30, should she survive him the premium to be payable quarterly in
;

advance for a period not exceeding 20 years, and the annuity to be entered upon at the death of the husband, and to be payable quarterly with proportion to the death of the widow.

Using Sprague's formula (17)


l
fi(m)

y\x

2m(- a(m)
*>

_ a(m)\ xy '

=
we have iW|so =

v 2m (a

if

we assume

sW = a-\ m-\

vi(a
s(j

-a 30

40 )

for the value of the benefit.

And

for the

payment

side

o^x^tU^
0:

20j

_
(ml
*y|

20

pm/a 80:40:20| + 8l a r
i

-Wi - D
^

50:6oN

ll )t

_ "

a(m) _
xy

x+n:y+n (m) x+n:y+n J)


xy

%
%n\
Hence

TO

I)

x+n:y+n

1m

D xy
/..

(a

m+l\
2m
J

\ *+:+

m+1
,

x+n:y+n \
xv

a
30
:

--,:>
40
:

20|

_ + 6.A _
,

D, 50:60 \
T)

^30

40 7

A, aged 45, wishes his son, aged 15, to receive an annuitydue of 20 on A's attaining 60 years or previous death. Find the
19.

286
yearly

ACTUARIAL THEORY
premium
at 3 per cent, interest, using the

[chap. xiv.

Table

for

the father and the


Benefit side

for the son.

20a,.

,-nl,. 45 :14| 115

Payment

side

= =

20 ( a

i6-

i5

45:i4|)
.

P(l

+ 15 u
.

-^

Hence equating the two

sides

^_ 15

15

45

liy

1+ai5:45:i4]
. .

An

approximation to a

may
1

be found as follows

15:45:U|

^5:45:151

^
_

But by Lidstone's formula P 15;46:lT|

= P 16:1^ + P46:1^- P
=10-192, and
flfij

lT|

Now

[M]

[16];1

^ = 10-899,

[NM

\
|

45];1

= 11-296

Therefore entering conversion tables,

we
'

get

P[16] :i5] =- 05492> PW]!K =- 06022


whence

^ %l

=- 05220

P [15]

[46]

=-06294 approximately.
lTj

Entering conversion tables inversely with this value we obtain


an K
[15]
,

.r,.!!-i.-nn
:

[45]

14|

9-861

and

chap, xiv.]

TEXT BOOK PART

II.

287

There are (S + T) persons involved altogether, and (s) will in only when the (S + T - 1) persons, apart from him, are reduced in number below S. Therefore his chance of getting a payment in any year is the probability that he is alive multiplied by the probability that less than S persons out of (S + T - 1 ) are

come

alive.

Now
abilities

the latter probability


that none,
that

is

exactly

equal to the sum of the prob1, that exactly 2, etc., that


1) are alive

exactly (S

1) persons out of (S

+Tt

p tr abc

Imnpqr

B+ xy

p r abc
. .

M
.

Imnpqr
. . .

xy

+ t^abc p

Imnpqr

m+ xy

+ t*abc p
z
2

Szll
.

Imnpqr

xy

;+;r-^+ 1+Z (1+Z) (1+Z)


3

z2

7 s-i

+.

(1+Z)s

1--*(1+Z)S
t"abc
. . .

s
Imnpqr
-

xy

where abc-

Imnpqr-

xy represents (S
therefore be
lmnpiT ...?y)

+T -

1) persons.

The

value of

(z)'s interest will

K 2t>*A(l -

P aic ...

CHAPTER XV
Compound Survivorship Annuities and Assurances
1.

It

has been already pointed out that there are two formulas

for the reversionary

annuity
y\x
i

2d' p x 1,0 trx \t*y

and a y]x
I

2d' 2p- -Sizl (l K


I

a x ) + tJ

and these two are identical


Similarly
either of

in value.

we may

express

compound survivorship

annuities in

two ways.

Thus
1 a yz\x
I

2d'

p t^x

i.o 1 \t"yz

for a payment will be made at the end of, say, the <th year provided (x) is then alive, and (#) has died before (z) within the
t

years.

But
|Sj,

=
=

%
2d'

\t%z

approximately.

Therefore

1
i

yz\x

Sti'p

t^x^-yz
I

xi,o \tiyz

= Qia yz\x ^yz


Also
a
1
!

yz\x

= =

p (Y<7 t*x^\t*yz
i
|

-La 1 ) \t"yz'

ayz

1 - ayz\x
|

And

yz\x
)

2d'j x|,g r
t

\t*yz

= = =
=

2vt

tPx(\t%-\t1yz)

a
a
x

a
- a
a:

1
i

\ 1

i/z

a1

yz\x
\

a - a a yz
1
I
I

xz

- ax + a + a 1 xyz yz\x
I

- ay\xz


chap, xv.]

TEXT BOOK PART


a*
i

II.

289

But again

2u<

*+t_y+t-i I +t-i

xyz
\

,j

for if (y) die in, say, the tth year (z) being still alive at (j/)'s death (x), if he survive to the end of that year, will come into

possession of an annuity-due for the remainder of

life.

By J

this

method a yz\x takes a


1
\ |

similar form, '

and can then be

a1 reduced as before to a yz\x yz\x

And ah = Ytfip yz\x


X

II
'
1
!

+ *~ l
z

,+ '*(!+
V
I

^ x+V

=
Also A
1

z\x

-ayz\x
I

as before.
,

Si,'

,+'-* JLtlzl
z

,/ /,, JE+J ( 1 _ _Ei da


/
,

J_ J

x+t-i

Y-t

'+t-i
I

y+t-1
I

x+t-h
I

x
*

-d^^+l_y+lzl

II
x
a:

? I

+ '-*

(l+ax -L ,) K +u

2 = Axyz 1

da 2

yz

|
|

which
2.

is

Text Book formula


find the annual
(1

(6).

To

premium

for a 1 \.

we must

divide the
;

benefit

on his

for it is (y) must be medically examined death the benefit starts, and (x)'s or (s)'s death earlier

by

+a

).

relieves the office of a liability.

The annual premium


(1

for a 2
(s)

is

found by dividing the benefit by

+a

).

Probably

(j/)

and

should both be medically examined.


is
i

The annual premium


both
(x)

for

As

payable at least so long as

and (^) are


death of

alive,

and

also for the period of (x)'s life


(z).

after the

(y),

but only provided (^) died after

Therefore

we must

divide the benefit


i

by
J ayz\x
i

= 1+axyz + 1+axy +a2 yz\x

Probably (x), (#), and (z) should all be examined, but in this case and the preceding one much will depend on the respective ages
of the
lives.

290
3.

ACTUARIAL THEORY
The

[chap. xv.

interpretation of the following symbols should be noted

a=

is

an annuity payable so long


.r,

as at least

r of the

m
a

statuses n\, w,

y, etc., survive.

It is

therefore equivalent to
1),

temporary annuity for n years on (r 1) lives out of (m together with an annuity deferred n years on r out of (m ^L + {a ^Jlthat is a |7i
I

1),

wxy

(m-1)

n\

wxy... (m-1)
(x) of

a-=l

is

an annuity to

which the

first

payment

is

to be
is

made at the end of the year in which (y) dies, but in no case a payment to be made till (n+ 1) years from the present time.

* ^W-mllTT s a reversionary annuity to commence on the failure of the joint lives (.r) and (y) if that event occurs within n years, but in no case are payments to extend beyond t years from the

present.

A2

is

an assurance payable at the end of the


(x)

part of the
is,

i:8

year in which the survivor of

and (^) dies (that

on the

average

of a year after such death), provided (z) die either

before or after both the others.

aW-

Just as

("' is

an annuity to

(x~)

payable in instalments of

at the

end of each

of a year, so

aw

is

an annuity to

(x~)

payable in instalments of 5 at the end of each period of 5 years.

That
aii)

is

5D* + 5 + 5D +1 o + 5EUis + ---

DX

DX
if

we assume 5D, x+n

=D, +D, ,+D x+n +D x+n+1 + D%+n+* ic+m-2 x+n-l


,

.,


chap, xv.]

TEXT BOOK PART

II.

291

EXAMPLES
1. Find the premium for an assurance payable on the death of the longest liver of A, B, and C, aged x, y, and z respectively should die first the premium to be reduced 50 per cent., and

should

survive

and

the

premium

to cease.

The

benefit side

= A xyz

And
forms

the payment side can be expressed in either of the two

P(a xyz
">

\a
-2
\

x\yz

2 ia +lflxz\y' ) xy\z
r
i

-5

and

2 P(ax +iax\yz + Aaxz \ & *

+a 2 ) xz\y'
i

whence P may be found.


2. Give a formula for the present value of 1 receivable on the death of a person aged 50, provided another person now aged 20 has then either died or attained age 40.

This assurance, being payable on the death of (50), provided


either (20) has previously died or 20 years certain have elapsed,

may be

represented by

A 2:S - = A 50 - A50:20:20| 50:20:20|


1

3.

Determine
is

A3:4 w

xyz
21

the value of an assurance on the death of (to) provided he die either third or fourth of the four lives (to), (x), (y), and (s) and provided (s) and (y) have died first and second of the four

This

respectively.

Now

A S:4 w

xyz
21

2 ivxyz

2 = Awxy - A wxyz - daxyz 1 1


1

11
-rfa
2

xyz

w
I

to

But

axyz\w
|

2d r x pw
( t ( t

|,<7
|

2
1

t*xyz

2 ,p (L<7 1 r w\\t*xy
1|

-|,<7 l
\t

) xyz'

-,
l
I I

Hence

A S:4 w

:xyss

Q axy\w - Q axyz\w approximately. rr J ^-xyz ^-xy = Awxy '-Au-xyz ^^-xy xy\w -Q'oxyz\w' '-(/(Q'o ) ^"xyz
1
I
i

21

292
4.

ACTUARIAL THEORY
Find Ihe value of
(a)

[chap. xv.


chap

xv.]

TEXT BOOK PART


w.xyz
1

^2:3:4

_ ^= " ^( = 1
t

tl

t-*

dill
z +'-I
/

II.

293

v+t-j x+t-j

,,+t-^ j-

IIIy x
vj

w+t-i

A~8:4 w.xyz
21

_ V

t t

= 0O t-l =l v

z+t-h
I

y+t-1
I

w+'t-j i-fl-tT

11x w
is

w+t-i

6.

The present holder

of a

title

of nobility

aged w.

It is

desired to effect an assurance payable on the death of his wife aged x, provided that during her lifetime, the heir aged y having
died, the next heir

aged z

shall

have succeeded

to the title.

Give

a formula for the single premium.

To
(x)

fulfil

and

(z),

the conditions both (w) and (y) must die before both but it is immaterial whether (x) dies before or after (s).
is
3:4 3:4

The

single

premium therefore
2:3

A- :x:z = Aw:x:y:z + A w:x :y:z wy


"Y
It

12

may be most

easily expressed as

an integral,

as follows

re

'-

=J o

Pj( 1

Py)tPJ l v+tH 1

Pj Pf,}**+&
t

7. Calculate by the Text Book Mortality Table the value of the following formula, using 4 per cent, interest
:

500A 7i0:70 -40ai0:70


500A 7i0:70 -40< ;70
|

50

50

= 500xA 70;70 -40x! 70:70


(since

50

by formula

(4) of this chapter of the Text

Book

ffl^

T0 50
|

Q70:70 a 70:7o|50

2a

70:7o|50^

= 250A 70:70- 20 Ko-50:70:7o)

We

have

A n n = l-d(l+ 70
.

70 )

= 1= 1=

-03846(1 +4-054)
-19438

-80562

294

ACTUARIAL THEORY

CHAPTER XVI
Commutation Columns, Varying Benefits, and Returns of Premiums
In addition to the expressions derived in Text Book, Articles the following should be carefully examined. It will be found that these or similar expressions are very frequently required in
1.

9 to

1 4,

Chapter XVIII. in connection with valuation by the retrospective method, and it is essential that the principles upon which they are founded should be thoroughly understood.

N -i - N . + .-i D x+n ^

'.(i+o-H+ia+Q"-^'

+U-i( 1 + o

x+n

This represents the accumulations to the end of n years of an annuity-due on (x) for that period. It should be noticed that it is greater than (l+i)s; for each value of /in the numerator is
greater than
is
I

in the denominator,

and the whole expression


71

accordingly greater than (1


is

+ i)* + (l + i)

'1

(1

i),

which

the value of

(1

i)sr

N ,-i- N . +t -i
x+n
x

'.(i+'r+^q+o-^
aA

+*, +t -i(i+o-

,+i

x+n
_

x+n

'J

s+1'l

J
j. 33+71

x+n-l

D X+n ^
x+t

x+n

x+t^

'_

a+f+l'/

'_

x+n -l

D x+n
x

x+n
J
l

x+n

x+n

Dx+n ^

"

x^-

a+1'-

x+n-l

M x+n
...

R-Rx+t -<]VI x+t


x

(l+i)-s+ d(l+iy- 1 + 2dx+V* ^ x^


'_

+td a;+E-l (1 +)-< ' v

S x+n
^,-tM R-R + g 'n
X
x
t
1

^ x+n
i

^-[ dx( 1+i T' x+n

+ 2dx+li l +
0"-'- 1

n-2
)

+---

+ <{d. + ,_ 1 (l+0"-'+Wl +

+ +d*+n-l}]

596

ACTUARIAL THEORY

[chap. xvi.

2. The following is probably a simpler method of obtaining the values of varying and increasing annuities and assurances.

(va\

iN+P i
x

, X+J

+ Nx+2 + N x ,+ i, +
x

)
-

AN hS

DX
When
A

CH
v

&

AM +*(M

..

^
AM +^R
,,

M _ M r+ ,+ .,+
x

Dx
When A =
(

R
IAX -

w
^
AN +(N
i-i
,,

_a) ( V n[ 'x <

N 5+" + LO
J)
)

+N

.)

AN h(S

_,_.

- S ^

DX
When
A

(la)

S -s

*+"

AM A(M ^.H-M
Also

^4-

(v^A),

=
.

+M

.)

AM x A(Ra;+l -Rx+n' .J ^

D
a;

When

R -R
(I

A)

+"
,


chap
xvi.]

TEXT BOOK PART

II.

297

'xn\

DX
(N -

N.J k{S
=
h

- S ^ - (m - 1)N ^

D
When
k

Sx
( Ifl )-i v 'xn\

-S x+n -Nx-\-n
.

15

Also (vAV-:

A(M s v

x+ro-'

+ A{(M x+1 tv

M x+n' + (M x+2 -M x+n' + ...+(M x+tt-1,-Mx+n' )}


,

_,_

>

DX

MM
^
a:

M x+n )h{Rx+1 ^ ^
J
*

Rx+n -(n-l)M x+n* ^ ^ J ^

DX
When
A

1
,

(IA)l-;
*

'xn\

R -R -M ^ 2* * = -=
J)
x

3.

So long as the S and

R columns

are supplied, the working

out of increasing benefits by these formulas is therefore an easy matter. But in cases where these commutation columns are not available, a method which has been described by Mr Lidstone The proof upon which the (J. /. A., xxxi. 68) may be used. method rests is as follows Let B be a benefit of any nature dependent on the life (.r),
:

where p v pv p v etc., and expressed by vp 1 + v 2p 2 + v 3p B + are the probabilities of a payment being made at the end of the
,

first,

second, third,

etc., years.

Then

d -^
di

Bx =
-r,

d dv
( ft

r.

R-.

x -p
di

dv

+ 2e ft + 3ft +.

)(- 2 )
)

=
Therefore

-(v'2 p 1

+ 2v 3 p 2 + 3v i p B +

_(1 +i) * B,

= =

ip l
(

+ 2v% + 3v%+

IBX

298

ACTUARIAL THEORY
is

[chap. xvi.

where (IB)
as

a benefit dependent on the


1

same

probabilities

but increasing by

per
"

annum

throughout.

d But
-7T

^__

AB -JA*B
approximately.

Hence (IB) = -(1+i)


This formula
is

AB -|A2B ^. -

approximately.

perfectly general

and applicable to any type


find the value of (I A)

of benefit which increases uniformly.

For example,

let

it

be required to
at 3 per cent.

by the Text Book Table


C

lA )45

~ 1()A5
|

^05
(-39003

= - 207 {(-42692 - -46889) = 207(-04197 + -00254) = 9-21357


4. The mended in
difficulties

- -85384 +

-46889)}

and dangers attending the practice (recom-

Text Book, Article 27) of omitting the denominator in

writing benefit and payment sides are such as to outweigh any slight saving of trouble.
Theoretically, such expressions
etc.,

as(M -

),

(N

-N

),

have no meaning as they stand (vide Text Book, Chapter VII., Article 9), and in practical use they will have different senses according to the particular denominator used with them. Therefore until the proper denominator is fixed the proper sense cannot be ascertained. It is only after supplying denominators to both that benefit and payment sides can be examined and compared to check their accuracy. Further, where a second life comes into the problem, and the denominator is omitted everywhere, the fact may be overlooked that, e.g., D is the denominator for part of the

problem and

for the remainder,

and thereby serious error may

be introduced.
6.

To
,

find the value of the

temporary benefits mentioned

in

Text Book, Article 46,


is,

we must

stop at the nth value of u, that

which

is

equal to

(n- l)(-2)

chap, xvi.]

TEXT BOOK PART


shall

II.

299

Then we

have

(U

^[( N ,- N ,+>o+{^ +1 -S I+7l -(-l)N i+TO }AMo


+, -

+ { .

*.+. ~ ( "

^ ^^
-

+ }

vA)^ =

f[( M - M ^ + >o + { R, + i- Rx + .-(- 1 ) M , + 4 A "o


-(-2)R x

+ {SR ,-2R

-^"^""^M

To

obtain (y,a)

and (v^jA)^ we need only omit from these

formulas the terms which cut off the whole benefit at the end of n years, but retain the terms which cut off the increase merely.

Thus

(V). =

^[ N B o+( S + i- S + J A
. , . X

"o

+ {2S e+2 - 2Sx+n - (n ^


.

v.

2)S ^ } A*w y a:+<

...]
(v-^A)
\ |
'

= irMi + (R^H-1 -Ras+n' )A x

+ {2R x+2 - 2Rai+m - (H - 2)Rx+n ^ ^ J


I >.
,

} 1

AV

*]
6.

The warning contained

in Text Book, Article 98, should be

carefully noted, as the error presents itself in different forms.

For

example, if it is desired to have a table giving the annual premiums for pure endowments, one-half of the premiums to be returnable in the event of death before the expiry of the term, it is incorrect to take the arithmetic mean of the premiums for pure endowments with and without return respectively. The correct office premium
for the

new

benefit

is

P(l

+ k) + c where
_,_

Dx+n + Ac(Rx - Rx+n -M x+n* ^ ^ * ^


Nx-1
x+n-l
*>
'

J\

x+n

x+n J

300
while the proposed
__

ACTUARIAL THEORY
office

[chap. xvi.

premium
,

is ir(l

__

c
I

D X+n ^
_,
,

Dx+n +c(R ^
V-

+k) + c where - R L SC

x+n

nM X+n' )
,

-i
I

INx-1 ,-N x+n-1


"-

N x-1 ,-N x+n-1 -(1+k)(Rx -Ex+n -M,) /\ ^ x+n'J


_,.
'

and these two are not equal.

The explanation is that if (x) were to die within the n years, having taken out a policy at this proposed premium, the office will return only one-half of the premiums paid but if, on the other hand, he had effected two policies, one with and the other without return, each for one-half of the sum assured, the office would have to return the whole premiums under the former policy which obviously are greater than the mean of the premiums under both policies. In accepting the contract at the proposed premium the assured is therefore allowing himself to be overcharged.
;

7. We proceed to discuss some practical problems not dealt with in the Text Book. It sometimes happens that (x) for some reason will not be accepted by an office at the normal premium for his then age. He, however, refuses to pay the premium for an older age which they wish to charge him, but consents to his policy at the normal premium bearing the condition that the sum assured will be paid under deduction of a certain sum in the event of his dying within t years and in full on death thereafter, t being usually fixed at the

expectation of

life of (x). It is required to obtain a formula to determine the amount of this " Contingent Debt." First, let us assume the debt to be constant during the t years,

and equal to X. Taking the life at his assumed or rated-up age we see that the value of the premiums which the office should receive is
x+n^-

x+n'
).

But they are to receive only P (1 + a lose premiums to the value of -p P 1 +

Therefore they

Now

( x+n v x )( x ) x'^ x+n' the present value of the debt is

XA-L x+n

t\

Therefore equating and solving for

X we have Px+n -P)(l+ x+n' ( x ) ^ x/\,

x+n:


CHAP. XVI.J

TEXT BOOK PART


till it

II.

301

X each year
As

Again, assume the debt to commence at fX. and decrease by


disappears at the end of
t

years.
office

before, the value of the

premiums which the


)

forgoes

is

(P

_,

-P)(l + a

=
is

(P x+n ^
-

-P)N x+n ~ *'


-

D x+n

The present

value of the debt

now

fSM x+n -X(R 1 ^


.

^ ^

-R

^ (i1 )

D 2+71
Equating and solving we have

x
normal
life

(Px+n - Px )N ^ -1 _, J v x+n
,

tM x+n

Rx+n+l
;

R x+n+t+l )

In this investigation the

damaged life is assumed to be a aged (x + n), and the extra rates of mortality for
:

successive years are accordingly as follows

Year of Duration.

302
paid since the

ACTUARIAL THEORY

[chap. xvi.

commencement or since the last increase, in the event of death within any quinquennial period.
Benefit side

= _5 +
+

IVf

56

x+i

+M ?i ,,+
V
flj

+5

+ 10

DX

Payment

side

ir

N3J-1 DX
i

whence we may obtain


If

ir.

no interim bonus is to be given the benefit side becomes

for the first

quinquennium,

M M + M + 5+-^ + 10+--- +
*
,

while the payment side remains


77

XX
56
, ,
7r

,,

R, 5- 5 ( +

,+

10+M, +16 +---)


X

-DX
found.

and the new value of


If

may be

V=

6 the benefit side in the first case

becomes

M
and the payment side being

6 D + D

N DX
x-l

and no interim bonus be given quinquennium, the benefit side becomes


if
b,

While

6'=

for the first

M
Payment
side
ir

and in

this case

DX + DX Nx-\ = D M+6(5M5* + R ^) !5l w = 5


,

5Mx+b + Rx+& ^ ,.

X-l

chap, xvi.]

TEXT BOOK PART

II.

303

For an endowment assurance with a similar bonus, we have


Benefit side

=
,t

M - M +D?
,

+
,

56 (

/M *+'> -

M *+ n + D*+"
v

+
, ,

M + 10- M
*

g+
s

,+ D * +

+
,

M x+n-b -M x+n +D x+n M x+n -M x+n +Dx+n\


, ,

X
)

'

(R iA x -R

^)-5(M x+b ,+M z+10 ,,+... \ x+n'

+M x+n'

D
_

. %

- M,^, + D ,^ x+n x+n

5( >

DX
,

"*"

M x+5 M x+W ^,+ +


LB +5

+M x+n' + h(D x+n -M.) x+n'


L

DX

11 v

(Rx -R x+n' )-5(M V


_,_

+M s+10 ,,+... +M x+n'


x

Payment
and
last
7r

side

x"1
tt

x+m ' 1

may

at once

be obtained.
first five

If

no interim bonus is to be given for the term on the benefit side becomes
ii ^

years, the

(Rx+b -R x+n' ^,+M x+lb + ^K ^ )-5(M x+10 v


,

...

+Mx+n'
_,_

If

b' =

b,

the benefit side

becomes
.

in the first case

Mx M
and

x-\-n

+D x+n ^

dX
in the second case

Rx -Rx+n -bM x+n +Dx+n ^ ^ ^

Dr x
S
_,_

M-M x+n +Dx+n +


x
,

5M x+b + Rx+b -Rx+n -rMx+n +nT> x+n ^ ^ JK ^

DX

Dx
side remaining throughout

Also, the form of the

payment
x-l

*
the various values of
(b).
it

x+n-1

Dx
may be deduced by
equating and solving.
find the annual

Compound Reversionary Bonus. To


for

an assurance of 1, to increase by 5b per unit every 5 years, calculated on the sum assured and existing increases, with an interim bonus of b' per unit in respect of each premium

premium

paid since the

commencement

or

since

the last increase, also

304
calculated

ACTUARIAL THEORY

[chap. xvi.

on the sum assured and existing increases, in the event of death within any quinquennial period.
Benefit side

= ^-{(M,X

Mx+5

+ (l + 5i)(M^ +5 - M, +w )
.

+ (1 + 56)(M, +10 -M, +18 ) +


+

w{^'~
x v

R , + 5- 8M ,

+ 5) +

+ B6 )C R +B - R, +1 0" 5M , +1 0)
.

+ (l + 5^(R2+10 -Ri+16 -5M x+16) +


Payment
and
it

.}

side

N*
it

may be

obtained by equating and solving.

no interim bonus is to be given for the first five years, the term of the second part of the benefit side will be omitted, and it will then read
If
first

- + 5>

+ P + B *XM, +6 " M, +10 )


. .

+ (l + 5^(Mi+10 -M x+1B)+. + {(l + M)(R + ,-R. +10 -BMB+10 )


+ (1 + 56M J_,.-R_L1
lib'

-5M X J+.
becomes
+1Q )

b the benefit side in the first case

2 {M r
X

+ b(Rx -R x+6 ) + b(l + 5b)(R

+&

-R

and

in the second case

i-{M^56M x+6 + 6(l + 56)(R^ -R^


6

+ *(1 + 5^R
The form of the payment
several values of
tt

+10

-R

+1B )

side

is

constant, and therefore the

for these benefits

To

find the annual

premium

for

may be obtained. an endowment assurance with

a similar bonus,

we have

chap, xvi.]

TEXT BOOK PART

II.

305

Benefit side

lM( X

M s- M

* +6 )

+ (1 +

56

X M , +5 - M , +10
^

+ (l + 56)s(M i+10 -

M i+1B )+

..

+ (1+56) +

(M, +n _ 6

M i+n ) + (l+56)T D>+i| }


+5

a;

{(
'

R ,-

R, +B - 5M J(+ a) + ( 1 + 5ft)(R
6

V!o- 5M , +1 o)+

+ (1+56) v '
Payment
side

(R^ ,-E .c+ji -5MJ x+?l-5 x+tt'


*-

tt

N x-l -N X+ll-1 D
w.
is

whence we may obtain


If

benefit side

no interim bonus becomes

to

be given

for the first five years the

M ]^{( ,-

x + 5)

+ ( 1 + 56)( M x + 5n-5

M x +1 o)+-

+ (1 + 56)~ (M, +n _ 6 + {(l+56)(R i+6 -R


X v
7t-5

M x+ J + (1 + 5by Dx+n \
.

+10

-5M i+10)+.

-.

+ (1+56) J V
1
'

(R^ t -Ex+n -5MJ \ x+n-5 aj+tt'J


first

If b'

6,

the benefit side in the


)

case becomes

i-{M i + 6(Ri -R, +6

+ 6(l + 56)(R

+6

-R

+10

)+.
+h

+ 6(l+56)^(Ri+7i _ 5 - R + J + (l + 5iAD
and
in the

M i+/[) }

second case
.

^\M x+ 5bM x+
x
*

+ b(l + 5b)(Rx+5 -Rx+l0) +


+ ) +
(l

+ 6(1 + 56)^(R^. 5 - R

+ 56)T(D, +|i - M +s) }

Then, the form of the payment side remaining unchanged, the several values of ic may be obtained.

Where

b'

01

it

may be shown
1

that the single

premium

at 4 per cent, for an assurance of

with that compound rever-

306
sionary bonus
is

ACTUARIAL THEORY

[chap. xvi.

approximately equal to the single premium at 1. For ease in working, let it be assumed that the bonus is compounded yearly. This will have the effect of increasing the value of the benefit, which may then be expressed
3 per cent, for an assurance of
1

fl-01

-rtroi

Now . =
1-04

wK+* + .HiW approximately, and we 1-03


d
d
,

/1-01\ 2

/1-OlX 3

I
' ' '

+ i+

---

if

substitute this

value for

it

we

shall decrease the value of the benefit

which

will

now be

T|T03 ^ + (T03y ^+i + (T03)3^+2 +


2

'

'

'

d"( X

C + C,+i + C:c+ 2 +

at 3 per cent.

The two approximations given


directions,

effect

to

above act in opposite


other.

and

will to

some extent neutralise each

9.

Policies the annual


full

Under a scheme of Discounted-Bonus or Minimum-Premium premiums are obtained by deducting from the profit premium the value of a certain rate of bonus.

(a).

Cash Bonus.

At the several investigations cash


On
it

bonuses

are usually declared as a percentage of the premiums received


since last investigation.

the
is

assumption that investigations


full

are quinquennial, and that

desired to apply a cash bonus of

profit

100k per cent, of the premiums received in reduction of the premiums, the yearly reduction will be
x 5p-

D*+!> +D s+10^ z+15^ +D +


x

n x-l
5D x+i = Dx+3 + D x+i + D x+i + D 3+6 + D X+7) ,, a lt

, ,

Now, assuming &


'

that

etc.,

we have
ftP'

the yearly reduction equal to


3

D *+ +D *+4+N N x-l
,

+D *+7 +D s+8+-

chap, xvi.]

TEXT BOOK PART


5D*+* + 5D* +1 + 5D *+u + Q
'

II.

307

But again

'

'

=
Therefore

a(i)
X

-2
X

Ax5F

_*$
a
X

+D x

-^

+D
15

x-i

-2 a +l x

Uniform Reversionary Bonus. On the assumption that desired to apply the value of a uniform reversionary bonus of 5b to be declared every five years, the reduction in the annual
(6).
it is

with-profit

premium
^

will

be
3+10
rc+15

x+5

x~l
If an

interim bonus at the same rate

is

also to

be assumed the

reduction will be increased to

R
x-i
(c).

Compound Reversionary Bonus. -If we


compound bonus, the yearly reduction

apply the value


will
.

of a similar

be

5bM x+5 + 5b(l + 5b)M x+w + 5b(l + 5byM x+15+

N *-r
Or
including an interim bonus at the same rate,
o)
,

we have
+10

KK- a + .)+frfl + 56XR +6 - R, +1

+ &(i + 56) a (R

J+

N x-l
In any such system, if the bonus declared is greater than that applied in reduction of the premium in accordance with any of the

above formulas, the excess

is

added to the sum assured.

But

if

the rate declared be less than the assumed rate, the difference must be deducted from the sum assured, or else an increase must

be made in the premium payable, care being taken to ensure that no option is permitted to the disadvantage of the office.

308
10.

ACTUARIAL THEORY

[chap. xvi.

at age (x

To find the annual premium for a pure endowment payable + n), the premiums received to be returned with simple
premium
i.

interest at ratej in the event of previous death, but the


to

be calculated at rate

The difficulty here is in the return of the interest on the premiums. In respect of the first premium paid, this return is of the nature of an increasing assurance commencing at one year's
interest,

and increasing by the same amount per annum.


is

The

value of this therefore

'

Rx - Rx+n -M x+n
,

DX
is

In respect of the second premium the return a similar assurance deferred one year, and
its

of the nature of
is

value

Rx+1 -

R^ -(ra-l)M x+n x+n DX


V-

_,_

and so on

for

each premium, the value of the return of interest

in

respect of the last being

Rx+n-l - Rx+n -

M x+n
_,

DX
interest in respect of all the
is

The value of the return of


is

premiums

the summation of these n expressions, and

equal to

2R-2Rx+n -,Rx+n A x
j
-

^- M
}

x x+n

D
R - R

Therefore the benefit side

___

SR-SRx+n -nil x+n _^+l) M x 2


+ j[* (!+) +
Payment
<-'}

x+n

DX D

side

= w

N X-\ -N X + 1h-\

'

II.

chap, xvi.]

TEXT BOOK PART

309

Equating and solving, we have


=

fD z+ +c(R
.

|_

>

a;

-R-nMx+n')+;c(SR x+n
_,_

-2Rx+n -wRx+n _ w ( w + 2 ) M \~| *+ 2


f
I

-5-[

N .-i- N, + .-i-( 1 +0(H,-R, .-M, +)i ) +


-i(l+ K )J2R -211

-R

_^1) M

\1

and

"'

7t(1+k)

+ c.

11. To find the annual premium for a similar benefit, with the exception that the premiums are to be returned with compound

interest at rate j.

Here we have the

benefit side

^+Mi+K)+
])
'

}2r^(i+/)^^
J

(1

+ ;)'

?f

= _Hi + {^(i +K ) + c }i+i(A'i--Ai n) V / V sen amiI


'

V.

1 -; where A' xn\

is

calculated at rate J, which 3

is

such that

+J "
-l
7r

t Payment
i.

*j side

sc+m-1

D
Hence
"

+ c-^D(A' 1 -;-AU'

N
and
tt'

_N x+n-1 -(\ + k) ^

^
1

D(A'L-AL)

7r(l

+ k) + c.
we have the benefit M -M
*

Alternatively,

side

D
a;

-M
^

+ (l

- M M -)_-HLg
,

+i7
a;

^}
,

>

%- + M
I

+ K)

ci

2 K 1 +i) M , + (1 +i) M, +1 +

x * 1

+(W)slM +M

-( 1 +i>si W ) M * + J

) )

310

ACTUARIAL THEORY
The payment
side being as above,

[chap. xvi.

we have

* = [D.+.+ c {( 1 +i) M .+( 1 +i) SM . + i+-CI +i)^ M J]-[N _ 0)

a+

!r

N^^-

+( 1+i) ,lM , + ,-i (1 + k){(1 +i)M + (l


;c

+i)^ +1

and t

ir(l

+ k) + c.
for a deferred annuity with a similar

12.

The annual premium

condition as to return of premiums may be found by substituting in the above formulas. for

N x+n

Dx+n

If in this last

problem we assume that the net premiums are

returnable,

we
+,

shall obtain

- = N,

+ [N._ 1 -Nji+|i . 1 -{(l +i ,-)M. + (l+i)M^1


. . .

+
If,

+ (1 +jy>Ma+% _ 1 - (1 +j)si,

mM x+n
_
1

}]

further,

we put j =

the portion of the denominator within

brackets becomes

(l+0Ma + (l+0*Ms+1 +
= (l+OC^
1

+(l+^Mx+a

-(l+0^ M, +n
)

^ ++.+! +*+.+,+
.
.

+" +,+y.+.+x+n
-

+(i +ty(v*+*dx+l +v*+*dx+2 +

+v*+-+id
x+n

+.
)

+ - {(i + o + (i

+(1
. .

+i) n
.

X+n
(?>

<ix

+ n-l

+VX+n+ld

if +

+ (i

iy}^+^dx+n + *+-+we+ . +1 +

V *( d

+ d* + l+---+ dz + n-l) + v x +\dsc+1 +dx+n-U ,,+ ,) <


,

... +v*+ n -id , rc+m-l


,

^,- W+^^+in
,

W+
1

+* +

"

(',

+ .-i -'.+.)
1

= D + D, +1 + +D. + .. -D, +Il {(l+0 + (l+0- + = N -N ^ ,-D (1+0*-; , N1+"= ^ Therefore


tt

- +(1+0}

x-l

x+n-1
,

x-1

x+n-1

+\

'

n\>

N
D
_,_

(l+0*-i

II.

chap, xvi.]

TEXT BOOK PART

311

which

is

provide a

the annual premium under a leasehold assurance to at the end of n years certain.
;

This result is correct for, since the office has to return to those die within the n years their contributions along with compound interest at the rate assumed in their calculations, it will

who

derive no benefit from those

must be
13.

left

who so die, and therefore mortality out of account so far as these years are concerned.
the annual premium limited
to
t

To

find

years

and

returnable with simple interest at rate with return.

for a pure

endowment

Here there
sum.
Benefit side

will

be

expressions for the return of interest to

= -jZ + {,r(l
,

K)

+ c}

R -R
Jl
it*

-tM
5?
3!

+^{^(l +

+4
x~
1

2R-2Rx+t -*Rx+n J( 2w -' + 1 ) M*+* x 2


g
x+t ~ 1
X

Payment

side

it

k may be found by equating the two


hence also
x'.

sides

and

solving,

and

14. To find the annual premium for a whole-life assurance of 1 deferred n years, premiums to be returnable in the event of death

within the n years.

Benefit side

=
=

-Jtt*
X

+ {^(1 + ) + c} -

R -R

?+^

-M**
,

Payment

side

N*~
tt

Whence Wnence
and

ir

= =

M 5 +c(R -R ^ -M
,

M
^

it'

ir(l

+k) + c.

Mr Stirling gives (/. /. v4., xxxi. 259) a simple practical formula for obtaining this annual premium from a table of annual premiums for pure endowments with return.

312

ACTUARIAL THEORY
:

[chap. xvi.

The argument is as follows At the end of the n years the premium for the assurance at the then age would be P but r rt x+n'
,

the

office is to

continue receiving only the premium

-k

therefore
future

at that time it

must have

in

hand

to

meet the shortage in

premiums a sum of
(Px+n -7r)a^ ^ ^ ' x+n

k must

therefore also be the

premium
,

for a pure
,

' x+% the annual premium for a pure endowment of

return, of this amount, or (P v

-ir")a

xRP^ x+n xn\

endowment, with . where RPxn\ is


1,

with return.

That

is
7T

(P ^ -,r)a ^ ' x+n x+n


*-

xRPi xn\
"

x+n x+n

'

xn\

'

px+n ax+n ^ _,

+ a
xn\

Taking net premiums throughout and substituting


its

for

RP

value as found in Text Book formula (31),

we get

M x+n ^
N a:-l -(Rx -R x+n -M x+n' ) v
,

which

is

the annual

premium

for a deferred assurance with return


first

of the net premium, agreeing with our


c are zero.

formula above

if

and

Again, taking the loading as a percentage on the premium is 7t' = it(1 + k) and c = 0, and making the necessary modifications on the value of RP . as found in Text Book formula
only, that
xn\

(47),

we have by

Stirling's

formula

- _

Mx ^ n +
Nx-1 -(1+k)(Rx -Rx+n -nM x+n,' )
,

'

which

is

of the office

the annual premium for a deferred assurance with return premium where the office premium is loaded with a perfirst

centage on the net premium only, agreeing with our

formula

ifc=0.

chap. xvi.J

TEXT BOOK PART


ir

II.

313

Now, taking

= 7r(l +k) + c, and

giving to

RP

-1 -

its

value as

found in Text Book formula (47), we have by Stirling's formula

v _

A *+ L Nx .
t

NI+ , _ + k)(Rx - Rx+n - nM x+n + %+ n Vx+1l +c(Rx -Rx+n -nM x+n


!

- (1

)
'

But by our

first

formula

M ^ +c(R -R -nM ) N *-l -(1+ K J\ x -Rx+n -wM x+n' )(R ) v


, , , ,

and these two formulas are not

identical.

The reason
formula

for the divergency will

be found on examining the

= (P, -7r)ax+n xRPi, J v x+n xn\


,

Under the circumstances now being considered RP


to provide for the return of

is

loaded

RP-^(1+k) + c.

According to the
office

argument by which this formula was derived the which should therefore be returned is
^

premium

x+n

'

x+ 71

xnyis

'

>

But the

office

premium which
,

actually

to be returned

is

RPi(l+) + c (P -7r)a J x+n ^ x+n amp


,

and these are obviously not

equal.

Mr
useful

Stirling,

however, put forward the formula merely as a

method of obtaining the office premium for the deferred also having to be considered a assurance, the premium P

premium with some

loading.

Its

usefulness

is

considerable, for

the numerator is constant for assurances commencing at age (x + n). the reciprocal of the office premium The process is to add to a
for a
result.

pure endowment with return, and divide P,_a. by the

1 he formula is easily modified to apply to endowment assurance and limited-payment policies. For the endowment assurance payable at age (x + n + m), or at death between age (x + ri) and that age, with return of premiums
if

death occurs before age (x + ri), we have

Ps+7i:m| ax+n'.m\ V = 1 + ax+n:m\ 1

RP

314

ACTUARIAL THEORY

[chap. xvi.

after

For a policy under which premiums are to cease to be payable age (x + n + in - 1), i.e. after (n 4- m) payments, we have

p ^ a^
i

-,

T>p

x+n:m\

xn\

15.

To

find the purchase-price of a life annuity of

to (x),

subject to the condition that should (x) die before he has received
in annuity
to

payments the whole of the purchase-price the balance be paid to his estate.
Let

is

W be the purchase-price.
=

Then we have

Benefit side

^+
=

'
X

+W+1

Payment

side

W
N
tt

Equating and solving, we have

W
Since
it

R3+l

Rg + W + l)

is still

involved in the right-hand side of the equation

be necessary to make an approximation to its value in the first place. The right-hand side on being worked out should then agree with the assumed value of W. After two such approximations the true value might be found by interpolation. This method of obtaining is not quite correct, inasmuch as is usually an integer plus a fraction. But as Mr Manly, the
will

author of the formula, points out, the correction for the value of
the assurance of this fraction of the annuity
that
it

is

so insignificant

might be ignored. These remarks apply also to the two following problems To find the single premium for an annuity with a similar condition but deferred n years, the net premium also being
:

returnable in the event of death within n years.

Let

W be the purchase-price of the annuity.


= =

Benefit side

N* +n
X

WM
*

- (R V

x+n + 1
X

- R

1 ++w+i'

Payment

side

Hence we have

W W=

*+"

+ m+1

x+*.+v+i>

chap, xvi.]

TEXT BOOK PART

II.

315

To find the annual premium for a similar annuity to the last, with the condition that all net premiums paid are to be returnable in the event of death within the n years.
Benefit side

N
'+
X

tt(R

- - R
-N D
X

x+n )-(R x+n+1


X

- R \ *+"+"" +i j

Payment

side

= *

Hence

"

Nx+n ( Rx+n+i \
,

R
*-

^ 3+.+tt7r+l/

N -1 -Nx+n-1 _(Rx - Rx+n' )


premium for a pure endowment payable premiums to be payable only so long as another alive jointly with (x), and to be returnable if (.t)

16.

To

find the annual

at age (x + n); the


life

aged y

is

should die within the n years. The value of the return in question was discussed on page 129, and making use of the result there given we have here
Benefit side

D^, /M - Mx+n M * +1 - M x+n ^ + + p - + Mi + ")+c}( * D D


,

M
Payment
side

*ri

,i-

M5?
_,

XX
_,_,

Py

+---

Nstt

^- 1

-N+-i
it'

+-i

Hence we may obtain


17.

ir.

Also

ir(l+ k) + c.

To

find the annual

premium

for a similar benefit, but the

return of premiums to be with simple interest at ratej.

Following the method of the solution on page 308, we have


Benefit side

D
=

-^ + Ml +*) + *}('-g^'- +
L
,

/M

-M

"

r
,

Mx+n-1 -M x+n
.

XX
D
\

M X+1 - M x+n
,

Py

+'~

Qx

n-lfyj

/R-R, -M
+J>(l+) + 4(

J ^
D

~ B + R^-R^-^THlVIPy +
L

R +

- R

-if)
,

316

ACTUARIAL THEORY
Payment
side

[chap. xvr.

it

N*-i:?/-i -N *+-! :.,+.xij

Equating and solving,


18.

it,

and hence

it',

may be

found.

To

find the annual to

premium

for a similar benefit, but the


at rate

premiums

be returnable with compound interest the event of {x)'s death within n years.
Benefit side
J

in

^iL
X

+K

+K) + c}

[{ (1+i)

^ +(1+i)2 ^i +

XX
1

...

X
1

+{(l+^=D
a;

}.-./'J - M' f M'


,

M'
/

- M'
x
>
\

s
i

4.

M' s+n- 1 - M' x+n


.

where D'

M'

etc.,

are calculated at rate J, which

is

such that

1+J

"

1+*
side
tt'

Payment
whence
19.
tt

?r

-i:-i~
found.

+-i:+.
xy

and

may be

annual premium for an assurance on the life of the premium during that period to be payable only if {jj) also is alive, and thereafter throughout (x)'s life, and to be returnable should (x) die within the n years.
find the
(x)

To

deferred n years

Benefit side

_,_

/M
,

M S+71 -I - M _x+n
D

xx
,

M-M

n-l'y^

"

chap, xvi.]

TEXT BOOK PART


side

II.

317

Payment

x~
iz

Uy ~ 1 ~

'

x + n - l:

+ n ~ 1

T +"-)

Equating these two sides we may solve for ir, and 7r'
20.

= 7r(l + K) + c.

premium for an annuity to the last survivor deferred n years, the premium to be returned in the (j/) event of the annuity not being entered upon.
find the single

To

of (x) and

Let

a'

be the purchase-price.

Then we have

Benefit side

=
7i

i|

xy

+ 'xi\n A xy
) + w \ay - n]\axy'
|

=
Payment

\a \| i
(

+ {o(1+k) + c}(i A +1 A -I A
side

a.

Hence equating and


( \ao: Vti|

solving for
)

a,

we have
\

) + n \uy - n \axy-' + c(\ A x +i n A y _i\n A xy J ^]n 1-(1 + k)(i A x +|\n A y -I\n A xy' ) J \\n \
\ \

and

a!

a{\

+ k) + c.

To find the annual premium for a similar benefit, all premiums paid to be returned on the death of the survivor should that occur within n years.
It has already been pointed out (page 151) that some difficulty attends the fixing of the status during which the premium shall be

payable.

We may

consider both cases.

(a) If the joint lives

be taken as the
//M x

status,
JVI

the benefit side

^+Mi + )+ }{pV^
,

M
X

"+

_,

*-

dX

V---,,

M
+

-M
D~" "*
1

/M-M,
V N

-i'V '
!/+ ,l

Dy
\
xy

Dv
x+%:y+v,

lx

"

+
Payment

-l

y+n
- i;

__x+nly+n\
> J

Dy
side

V
'

D xy
)

tt(1

+ a^._
i

whence we may obtain

tt

and

also

it'.

318
(b) If

ACTUARIAL THEORY
the

[chap. xvi.

premium be payable

to the death of the last survivor,

we have
Benefit side

/R - R
i

n\

a- + {*(! + xy
I

k)

+ c}(-JL.
V
xii

*+ n
,

-nM *+
,

D
x+% V+n
,

R _ Ry+n _ My+% _ R L y

- nM -nM

x+n:y+n \
,

Dv
Payment
side

*y

tt(1

+^ :Srj[)
7r

from which other values of

and

ir'

will

be found.

21. In the problems connected with pure

endowments with return


in practice frequently

of premiums, the element of mortality

is

ignored.
interest

This

is
;

in effect taking for granted that the life will

survive the term

and if it does not, the office receives for its trouble on the premiums which it has received and now has to repay.

Thus in the case of the annual premium for a child's pure endowment to (,r) payable at the end of n years, with return of premiums in the event of previous death, the net premium is
simply found from

K =

vn

When the question is complicated by making the premium payable only so long as the father (jy) shall survive (see page 315), the net premium is taken as
vn
. a yn\

EXAMPLES
1.

The sum

of

is

deposited by each of

persons in a fund,

and accumulated at compound interest. a is paid on the death of each member, at the end of the year in which he dies, and at the end of n years the amount remaining in the fund is applied to the purchase of an annuity upon the life of each of the surviving members. Find the amount of the annuity.
Let the amount of the annuity be p. annuity of p to each of the survivors of
ago
is

Then the
/

value of an

persons alive n years

pi

CHAP. XVI

TEXT BOOK PART

II.

319

But the accumulations of the fund are

Hence
*( t

(l+0-a{d>(l+0- 1 +d. +1 (l+-)- g +---+rf, + ..

1 }

sD x -a(M x ^
x+n
Alternatively,

M x+n* )
_,_

la, x+n x+n

Benefit side

p being the amount of the a(M - M x+nJ pN j_ ) = V x + C^2


,

annuity as before,

Payment
.

side

* ^
a;

t? Equating^

u we have r

=X

x+n' -

x+n p-
3 X

x+n
X

x+n'

~D

DX
= _^
*D - (M V,

M x_+nJ ^
)

Nx+n
,

as before

2.

If

persons each secure by annual premium an endowment,


will be payable at maturity to the accumulated premiums paid by the
die.

show that the amount which


survivors
consists

of the

survivors and

by those who

The annual premium


and
its

is ~P x

= =
s-l

_ ft*

x+n-1 accumulations to the end of n years amount to

xn\\

v x+n

_L ~ Pxn\

N !S-1 -N x+n-1
v x+n

D x+n
Na;-l -N, ai+n-l
.

,-N x+n-1 Nx-1 ^


, .

U*+

x+n

which
,

is

the amount payable at maturity, being

for

each of

the /x+n

survivors.

320

ACTUARIAL THEORY
3.

[chap. xvi.

For what benefit

is

P_
the single premium?

Explain

the formula verbally.

This is the single premium for an endowment assurance of 1 with the net premium returnable, since the value of such a
benefit
is

Axn + A xAxn\ ~. n
\

the payment for

it

being A.

Hence A =

1-A-r xn\

^J-

for

Pxn =
\

dA-,
1

p_, A xn\
P
-,.

Now
;

Y-, -^p

is

the value of a perpetuity-due of


1

But P

-,

will
(.r)

insure the
|

payment of

at the failure of the joint status of

and after that, a fresh status of a similar kind being set and n up and the payments of premium continuing under the perpetuity, payment of 1 will be made on the failure of the second status and so on indefinitely. And this is the benefit asked for, since on payment of the endowment assurance 1 may be taken, and there remains A to set up a second similar contract, and so on indefinitely.
" Suppose the annual premiums to increase or decrease a sum every t years, and at the end of v intervals of / years each the premium to continue constant during the remainder of
4.

certain

life,

what annual premium should be required during the


?

first

years "

Jones gives as the answer to this question

M E + g( N

E +( - 1

N
tt

+ 2 -l+(

+ NS + ,

-l)

X-l

while Chisholm, correcting him, gives

N s-l'?( N * +J -l + N
State the
correct.

+ N x + vt-l)
both answers are

different

conditions

under which

chap, xvi.]

TEXT BOOKPART

II.

321

This problem is discussed in Text Book, Articles 28, 29, and 35 of this chapter, and from what is shown there it will be observed that Jones's solution proceeds on the assumption that the premium increases or decreases by q per unit of the sum assured, while Chisholm assumes the increase or decrease to be Each answer in its own case is correct, q per unit of the premium. the question being stated ambiguously.
5.

Find the annual premium


(^).

for

of

(jy), all

premiums paid except the

an annuity to (x) after death first to be returned in the

event of (x) dying before

Benefit side

y x
|

+ {it (1 + *) + c) +a
)

+ l! +i

Payment

side

ir

(1

ax

_xy +c

^HlSI
)

AndTr =
i

+axy -n+K) v '

x +y- y+i

Dxy

6. Deduce a formula for the annual premium for an assurance on the life of (x) against (jf) for n years, with return of all premiums paid should (%/) predecease (x).

Benefit side

xy

- M-4 x+n:y+n
xy

<

/j

1 L. Rxy - R-.-i--M x+n:y+n x+n:y+n

xy

Payment
whence

side

Nx ir

y-

-Nx+n~l:y+n-l
Dxy

(Mi - M-LV.

xy

x+n. y-\-nJ
,

_-) + c(U
>

xy

- R-rx+n:y+n

i-M- JL) x+niy +n'


i

,-NT x+n-\:y+n-l J < +K )(Ri-R x+n:y+n _M x+w.y+n-l )_(l 1-) (N x-l:y-\ ^ ' K ^ xy
n

7.

endowment

Find the annual premium required to secure to (x) a pure of 1 payable at the end of 20 years, with return of two-

thirds of the

premiums

in the event of death within the second

half of the period.

322
Benefit side

ACTUARIAL THEORY

[chap. xvi.

D g+20
X

2I

n
,

,A
,

c]

10M ^+10 + Rs+10~ Ra;+20~ 20M


X

a;

+20

Payment
whence

side

ir

N x~l -N J+19 DX

N,-!- N
8.
life

+19

-|(1 + k)(10M i+10+ R^ +10 - R, +20 -20M i+20)


t

Find the annual premium limited to

payments

for a whole-

assurance to (x) subject to the condition that interest for each

year on the net premiums, up to and including the year of death, is to be allowed by the office at rate i, which is the rate realised by the office on its investments.

Benefit side

chap, xvi.]

TEXT BOOK PART

II.

323

the year of death.


of
1

The benefit side is simply the present value payable at the end of the year of death.

9. Find the annual premium for an endowment assurance to payable at age Qc + t) or previous death, subject to the condition that interest for each year on the net premiums, up to and including the 2 th year or the year of previous death, is to be allowed by the office at rate i, which is the rate realised by the

(x)

office

on

its

investments.

Benefit side

M s~ M

r +t

+D

+t

D
Payment
whence
side

+t7r
,

S,-S, +t -*N. +f

\
!

D
_,,
,

R-R -M. +t
D

N - Nx+t ~^ = *- x ~^ D

M X - M x+t + D x+t
,,

,,

N ,-i " iSx ~ iRJ - ( N, +( -! " iSx+t ~ iRx+t) + ^x+t + M x+t~) (

X
t

M X+t + D X+t
Na:-l - iS
.

_,_,

RX -Rx+t -tM x+t + tD x+t ^, ^ ^


since as before

- iR
a; a;

= R
a;

and and since

Nx+t-l - iS x+t -iRx+t = Rx+t


,

i(N x+t ,,+


*

Mx+t'
,

,)

iN x+t + viNx+t-1 ,-JN ,,


,

x+t
,

= (1-)N

^
,

= Da+t + Na;+( ^ L

- N a;+(-l
_,_,

= Di+( -Ma:+( ,,

A proof of
assurance of

this

by general reasoning may


is

also

be given.

The
this

value of the payment side


ir,

as
tir

before that of an increasing


in the 2th year.

2tt,

etc.,

up to

But in

case the benefit ceases then entirely, tir being receivable also if The benefit side is simply the the life completes that year.

present value of 1, payable at the end of the year of previous death.

years, or at the

end of

10. Find the annual premium for a pure endowment payable at age (x + 1) ; the premiums to be limited to n payments, and to be returnable in the event of death before age (x + i).

324

ACTUARIAL THEORY
Benefit side

[chap. xvi.

D R - R = -2 + {tt(1 + k) + c} -i_,_,

-jiM
'
!

,,

DX

Payment

side

ir

Nx-1 -Nsc+n-l Dx
D
,,

+ cfR - R
v
'

-M
a

,,)

x-1

x+n-1'

/V

^4.71

3;+^

Obtain a formula for the office annual premium, P, required on (x) for a term of n years, the assurance to cover (1) an advance of p made out of a trust fund at the beginning of each year, (2) the premiums actually paid under the policy, and (3) the legal expenses of the arrangement, say a.
11.

for a policy

Benefit side

p_J5

R - R*+ -M
,

!S

R - E -jiM E5 +{*(!+ ) + .}_


,

+a
Payment
side

M
'

Mx+n
x-I

DX
x+n-1
it

DX
R

whence
t

tt

=
tt(1

fp + cYR -

(N

-M ) + a(M - M u -M )_(1 + K )(R _ R


,

and P

+ k) + c.

terms of commutation symbols and the rate of an expression for the annual premium for a deferred annuity to be entered on at age 65 on a life now aged 40, the premium to be returnable in case of death before 65, and the annuity to be payable half-yearly, and to be complete.
12. Obtain, in

interest,

Benefit side

= 40

D [ N(i5 + * M + (1
N-N 64 89
40

+ .>M B

+ {P(1 +K ) + C }(R40 -R65 -25M 65 )]


Payment
side

= P

chap xvi.]

TEXT BOOK PART


4

II.

325

whence P =

N e5+i D 65 + Kl+O M 66 + C (R 40 -R66 -25M 66 ) N, -N M -(1+K)(R 40 -Ra6 -25M ) M


9

and P' = P(1+k) + c.


13.
life
first

of (x) of 1000, increasing at

Required the net single premium for an insurance upon the compound interest during the

5 years at the rate of 4 per cent, per

annum.

The

single

premium =

1^

{(1-04)C

+ (1-04)2C;c+1 + (1-04)3Ci+2

table

endowment assurances under a reduced by anticipation of future bonus. Investigate a formula for the annual reduction when the discounted bonus is
14.
office

An

proposes to grant

of

premiums

(a)

quinquennial cash bonus of

per cent, per

annum

of the

premium.
(F) A simple reversionary bonus of 1 per cent, per annum declared quinquennially and vesting when declared. It may be assumed that the office does not allow interim bonuses.

(a)

For a cash bonus the reduction

is

01

P'

_
xn\

5(

D*+5 + D * + 10 +D * +1 + N as-1 -N x+n-1


5
-

+DX + J

(6)

And
V.

for a simple reversionary

bonus
.

01 X

5(M 1+5 +M x+W ,+

M 2+15 +.

M x+a-6' J
,

fra

- 5)M ' x+n +raD x+n


,

N x-l - N x+n~\
,

15. Obtain a formula for the office annual premium for an endowment assurance policy on {x) to mature in 20 years, the premium to be based on select tables, and to provide for a compound reversionary bonus of p per cent, per annum declared

quinquennially, with interim bonuses at the same rate after the 5 years, and the loading to provide for an initial commission of k per cent, on the sum assured spread over the whole term,
first

a constant of

/ per cent, on the sum assured, and a percentage of on the gross premium.

326

ACTUARIAL THEORY
The problem
to find the net

[chap. xvi.

premium

for such

an assurance

has been discussed in general terms on page 305. Here the particular case is treated, and the office premium also deduced.
First, to find the net

premium, we have benefit side


)

= IT

Hi - M M+6 +
2

+ Too") ( m W+6 "


15)

M M+M)

+ + +

1+ (
(

^) M M + 10- M M+
(

i+ iS>)H 1+1 51

M W+ 20)+( 1 +lS))X ]+2

Too \ Too V

+ Tooj ( rm+5 ~ rm+io ~~ 5 M w+io)


Too;
(

+
+
Payment
whence
" [x]

rm+k> - rm+i5 ~ 5 M [x]+is)

TOO V

T00J

RM+16 _ RM+20 - 5M M+2o)|

side

tr

N M - N M+20

M+20

m T 100
v.

[*i+6

iooVs

100; ^

Ws

"w+io^

+
+

p ( + TOoJ ( RM+io _ ^l+ie^ + TOOV 1 + TOoJ ( R M+i6" Rw+2o) T00V


p /
1

5p\ 2

5p \ s

1+ T%)^ D M+20-

M M + 20)}
&

Further, the office

premium
100a

_1 / + ~ l_J?L^
100

J_\
10(

Find the annual premium for a deferred annuity-due to first payment of which is to be made at age (x + n) with premiums returnable in the event of death before that age. If (x) survive the n years, the annuity is guaranteed for at least t years whether he live so long or not.
16.
(),

the

chap, xvi.]

TEXT BOOK PART


=

II.

327

Benefit side

-^(a- +
X

ja,
(

+J

R *M + + {<1 + k) + c} *~ *'+""

ux

Payment *

side

wa. -,
xn\

Equating, ,

*+^ + .lVJ +
ir(l

cC

RJ - R.+. -* M ,+J

and
17.

ir'

+ k) + c.

table at 3i per cent, the annual premium an endowment assurance of 1 for a term of 30 years with a uniform reversionary bonus of 1 per cent, on the sum assured in respect of each year entered upon after the first.
at age at entry 30 for

Find by the

[M1

Benefit side
.

M [] - M
D
side

6Q

+ D60

Q1

R[3q]+1 ~ R eo - 2CjM eo + 29D6o


"[80]

[80]

Payment

= P
-

[30

-N ?
[30]
-

M
r

301

eo

+ D ao +

01

Rrsom " R eo " 29M eo + 29D J


[80]

N
(10267-77 - 4671-51

-N

60

+ 7432-6)+ -01(278665-44 - 58079-89 29x4671-51+29x7432-6) 614584-81650-3

13028-86

+ 3006-5716 532933-7

16035-4316 532933-7

=
18.

-03009

Find by the O tM1 table at 3| per cent., for age at entry 40 with a term of 15 years, the annual premium for an endowment assurance of 1, together with a compound reversionary bonus of 1 per cent, per annum, which is to compound every 5 years, with an interim bonus at the same rate in the event of death during the 5 years calculated on the sum assured and bonuses in force at the beginning of the quinquennium.

328

ACTUARIAL THEORY
Benefit side

[chap. xvi.

j^[(MM - M B + DJ + -01(R
[40] *-

[40]

R[4()]+5 )

+ -01(l-05)(R [40]+5 - R50) + -01(1-05)^(R 60 -

RJ

-M
Payment
whence
side

65 {

(1-05)3

-1} + D M { (1-05)3-1}]

N
= P

-N
D
[40]

P =
'[40]

""55

[( u

MW

5B

+ D 65 )+- 01 (Vr

o:+5 )

+ -01(l-05)(R[40]+5 - R 50) + -01(l-05)s(R60 -

RJ

+ {(1-05)3 _1 (D 56 -M 66 )]
}

= "

352204-126234-5 V"

/ (8202-99- 5689-39

+ 9958-2) J

+ -01(191831-83 - 151953-13) + -01(1-05)(151953-13 - 115901-12) + -01(1-1025)(115901-12- 84508-96)


+ -157625(9958-2 - 5689-39)1

" =
19.

14268-1029 "225969-5
-06314
office single

of

premiums for pure endowments and without return of premium in event of previous death, are 70 and 65 respectively, find the
Given that the

100

at a certain age, with

office single

the

premium for the pure endowment with return premium in event of previous death.

of half

67,

As pointed out on page 299, it would be wrong to charge 10s., as that would suffice for the return of 35 (i.e., half of 70) and not of 33, 15s. in event of previous death. Instead, let S be the sum assured under a policy without return, and (100 S) the sum assured under a policy with return, That is so that the premiums on the two policies shall be equal.

(100-S)x-7 = Sx-65
S and 100

51-852 48-148

-S =


chap, xvi.]

TEXT BOOK PART


II.

329

The premium under each

policy will be 33-704, and the premium required under the joint policy will therefore be 67, 8s. 2d.
20. Find,

by the use of the following


- 9479
>

office rates, viz.

P '4o:i^ =

P'i:i5i

-01475, and A'

60

-55396,

the annual premiums for an assurance on a male

life, aged 40 next birthday, of 1000, payable in the event of death within 10 years, with a return of all the premiums paid if he survive

that term

(a) If the return of

premium

is

to be
till

made

at the

end of 10

years,

and

(6) if it is

not to be

made

death.

Let P be the premium required.

Then()
.

P = lOOOP'i^ + lOPxP'^1,

10<>P'i:iol
i. 1_10P' 40:]0|

Now

P'. .i| is not given, n

but

may be taken
-08004.

= P':i5r P 'i:| = -09479- -01475 =


Though by endowment
loss.

this

method there
for a very

is

insufficient loading

on the pure
is

portion of the premium, yet the fact that there

term assurance

much

larger figure

makes up

for this

1000 x -01475
Jl

LlLlLU'lt

330

ACTUARIAL THEORY
If in these formulas

[chap. xvi.

we assume net premiums throughout, we

^W
21.
office

1000 A*

40:l0|

- 10A<M:10| *

V^

1000 A i
(6)

,-,

a 40:10|

-10^ 1UA

Which
'

40:10|

are obviously the net annual

premiums

for the benefits, thus proving

the correctness of our formulas.

Under a certain "Reversible Premium" scheme, an undertakes to grant whole-life assurances, under which, after n years, the company pays the premiums to the assured, instead of receiving them from him, and this continues until the life drops, when the sum assured becomes payable. If n = 20, find
the
office

3 per

cent.,

annual premium at age 40 by the Text Book table at allowing for a loading of 15 per cent, of the net
5s.

premium, and

per cent, on the sum assured.

Benefit side

tt'N

DX

+
,

, x+n-1
,

DX

Payment

side

= =

whence

ir

Nx-l - (2 + k)N x+n-1


,
*

'

Under the given conditions

40

+ -0025N 59
69

N89 -2-15N
11869-4

+ -0025

x 112093-8

458461 -2-15x112093-8
12149-6345 217459-33

=
and
t'

-05587
-05587 x 1-15

= = =

-0025

-06675

6, 13s. 6d. per cent.

22. Find the annual premium for a pure endowment payable at age (* + n) the premiums to be limited to t, and to be returned with
;

compound

interest at rate j in the event of death before age (x + n).

chap. xvi.J
Benefit side

TEXT BOOK PART

II.

331

= -^- + Ml +K ) + c }{(l +y)-JL__? + i (


x

D,

M-M
z

+ n +jy

Mx+t-i,- M x+t
,,
,,

XX
+<;

-y

M-M * M
M*+
i

D
z

M-M
a;

M-M
z

+
where
s'-r, t\

+ (i +j7
is

^^d
M
,
,

a;

^- + (i
(

_,_,

D
+i)*'i,
x

M'

- M'
x+t

-ff -%-,
.

^}
-v
,

;*, calculated at rate J' while M' , M'x+n? and D' x+t x+t'

are calculated at rate J, which

is

such that
1
, 1

+J

1+8

Payment

side

= v

Nx ~ -N^, ~ x+t
,

By
23.

equating the two sides w

may be

found, and

ir'

= tt{\ + k) + c.

Find the annual premium for a pure endowment payable r), the premiums alone to be returned if the life dies within s years, but the premiums to be returned with compound
at age (x + interest at rate^", if the life dies after s years.

Benefit side

D
-J?L

R - R - ,vM + + + {t(1 +k ) + c }_
,

{*(!+ k)+c}{(1+j)
,

M z+s - M x+r ^
L

+l|

D
a;

+ (1 + +
Payment
...

M ,,-M ET ^ jy+a _jtL


X

+( l +i y

M +'-!,-M x+r
,

_,_

j
X

side

ir

-N
X

j
tt'

whence by equating,

ir

may be

found, and

= w(l +k) + c.

332
24.

ACTUARIAL THEORY

[chap. xvi.

Find the net premium limited to 10 payments


;

for

an

sum assured is 1 until all the premiums are paid up thereafter the sum assured is the amount of the premiums accumulated at compound interest at rate i from the dates of payment of the premiums until the end of the year of death, should death happen before the expiration of the If the life survive 20 years, the sum twentieth year of assurance.
assurance on (x) under which the

assured again becomes


to

1,

but the policy-holder


i

is

to be entitled

an annuity,

until death, at rate

per

annum upon

the total

amount of premiums
Benefit side

actually paid without interest.

Mx p

\I

x+9

+ {^(l + K) + c}{(l+i) + (l+if... +(l+0 10 }


C* +9 + ( 1 +')Cs +1 q+--- + (1+0 1

C^
j

*{
+

D
io
i

V + M
X

+ ,) +c}f

N^ + *"-^ I+i >


X

the expression " until death " being taken to imply a complete
annuity.

Payment

side

Nx ~
ir

Nx+9
X

_,_

And

7r

may be found by

equating the two sides.

25.

Given values of a
;

as

follows

at 3 per cent., 19*895

at

3i per cent., 18*441 at 4 per cent., 17*155, find at 3 per cent, the annual premium for an assurance on (x) of 100, the sum assured to increase by 1 per annum for each year entered upon.

Here P =

100A x + (IA)
l

+ .

To

find

(I

A)

we may make

use

of

the general formula

established on page 297.

(W).-

-(1

CHAP. XVI.]

TEXT BOOK PART

II.

333

We have
Rate of
Interest.

334

ACTUARIAL THEORY
Therefore the benefit

[chap xvi.

= =
?(}

-55338 -55338

+ P(W5) 2054

+ Px

2-362.

The payment

side

iQ .m)

= Px

13-207

Equating the two sides we get

Px

13-207

-55338

+ Px

2-362

-55338
10-845

=
The
27.
office

-05103
1-15

premium therefore = -05103 x

= -05868.

Use Lidstone's two approximate formulas to find by the premium for a joint-life endowment assurance on two lives aged 44 and 45 respectively, which shall increase by 1 per annum, i.e. 1 to be payable in the
[M]

table at 3^ per cent, the annual

event of the first death taking place in the first year, 2 if it happen in the second, and so on, 20 if it happen in the twentieth, also 20 if both survive the twentieth year.

The two formulas

are

pxyn\ = -i
and

chap, xvi.]

TEXT BOOK PART

II.

335

Hence approximately the annual premium inual


-(1-035)03945 - -00182
005

11-869

=
28.

-720

aged 35 next birthday, has a child, aged 1 next assurance of 150 is to be paid on the child attaining the age of 21, provided the father be then alive. In the event of the father's death an annuity of 5 is to be paid annually until the child attains age 21, with a payment of 100 at that date.
father,

birthday.

An

The premiums

are to cease on the father's death, and to be returned on that of the child before reaching age 21. Deduce the formula for the annual premium.

Benefitside

150

/M-M
X

^ M-M
+5x T ^35

^a^ + 100^(1 - w pJ

M_M\
"t-

-r

JT

!\

+19F35

J5

Payment

side

N
-k

-^-N5ii D
85 :1
jt

By equating the two


29.

sides,

may be

found, and

-k

= ir(l + ) + c.

by n equal annual payments and (c) the premium for an assurance to provide for the cessation of the annual payments and the extinction of the debt, if the debtor aged x die before the expiration of the n years. What should be the amount of the annual payment ?
is

debt

to be discharged

to include (a) principal, (b) interest,

If the annual

n years,

we have

payments are made at the beginning of each of the the annual equal payment of principal and interest

to repay a loan of

in that time,

XT

and the annual premium to


is

insure the balance of the loan outstanding


a _'^
*l

^-{(M x -

M x+n-V + <M
,

,)

M x+n-v ^ )+
X+71-1

+i>"- 2 (M V
x

x+l->

,)}
>

X-l

Adding

this to

we get the whole annual payment required.

336
Alternatively,

ACTUARIAL THEORY
we may proceed
thus.
If the loan

[chap. xvi.

be repayable

by n equal instalments of
policy
if (x)

the

amount

payable

under
tne

the

die in the

first

year

is

a
"I

^TTi >

secon d

a - 2 r
policy
is

and so

on.

Therefore the whole benefit under

the

a K ( c," srn +C+i a ^l +

'

+C+.-i"n \
;

and the premium to be added to the equal annual instalment


ot

is

K C +Cx+I a ^2\ + **^T\


(.

+Cx+n-2 aT^)

X-l

X+71-1

The two

results are identical, for

C.(l+t>

+ "- 2 ) + C, +1 (l+i> +
+
C

2
i>

+"-)

Vf

,l

-2

+
<
as

+ Vn-2Q
a;

ic+m-1'

*-

x+n-2-1

'

*+l'

Find the annual premium required at age x to secure 100 for six years commencing on a child's sixteenth birthday the premiums are to be limited to (16 - x), and in the event of death before age 16, the whole premiums paid are to be returned, while if it occur between ages 16 and 21 a proportion of the premiums paid, decreasing in arithmetical progression from
30.

per

annum
;

five-sixths in the seventeenth year to one-sixth in the twenty-first,


is

to be returned.

chap, xvi.]
Benefit side

TEXT BOOK PART

II.

337

ioo^^ + {<
X

+ K) +c}

R--^-^ 6 -^ M 18
{
x

Payment
whence
7r

side

rr

-i

j=r

found, and 7r' = 7r(l +k) + c. method of carrying through the transaction would be to have six policies each for 100 payable at ages 16, 17, 18, 19, 20, and 21 respectively, with return of premiums paid in the event

may be

A better

of previous death.
31.

Find

the

premiums under a
effected at age x,

payment required to redeem future endowment with returnable premiums, and payable at age (x + 1), which has been n years
single
child's

in force.

and it' are the net and office premiums for the original and if we write A and A' for the net and office single payments now required, we may take it that A must be equal to the value of the future premiums now to be forgone less the return in respect of these premiums, and plus the return in That is respect of the single payment.
If
ir

benefit,

,-Nx+t-l _ Nx+n-1 ,,

D~ x+n

"

R^ -Rx+t -(t- n)M x+t x+n


v
'

,,

D x+n ^

+ {A(l+/c') + c'}-^
-L.

*-+!

_L,

x+n

Hence
.

,i:+t-l

x+t-V
,

'

x+n

x+t
'V.

'

r+t>
_,_,)

x+n

x+t'

D x+n -(1+ K ')(M x+n - M x+t' ^ v


and the
single

premium required
A'

A(l+/c') +

c'.

338
32. If

ACTUARIAL THEORY

[chap. XVI.

you were furnished with the office annual premiums temporary assurances of 100 for from one to fifteen years at age x, and also with full tables of annuities, how would you arrive at the annual premium for an assurance of 1000 decreasing by one-fifteenth each year, and at a premium also decreasing by
for

one-fifteenth annually

Let the premium required commence at 15P and decrease by

per annum.
Benefit side

= 1000x TV(P'i :ri + P'i^aK ^ + P^ a^ + n


where
P' 1

...

+P'^a^)
unit.

.^

etc.,

are the office annual

premiums per
'
"

Payment
and P may

side

P(%._r\

+ \:T\ + a,:T\ +

'

+a*:l|)
assurance,

be obtained therefrom.
practical

more

method of carrying through the

which, however, would not fulfil the condition that the premium should decrease by an equal amount each year, would be to get
(x) to effect fifteen policies, as follows
:

Term.

CHAPTER

XVII

Successive Lives

EXAMPLES
1.

Give an explanation of the expressions


(a)

AA A
v

(6)(l+0*As A A f
(a)

This represents the present value of


(z),

to be paid at the

end of the year of death of


of the year of death of the year of death of
(b)
(if),

who is to be nominated at the end who is to be nominated at the end of

(x).

moment

This represents the present value of 1 to be paid at the of death of (s), who is to be nominated at the moment

of death of (y), death of (x).


2.

who

is

to

be nominated at the moment of

Show

of the

that the single premium for an assurance, with return premium along with the sum assured, is equal to the value
lives,

of

all

the future fines on successive


all

where the
be
so.

lives

are to
life

be nominated
possession.

of the same age as that at present of the

in

Explain verbally

why

this should

The
is

single

premium
:

for

an assurance with return of premium

found as follows

Benefit side

Payment
and
Again, the value of
ages
is

side

= AX + B = B

AX

B = ,_*1

AX

all

future fines on successive lives of equal


.

Ai + (Ai)= + (Ai)3 + A
1-A.

ad

inf.

340

ACTUARIAL THEORY

[chap, xvii,

Now, under the assurance, we obtain 1 + B at the death of (x), whereof 1 will pay the fine falling due at his death, and B will set up a new policy of like nature on a life then aged x, which in turn will pay the fine at the second death, and provide B for a third policy, and so on, ad infinitum.
3. Find the value of an annuity during four successive lives the second, third, and fourth lives being nominated on the deaths

of the
a

first,

second, and third lives respectively.

,.

A A(l+a) 1-A 1-A 1-A 1-A = !?-l + A -__?+A A -JI+A A A w x w x v d d

+ A (l+a) + A A (l+a)+ A
d

'

1-AW AAAZ _ X y
d
4.

copyhold estate

is

held on two
it

the end of the year in which

drops,

by a

of a fine of 8.

Assuming the two

lives

each renewable at 10, on payment to be now aged 30 and 35


lives,
life

aged

respectively, find the present value of all the fines in perpetuity at

3 per cent, interest.

The value

of the

fines

payable
is

on the succession of

lives

starting from the life


8 ( A 80+

now aged 30

A 30 X A 10+ A 30 XA 10 ><A 10 +
.

'

"

= 8A 80 {1+A 10 + (A 10 ) +
8A

}
life

Similarly,

on the succession starting from the


8A.

aged 35 we

have

Ao
The present value
of
all

the fines

is
B)

therefore

8(

A S0+ A B
A 10

Taking the

Carlisle table at 3 per cent,

we have

8(-40129 + -43399) 1- -28606 "

6-68224

-71394
9-360

chap, xvn.]

TEXT BOOK PART D

II.

341

have the perpetual right of alternate presentation annual value of k. Assuming that D has the next right of presentation, that the present incumbent is aged y, and that his successors will all be aged x on appointment, find the sum which C should pay D to purchase his interest.
5.

C and

to a living of the

On

the principles of Text Book, Article 32, the value of the


is

perpetual right

k{d
y

+ Ay (i + ax) + Ay A x Q + d x ) + A y

(A^ + d
. .

x)

Of

this series the

even terms represent D's share, which

is

therefore equal to
/cA
y

Q + d ){l + (A f + (A y + kA$ + dJ
x

.}

Modifying this formula in accordance with Text Book, Article i.e. assuming a new presentation to be made at the moment of death, and the presentee to then enter upon a continuous annuity, we have
35,

AAy ax

1-(A) 2

CHAPTER

XVIII

Policy-Values
1.

The Prospective and Retrospective Values of

policies

under

the various ordinary classes of assurance should be written

down

propose to deduce the retrospective values for whole-life and endowment assurance policies, and prove that they are equal to the corresponding prospective values.

and their identity proved.

We

Assume
at

that each of

persons has effected a whole-life policy


.

an annual premium of P

Then the premiums paid


i

at the

beginning of each year accumulated at rate


years amount to

to

the end of n

n
)

+l

^+ r- +i i

+u-

l(

1+ o}

= px
_s

Ds + Ds +1 +Nx-1 ,-N\ x+n-1


,

+ D s + n-l

yx-l- n

p
x

tfc+n

The claims paid


to the

at the end of each year accumulated end of n years amount to


*v
'

at rate

i+l^

'

'

x+n-i

Cx + Cx+1 +
v x+n

+Cx+ n -l

M x -M x+n
,

jjx+n

The fund in hand made up of the surplus of accumulated premiums over accumulated claims is therefore

p
x

,-Nic+n-1 Nx-l
,

M -M
x

s x-\-n

yx+n

yx+n

CHAP. XVIII

TEXT BOOK PART


sum
V"
x

II.

343
viz.
/

Dividing this by the number of survivors,


the average
in

we have
is

hand
xK
a:

in respect of each survivor, that

x+n-l'
J)

x+n'

x+n

which

is

the policy-value found retrospectively.


is

The prospective value


n

V x = Ax+n -P(l+ox+n' ^ ) x^
,

To prove the

values by the two methods equal,

we must assume

the rates of mortality and interest to be the same as those employed in the calculation of P
.

Now

P(N

-Nx+n-V ^ ,)-(M x -Mx+nJ


*
,

x+n

PNx-l - M D~ x+n
x

+
,

M x+n -PNx+n-1
,

D~~ x+n

= A x+n - Px^ + flx+n' (1 L ^ )

M
since
x-l

For the endowment assurance payable at age (x + ) or previous


death, the value by the prospective
n
xt\

method

is

~"

x+n:t-n\

xt\^

x+n

-n-

{'

the retrospective method the value will be the same as for for P the whole-life policy with the substitution of P Thus
-r.
.

By

-y

Pxt (N x ri ^
I

-Nx+n-1' ,)-(M x -M x+n' ^


,

xt\

J)

x+n
,

Now

pxt\^ a;-l -Nx+n-1' ^ x -Mx+n' (N L ) x+n J-(M


x+n

P*-|( N,-i

N*-H-i) - (M. ~ M z+t + D D^

+t )

(M +

-M^ + DJ-PJN,
g
:

,-N

_,_,,)

since

a;+:(-|
X

*|V.

+ ai+n

--1

M -M X+t +DX+t
Nx-l -N_,_, x+t,

_,_,

*\

344

ACTUARIAL THEORY
Others which should be worked out. similarly are
:

[chap, xviii.

Pure endowment

-5V I = Ax+n:t-n\ - P v
a*|

xt\^-

1, ( 1

+ a*+:t--lK tO
,

prospectively r r '

(N P i v -i - N +"- 1/ 'l
a;

")

retrospectively

Temporary assurance

V 1- = A
_
pi-fN v
^l

P1 -.(l+a
"- 1

n")

prospectively
)

-N +-i 1-(M
y

L_5

M 51
,

retrospectively

X 4-71

Limited-payment policy
(1)

When
n:t

<

<

Vx = Az+n - .Px^ + ax+n:t-n-l y (1 n)


,

prospectively rr
/
,

=
(2)

,)-(M PCN x ~ -N *+n-v L_E - M i_ xV


) 1

retrospectively

When
n'.t

n
x

or

>
,

= Ax+n
,P(N

prospectively J r r
,

= LA_*rl
Joint-life assurance

,)-(M -M ^ -N*+'- 1J * 1
,,

retrospectively

z+n

fl+ffl Vxy = Ax+n:y-\-n -Pxy^ ,) x+n'.y+n'


, , ,

prospectively J r r
)

P CN -!
*iA

-!

N x+n-l:y+n-lJ - (M sy - M x+n:y+n-> V
)

retrospectively

x+n:y+n

Leasehold assurance
,

ij

'""- P

M(

1+8 rnrm)

Prospectively

= P-(l

+')*-.

retrospectively
occiir
later,

Further problems similar to these will then be disposed of,

and

will


chap, xvni.]
2.

TEXT BOOK PART


notation for policy-values in

II.

345

The

regard to select tables

follows the rules already laid


If
effect,
/

down

(see

page 140).
is

<

n,

the period during which selection

assumed to have

V
*

[x]

= A [x]+t -Pa

lxflxl+t

=
If
t

a
1

M+'
[X]

>

n
t

[x]

~'

x+t

[xf'x+t

= 1- %+t
%]
If the life presently

aged

Qv

+ 1)

is

assumed

to be

still

select the

reserve value

is

[x+t]

[x]%+t]

~ ~g
[X]

3.

very simple proof of Text Book formula (3)


n

is

as follows

V x +Px = Ax+n -Pax+n ^ x


,

= (nx+n +

VP x+n A x+n+1 )

- Px VPx+n( l + %+n+O

*?,+.

+ vPx +n{ A x+n+i - Vx( l + V+l)}


X n+l V x)

= <%+n + Px+n
Or, retrospectively,

P (N
n

-N

,)-(M
,

-M
,

) *

+ x

g
p

iC+7l

,P,-rU-( M ,- M
D
piV e-1 CN
l

i)
,
,

<U.

-N

rc+n''

)-(M j -M x+n+V L _,,) V

*>,+

d
x +i v ^

+
,

9*+"

KV + V

346
Similarly,

ACTUARIAL THEORY
we have
for
1

[chap. xvnr.

pure endowments

y
n

1_

]_

J^

xt\

xt\

x+n:t-n\

_p

xt\

x+n

a- 1[
V
xT\

Px+n

x+n+1 i--l|
:

~~

Px+n\
^

fl

ar+m+l :t-n-i\'

= =
s\ Or, again,
-

vPx+-nS
V

x+n+1

~~
1
1

xT\

tt

x+n+l t-n-ifi
:

Px+n X m+1
1
,

rrtj

\^ + P^ = IP- g
tt
t> 1

i Psi CNa: 1 - N x+n-1'

")

P1 + t>lf|
.

x+n

pi(N
=
=
4.

P,+. x
pr _ '* x+n x
.
.

L"dx+n+1
xt P-

z-1

-N x+'

Tl+1

V xt|
'

By Te^

.Boo formula (3), n


x x

\-*x+n

-lx+ii

n+\

xJ

=
=
Therefore
(
vfl

via via

+(1-0 ^ ) ,,V} V Jx+tiAj+1 x> '"rt+n


,

<-*x+n \

(I-

ra+1

V)+ n+1 V
x'

x>

Vi + Pax^ + i) = )(1 /

q(l - n+1 V )+ n+1 ^x+nray

V, x

year,

From this we see that the reserve value at the beginning of the and the premium then paid, both accumulated to the end of

the year, are equal to the reserve value at the end of the year,
together' with a contribution towards the claims payable.

Now, if the mortality actually experienced agree with that assumed, the account will work out as follows for I policies, ' x+n * each for 1, existing at the commencement of the year
,

Claims payable

d,

+n

Contribution towards claims payable

x+n

xq (1- n+1 x' ,,V) *xwS


.

Reserve released

= dx+fiS - n+1 xJ ,,V) (1 = dx+n x n+1 ,V


, ,

a;

Together
so that the claims payable are exactly met.
Profit or loss from mortality in an Insurance depends on a comparison of the claims payable

x+n

Office therefore
less the reserve

chap,

xvm

TEXT BOOK PART

II.

347

released, with the expected contribution towards claims payable.


If the claims, less the reserve, exceed the contribution, there
loss to
is

and vice versa. Therefore mere comparison of the claims payable with the accumulations of premiums received is no test of profit or loss from
the
office,

mortality.

It is

impossible to view the contracts in this light,

since

at

the date of the claim the accumulations of premiums

received are not available, having been applied to pay current

claims

and to increase the reserve (apart from payment of expenses and distribution of profit). Further, however long the life live, even beyond his expectation at date of entry, there is a loss to the office in respect of his claim (unless indeed he live

beyond the limiting age of the mortality table

used), since

is

the average reserve in hand at any time while the claim to be paid is 1. Every life assured on the books has to contribute towards
the deficit, and the profit or loss on mortality, as already stated, depends on how this deficit compares with the contribution.

In the case of an assurance under which no further premiums


are payable,

we have

Here the reserve value accumulated for a year is equal to the reserve value at the end of the year, together with a contribution
towards the claims payable. In the case of an annuity, we have

<w(

1+

1+ "+.+i)-?.+.( 1+a.++i)

This formula was discussed in the notes on Chapter VII., page 120.

6.

Returning to the equation

(.v.+W + O
we
see that

w(

-+i v .) + .h-i

v.

V +P > = <

according as

Now,
of the

V +P

) is

the reserve value immediately after payment

(n+ l)th premium and B+1 V. the reserve value immediately Therefore the former before payment of the (n + 2)th premium.
is

> = < the latter, according as < = > the current mortality risk.

interest

on the reserve

is

348
It will

ACTUARIAL THEORY
be found
that, unless the policy has

[chap.

xvm.

been a considerable

number of years
fore

in force,
.

^V^ + PJi <

,V V + Px > n+1 x On n x been a long period in force (V,+ PJf may exceed q x+ Jl - n+1 VJ, ,,V that is the reserve value of the and therefore nVx +Px < n+1
,
a;

- +1 V.), and thereq x+n hand, where the policy has the other > r j
(l

policy will increase in the course of the year.

In the case of a temporary assurance

Vi- +pi_
according as

> = <

And

it

will

be found (where
is
1

is

not very great) that interest on

the reserve

insufficient to provide for the current mortality risk,


is
l greater than ,,V\ r.. Indeed n V xt\ alone T r 7i+l xt\ 1 - as may be seen from Text Book, page V

and that

V xt\ + PV. ^ xt\

frequently exceeds
319, Table C.

In the case of a pure


n
xt\

endowment
xt\ xt\

Vl + PI > = < VL ^n+1


+ pKr|) < z

according as

CV
But obviously

xF]

>

9x+n x + i V xT|

Ulfj +
since the latter
is

xf\

)*

>

%+n

n+1

a*]

negative.
i,

Therefore

Vi +P
xt\

xt\

<

n+1

,,Vi

xty

showing &

that

the reserve

value in this class increases in the course of the year.

For the endowment assurance (the summation of the

last

two)

we have

V-+P-> T
a*
|

xt\

= <

n+1

xt\

according as

CV
that
is,

rfl

+P-l)* < = >

Ix+nV-n+lVxTi)
is

according as the interest on the reserve

< = >

the

current mortality risk.

CHAP. XVIII.]

TEXT BOOK PART

II.

349

6. As an illustration of how to ascertain profit or loss from mortality, let us assume in connection with the example worked

out on page 316 of the Text Book that the actual mortality experienced for the first five years was as shown below, and not according
to the Text

Book

table,

and that the annual premium was -01873.

Age.


350
7.

[chap. xvih.

ACTUARIAL THEORY
By
Text Book formula (10)

-A

i_ a X
general reasoning.

This result

may be proved by
(x) to

Suppose

enter into such a contract as that described in

Article 60 of Text Book, Chapter VII., under which the amount

payable after deduction of the single premium shall be 1. That is, if B be the single premium the total sum assured is 1 + B, the loan on the policy is B, and the interest payable in advance on
this loan is

dB.

Then B = A^l + B)

whence

B =

A
-

-AX
is

~
1

The sum assured

therefore
is

The

single
is

premium, which
. .

also the
.

amount of

the loan,

1-A ^ ~ = 1 -A X
ja

The yearly
also the

interest payable in advance, which is annual premium for the net amount pay-

able,

is

....
at
1
is
=
-r

1-A.
is

The net amount payable


assured, less the loan, that

death
-

the sum
^-, or
X
1.

A
X

Now,

after n years the reserve required


1

under

the above single-premium policy for

from which deduct the policy loan which the

must take

credit for

The

difference

is

..... .....
A
n
*

r^x

; s

Ax+n
,

rrs:

office

A 1-A A -A -^ x 1 -A X
,

which is the reserve required for an annual-premium policy under which the net amount payable is 1, and which has been n years in force. That is,

-A 1-A
_,_

chap, xvih.]
8.

TEXT BOOK PART

II.

351
43,

laboured.

The proof of Teat Book, Articles 41 to The matter may be put more shortly.

seems rather

P'

x+n

-P' x

P'

x+n

+d

n
.

Vx
C- Kd

(P,

+0(i + x+n +

O
C

Now, according
is

as c

> = <
; '

Kd, the expression

Kd

(P,
n

positive, zero, or negative r ' '

and

+ .+d)Ci +

< = > n Vx

Or, again,

51
'

-PX
c+d l+K

+n
Therefore
7i

> = < n Vx
^
_
, "

px+n -px
p
,

px+n -px
,

c
_i

+d

P.+d x+n
c

"+ n
as

l+K
d
i

that

is,

> = <

+d

l+K

or as

a -

l+K
Kd

c > = < l+K

or, finally, as

> <

9. Text Book, Article 48, is very important, and has a wide bearing in a consideration of the effect that an increase in the mortality has on policy-values.

One

is

apt to assume that merely because one mortality table

exhibits higher rates ot mortality than another, the former requires

352

ACTUARIAL THEORY

[chap.

xvm.

But it is impossible to argue so larger reserves than the latter. fast ; for we see that, if in the expression

1we
increase

P +d
P
,

+d
tell

both
is

PX and PX+IV we cannot


,

whether the

whole expression
examination.

increased or diminished without more minute


is

The same point

seen on examination of the value of

found retrospectively,

r-fc{ U +)"+W 1+ x+n


1 ^

^
I
,

1+

WiP
it is

+'')}

-{d,(i+0If the rate of mortality as a

+^ +1 (i+f)-+...+d,
is

+1l . 1

}]

whole

increased,

quite true

that
n

Px

V. if

x+n but at the same time


.

is

increased and

decreased, both tending to increase '


I

,,, x+1'

, x+V

etc., '
all

are decreased, and '

d. d

etc.,

proportionally

increased,

tending to decrease

and the

final result

may

quite well be a lower value for

Now,

as pointed out in Text Book, Article 48, " If the increase

be proportionally greater at the younger ages, the policy-value will be diminished, and if the increase be proportionally greater at the older ages, the policy- value will be augmented." Also, Dr T. B. Sprague, in his paper, " How does an increased mortality affect policy-values " (/. I. A., xxi. 109), says "It seems that we
:

may

fairly

(1) If

draw the following conclusions two tables show the same mortality
:

at

young ages and

at higher ages an increasing difference in the rate of mortality,

then the one which shows the higher rate of mortality will require
larger policy- values.

two tables show the same mortality at high ages, but an we proceed to younger ages, then the table which shows the lower mortality at younger ages will require
(2) If

increasing divergence as
larger policy-values.
(3) If

two

tables,

and B, show the same rate of mortality

at

the middle ages, say about 50, but at younger ages the table A shows the higher mortality and at higher ages the lower mortality,

then table

will require the lower policy-values."

tells us that "policy- values do not at all depend upon the absolute rate of mortality exhibited, but only

Finally,

Dr Sprague


TEXT BOOK PART

CHAP. XVIII.]

II.

353

upon the progression that the rate of mortality exhibits. It is the table in which the mortality increases the more rapidly, that
requires the larger policy-values."
10.

As shown

in Text Book, Article 49.

n
1

x X

> = < n Vx > = <


1+a'
1

+a

according as

l+o.
If,

+ax+n
at 3 per cent,

then,

it

be desired to compare the reserves

experience with those of the worked out for each age as follows
of the
:

HM

M
,

a table should be

Ratio of annuities-due,
policy-values.

g O
1

at 3 per cent, for comparison of


ACTUARIAL THEORY
The matter becomes H M and
In this case
rather

354

[chap. xvih.

more complicated when


.

it is

desired

to

compare the

H M(6) reserves with the O m


M
n

when

< 5 M V > = < H n


n
21

Vx
A x+n

H Ma
according as
a

^-^ M
x

> = <

^ n^i? Ma

H Ma

But when n

or

>

5,

H M and
according as
1

H M(6) nVX > H


M(5)

= < O m VX
71

HMa

a x+n

> = <
= <

nM
Ma
< >

that

is,

as

H -^ > M
a

Ma

H = M

M6

x -? a ^

Having drawn up a table of the two

ratios

H Max
^M O^a

and

H Y = OV
<

M5

a+rt

we can
for

tell,

by inspection of the

ratios, at

what ages

at entry

and

what terms the


to,

and

H M^

reserves will be greater than,

equal

or less than the

Om

reserves.

It is

wrong

to assume that, because one table or combination of

tables shows larger reserves than another for whole-life policies,

the same relation will hold for

endowment assurances.

Comparison

must be instituted between an entirely viz., term annuities. For


n

different set of functions,

V-

xt\

CHAP. XVIII .]

TEXT BOOK PART


a'

II.

355

V
x,

= V

then the ratio

will

be constant for

all

values of

and we may write

1+a' X
1

i
-

+ a.
a'
x

1+k
= 1+K
1

whence

Then

+
1

a'

+a' X
x+n

= 1-

1+K 1+a ~T+k 1+ax-\-n = 11+aX


=
n

as required. *

But again
1

dx + i-i +
fl

1+K
aX - k

<

+%+l)
a

aX k
X

which

is

Text Book formula (29).

conclusions of Text Book, Articles 59 and 60, proved directly for the rate of mortality, q' x

The

may be

356

ACTUARIAL THEORY
If

[chap.

xvm.

'W-O-t)
N

x'

a'

= i_p + _^

The addition

to be

made
to

to the rate of mortality at age x if


is

equal policy-values

are

be produced
x.

therefore

which increases with an increase in

Now,

if

instead of this increasing function

we make

a constant

addition of r to the rate of mortality, the increase will not be so rapid as is required to give equal policy-values. Therefore, on

the principles of Text Book, Article 48, the constant to q is to diminish policy-values.

effect of

adding a

Again,
will

if for

we substitute - r,

the rate of mortality

be increasing more rapidly in proportion than under the formula which produces equal policy-values and therefore on the principles of Text Book, Article 48, the effect of deducting a con;

stant from q

is

to increase policy-values.

11. In this connection

it

will

be useful to discuss the reserves


Extra

required for policies upon lives subject to extra mortality.

mortality will probably occur in one or other of three well-defined

ways.
(1)

The extra mortality may be higher than the

normal

throughout, the difference being small and slowly increasing at

but becoming great in the later years of insurance. We should expect reserves under such a table to be greater than
first,

those under the normal, as the increase in the mortality


portionately greater at the older ages.
(2) If the extra mortality
is

is

pro-

greater than the normal, but by

a constant

difference

throughout,

we

should expect the extra

mortality reserves to be less than the normal, since this constant


addition does not allow for the increase in the rates at older ages

being
(3)

sufficiently great to give equal policy-values.

The

difference

normal may be great


disappearing, until

between the extra rates of mortality and the at first, afterwards diminishing, and finally the two tables coincide. Here also the reserves

CHAP. XVIII.]

TEXT BOOK PART

II.

357

under the table of extra mortality will be smaller than the normal, as the increase is proportionately greater at the younger ages.

The effect upon policy-values of an increase in the mortality under a table graduated by Makeham's formula, = A + Be*, may be considered briefly.
/j.

If in this formula the value of

be increased, the

result, as

shown on page 232, is equivalent to increasing the and that, as proved in Text Book, Articles 69 and

rate of interest,

70, results in a lower policy-value. A lower policy-value is therefore the effect of a constant addition to the force of mortality. If, on the other hand, B be increased, the effect, as shown on page 233, is to increase the age, and therefore a higher policy-value will be given.

If

and B be both increased, the ultimate

effect

cannot be

ascertained without further investigation, as the two increases operate in opposite directions in their effect on policy-values.

There are two well-known methods of dealing with extra-rated


cases in valuation.
(1) Policies on such lives may be valued at the increased ages which correspond to the higher rates of premium charged that is, they are treated throughout as normal policies effected at such
;

increased ages.
(2) The policies may be valued at the true age, precisely like normal policies of that age, each year's extra premiums being assumed to meet that year's extra claims. It is interesting to examine the extra rates of mortality which are assumed to underlie each of these methods. Suppose (x) to be a life charged the premium as at age x + r. Under the first method we then have

Years

358

ACTUARIAL THEORY
In examining the second method,

[chap, xviii.

we know that
i

for a

normal

life

CV. +

W+O =
That
is,

n+ i

V * + %U l -n + V x)
life

while in the ease of the extra-rated

under

this

method

C.v,+p.+R)(i+0 =
where

is

v.+9', .(i-, +1 v; + the extra premium, and q' represents the


, +1

actual

rate of mortality.

the normal reserve plus the ordinary

net premium and extra premium accumulated to the end of the year are assumed to be sufficient to meet the normal reserve at the end
of the year, and

make

the necessary contribution towards payment

of the claims actually experienced.

Hence
,

R(l+i) (<?', -a )(1- ^V) * ' " x+n *x+n'\- n+1 x'
and
(*'

gfi+0
n+1
x

=
where
it is

R(l+tX
x+n+1

(#'

-q

represents the extra rate of mortality which

desired to ascertain.

Since

R = Px+r - Px we have
,

Years
Elapsed.

TEXT BOOK PART

II.

chap, xvin.]

359
59.

69, is

made

to

depend on the conclusions of Text Book, Article

Conversely, the proof of Text Book, Article 59, may be shown to depend on the proposition that an increase in the rate of interest
decreases policy-values as proved in Text Book, Article 70.

Thus, let p be diminished at each age by a constant percentage.

Then

a'

p' + ^P>'.

p.(i

+V
2

+ = *>* + (') = a" calculated from

a
,

W
+1

~ r)P.+i( 1 " r) +

the normal mortality table

at rate of interest J,
1

which

is

such that
=
1
:

1-r
V'

whence

<
,

1
-z
.

and

>

i.

l+a'

Now

= 1= 1-

1+a'
1

+a x+n l+a" X
calculated from the normal

=
But since / > i ^
n
i,

V" x

mortality table at rate of interest j.


'

V" x < nVx

calculated at rate

i,

and therefore

< nV x

Hence
interest
;

it

is

seen that the effect of diminishing


is

px

at each age

by a constant percentage

equivalent to using a higher rate of

that is, policy-values are diminished. a similar process it may be shown that the effect of increasing p by a constant percentage is to increase policy-values.

By

13.

The

propositions of Text Book, Articles 71 and 72,


:

may be

proved as follows
If a
X

<

x+1
,

then

i>P

V+ ax+ i)< ax +
vp

and

<
1

a *+i

+ (Ka.i X+1
x+l - i
I

-w *'
1

>
,

1+ax+l

that

is,

Px:i\ > T^

x+1

360
Again,
if

ACTUARIAL THEORY
ax

[chap, xviii.

<

x+l

<%
a
tx

l+aX
a

that

is,

Pi
;T1

>

P^

Further, if 3

<

a
1

then
that
Finally,
-'
is

l+a
a

+a
,

,,

P > P
-a
,

,V i

= -^
*

l+a
a

Therefore,

if

<

,,,

,V

is

negative.

in

14. Besides the two cases mentioned in Te.rf Z?oo, Article 73, which negative policy-values occur, the following may also be
:

noticed

(1) Reversionary

Annuity Contracts.

Here we have
n

Vay\x =
I

a
I

y+n\x+n
, , ,

- Pa ax+n:y+n y\x
|
, ,

/a x+n
\

ax+n:y+n
,

a -a \ ^A a _
a
y

it:j+n

It

premium
ages.

has already been pointed out (page 274) that the annual for such a policy may decrease with an increase in the
If this

were to happen, the above formula would give a


(x) against the survivor of

negative result.
(2)
(s), (z)

Contingent Insurance, having died.


conditions
x.yz

(j/)

and

Under such
n

Vi

1 - = A-i- -T--Px\yz x-\-n'.y+n -a x-\-n:y-\-n ,_ pi _^ a = fp_J ^

x+n'.y+n

x'.yz'

x+n: y+n

chap

xviii

TEXT BOOK PART

II.

361

As pointed out on page

247, if n be small, P_!_ ____

may be

less

than P 1 , in which case this value will be negative. x:yz'

15.- prove To r
V(>
7i
a:

"" V<>
*

/,.-!,P(W\ V *\ + ^J x (l
2m
)
e+ti

= A z-fft

-P(l a()
a:

= A x+n -P<>(V -Htfl) x x y x+n


2m
)

= A x+n -/px +^-lip(m)(P x +d)\a^ ^ x+n x


y

2m

+^PW 2m
*

(since

PW

P. +

^PO-^ + 2m
1

d), see

page 196)

a Az+71 -Pa^ J ^J.pW{l-(P+^a,J + o ' x+n' x x+m


j.

2m

a;

<c

=
Again
n

vfi + ^pc-A *\ 2m x
)

V^ xt
|

= Ax-\-n:r-n\
a?+m:r-|

p<> a< m> xr %+n:r-n\


\

xr\{ x+n:r-n\

2m

T>

J)
N

"

w +^z:ip(^i-^r a )j'i a r r A x+n:T^\ _/p_ + ^p(>fpi_ + <f)\ax+n:r-v,r 2m xr \\ xF\y xr\ V ' \ xr\

2m

(since

pg =
A
=

P-^P^P^ +
p_ a
OT "~*
.i.

rf),

see page 198).

Wl

_-:_

pwri- ^r-(pi_ +
*

f)a

,\

X+71

V*r|

2m

p(m ) V 1 *r\n xr\

Or, better
y(0
n
xr\

_ a x+n:r-n\
A
i+m:r-n|

p('i^a(m )
xr\

x+n:r-n\
1

^ _pW/a i+n:r-n| w ~ ^ (P x+n:r-n\ + ff)ax+n;r-n\) J V *r|\

2m

362
(substituting for * &

ACTUARIAL THEORY

[chap.

xvm.

aW x+n'.r-n\
_. xr\

its

value as found on page 198) r /

,-/p A^ x+n'.r-n\
I

+ 2Ll!p<(pi + ^)\ ax+n:r~n\ xr\^ xr


'2m
\

ra-l p(m)/p

'

2m

*r

*+:r-n|

x+n:r-n\

a
as+:r-|

Pot| as+:r-n| _a
(

OT
I

2m

~ - P ^(P * 3+n:r-|
(

xr

P'-la x+n:r-n| rr|/


'

V - + ^ip *^ V 1

Similarly,

V=
V
n+t
(n

V+^PWVi-,
being an integer and
t

16.

To

find

a fraction).

Vx
a
y

'

x+n+t

~^

y
x

I- 1\

x+n+t

Now
and

01
]

= a y

a
y

a
y

i|

Therefore, interpolating by
fraction of a year

first

differences,

where k

is

any

=
, ,

#e

Hence
and

1-(|

,|a

, x+n+t
,
,

x+n+t
,
,

,-(l-<) > '


,

n+t
,

V x = Ax+n+t - Px a x+n+t + Px^ (1


,
,

i) '

which agrees with Text Book formula

(31).

17.

To

find

n+t

V, x
>

l (t

= -\ - m
)

n+t

V(>
x

= A x+n+t _Fm>a<m x+n+t x


)

= K+n+t ~ P* + {

^W
!!

+
)

*)}

* **M + P^

2m

= A. + ^.- p,v. + .+

kr p S*

-( p.+'0v^ P

= ( Ax+ n +t ~ F x a x+%+t) \ l +

~2m~

*7

chap, xvni.]

TEXT BOOK PART

II.

363

which agrees with Text Book formula


n

(36), since

V+<(,,V-V) Mi+l x x n x'

= A x+n -Pax+n^ ^ x+n+l +t(A x


-t(A x+n -Px ax+n' ) v
_,_
,

-Pax+n+\> x
)

= A x+n + l(A2+71+1 -A x+n' ^ ^ ^ )


*
,

-Px {a+ +t(&x+n+1 -ax+n'> ^ ^ ^ )} v


'
,

= Ax+n+t -Pax+n+t x
if first differences

are taken to be constant.

To

find

n+t +(

,V()
x

("H
k

V()
a;

= Az+n+S - P(m x

>

a( i -si x+n+t
I

m>

= A x+n+t -P(m/ aO0 - - +s\ x \ x+n + m J


t

- a -PW a() + P()(\m -..../ x+n+t x x+n+t x


*

s\
j

- P(m)( a = A x+n+t _ P<xw)fax+n+t \


k

''^^\

2m

+ F/- - s) *
\m
J
!!

- A, M+1 -{i',+=i

W.+<o}v.*+

+{ p .^W,^>}{(i-<>-(i-^)}

Hence

^VN
2

= A x+%+t - PA+m+| + P^l \

- P,(l - *1)

+ !!llpw{l-(P x + i)a*++* +P(l-0-Pfl- )] m * ^ ' *\


J)

2m
+(
v
s

\m
2ot

J
n +f

*^
+d

J)

,m \ p(m/I -s) -2m- " \?n J

364

ACTUARIAL THEORY
The
third

[chap, xviii

and fourth terms of

this expression are very small,

and

in practice are usually ignored, it being

assumed that

n+t

V(>
so

=
n-\-t

V x - Px\(l - ^-^)

ml
,

= Ax+n+t ,,-Px ax+n+t + Pfu L x


,

\m

-s)
J

noted that where the rathly premiums are instalment premiums, the third term will not appear in the expression for lm \ and therefore the value used in practice the exact value of x
It

may be

n+t

will in that case

be so much nearer the true value.


V(m)(i

To

obtain

s),

we may

also

proceed by

interpolating between
/
(

pc\
nV() + -i-] and
p(m)

t+iVW
p(m)

Thus

VW n+t x

n-\

j,V()
x

fr+iV< m >uVm j -| + -i- + m( n ^ x "+ m \ ZT x

=
Now,
'

fcV(>

+ sm(

J;+iV( m)-

VfM + F> - - S
(

substituting for o

TiJ

iVW m
a:

and

n-{

i+iVW x
m

their values as

found by Text Book formula

(36),

we have
re

+t

vw
a;

fi
\

+ ^P^pc'Ar V a +-f + 1 V - V) * / L 2wz


71

Itl

?t

re'

+ J n v *
1

+
Tfl

( +! V71

^V
-f

V)- nV x --(+* v x' 7^


N

a;

v)\l + pwfx' \w J
re j

-*

f1

p(m)N
^
)

v +f- + * )(
is

^v

vU+pwf--^
may be
second
ignored;
term.
If

The

quantity

PjW

very small, and


P(>
X

and P X may be substituted J


these alterations be

for

in

the

made the

expression will agree with Text Book

formula (38).
18.

To

find

n+t

V-: xr
| \

V_ n+t
xr\

= a x+n+f.r-n-t "

P x l-t\lax+n+t
xr\

n-1

chap, xvni.]

TEXT BOOK PART


i

II.

355

Now

_ =
i/m|

01

a a

y:m+0\
,

,1a;

Hence
of a year

interpolating

by

first differences,

where

k is

any fraction

i t|

a.

ym\

=
;

y:m+K\

T.-t\

'x+n+t:r-n-l\
"'

^x+n+f.r-n-t]
xr~\

~\ "
n+t:r-n-t\

n+t

xf\

x+n+t:r-n-t\ ~

x+

a:?]^

~0

Or following the method


n+t
xr]

of Text Book, Article 78,


Mi+1
xr]

we have
)

"

xr]

~n

xTy

xry<

The two formulas


n
|

are identical, since


y

~ Vxr + t( V_.- n V-.) xr\ xr ^n-f


X

x+n:r-n\
,

xr\

x+n:r-n\
,

<\

*+n+l:r--ll
*

_
x7]

x+ri+l:r-n-l y

-fA x+fl.:r-m|i-P-iax-\-n:r-n\,)} y ^
a;r
|

= A x+m:r-n] + /fA a,'+n+l:r-TO-l ri-A x-j-7i:r-7i|-' ,,


, i

r")

V-

_p_( a
, ,

+ /(a

"H

= A a-+ti+(:r--(| -P-rax+n+t:r-n-t\ ., r xr\

19.

To

find

V^,
_^

(t

= -+
p(m)
xr\

)'

+'

V^
a:''

_ ^

i+l+t:r-K-|

|a (m)
s\

x+n+t :r-n--r-\

fc+J|

x+ji+Cr-ji-*!

- P "^( zr|\
(

aW x+n+t:r-n-t\
a

m
(P
*

_A x+n+t:r-n-t\ P^la x+n+f.r-n -t\ xr\\


xr\\m
J

x+n+f.r-n

-t\^

x+n+t:r-n-t\

J)
'

m~
2m

\
J

366

ACTUARIAL THEORY
A

[chap. xvni.

n+t

yW
xr\

_
'

x+n+t:r-n-t\

/p _ T ^-^pWCPl_-i-(fl\a*++t:i'--l| |w| + 2m f|^ w| ;


J

-l p(

ro)/-p

+ pfl +!
{

sr I SiCPfc I+ -)}{(i-0-(i-^)}

,.

w ~ 1 p(w)ffp.._i
2to
(W \I

*++*: r-*-*|

pi-^a ;
ct|

rc+m+(:r--i|

+ pi-n-rt-pi-/i-^lYl T ax|V ' xr^ m Jj

+d

m zlm(L- s
2m
XT

\\m

)
J

= n+t V xt\ - Pxr\\ - *1\ + ^zlpW-f Vi- - pi-6 - ^\ -(\ xr|\^ nl jj m J 2m iw|\+ r|
2m

\\m

The third and fourth terms of this expression are very and in practice it may be taken that
n+t

small,

yW
xr\

n+t

(\ V xr\ Pxr{\ - iii\

ax+n+t:r-n-t\
As was the case

Pxr\

x+n+t:r-n-t\

+ Pxr\

for whole-life assurances, the third term in the

exact expression entirely disappears


are instalment premiums,
sion
is

when the premiums receivable and accordingly the approximate expresmuch


nearer exactitude.

in these circumstances so

20.

To

find

,,

V
.
,

n+t-.r

V x = A x+n+t - r Px x.1-(|
x+n+t~r
8,

x+n+t:r-n-l\
r

x+n+t :r-n-t\

367

chap, xvin.]

TEXT BOOK PART


n+f.r

II.

21.

To

find

V(),
x
'

(, \ f \

<\ <~S
/

, +*:

VW s

= A x+n+t - r F/aW x \x+n+f.r-n-t\

m +.A

= A*++ -1 Pz + TO-1 r FYPi- + d'la T |r * V w|


ot
'

J *++*:r--t|

W-l
2ot
r

p(m) ,-p_l * v x+n+f.r-n-t\

T
,

jx
'

x+n+*:r--t|

+ =
OT-1
2ot
r

{A+ ! K 1 ^P(ftl^}{a-0-(i-'-i)}
*x\+n+t
:

x+n+t ~

r-n-t\

+ r "*( ~ V ~ r
pl

*(

^~
'

p(m)
*

f/p_l
\ V *++t:r--|

pi_x 1

j!r|^V+l:f-n-|

(1

_ A _ pi_/l _
<w|\

^ +1

\\
Jj

2m

\m
x
r

+':'

v-pfi- *T\ + x\ m
J

~
2m
r

pw( x

\+

vi- w|

pUi - m CTiy

^\
Jj

The

third

ignored, and

we

and fourth terms are again very small and may be shall have

n+f.r

vw
x

n+t:r

V x - px\ (i
r

^-^
m
J
:

Ax+n+t Pax+n+t r x

r-

n-1

h
*
j

Px C-s) \m J

22. In practice, however, these expressions for limited-payment


policies are inadmissible, as explained in Text Book, Articles 115

to 119

and we may modify Text Book formula (55)


n+f.r
x

as follows

x+n+t ~

j-

a\

~ Cn-t\ 3'x+n+t:r-n-l\
,

+ {P'.(1- C)-P,} 1 _,|^. +


and
n+f.r

U<)
x

L, n+f.r

(1 U x - r P' x^ -c)(l- J\ m

368

ACTUARIAL THEORY
The formulas given
in

[chap.

xvm.

sections 15 to 22

were deduced by
No.
12).

Mr

J. J.

M'Lauchlan {Trans.

Act. Soc. Edin., Vol. II.,

23. To find the reserve after n years of a pure endowment payable at age Qc + f), with return of premiums in the event of

previous death.

By

the prospective method

V =

-^l+{ir(\ +

D D x+n
,

K)

+ c}

M, +8, -R-(M +( U ! ?5 D x+n

Nx-\-n-l ,-N rc+i-1


,

d~~

By

the retrospective method, the premiums returned at the


years, for
I

end of each year accumulated to the end of n


taken out, amount to
{Tr(l

policies

+ K) + c}{dJl+iy-i + 2d!c+1 (l+iy-z + 3d x+2 (l+iY-3+--+ mtx+n-l)


C

+2C

+3C +

...

+ bC

W1 +K

R -R - M ^ !" + C1J
,

Dividing this result by the number of survivors after n years

we have
{

v (1 + k) + c} -!

R -R

^ -bM
,

ai-fm

The

reserve

by the retrospective method

is

therefore

tt(N
*

,-N

)-Wl + + c}(E-R .-M.,) _.


it)

chap, xviii.]

TEXT BOOK PART


expressions are identical, for

II.

369

The two

T (N

,-i-V )-KU) + c l(R- E,-,M


1
x-\-n

"i^^ {N -

~
1

N-+ -

"
1

(1

+ l,)(R -" R -+-' M


+t)}

^
+(

-{D, +i + C (R

-Rx+4 -m

+ D * +( + {*(!+) + c] (nM x+n + R i+b _ R


^

_ ,M

x+J )

x+n-1

x+t-V J

*+
1ST

a;+?i

7r

x+n-l

-Nx+t-1
^
t)

since

, =

^+^<KzK fiI_tM^

As explained on page 318 the premium for this benefit is any account of the element of mortality. The premium charged would therefore be
usually calculated without taking

P_

with a suitable loading for expenses.

The

accumulated at rate

reserve accordingly might be taken as the net premiums i to the date of valuation.

under a similar policy with the addition is to be returned with the premiums in event of death before age (x + 1).
24.
find the reserve

To

that simple interest at rate^'

2A

370

ACTUARIAL THEORY
Prospectively, the reserve
,
,

[chap, xviii.

is

-R raM D +R -+ i+1 ^1+^(1 + K) + c} 5 x


,

a;-f-?i

<M

+j{ir(l

+ ) +

^+i) Mj 2
c}

+ Ra;+7t +2R^ -2Rr-w - ( R ri .fcl) a;+7i


i

B
+.

_ N <e+-l -N x+t-1 -TT pThe


interest

third term here

is made up of the liability for return ot on past premiums and that on future premiums. The

former

is

equal to

<

x+n

x+U

x+n

x+t

i+<)

^
2
is

M x+n +<Rx+n - Rx+t'W + +


\

-+
2

1)
x+t

And

the latter

equal to

2R

-2R ,-(i-n)R

_(<-")('-+ 1)

>'
Together, as above,

D
<

J*

^
"^

M , + , + "\+n + 2 V. " 2 V s
is

R* +( -

^
2

x +t

The

reserve found retrospectively


-i

D^ [>(N
value of
25.

N, + ,-i) - Ml + *) + '}(* - Rx+m - nM x+n)


K)
'

-j{*(l + v

+ c}teRx -2R^ -Rx+n _<^+l) x+n


'

\"| M x+nf

The two formulas may


7T

as

be proved to be identical found on page 309 be remembered.


easily

if

the

To

find the reserve

under a similar policy except that the

premiums are

to be returned with

compound
1).

interest at rate

in

the event of death before age (x +

chap, xviii.]

TEXT BOOK PART


is

II.

371

Prospectively, the reserve

iVi +
x+n

+ K) + c}

_L
x+n

{(

+i>-,(M x+K -

M x+t

+ (1 +jY+\M x+n -

M x+j)

+ V+jY+XM x+n+1
^

-M x+t

+(l+j)KM x+t _ 1 -M x+t )}

x+n:t-n-\y

And
f

kil. W
X+
26.
years,

retrospectively

+ ,)+4

^
*

{[1+i)(Mr

M i+t)

X+tl

+ (l+i) 2 (M x+1 -

M + J+-

+(l+i)(Mi+ ,.

r Mj}
ir

These two should be proved equal, given the value of found on page 310.

as

To

find the value after n years of


life

premiums payable throughout


t

an assurance deferred t but returnable in the

event of death within

years.

Three cases
(1) n

arise, viz.,

< = >
is

t.

<
,,

t.

Prospectively, the reserve

_S!
a+7i

nM
+{.(!

+ K) + C

+R

-R
a;+?&

-tM

*g

ttN

'+*- 1
x+n

Retrospectively
jt(N

-N
x+n

,)

R-R, -M,
x+n

Now
l

these two expressions are identical, for


> '
v
.

0-{t(1 + k) + c}(R -R -J IWN3-1 -N x+n-V J)


*

>

a;

a-j-Ti

-M^)1 x+n'-l
*+

x+n

d x+n
1

["{N.-i "
t

+ K )( R , " R * +( -

M +$ ~ M +
* *

<

~< R * ~ R-+. ~ M

D^x+n

^M
+ ir t --

+ M x+ + 'C 1 + K )(nM x+n + \+n ~ K+t - tM x+t) - irN^J + <nM x+% + R +n - R, +( x+t )

+ *) + ') nM x + n + R s + . " R, + " <M x +t ) - * N, + *-l]


(.

since smce

M x+t + c(R x -Rx+t.-IM x+t) ^


,,

x-l

(1 \

+ k)(r X . Bx+t J\
'

im x+t' )

372
(2) n

ACTUARIAL THEORY
=
t.

[chap. xvih.

Prospectively

Tr^a+f
,

71

'-

a;+{

Retrospectively

N-l - Nx+i-l
,

_{,( 1+Jt) + C }_*


identical.

R-R^m,, *M
*+

+f

i+f

which may
(3)

easily

be proved

n>

t.

Prospectively

-^? - tt
x+n

-^^
,

a:+7?.

Retrospectively

Ns-1 ,-N^ x+n-1


.

^q + K

+c }_?

R-R^.-iM,, !+<
be proved

M * -M*

These two expressions also may

easily
t,

identical.

We have seen that when n = must have in hand is A -ira.


of the

the reserve which the office This has to be provided out

premiums received, and the mortality up to age (x + 1) may be ignored, as the premiums are returned in the event of death
previous to that age.
interest the
in
t

We may

premium

calculated

years certain to this


tt(1
^
>

therefore find at what rate of by the exact formula will amount amount. That is, find j such that
8

+j)s r,,.. '

10)

= A X+t jraX+t
, ,

The

reserve,

when n <t, may then be taken

as tt(1

+j)s

...

27. To find the value of a similar deferred assurance, but with the condition that during the t years the premiums shall be paid only so long as another life (j/) survives.
(1)
(a) x
'

When
w/

<

t.

( y) still

alive, '

occurring in nry pi, cases out of /x+n x+n


,

Prospectively

M
^1
x+n,

+M

+ K ) + el

J- {(B+ 1)(M
x+n

_ M. +( ) +Py+n (Mx + n + i/N+"-i y+-i =

+ -'

n CM l' ^t-n-ll'y + iiV l x+t-l v


11

-M x+t Y-wl w "


x
J

Nx+t-i-.y+t-i N*J) \
D *+
/

D x+n:y+n

chap, xviii.]

TEXT BOOK PART

II.

373

Retrospectively
7T

jt(1+k)+c}_^
x+n x+

X+n
*->

+n

x+n

(b) If (y)

died after
,

payments had been made, occurring


/

in

Mb-1'

m'

p)lx+n y'

cases out of

x+n

Prospectively

^+
a
.

,, (

+m{B-(l

+ K) + c} ^

M *+'- N +'-*
T

Retrospectively

N -l- N +-lx+n
w

+)c)+c}

R - R- ->-'" M x
l

+.

"x+n

(2)

When

t.

(a) If (3/) lived

Q-l)

years, occurring in

cases out

01

x+t
,

,.

M
Prospectively

-j^ x+t

tt

~^l1
x+t

Retrospectively

N -i,-N ^+t-i
,,
,

ff

_ {T ( 1 +

K)

R -Rgt -*M e + c |_^


,

x+t
(6) If
(

x+t

(^)

died
.

after

m
I

(
,

< i)
,.

payments,

occurring

in

,P -

P )i

cases out of

M^
Prospectively

N
*"-

"f^

^,
+(

s+t

Retrospectively

v
(3)

N-N
x-l

+-! _

{a .( 1

+ K) +c} _

R-R.-mlVI, E
lp

When

><.
(<

(a) If (#) lived

1) years, occurring in

P y isc+n cases out

of

x+n

Prospectively

M _^+n_ N
7r

x-\-n

rl

x+n

374
Retrospectively

ACTUARIAL THEORY

[chap, xvfii.

T - x-l D
(6) If
(
3/

N-3ST, *'x+n-l
x+n
(y~)
.

l~(\

,A

R-R^,-/]VI x x
)

M-M
x+ t
3,+n

x+n

x+n

died

after

m (<
,

i)

payments,

occurring

in

- v ~)l cases out of / x+n m"y J x+n W-l'v

M
Prospectively

N
~^
"

T)

Retrospectively
'N
i

x-l i

~ -N

a+m-1

71-1

D x+n

N x+*-l -N a;+m-l\ \ / D x+n


R -R
^

-mM
x+n

,,

x+n

reserves for limited-payment policies, endowment and temporary assurances have already been given, both by the retrospective and prospective methods, and the values of each by the two methods are equal.

28.

The

assurances,

The three manner


:

classes

may be looked
a

at together in the following

n:t

yx _

x+n

Pa x+n:t-n\ x
t

= A x+n -,Pa x+n + JPx x x


,

N
.f-'Y)

x+n

_
xt\

= A x+n:t-n\ Pxt\ x+n:t-n\ -a


'

= A x+n

^N +'-i ^
n
i

p
xt\

J)

x+n

+p_
xt\

Nx +t-i
,

T\

x+n

= A k+ji -P +
yi-

(P
a
o:(| r|

x+n

++
1-

<^
)N
J)
a:+7i

x+n

A
J)

= Ax+n

M Ei_pi_
xt\

x+n

+pi_ x+n^ xt\


'

N x +'T)

= Ax+n - P1 - a + x+n
xt\

f Pl_
xt
\

_P x
J)

+ tJ

x+n
x+t-i

x+n


chap, xvin.]

TEXT BOOK PART

II.

375

In each of these expressions the


general form
benefit.

Ax+n - Pa

+B P
,

first two terms are of the alone varying with the nature of the

N
The
coefficient.

third term has -=i x+n

constant

with a varying

This coefficient consists of two parts, the first of which shows the correction to be made on the second term for the value of the premium, and the second the correction to be made on the first term for the value of the sum assured. Thus in the case of temporary assurances, no premium will be received after age x + t, and therefore the value of all premiums after that age must be added to the liability ; further, no claims will be paid after that age, and therefore the value of a premium starting then which shall be sufficient to meet all these must be deducted.
29. These formulas

may

also

be worked into the following

forms
,V

n;t

A x+n ,

Px ax+n + P_ti x
,

J)

x+n
,

x+n

P
x

f,P

x+n

A-

-P)Nx ,-T(N x -Nx+t-\' + PNx ,) x


J)

x+n

A-,Pa+
x+n
t

(,P
'

x+n

-P)N 'x ' ^ J)

376

ACTUARIAL THEORY
= A a+w -

[chap.

xvm.

VL
xt
|

PV, a x+n ^ xt
\

CP 1 - - P * +tJ "'
K

'+ 1 - 1

jy

x+n

= A, -PLa x+n x+n xl


| ,

(PL-P)N X-l ^P^fN X-l -N X + t-l' + PNx-l -Px+t N x+t-l ,) X> X


>

Xt]

Xt\^-

x+n

= A x+n -P-ax+n + (^n-PJ^-! xt\


,

jy

x+n
r.
,

since

PV,(N X-l Xt\^

,)=M-M,=PNX-l -PX+tNX+t-l -N X+t-l' X+t


,

,,

Here each expression is of a perfectly general form independent of the value of t, except in so far as t determines the value of (P - P )N =-^ - Pa x+n H the premium for the benefit, A , where r ' x+n J)
, ,

x+n

alone varies, being the

premium

for the particular benefit under

consideration.
30. The reserves for policies under many special schemes may be simply found by remembering the method by which the annual premium was calculated. For example
:

(a)
(r),

To

find the value after n years of a whole-life policy to


at rate

be guaranteed on the sum and thereafter the sum assured is to be payable, the office assuming rate of interest i in its calculations. It will be remembered (see page 148) that the

under which interest


I

is

to

assured for

years after the death of

(x),

annual premium for this benefit

is

p^+O'-'K-k,)}
Therefore the reserve will be
n
x

'

(t)
|

(6)

To

find the value after n years of a whole-life policy, under

which the sum assured

is to be payable in t equal annual instalments, the first at the end of the year of death of (x). The annual premium for this benefit (see page 147) is

x^

chap, xviii.]

TEXT BOOK PART


will

II.

377

and therefore the reserve

be

V x x^l
t

31.
life

To
2 P.

find the value after n years of a policy for the


is

under which the premium


is

for the first

years,

whole of and there-

after

(1)

When n<

t,

the value

is

\+n ~ P (\+n + P ( N . - N ^ J - (M

-.

a *+

J
)

Prospectively

^^
!

*+y

*"

Retrospectively

and these two are equal.


(2)

When

P(N -?Z1

> the value is A x+ n ~ 2Pax+ Prospectively + N, -2N +-^ I ,)-(M-M jrW


or
t,

5zi

Retrospectively

which are also equal,


32.

To

find the value after n years of

an endowment assurance

policy payable at the

end of

years or previous death under which

the

premium
(1) n

is

to

be P

for the first r years

and thereafter 2P.

< r. A x+n\t-n\
p (a x+n:t-n\ ^
|-

Prospectively
r-n\
i

) x+n;t-r\'

Retrospectively

IYN a;-l >


(2) n

-N x+n-l' ,)-(M x - M x+iw ^


^

D x+n
,

or

>

r.

Prospectively

A
Retrospectively

- 2Pa
:

,)-(M ,-2N x+n-1' v x -M rJ_J P(N x-l +N x+r-1 * x+ws


n
,

D x+n

378

ACTUARIAL THEORY

[chap, xviii.

Again in each case the reserves by the two methods may be proved equal.
33.

To

find the value after n years of a policy subject to a


(.r)

contingent debt should


(a)

die within

years.
t

Where

the debt
(x) is
t.

is

X for the whole period of


we have

years.

Assuming that
(1)

rated up r years,

When

<

M, +r+ro(l-X) + XM +r+t
T)

77

x+r+n
,
,

x+r+n
(2)

When

or

>

t.

Ax+r+n
,

7T

a x+r+n
, ,

(6)

Where the debt


t

is

X per annum for


(1)

years,
t.

<X for the we have

first

year, and decreases by

When

<

M x+r+ ,{1 (2)

(*

- )X} + X(R^ +r+7i+1 - R +r+(+1 )

_^
X

D x+r+n
When
n

x+r+n

or

>

<.

A
34.

7r

To

find the value of a


if
(.r)

2 being payable

live

years, or 1 if

double-endowment assurance he die before that.


xt\

policy,

V =
= _

V-+ nVxt\ xt\

V-+Ax+n:t-n\
y
xt
|

Pia x+n:t-n\
xt\

j^

x+n

-n

A xt\
\

+ n:t ~ n
a
.

art

_ =
Similarly, to

V
n n

xt\

T A x+n:t-n]
4-

xt\^

Id

Vxt\J
"^

Vxt\( 1+A xt\) + ( Ax+n:-nr\~ A xT\)


half-endowment assurance

find the value of a

chap, win.]
policy,
that.

TEXT BOOK PART


if (x) live
t

II.

379

being payable

years, or 2 if he die before

V =
=

-,
art
I

I
xt\

V ^( 2 - Ai|)-(V

TO:

^-A^)

35. To find the value after n years of an annuity deferred years which was purchased by single payment.
(1) n

<

I.

Prospectively

Retrospectively
I

x a a zV (l+{) n J 1
1

^ x+n

_ isD XX ~ ~D x+n
1
1

The two

expressions are equal, for

,|(iD
t\

Nx+t D X _ Nx+t X X D x+n ~ ~W~ D x+n D x+n x


,,
,
=

!-'">+

(2) n

or

>

t.

Prospectively
Retrospectively

,\a
<
I

Dx

Nx+t -Nx+n
,

D
Again
tl

_,

D~
-NxW
,

,|D x -(Nx+t K x

D x+n

N D x+n

+n

36.

that the
(1)

To find the value of a similar annuity with the premium is to be returned if Qc) die within the t

condition
years.

<

t.

Prospectively
, t-n\
I

x+n
,

+{A(1+K)+C}A \ / x+n:t-n\
;
'

'

'

Retrospectively

AD
D x+n
,

>-{A(l + v
'

*) y

+ c}-S 1
'

M -M x+n D x+n ^

380

ACTUABIAL THEORY
latter
is

[chap, xviii.

But the

equal to

gi-

[A{D - (1 + K)(M x -

M x+ J} - c(M x - M x+n)]

x+n

+ V x+t + {A(l + K) + c}(M x+n -M x+t )]

N
=
,

J _,

+ WHk) + c)
x+n +{Afl
,

JVT

-M,,
since
,

A _

N
_
x

+ c(M-M
+ k)(m x _ J\
'

,)

x+n
t-n\
Iff
I

x+n
;
,

(1 ^

m x+t>

<

+
'

K)
'

>.

+ C}A-5x+n:t-n\
>

(2) n

or

>

<.

Prospectively
Retrospectively

A -g--{A(l + >) + c} 5
o:+?t

M* -M

p a+

+t

N --^-N^
,
,

a;+?i

But the latter

is

equal to

^[A{D^-(l +KXM,-M^)}- C (M,-M^ )-(N


(

+i

-N

+ J]

X-\-%

= IF"

A{

(1

+ )(M x -

M_)} - {N

+ c(M, -

M x+t

)}

+ N, + J

N
=a

37. To find the value at the end of n years of an assurance with a uniform reversionary bonus of b per annum declared every five years, an interim bonus of b' being granted in respect of each premium paid since the date of last investigation should the
life

die within a quinquennium, assuming

re

to be a multiple of

5.

Whole-Life Policy.
1

J)

x+n

_[(l+re6)M x+n + hb(M x+n+5 +M x+n+10 + ...) J ' LV J V


, , ,

+ b'{\+ n

-m

+ + n +, + ^+n+,0

--

)}]-".x+n

chap, xvin.]

TEXT BOOK PART

II.

381
for this

having the value found for the premium page 302.


77

benefit

on

When

b'

= b, we

have
,

(1+6)M

+ bR

x+n
ir

having

its

appropriate value.

Endowment Assurance,

maturing at age
x+t j
-r

(x

+ i).
x+n+10

Dx+n

l-V

J\

x+n

x+t

*
\_

x +n+b

x+t>

+ (t-n)b(D x+t -Mx+t ) + b'{(Rx+n -R x+t)- H M x+n+&


+ M x +n+w +

+ M
+D
^,)

x+ t)n -

-v=^
-R
,

When V = 6, we have
[(1+6)(M ^ -

M
;

^,

+ 6{R

+ (/-YD

,-M,,)}!

x+n

ira.

" in these two formulas will have different values as found two benefits on page 303.
38.

for the

To

find the value of

an assurance with a compound rever-

sionary bonus on similar conditions.

Whole-Life Policy.

1_(1 + 56)T (Mx+n {

M x+n+5

+ (1 + 5b)(M x+n+& -

M x+n+1Q

+ 6 '( R. + . " R, + , + 5 "

5M , + u +5) + *'d + 5bX Rx+n+, ' K+n+ W ~ 5M * + + I0)

If

6'

= b,
+5 )

J-(l + 56)T{ M x+ + 6(K s+n - R^

+ 6(1 + 56)(R, +n+B -

R^J

+ 6(1+5^(R^ +10 -R +n+u )+- -}- +n


will have a value appropriate to the benefit as indicated on page 304.

382

ACTUARIAL THEORY

[chap.

xvm.

Endowment Assurance.

D^l + 56)
+ (1+56)

{(M x+n

M x+M+5

+ (1 + 5bXM x+n+& -

M x+n+ J +

(M^-M^-Kl + S&^D^

+ 6'(R
+
...

+n +6'(l

RI+ , +5 - 5M , + , +5) + 6'd + ^)(Rx+n+6 - Rx+n+10 - 5M


+

xm

5^(R

i+( . 5

-R:c+i -5M^)}

+7[;

^
io)

If

6'

= 6,

_i-(l + 56)5 { M x+k + 6(Ri+k - Rx+n+b ) + 6(1 + 5&)(


t-?t-5

V* + " V +
5

'

t-n

+ 6(l+56)-T-(R^ 6 -R, +t ) + (l+56)


The
values of
7r

(D,

+(

- M, ,)}- TO<+ . !P +

are indicated on page 305.

39.

To

find the reserve

under a Discounted-Bonus or Minimum-

Premium
(a)
It

polic}'.

Cash Bonus.

premium
was

was found on page 306 that the deduction from the ordinary for a discounted bonus of k per annum of the premium

kV

N*+

~
.

Therefore in finding the reserve of this

class of

x-l
policy,

we must add

to the ordinary reserve for a full profit policy,

to allow for this decrease in future

premiums
That

but

we must

also

make

a deduction from the liability, in respect of future bonuses

at this rate

which

will not

be payable.

is

=
x

-^V x +AF x~$ 2 ax+n -5/fcP' x


x-l

*+"+ 5+
J)

*+rc+io

+ ""

x+n

= =

N N Vx +AF x ^-2 a x+n -AF x XT " +1t+8 aa+n ^ ^ M


x-l
J^

x+n-1

V + H>'

(
x

^J
a:-l

+TC+2

V^

m+7S-r

being the reserve for a

full profit policy.

chap, xviil]

TEXT BOOK PART

II

383

(6)

Uniform Reversionary Bonus.


to

The deduction from the ordinary premium was found


be b.^-?-.
x-l explained,

Rx

An

addition and deduction must be


shall

made

as above

and we
a

have

Vx

Vx +6_L

It

x+w

-b

R x+n

a;

Dx+n
\

(R
,

R
,

N X+ll-1
(c)

N x-l' J

*+

Compound Reversionary Bonus.


is

The deduction from the ordinary premium

K*x - R. +5 ) + 6(1 + 5b)(Rx+5 - Rx+1() + 6(1 + 5b)%Rx+w - R, +lg ) +


The reserve accordingly
will
(l

...

be

Vx +

^-Va) + 6
+n ~

+ 56)(R, +5 -R, +I0) + -J^"

x+n

x-l
tt

b (R

R, +m+5) + *q + B *X V, + 5 ~ Rs +

+ 10) +

D x+n ^

r
"

6 (R,

+ro

- R, +m+ a) + Hi

56 X R

+ +6 -

+1 q)

x+n-1

H R, - R, +5 ) + Kl + 56XR
x-l

-R, +10 )+ +5

-)

does not fall to be that a surrender-value is as a discussed, but it may be remarked rule granted only where a benefit is certainly payable, as under whole-life assurances, endowment assurances, joint-life assurances, etc. It is customary to allow no surrender-value where the
40.

The

subject

of

surrender-values

only contingent, e.g., temporary insurances, where the sum assured is payable only should the life die within the term, a contingency which may or may not happen contingent insurance, (x) (x) against (y), where the sum assured is payable only should
benefit
is
;

die before

(j/),

which may or may not happen.

384

ACTUARIAL THEORY
In the case of a pure

[chap, xviii.

endowment with return


deathj

of the premiums
is

in

the

event

of
is

previous

surrender-value
;

given,

since a benefit

paid whatever happens

but where

it

is
is

a pure
paid, as

endowment without
the benefit
is

return, usually no surrender-value then contingent on survivance.

In the case of the double-endowment assurance, the method by which the surrender-value is calculated requires special consideration, since it must not be overlooked that only half the
benefit
is

certainly payable, the other half being contingent on

survivance.

41.

The

principles of Text Book, Articles 122

and 123, on which

formulas (56) and (57) are founded, to apply to any kind of benefit.
First, let

may be

stated generally so as

W be

the amount of paid-up policy to be granted.

Then the

value of a benefit of

W must equal the value of the

policy.

Second, the paid-up policy must equal the sum originally secured less that proportion of it which the future premiums
will cover.

In the case of a whole-life assurance,


(1)

we have

WA

V
1

(2)

Px+n
,

Similarly for a deferred annuity-due, where

P =
-

x+t-l

N x-1 -N x+t-l
")

we have

^
(2)

/in

w N x+t-l
D x+n

_ N s+i-1 =
1

PC N \

x+n-1

N x+t-V

Dx+n
^x+t-1

N x+n-1 -N x+t-l
a a

For a reversionary annuity, where P = -y


1

we
xy

have

W K+* _ ax+n:

+J =

a x+n ~ x+n:y+J ~

P ( ! + aX +n:y+J

(2)

g+w
,

-x+n:y+n
, ,

+ ax+n:y+n

chap. xvm.J

TEXT BOOK PART

II.

385

42. To find the paid-up policy to be issued after n years in lieu of a pure endowment policy payable at the end of t years with return of premiums in event of previous death.

The value of the present

contract

is

< N -i- N. + .-i)-^(R,-R^.-.M.


|

x+n
are to be returned in event of death before age x + t under the paid-up policy as under the original contract, and therefore we shall write

Now, the n premiums paid

W
x+n

x+n

**~

x+n

.hence

" (N

N + .-i)-*'( R* -+.- M.u J *-' " D x+t

43. Under a last-survivor assurance three cases arise in finding the paid-up policy.
(1) (x)

and (y) both

alive.

WA-x+n:y+n
or

Ax+n:y+n
P-

P. axy x+n:y+n

= i-_
'

x+n:y+n

(2) (x) dead.

WAy+n
or
(3) (y) dead.

= Ay+n - P- ay+n xy
=
1

3y+n

P-

WA x+n
or

= A x+n - P-ax+n ^ ^ xy
p-

44. It
policies

is

common

practice for offices to guarantee paid-up

under limited-payment whole-life assurances and endowment assurances, the amount of each paid-up policy bearing the same proportion to the original sum assured as the number of premiums paid bears to the whole number payable.

2B

386
It

ACTUARIAL THEORY

[chap. XVIII.

benefit exceeds the value of the original policy,

sometimes happens however that the value of the guaranteed and the conditions
investigated.

may be

whole-life assurance by limited payments, where t premiums were originally payable and n have been paid, the

Under the

amount of paid-up policy


select,

is

Assuming the

life

to be

still

we have
n A
2
-5,

_ ^

_ P
t*+]
*

a
[*]

[a;+m]

[i+n]:*-

according as
[*]*[*+]:-

>
I

""

<

[}

t)

[*+]

or according as

P
t
[as]

> = < ^ ^

1
I

Jt-nlx+n] P
1

The

following figures based on the

Table at 3 per

cent,

illustrate

the point

Age

at

Entry.

CHAP. XVIII.

TEXT BOOK PART

II.

387

benefit is always less than the value of the original contract.

The

following figures are on the same basis as before.

Age

at

Entry.

(0

388

ACTUARIAL THEORY
this
is

[chap, xviii.

and

the lump
to be

sum

to be paid to the office if the future

Femium

is

-,. the premium for an endowment assurance

at the original age at entry.


It is frequently suggested that it would be an equitable arrangement merely to pay the difference between the premiums accumulated at compound interest, or

But

this is insufficient, since

N -N
=^

^^

>

(1

+i)s as shown

x+n

on page 295.

The following case


tion.

will illustrate the absurdity of the sugges-

Suppose an

office

(1) Permits its whole-life policy-holders to alter to

assurance on paying

up merely accumulated at interest, and


(2) Permits
its

the

difference

in

endowment premiums

policy-holders to pay premiums, the difference between the premiums being allowed to accumulate as a debt against the policy, which will be deducted from the sum assured on payment

endowment assurance

only

the

whole-life

either at maturity or at previous death.

No policies will be taken out under the second scheme, for under the former just as good a benefit is secured for the same premium, with the additional advantage that the accumulated difference in the premiums will be deducted only at maturity and not at previous death. To put the two classes on an equality, the amount to be charged at the end of m years in the first scheme should be altered to
/p
^

p
xm\

\ x'

x-l
J)

x+tn-1

x+m

Another illustration of the same absurdity may be given. Suppose the assumed conditions to apply to all classes of assurance. The life assured would then be well advised to take out a temporary assurance which will give him the sum assured in the event of death during the term at the lowest premium. Then at the end of the term, if he survives, he alters to endowment assurance, and pays the accumulated difference

(P-i-Pi )fl+i>-, = P(1-m>and he should immediately receive


1,

which

is

clearly wrong.

chap, xviii.]

TEXT BOOK PART


amount
PI")

II.

389

The

correct
/p
>

to

be paid by him
,

is

N x ~ -N as+ro-l _
, "

p
1

_1_

N x-1 -N x+m-\
)

xm\

xm\'

J)

x+m

xm\

x+m

=
Thus he provides the payment of
1,

which has to be made to him.

From

the formula given on page 387,

we have

p ~ p x:n+t\

V n x:n+t\
a
x+n:t

Vx
_ ^a x:n+t\'1 x+n:t\

_
1

fp x+n:t\
^

_
%

V%

"""

x:n+t\

a x+n:t\

= Px+n:t\
From
paid
this expression

V
a
x+n:t\

we observe that the future premium to be the endowment assurance premium at the present age, future less the reserve value of the existing policy spread over the
is

premiums. Again, we
in

may

argue as follows

As

no premiums are to be
1

received after age (x + n

+ t), and

as the office will lose the interest

advance after that age on the assurance of


office is

which

will

then be

payable, the total loss to the

(P x +

rf)%^
X+lb

(.V

+ d )(*x+n-\+n:T\)
~ ax+n:T\

a x+n

Spreading this

loss

over

the

future

premiums and adding the

result to the present premium,

we have
a

pX

x+n~ x+n:T\ Xa-x+n:T\ -x

Now
altered

let

the premium to be paid remain at


assured, S.

?x

to find the

sum

390

chap, xvm.]

TEXT BOOK PART

II.

391

At

the succeeding investigation,

we have

B
from which y 2

*\

P(N *v

"2

-N Vl~ lJ
n

may be

obtained.
similarly at the following investigations.

And we may proceed


If the policy is to
let

y v y v ys

etc.,

payable, and let


before.

be altered into an endowment assurance, be the ages at which the sum assured will be the other symbols have the same meaning as

We

have at the

first

investigation

N
J)

B,A = (Px +d)-^ v ' la;,


from which we

may

obtain y v

At the next

investigation

N
B 2 A x =
from which y 2
(P +d) >
V-

"-^

-N
H

J)

^
,

may be

found.

And we may

proceed similarly at the succeeding investigations.

EXAMPLES
1.

Given

P25 =

-01521,

P42 = -02654,

a42

= 15-5679,

find

the

age 25, which value of a whole-life policy for 1500 and to which a reversionary bonus of has been 17 years in force,
effected at

383

is

attached.

Value of policy

=
= =

1883 x

Ai2 - 1500 xP25(l + a


P42 - 1500
x

i2 )

(1883 x

P25 )(l + ai2)

(1883 x -02654 - 1500 x -01521)(1


(49-975 -22-815)16-5679
449-984, say 449, 19s. 8d.

+ 15-5679)

= =


392
2.

1,

ACTUARIAL THEORY
Give
as

CHAP. XVIII,

many

formulas as you

know

for

xt\

x+n:t-n\

xt\^

x+n:t~n-l y
^

pxt\^ x-1 (N

,)-(M -M x+ns -N x+n-1* )


,

_,_

D x+n ^
*
xt\

'>

x+n:t-n-\\ J

x+n

t-n\

~~

xT\

A
P

+ a'x+n
^

t-n-iy

A
1

(l
K

^U

x-\-n:t-n\' x+

1+ax+n:t1 +a a;
:

x:t-l\

x+n:t-n-l

l+a x:tl

= 1A.

1-A x+n:t-n\ 1-A


xt\
:

x+n:t-n\

A. xt\

P z-\-n:t-n\i+d ;
,
'

P x+n:t-n\
,

xt\

Px-t-n\t-n\i+<* 7
=

l'irtlX

1
l

V a:+l:t-i|)'
and
,V

'( 1

*+-l:<-+l|'

3.

Find formulas for


is

-,.

when

the rate

of interest

zero.

Vx

1+a 1 +a
(when
interest
is

zero)

1+ex+n l+e

chap. xviii.J

TEXT BOOK PART


1
i

II.

393

y_

__

+ax+n:t-n-l

= (when
n:t

interest is zero)

+e l+ex:t=T\

,V

Ax+w - P(l+ax+n\t-n~~\\' -,) x^


,

= (when
since

interest

is

zero) 1

l+. x+n-.t-n-i\

+ ex:T=T\
when
interest
is

,P
'

"

A
=

1
-=

l+(l

x:t^\

1+e*:*

zero.

It will
life

assurance

<(in
4.

be observed that the formula for limited-payment wholeis the same as for endowment assurance, so long as the limited-payment assurance.

in force, the

Under a policy taken out at age x which has been n years sum assured and bonuses amount to S. Prove that
is

the value of the policy

equal to

(s

+ ?x +

~
J

A x+n - ( Px + -A

Value of policy = SA,

+.

- P,(l + %+ J

C A, x+n

P(l-A x+n' ) xV
_,_

= SA x+n - P x^ - Ax+n' (l + V) (1 ^ rMn )


\

fs

P P + P + -J)a ^ -(? + -J)

5. There are 44 policies of have been in force 1, 2, 3,

etc.,

each, all effected at age 40, which up to 44 years respectively.

Find the values separately is 17-52789. sums assured, and of the future net premiums, of the aggregate

The sum of

their values

having given

A 40 = -379434.
we have

By

Text Book, formula 18,

2Ax+n = 2V(1-A x' + rhx ) aA

394
Therefore

ACTUARIAL THEORY
2A,^

[chap. xvih.

40+71

= = = =

2V(1-A) + 44A 40 40' 40^


-1

(17-52789 x -620566)

+ (44

x -379434)

10-87721

16-69510

27-57231

which

is

the value of the aggregate sums assured.

And

the value

of the future net premiums

= 2A, -2V, 40+ra 40 = 27-57231-17-52789 = 10-04442


6.

Explain under what circumstances n V x

<

_jV

j,

and give
the

an example from some known table of mortality where anomaly occurs.

V "IX
if
1

<
<;

71-1

V+1
3+"
a
x+l
,

x +n

x+1
,

X X

a
if

a
a

x+n
if

x+n

< %+!

is very unusual, but does occur at the infantile ages of all mortality tables, and at very advanced ages of some mortality tables which have been badly graduated, e.g. the Carlisle Table.

which

policy effected at age x to be payable at age (x

Find the reserve value after n years of a pure endowment + f), with premiums limited to r and to be returned in event of death before age (x + 1).
7.

The net premium

for such a policy


is

was found on page 324.

The

reserve value after n years

(1) n

< r.
nM ^ + R*+* - R *+<-._ rM D *+ ^ _.*+ + {-(! + K ) + c v ' D^ D ,-N s-fr-l N %+n-l
, ,

Prospectively
f

J _,
'd

}
'

'

'

x+n

chap, xvm.]

TEXT BOOK PART


N x-1^ N *+*or

II.

395

Retrospectively

v
(2) n

-{ ff (l +){) + c }_*

R*+" - nM *+"

>

r.

Prospectively
J _, _+' + r ^(l + K + c ) J_^^

M *f

Retrospectively

N, -

N r4- - 1 r
+
1

-{ a -(i +

K)

R -R - rM **: +? + c }_;
_,.

In each case the values found by the two methods may be proved equal, and it will form a useful exercise to do this as shown for other similar problems.

Find the annual premium to secure an endowment assurance maturing at the end of t years, with a guaranteed bonus of 2 per cent, for each year completed and also the reserve value at the end of n years.
8.

to {),

Benefit side

M -M x+t + D x+t
x
,

,,

DX
Payment
side

2 + .no
,

Rx+1

Rx+t (f-l)M x+t +IDx+t L1 V J


t

DX
,

N J-l - N X+t-1 ^ DX
,

whence equating and solving


p

M
The

M, + + D x+ + -02 {R
, ,

+1

- R, +i

(I

- l)M f+t + /D, } +(

N ,-i- N.+-i
reserve value after n years
is

Prospectively

M s + ,- M s +( + D * +( D 1+71

.no

"

+ .+

+ . + l-

R. + -(

<

M x+

+ <D +

D *+
,

_p

N x+n-l -Nx+t-1
x+n

396
Retrospectively

ACTUARIAL THEORY

[chap. xvhi.

p e

Nx-l - N x+n-1
,
_,_

d~ x+n

- M x+n d~ x+n
,

r\n

02

Rx+1 - R x+n v _,_-(- 1)M x+n /


iJT x+n

Find in terms of commutation columns the value after n of a policy for a deferred annuity, payable half-yearly, maintained by annual premiums, to be entered on at age (x + z).
9.

years

Examine the three


Here

cases,
0(8)

n <,

=,

>

z.

tt

^ +s +' * J = ^A-l = N,-i- N +,-i l +a x:7=T\


1

+1D

and reserve value of policy


(1) n

<z.

(o) Prospectively

N* +

'

+4-D x+ *
*

N
tt

p x+n
1

-Jthl^L

-N
**=i

x+n
,

(6) Retrospectively

N "- ,-N x+n ~ 1 L


x+n

(2) n

z.

(a) Prospectively

N *+' +iD ^
*
X+Z

*+'

(6) Retrospectively

N "~ 1 -N
T

a:+i,

~, 1

ir

(3) re>z.
(o) Prospectively

N +n +4-D *+*
*

10. What annual premium should be charged for an assurance of 1000 to (.r), the premium being successively reduced by the first premium and ceasing altogether after the tenth payment ?

of

What

is

the reserve value of the policy at the end of 6 years

CHAP. XVIII.]


398

ACTUARIAL THEORY
Or
again, the single

[chap. xvrn.

premium

is

Find

J,

such that

1+ J
J,

l+i

4.

Then the

single

&

premium r
after
t

= A'^
years

calculated at rate
is

and the value of the policy

(1

+jJA' x+t

In the case of the annual-premium policy we have P

l+a X
.

The value of this


12.

policy after

years

is

(1

+j)*A

Pa

policy

by annual premium was issued n years ago


Find the reserve value

for

a reversionary annuity to (x) after (y). the present time.


(1) (a) still alive v /

at

n n

Vay\x = ay+n\x+n - Pay\x^ + ax+n:y+n' (1 )


i

(2) (y) \ / v-7 J

dead

Vay\x =
i

ax+n

13. Find an expression for the value at the end of n years of a contingent insurance payable if the survivor of (x) and (if) die before (z). It

must be ascertained whether


if

(x)

and (y) are both

alive.

Then

both are alive


n

Vl = A x+n :y+n:z+n xy\z


-

Pi (l+ax+n:y+n:z+ns 1 xy.z^-

If (x)

is

dead,
n

Vi = xy'.z

A-J
is

y+n:z+n
dead,

Pi (l+a y+n:z+n' ) xy:z^

And,

similarly, if (y)

Vixy'.z

J = A x+n:z+n

Pi (I + ax+n:z+n' xy:z K

14. Obtain by the retrospective method a formula in terms of annual premiums for V 1 - , and prove by general reasoning and

algebraically that

y
*

P -Pi-, xn\
a:

P r xn\

chap, xvm.]

TEXT BOOK PART


PV,(N
n
xt\

II.

399

,-N

)-(M
jj x+n

pi

400
15.

ACTUARIAL THEORY
Given
at

[chap, xviii.

31 per cent. * r
for the

Vx =

-50084, and 7
),

Px+n =

-05917, '

find the

premium

age at entry (P

the value of the sum


policy equivalent

assured
to

(A

),

and the amount of paid-up

Since

chap, xviii.]

TEXT BOOK PART

II.

401

whole-life policy was effected n years ago at age x, and is now to be reduced by half, the value of the rest of the policy being applied in reduction of the annual premium.

17.

the

sum assured

Find the future annual premium.


(a) We may take half the premium formerly payable and deduct therefrom the value of half the policy divided by the annuity-due for the rest of life.

Thus,

iPa

-^
x+n

R-KP.+.-PJ

= px -!?_, * x+n
(6)

Or we may take the premium


by the annuity-due

at the present age for a

policy of \)

and deduct therefrom the whole value of the old policy


at the present age.

divided

Thus, 3

>x+n --2-i = >x+n -(P^ -P) v x+n * * x* a


x+n

= px -I? x+n ^ *
(c)

Or we may reason

that the value of the present policy

must equal the value of a sum assured of \ less the value of the future premiums. Thus, if P be the future annual premium,
n

V x = 1A x+n - Pa x+n ^ ^ *
,

and

Pax+n =

U
*
*

x+n

- nV x
>

x+n
,

x+n

x*

>

x+n

hence

P = Px - APx+n *

18. (x) and (y), who are insured under a joint-life policy for 1000, desire at the end of n years to have it converted into two What premiums will be single-life assurances for 500 each.

payable by (x) and (#) respectively

The
(x)'s J
*

joint-life
is

policy has acquired a value of


1

^V^

of which

share

Vxy

and

( y)'s \J /

Vxy
1

parts together these two A

Now, if from the making up the whole value of the policy. premium payable by (x) at his present age for a 500 policy we deduct his interest in the old policy-value spread over the whole

2c

402
of his
life,

ACTUARIAL THEORY
we
shall arrive at an equitable
for (z)'s

[chap. xvih.

him.

Thus we have

new

policy for

premium to be paid by 500 a premium of

1000

500Px+n

2-J2 a x+n
policy the

And

similarly for

(/)'s

new
,

premium

is

1000 Vi

500P

!LJ*

y+

v+n

19.

A whole-life

policy for 1000, effected at age 20, has been

and has accumulated bonus additions of 450. proposed to devote part of the bonus to convert the policy (including the remainder of the declared bonus) into an endowment
thirty years in force,
It is

Using the H table at 3 per cent., assurance maturing at age 65. and ignoring the question of loading, find how much bonus will remain attached to the policy after the alteration has been made.

The

office

has in hand at present 1000

30

V20 + 450A 5Q

If

be

the amount of bonus to be surrendered this will be reduced to and it will require to have in hand for 1000 V +(450- X) A
,

the

new

contract

1000(A50:1^-P20 a 60:1^) + (450-X)A60:

The difference between these two reserves must be the present value of the bonus to be surrendered. That is

XA

60

= 1000(A 50:1^-P 20 a60:1^)-100030V20 + (450-X)(A 60: ^-A 60)


..

"MOV,-;,- 1000P20 a50: ^- 1000 80 V20 + 450(A60:llq - AJ


A
685-47 - 154-10 - 353-53 68547

50:15|

+ 53-70

= =

337-783

337,

15s. 8d. approximately.


4s. 4d. will

Bonus amounting to 112,


to the policy.

therefore remain attached

At

future divisions of surplus the whole-life bonus only will be


it

applicable to the policy, and

will

have to be converted into


proportion.

endowment assurance bonus by simple


chap, xvin.]
20.

TEXT BOOK PART


II.

403

of a child's

Give the prospective and retrospective values after n years endowment policy effected at age x, payable at age (.r + 1), with premiums to be payable only so long as the father (y) lived along with (x) and to be returnable in event of death of (x) Prove the formulas identical. before age (x + f).
Prospectively
If the father
is

alive to-day,

which

will

happen

in

x jp

cases of the survivors,

D^
T\
- i+

'

Mi+^o + cjr
ry
I

/V

x +n

x+u

'y+TiV

x+n+\

M x+t')+

..

x+n 1+71

N i+n-l:;/+ro-l -N i+t-l:y+t-l
x+n:y+n
If the father died after n

payments

^ +m(

7l

_1

P - n Py )
!/

cases,

x+rt

x+n

If the father died after {n

1)

payments

x+n { n _ 2 P y ~ n . x Py )

cases,

1 +

,t(1

+ k) + C ^

^p ^
etc.
:

etc.

If the father died after 1

payment

j+b (1

-py)
'-*

cases,

n i + {,r(l +
z+71

,c)

+ C }-*g

z+7t

The sum

of

all

these cases

is

ULd^ x+n

+ {,r(1 + K) + c}

M...-M...

M.,-M
+py^-jT
x+n

"

M
+ 2Py p

-M
D~ d~
t

, +t

x+n

M...-M.,,
x+n

M x+ , +1 -M j+
*+

M,+ -x-

M ,+A

I+ "

_
i+7i-l:a+7i-l

s+ t-liy+t-l

D~

404
Retrospectively

ACTUARIAL THEORY

[chap, xviii.

*{jx (i

+iy+ix+1

i pv (i +iy- +ix+2 x 2 py {\

+o-2 +

..

+U-i x .-iP,( 1+ ')}-Mi + ")+^(


i"y
v x+n

/M ' -

_,_

B, + .

+ y

M _-M
%-h>'

+'
,

n-l"y

v x+n

,-N
/

,
i

/M
<

-M
v x+n

^
^y

M ,,-M
v x+n

^z+m

'

>

\ N

2"y

yX+n

-l"j/

v x+n

To prove the two


recall the expression

obtained, page 315.

final expressions identical, we must first from which the value of the premium was Adapting that expression to the present case,

we have

-rr+Ki + ) + <H
1

__,

M x - M x+t ^
D
g+t-1

+py

M^.-Ikf, * +1 +t

D
a+<\
J

'

+ ,p,

M, ,,-M,, +

'

+--

^t-lPy

N x _ _ x-l-.y-l -N x+t-1-.y+t-l

D ay

Therefore

+e

+ {t (1 +

+ c} {(M x -

M x+t

+ Py (M x+1 -

M x+j

+ iPy (M x+i -

M x+t +
)

+ t-lPy( Mx + t-l~

M +t

)}

irfN ^

a-l:y-l

-N a;+-l:!/+(-l^
)

D
?

J)
:Ej/

Also

it is

to be noted that

D xy

is

of the form

vHx I

chap,

xvm

TEXT BOOK PART

II.

405

Now
rD
,,

the reserve by the prospective method

Ujr*-'* Mi + ) + }(

/M x+n - M * + j
,

+v
,

M-M
'+

M
^zPy

M
^
^nfy
x

J)

M
^ n+lPy
f)

-M
x+n

+
-,
\

x+n

x+n
,

M s+t-1 - M s+ i\
J _,

^t-lPy

J)

x+n

^ W nl'y

N+n-l:y+n-l - N +(-!: y+t-l J D x+n:y+n


,

= -i-TD i+( ^+{7r(l + K ) + c}{(M 1-1-11 -M x+u r J+p(M z+tc IV a;+?iL


'

>.

y \.

-M

+''

,)+

+ n"j/\ x+n p (M
,

M x+tJ + n+lt'y^ x+n+\ - M x+i' ,,)+ p (M


,

,)

_,_,

+ =
8

v(M

-M
1

"M-irfN

-N

D
^

i
x+n:y+n

?~|
y
-*

i-K + W

+ K) + c H(MI -

M i+J
1

+ ^(M >+1 - M, +( )

+ 2^( M ,+2-

, +i

)+ +

Py(

M x+t-l- M x+t)\
J)

-'"'V^x-l-.y-l'

x+t-l:y+t-U

_ - + 7r W x -l:-l
v.

x+m-l:!/+.-l)

7"

xy

- {< l +K) + c}{(M ~ x

M x+n )+P {M x+l -M x+ J


y

+ 2Py(. M x+2=

M x+J+
, ,

+n-lPy(

M x+n,

Mx+J}]
,

Ni-l:-l -N jc+-l:y+n-l
*
IT
,

x+ts

f^Q T ^ T c \ v >
I

/
I

/M - M +
yx+n

T -fy
,

M +l M + ,,u a:+

T
4-

. .

V ^n-l-fj/

M X+%
,

,w a!+

M X+ ^

.
1

which
21.

is

the reserve by the retrospective method.

G. H. Ryan formed for a particular purpose a hypo3 per cent. thetical mortality table by adding -01 to the that the policy-values by such a mortality P at all ages. Show

Mr

table are necessarily less than the

3 per cent, values.

406

ACTUARIAL THEORY
By
this hypothetical table

[chap. xvnr.

y/
'

2;

F x+n F X F x+n +d
(

p, ,+-oi)-(P,+-oi)
+

px+n -px
,

But the true value by

HM

table at 3 per cent.

-P P P x-\-n +d
, ,

Therefore

V < V
I.

for every value of x

and

w.

22.
life

Each of
1

persons effected n years ago at age x a wholeat

policy for

an annual premium of P

Find the reserve

How much required to be held to-day in respect of the survivors. of this is required for the lives that are still " select," and how much for the now " damaged " lives ?
The
total reserve required is

[x]+n\

[x]+n

~
,

\x]\x\+v)
still select.

are survivors, I, of these I, * [x+n\ [aj+w required for them will accordingly be
,
,

Now

The

reserve

[a:+]V

lx+n]

[x]

[x+ny

The remainder number


/,
,

of the
,.

/.

lives are the "damaged," and they The reserve required for them will be

{<dlxl+n - d[x+n}) + VK d[x ]+ n+l ~ d[x+n)+l) +


~*

[]( [*]+""

lx+ny
r

+ V{
,

[x]+n+l~ [x+n]+lJ~*~
,(N
,, [x]+n
r

'

'

'

_ ~

(j

\ v

(M [x]+n r ,

M [x+ny 0-P

[x]^

-N.[x+ny , ,)

y\x]+n

Ix+nV

D [x]+n - D [x+n]

chap, xviii.]

TEXT BOOK PART


lives,

II.

407

The
for the

reserve for the "select" " damaged," will equal the

together with the reserve

total reserve required


1

(A

-Pa
=

~)

+ (l

-I

~ V M+ n

[*+]) [*]+

[i(

N ri+n ~ N ri+i)

[+>i]

+ .]-

MN , + ,
[

CM M+ ,-M [it+|t] )-PM (N M+)( -N ri|+Bl )

__

M M+ -P N
[s]

[afl+n

is granted at an annual aged x, with the option of continuance at the end of the term as an endowment assurance, maturing at age (x + n + 1), on payment of the normal yearly premium at age (x + n\ Find expressions for the value of the policy on a select basis, (1) at the end of the (n - l)th year, and (2) at the end of the ( + l)th year, assuming the option to have been exercised.

23.

policy for a term of w years

premium

to a life

The premium payable during the

first

n years

is

p
while the
is

M -M [x]+n
[x]

CP V* []+:

[x]

N [x]+n
r ,

P[!+]:-VN [x]+n -N [x]+n+t \ x A N [x] - N ^


|

->

[*]+

premium P[x+n]:t\
(1)

thereafter for

years if the option be exercised

The

reserve at the end of the (n - l)th year

is

PCN

M N M+ .-i)-( M M
-

M W + -i)
+
l)th year, the option

(2)

The

reserve at the end of the (n


is

having been exercised,


A

[*]++! :*-l

_ p [x+n]:t\
I

[a;]++l:t-l

24. If in the
effect is

formula a

= A + Be*
(2)

the value of

be

1,

what

produced upon (1) /^

("^

and (3) ("H^?

408
(1) If c

ACTUARIAL THEORY
=
1,

[chap, xviii.

then

yu.

= A + B, which

is

constant for

all

values

of

x.

(2) It has already

been proved that under such conditions

as to

mortality

=
jx
-\-

(see

page 114) page 218)

and

A = ^=
=

(see

Therefore

<>P

i
p+d
/*

=
(3) ^ '

(>V
n

Ax+n -W'Pa x+n x


,

IX.

+8

^^ + 8

=
which is obviously correct, as the premium for each year will meet the year's risk, and there will be no reserve to accumulate.
Prove that the expected death-strain under a whole-life an annual premium payable throughout life, increases with the duration of the assurance if, at all ages on the
25.

policy, subject to

basis of the valuation mortality table

and

rate of interest,

A2 a

is

algebraically

>

iAa.

The expected
effected at age x

death-strain in the (n
is

+ l)th
in

(1

),

and

year of a policy the following year


if

(1

).

The

strain will therefore


x'

be increasing,
m+2
x>

"x+n*-

~n+l

x+n+V*

that

is, if

a ^

^2+J
x

<
*"

J^+l
x

a x+ji+l Px+n a x+n+l


0r if

a x+n+2~Px+n+i a'x+n+2

%+n+l - V + l >x+n

< >

"x+n+1 ~

+')V+1

that

is, if

iAa

which

is

the condition desired.

chap, xvni.]

TEXT BOOK PART


persons

II.

409

26.
its

At the commencement
l

of a certain year a

books

who have been

assured for

company has on each for n years,

and who

will

mortality q x

+ w^ and

be subject throughout the year to a special rate of in respect of the claims which occur amongst

them, the company undertakes to pay only the reserve values at the end of the year. On the assumption that the extra mortality will cease at the end of the year, and that it will not prejudicially affect the lives remaining assured, state under what conditions the company will make a profit from the arrangement, and find an expression for the amount of such profit. (Assume the premiums due at the beginning of the year.)

The

office will

have in hand at the end of the year

^v.- + p
to
I

,-J( 1 +) =

* H X +l V -. + d.
meet
its

which under normal conditions

is sufficient to

claims and

the reserve values required for the survivors.

Under the conditions


(q

stated the

+w ) = d +w
.

I.

number of deaths is increased but the amount paid to each is only


*

I Further, the survivors will be/ (d +w l) = l ,Vx-n ' x xx x x x' x+l Therefore to meet its actual claims and the reserves for the survivors the office should have in hand at the end of the year

n+l

,w

Vj+l

x
l

x/n+1

x-n

%Jn+\

x-n

=
The
/

n x+l

Ti+1

,,v x-n +d x x

?i+l

,,v

x-n

office will

therefore

make

profit, if

.+l

x .+l V .-n + d.

that

is,

if

> lx+l X n+l V x-n + dx X n+l VX - n dx(l- n+1 V x _J>0


is

which must always happen, as n+1 ^ x _ n

fractional.

Further, the amount of the profit must be d.(l - B+1 V j ._J.

27.

The

actual

expected amount. mortality during the year ?

claims for the year in an office exceed the Does the difference represent the loss from

Give the reasons for your answer.

This difference does not represent loss from mortality. The value of office has in hand for each policy on its books a reserve A comparison merely between greater or smaller. certain amount,

410
actual
loss

ACTUARIAL THEORY

[chap. xvih.

and expected claims cannot therefore indicate the profit or from mortality. The loss to the office through the death of any single life assured is not the sum assured, as would be implied in such a comparison as that suggested, but the difference between the sum assured and the above-mentioned reserve. It is this difference, then, that must be taken account of, if we are to make a true investigation into the profit or loss from mortality. The reserve held by the office at the beginning of the year and the net premium then paid, both accumulated to the end of the year, provide two things
:

(1)

The

reserve value required at the end of the year

and

(2)

contribution towards mortality risk.


of

The

total

the

contributions

to

mortality

during the year

would require to be compared with the net loss to the office in respect of the claims, i.e., the difference between the sums assured and the reserve values as described above, the balance between these totals representing profit or loss from mortality. It is indeed conceivable that the actual claims in an office might exceed the expected, and nevertheless a profit from For the claims might have occurred chiefly mortality result. among old assured lives where the reserve values were considerable, and the actual loss to the office consequently small. On the other hand, the actual claims might be well within the expected, and yet there might be a loss from mortality, due to the fact that the claims occurred chiefly amongst recently assured lives where the reserves in hand were small. In this connection it may be pointed out that in the annual reports issued by insurance companies, one may sometimes observe
a table giving the distribution of the claims experienced according
to the age attained at death.
little

Such a

table, however, conveys but

information regarding the mortality experience of the comIt is

pany.

obvious that

much would depend on


little

a variety of
class of

considerations, such as the average age at entry

and the

insurance
busineso,

effected.

company transacting

whole-life

and that chiefly at the younger ages at entry, but doing a large endowment assurance business, would tend to compare unfavourably in such a comparison with another office doing very
little

endowment assurance

business, and a considerable

amount

of whole-life business chiefly at the older ages at entry.


mortality in the

We

could not conclude merely for this reason that the profit from
first

company

is

less

than in the second.


chap, xviii.]

TEXT BOOK PART

II.

411

28. Assuming that an office had on its books at the commencement of a year a group of 1000 lives aged 40, each of whom was insured under a policy for 100 (without profits) payable at age 55 or death, and effected exactly 10 years previously at an annual premium of 3, 14s. also assuming that 10 of these become claims (payable at the end of the year of death) during the year, the
;

remainder being still in force at the end of the year that the office earns 4 per cent, interest on its funds, spends 10 per cent, of
;

its

premiums, and makes an


of this
is

H
?

3 per cent

net valuation

find

the total profit to the office earned

How much
interest
;

(1) profit

by the group during the year. from mortality (2) profit from
;

(3) profit

from loading

From Hardy's
100
,o

" Valuation Tables "

we

find

V SO:25J =
=
=

100A :1

lH-

100P30: 2

-^0:i5i

66-847 -3-244x11-383
29-921

100

ll

VM:i =
= =

100A :iii- 100P

:i

.l:iii

68-528 - 3-244 x 10-805


33-477
is

The accumulation of the fund

as follows

at beginning of year, 1000x29-921 Add-Offiee premiums paid, 1000 x 3-7

Fund

29921

Less

10 per cent

for

expenses

3700 370
3330
33251

Add

also

one year's interest thereon at 4 per

rate realised

....
liability,

cent., the

1330
34581 1000 33581

Deduct the claims payable

Actual fund at end of year From which deduct the office's


Difference,

990 x 33477

33142

being total profit earned

by the group
439

during the year

412

ACTUARIAL THEORY
Total profit, as before
.
,
,

[chap.

Made up
(1)

thus

The liability at beginning of year was H M 3 per cent, net 3-244


premiums, 1000 x

Interest for year at 3 per cent., the valuation rate

......


chap, xvin.]

TEXT BOOK PART


P^ the H M
a.

II.

413

we

insert values for the functions on the right-hand side of the

equation, as

follows:

net

premiums
is

are

used

throughout;
five

A^ and

+B , when the policy

of less than are used, values are

years' duration,

the values from the

table

but

when

five or

more years have elapsed, the

H M(6)

taken.

In the case of policies, which have been less than


in force, the

five years

H
five

reserve

is

less

than that required by Dr Sprague's


For those policies of
five or

Select Tables at all ages at entry.

more than
as follows
:

years' duration

we may compare the


.(H M ( 6 >) x+n

formulas,

y(H M
n.

and

HM

( 6 ))

_ ~

_ p(H &(H (B)) x+n x


)

and
It will

VM

= A<H"W)_p (H*C5)) x+n [xTx+n


is

be seen that the only difference between them

that

the

H
.

and

H
Dr

valuation employs the


is

net premium, while

under the other the select premium *


than P.
of

used.
all

Now Px

is

less

Sprague's Tables for


is

ages at entry up to 43,

and thereafter
thereafter
It

greater.

Hence the

and

H
an

reserve

is

greater than the select reserve for ages at entry up to 43, and
is less.

may be mentioned

that for an average

office

and

valuation gives a close approximation over the whole business to

the reserve required by

Dr

Sprague's Select Tables.

CHAPTER XIX
Life Interests

and Reversions

1. In practice it will be found that Life Interests are usually payable with a proportion to date of death, and therefore in such a case, though Text Book formula (1) is commonly used, a more

exact formula would be

*. = a'x + $ A'x

v-V F F X +d +t F X +d
F

F +d
X

'-4
A policy
must then be taken out
for

, ,

and we have

Amount paid

to vendor

.....
.

FX

T
,

P.+ d

First

premium on

policy

^
1

p,
X

4)

Total outlay J

+ tl ^ +d F
s

"i

II )


chap, xix.]

TEXT BOOK PART


is
.

II.

415

The annual income


to

be applied in payment of

One

d(l
year's interest on total outlay
.

*j

Annual premium on policy

At death there

is

received

Sum

assured under policy

Proportionate payment of

life interest

Together

....
payment of

which

is

to be applied in

416
3.

ACTUARIAL THEORY
The problem as stated
in Text Book, Article 13,
is

[chap. xix.

much more

frequent in practice than the problem to find the value of the life interest, and therefore it will be well to state the matter from
that point of view.

Since =;

P +d
life

purchases a r
=

life interest

of

1,

sum of

1 will

purchase a

interest of

F -^+d
\
a;

.,
J

and the policy to be

effected

is

for

^
policy

Then we have

Amount paid
First

to vendor

.....
1

premium on

Total outlay

The annual income


which provides

is

for

One

year's interest

on

total outlay

chap, xix.]
4.
(2), as

TEXT BOOK PART

II.

417

In connection with the Reversionary Life Interest, formula

Jellicoe.
lives

mentioned in Text Book, Article 51, was given by Mr Charles It is assumed under it that an annuity for the joint is actually purchased or set up in the books of the office.
that if the

Dr Sprague, arguing
is

number of

contracts entered into

no such procedure is required, or, as a matter of fact, carried out, suggested formula (5), where one rate of interest is assumed throughout, and which, without the correction for payable if (jj) die first, reads
sufficiently large,

1-(P' +d,.,)(l+a
y\ x

,..)

F * +d,_ w
interest
till

Or,
interest

if

we are to assume a higher rate of comes into possession

the

life

1_(F +d,.,0(1+ a
y\ x

,.)

P'

+d...
(t)

For a complete reversionary


formula
&'

life

interest

we might

use the

v\z
\

a %y
P'

P'

+d
2)
l

a
*u

^ l-(P>^)(l+%)
Fx + d
)

V
*

-(P +tQ(l +

p-^
X

which agree with formulas (16) and (17) of Text Book, Chapter XIV.
If

now we
of
P'
1,

give

^ -

(1

+ a^)
1

for for

an annual reversionary
a
similar

charge

we

shall

give
this

charge

of

+d
0(i
I

r-(F, +
f

In

case

policy

must be

effected

Proceeding as before, we have

2d

418

ACTUARIAL THEORY
to vendor

[chap. xix.

Amount paid
First

.....
. .

P..

premium on

policy

Price of joint-life annuity

i-(p; + <0(i+v> F x +d
.

-cp.+^ci+o
-

Total outlay

i-(p;+rf)(i

+%)

The annual income, from the annuity


during the joint lives and from the
life interest after (j/)'s

P'

+ rf

death,

is

l-(F. + d)(l+0

which provides

for

One
on

year's interest
total outlay
.

-(F. + ^l+a^)
p'

Annual premium on
policy

l-(P, + d)(l+^)

F +d (P's+^+y)
j^r,

At

(x)'s

death the sum assured

is

received

, .
,

r
xy'

which repays

The

total outlay

i-(F.+9(i+0
^

And one

year's in-

terest thereon

i-(P>rfXi+v>

l-(F+d)(l+0
5.

For the Absolute Reversion,


is

Jellicoe's

formula (8) assumes

as before that an annuity

actually or constructively purchased,

while Sprague's formula (9) rejects this as not in accordance with customary practice, and adopts one rate of interest throughout, assuming that reversions will be purchased in sufficient numbers to

warrant this procedure.

It is true that a specially large reversion

chap, xix.]

TEXT BOOK PART

II.

419

might throw out the average on which the latter argument rests, but this merely indicates that the office roust avoid contracts of such size, just as they have a, limit for the amount of assurance on any one life. As before, let us consider the reversion which can be purchased for a given sum, as that is the more usual problem. A reversion of 1 is purchased for 1 - d (1 + a ) therefore 1 will purchase a
;

reversion of

-=

r^ T 1-dQ+aJ

And an

annuity of

-,

l-<l+<0

must

be purchased.

Then

Amount

paid to vendor

Price of annuity

......

....

Total outlay


420

ACTUARIAL THEORY
Now
if
1,

[chap. xix.

l-(P
then

,;l

+rf)(l+a
will

purchases a
a

contingent reverreversion
of
(ij)

sion
=

of

purchase

contingent

^-=57^

-j-j-

for whicli

amount a

policy on (x) against

must be

effected.

Also an annuity of

-(?l

y^+ d
xy
ll

P' 1

+d
l

X +%)
1

must

be purchased.

Accordingly we have

Amount
First

paid to vendor
policy

...
.

pa
^

premium on

7=r7;

^-^

Price of joint-life annuity

+d ___S!___ ^
P' 1
j

Total outlay

_ (P

a^
-tt
xy

)(1

+%)
,.
.

ioint-life annuity is The annual income from the J J

P'^+d -(je'i
""
'

+d)(l -^

+a "xyJ
'

which

will provide

One

year's interest

on
-

totalout

^
. .

i-ovocn-,)
?_

Annual
policy

premium on
.

i-(Pl+0(i+O
P'i xy

+d

i-(P'i, + <0(i+O
If (x) dies
falls in,
first,

the
if

and

sum assured by the policy (#) dies first, the amount

in reversion,

amounting to

i-(P^ + rf)(i + %)
+d)(l+a
^-y-

which gives
Total outlay
'

l-(P'i
-

One

year's
.

interest
.
.

thereon

j=-

^.

l-(PX + rf)(l
!/

+%

chap, xix.]

TEXT BOOK PART

II.

421

7.

The method
to

reversions presents

of book-keeping to be used in connection with some difficulties. There are three common

methods
(1)

be chosen from.
is

formulas

upon which Jellicoe's from the annuity department an annuity to pay premium and interest or interest alone, as the case may be. The amount available to purchase these annuities is the difference between the sums in reversion and their present value it must be added tc the amount invested in reversions, and will there appear as an asset, while it will also be entered as a liability by being included in the annuity fund.
proceed,
of
actually

There

the theoretical method,

purchasing

The

the necessary however, Sprague's formulas be used and this method followed, the annuity will have,, to be purchased on, say,

annuity, as explained, will always provide


If,

annual income.

a 5 per cent, basis, which of course

is

not profitable to the annuity

department.
(2) Interest at

an assumed rate may be added yearly to the

value of the reversion, and taken credit for in the revenue account.

But the annual increase in the value of the reversion is not so if only a few reversions were to fall in during a quinquennium a large sum might have to be written
great as a year's interest, and
off

the reversions account at the valuation.


or of

Where

the business

is

new

no great extent
safest

this

in such circumstances this (3)

might easily occur, and accordingly method is not to be recommended.


to

The

method

is

add only the yearly increase

in the

value of the reversion, and take credit for the whole difference between the fund in reversion and its value when it falls in. Such a stringent method means, of course, that this form of investment

may show

at one time a very low rate of interest,


all

rate swollen out of

proportion.

and at another a But obviously a loss cannot be

incurred at any time.

EXAMPLES
per 1. Determine the present value of an annuity-certain of 1 years, which is to pay during its continuance a given annum for n rate of interest on the purchase money, and to replace the purchase

money

at the expiration of the

term

at a different rate of interest.

On the

principles of the life interest,


OI~,
l

TTi

P' rr.+d

422

ACTUARIAL THEORY
is

[chap. xix.

where d
end of
2.

at the rate of interest to

be

realised,

and

P',^

is

the the

sinking fund payable in advance required to amount to


(re

1 at

of interest for replacing. 1) years, calculated at the rate of 10,000


is

A sum

required on the security of an ample


It is

reversionary

life interest to

(35) after (65).

required to find

what annual charge on the life interest must be given, and for what sum (35) must be assured, the office premium on his life being 2, 8s. lid. per cent., and interest being taken at 5 percent., with the joint-life annuity based on the Carlisle Table.

The annual charge


10000(P'
36

will
tf)

be
10000(-02446 + -04762) -(-02446 + -04762)8-143

1-(P' + <9(1

+ + .) -

=
and the amount of the policy 10000

1745

13.

24210.

-58695

charge must be placed on funds, over which an absolute held payable at the death of a person aged 65, in conThe Carlisle Table with sideration of a sum down of 10,000? 5 per cent, interest is to be used.

What
is

reversion

The charge

is

10000

10000

A 65
4.

~ =

-58262
17164.

of 20,000 is desired, to be secured over funds falling aged 30 should he be alive at the death of his mother aged 60. Find the amount of the necessary charge on the funds, = "01354. The Carlisle Table is to be having given that P'^
to a person
.

A sum

i0

used for the assumed.

joint-life annuity,

and

5 per cent, interest

is

to

be

The charge

is

20000

i-CP's^eo +

^+^eo)

~
=

20000 C01354 + -04762)9-196 145707.

CHAPTER XX
Sickness Benefits

EXAMPLES
I.

If the law of sickness be

such that at any age two are

constantly sick for one that dies, find the single


sickness allowance of 10s. a

premium
age 65.

for a

week

at age x, to cease at

Out of
during the

persons alive at age x the

number
,

constantly sick
etc.

first

year

is

2d, during the second 2d


is
is

Therefore
,

the amount paid in sickness allowance

26 x 2d

26 x 2d

etc.,

and the present value of the payments


vl52(d
x

+ vdx+1+

+ tfl*-dj
is

and the value of the benefit

to each person

52(1+0*^5+^ D
M
52(l+t)*2.

-^
at

- M

D
age x to provide the

Find the weekly premium required


:

following benefits
(a)
(6)
(c)

25

at death.

A A

sickness allowance of 10s. per

deferred annuity of 10s. per

week limited to n years. week to be entered upon at

the end of n years.

Benefit side

= =

25

Payment

side

(N-NJ P^ X+J + JfD-DJ


" V

XX ^
)

+ -5

'

+ * + 26

x+n

'
X

x+n

P being

the annual contribution.

424

ACTUARIAL THEORY
Equating and solving,

[cHAr xx.

P =

25M.(1 + i)i + -5(K. - K, + ) + 26 (N j+ , + jD^J

N.-N.+. + iC ."
P
is

And

the weekly premium

^~.

3.

Find the weekly contribution required at age x to provide


:

the following benefits


(a) (6)

20

at death.

of 1 per week for the first six months' sickness, 10s. per week for the second six months, and 5s. per week thereafter, the whole benefit to cease at the end of n years.
sickness allowance
(c)

deferred annuity of

5s.

per

week

to

be entered upon at

the end of n years.


Benefit side

on 20

M(l+j)* ' X

_
s-

+*
,

J II (K X -Ki ) + -5(K x < x+v,J

III " ) -K" ) + -25(K x -K x+n' V x+n' DX


I

N
+ 13

x-jx-i-n

+AD x * x+n

Payment

side

P^

p
X

'

~
contribution
is

Hence P may be found and the weekly

CHAPTER XXI
Construction of Tables
1.

A
i

table of log

formed

as

shown

in Text Book, Article 49,

at rate

may be checked
i,

very simply with the table at ratej.

For at rate

~ ll g D = x
And

+ l g lx+1 +--- + log /_!) + log (.r + ^+l+ +c^l)

at rate^',

^-HogT> x = Qoglx + loglx+1 +... + log/a,_ 1 ) + log*/(.r + ^Tl+... + JJT~l)


Therefore

~
'

log

Dx at
A

rate j

= 2 " 1 log D x at rate + (log v - log v)


i

^ ~ ^ %+
is

'*

2.

table of

A may
way

be formed with the help of Gauss's which

logarithms in a

similar to that in

formed as

shown

in Text Book, Article 99.

Ax =
=

% + vP A x+1
+i

^-i) + ^A

where

II

=
Px

Hence

logA^ = logvpx + ]ogU x +

[t](log

A x+1 -logU x)

Starting then at the end of the table


log

we have

Au

and

A
the

logv.

From
as

logi; deduct logII M

as tabulated (for

the

Text Book table at pages 499 and 501); enter Gauss's table
difference

with

argument,

and

to

the

result

add

426
lo g

ACTUARIAL THEORY

[chap. XXI.

n W -2
Aw
0.

and

lo S vPa>-2>
;

and

We

haVe

l0 S

A o>-2,

Fr m

log

deduct logII w

enter Gauss's table, and to the result


,

add log II U
age

and logvp u3 and we have logA u and so on, to Then take the antilogs, and the table of A is formed.
of
ic

The

table

A
.

when formed may be simply checked with


Fol-

the table of a

A X + A3+1 +

---

+K-l =

- da + (V - da +(-*-!) X) X +l)+---

3.

Besides the method of tabulating


56,

P given

in

Text Book,

Article

we might

enter annual-premium conversion tables

with a^ and so obtain


again,

as

described in Chapter VIII.


of reciprocals, which
d.

Or

we might make use of a table


1

we should

enter with

+ a, and from

the result deduct

Thus

Age
(1)

chap, xxi.]

TEXT BOOK PART


at

II.

427
always the same,

where the age viz., .r + n - 1


Putting
1

which the annuity ceases


slide

is

on the

and d on the

fixed

plate with

regulator at subtraction, multiply d


value of

by

(l+a

the the

-.)

and

-j

will result.

On

changing the regulator to addition,

continued multiplication of d by the series of differences found as


above, will give the values of '

K Aaj+l:-l|' Ax+2:-2|' n
.

-,

.,

etc.

For
,
,

- d(l + a

-;)

= A + d(a

-,

-a

-,)

etc.

etc.

5.

Instead of using the values of -

Aa

to help in forming the

table of policy-values as described in

Text Book, Article 78,

we

may

use the annuity-due values themselves.

For

= l-f**

Therefore, putting
sively

on the fixed

plate, multiplying succes-

by a

etc.,

and using the "effacer" between each

operation,

we

get the values

-^ a
X

-lly a
X

etc.,

the complements

of which are the required policy-values.

6.

The
at,

values of endowment assurance policies


since

may be similarly

arrived

= 1% V-r xr\

xr\

Or they may be formed on the


78, since

principles of Text Book, Article

lt+1

V xr\ = nVxr\

x+n

-n- 1|

x+n+1

r-

n-2

l+ax:r-l

428

ACTUARIAL THEORY
A
preliminary table, as for the tabulating of

[chap. XXI.

A^,

must there-

fore

be formed, consisting of
x:r-l\
-,;+l:r-2|
ir+l:r

a
a

x+2:r-S\
x+Z:r-i\

x+2:r-a\

etc.

Then with the

regulator at addition, and

1+a

on the
will

fixed plate, the successive multiplication

by these differences

give us ,V 1

V -,, iff J ir'

V -;, 3 xr\'

etc.

The
1
I

results
.

may be checked by
. .

addition for

_ Vxt + 2 V xr -+
|

+ r-1 Vrr|
ax+\:r-2\
a
x:r-l

a
\

+2:r-3|

1+ax:r-l\
r
(.

1+aa;:r-l|
'

...

+
a

"x:r-l|

1+a ~x:r-H
'

a >,:=l\-(. .+l:7=\
1

+a,+i:7=t\ + + a*:^

x+ ,-,-.r)

7. The construction of tables of policy-values for limitedpayment policies is a slower process, as the premiums have to be valued separately from the sums assured and the difference taken. As a preliminary, a table of differences of annuity-values should be formed, as in the case of endowment assurances.

Years

in force.

chap. xxi.J

TEXT BOOK PART

II.

429

Putting P on the fixed plate, and multiplying by b t 1, we get the value of the premiums outstanding at the beginning of the last year of premium payment, i.e. Then the successive multi-

plication of

and their continued addition will give the value of the premiums outstanding at the beginning of each year down to the second. For
n

?x by the

quantities found above

_ Pax+k-2:2| x
x

=
m,

p
i

-i-

P n i j+-2:l|

i+vi-3:sl

""

x*x+n-2:T\

+n

x^

ax+n~3:2\~

"x+n-i-.T^

etc.

etc.

The

results

may be checked by

addition, since the total

The value of the premiums must be deducted from the corresponding assurance value to get the value of the policy. The total may be checked by addition, for it should be equal to (A , + A X-\-t. + + A 1'), less the above summation of the ^ X-j-ib
.
.

2.-1-1,

values of the premiums.

The value

of the policy after the premiums are paid up

is,

of

course, just the assurance value.

EXAMPLES
1.

Show

in detail

how

to obtain a table of annual

premiums

for

whole-life assurances from the values of q

without constructing

the

life

table.

Assuming a

rate of mortality represented

by a

constant

addition of -01 to q

according to a standard table, explain

how

the required

premiums could

be approximately obtained

without special tables.

Write down in a column in reverse order the values of


age
a)

px from

- 2 downwards.
.

From

these values prepare

a column of

log vp

430

ACTUARIAL THEORY
Then
logvp a2
lo gP

[chap, xx r.

= logw2
fl

W log a -2 l0 g^ l0 g a W -4 + W
B -J +
etc.

= % a 0>-$
l

a,-3

l0 S

a W -4

etc.
,

a a% etc. column pass to the values of a u Enter annual-premium conversion tables with these values, and
this last

From

obtain
process

P
:-

10

2'

to

etc.

The

following schedule exhibits

the

Age


CHAP. XXI.]
If;

TEXT BOOK PART


3

II.

431

then, the premiums required are

we

per cent, premiums,


enter a 3 per cent

shall obtain

good approximations

if

we

following the formula


P'

annual-premium conversion table with 4 per cent, annuities as found by the method in the first half of the question, thus

1+

<W
<*%>

(s%)

SmCe

"^

"W)

a PP ro ximately.

2.

From
.

a table of

VQ
""

show how you would construct a

table of a

Since

"- 1 V

%~

l+o.
l+a

and the value of _ V W 1

is

given, that of a can be found. Q


3

Then from 'ogC 1 - v )j etc


3

^
-

VQ

etc., find

log(l -

log(l

V
fl

),

t0 each of

which add log(l

+aQ )

and the

results

are log(l
these,

+ax ),
etc.

log(l

+a g ),
1

log(l

+ag ),

etc.

Find the antilogs of


results
:

and deduct
a
B
,

from each number, and the

are

The

following scheme shows the process

Age
attained

Printed by

Oliver & Boyd,


Edinburgh.

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