146 Premium calculation
6.3 Assumptions
As in Chapter 4, unless otherwise stated, we use a standard set of assumptions
for mortality and interest in the numerical examples in this chapter. We use
the Standard Select Survival Model with a two-year select period specified in
Example 3.13 with an interest rate of 5% per year effective. Recall that the
survival model is specified as follows:
/Lx =A+ Bex
where A= 0.00022, B = 2.7 x 10- 6 and c = 1.124, and
2-s
/L[x]+s = 0 ·9 /Lx+s
for 0 :::; s :::; 2. The select and ultimate life table, at integer ages, for this
model is shown in Table D.1 and values of annuity and insurance functions at
an effective rate of interest of 5% per year are shown in Tables D.2 and D.3.
Example 6.1 Use the Standard Select Survival Model with interest at 5% per
year, to produce a table showing values of li[x], li[xJ+l and lix+2 for x =
20, 21, ... , 80. Assume that q131 = 1.
Solution 6.1 The calculation of survival probabilities P[x], P[xJ+l and Px for
this survival model was discussed in Example 3.13. Since we are assuming that
q131 = 1, we have a13 1 = 1. Annuity values can then be calculated recursively
using
lix=l+vpxlix+l,
li[x]+l = 1 + V P[x]+l lix+2•
li[x] = 1 + V P[x] li[x]+l·
Values are shown in Appendix D, Table D.2. D
6.4 The present value of future loss random variable
The cash flows for a traditional life insurance contract consist of the insurance
or annuity benefit outgo (and associated expenses) and the premium income.
Both are generally life contingent, that is, the income and outgo cash flows
depend on the future lifetime of the policyholder, unless the contract is pur-
chased by a single premium, in which case there is no uncertainty regarding the
premium income. So we can model the future outgo less future income with
the random variable that represents the present value of the future loss. When
expenses are excluded we call this the net future loss, which we denote oy Ilb.
When expenses are included, then the premiums are the gross premiums, and
