SMM065
Subject CM1(2) – Contingencies
Unit 2 – Simple assurances and
annuities
Lecture 9
Assurances payable immediately
on death (1)
So far, we have considered assurance contracts where the benefit is payable at
the end of the year of death.
In practice, this is unrealistic (as the benefit will usually be payable as quickly
as possible after death).
Thus, we now assume that the benefit is payable immediately on death ...
clearly, this is also impractical, but crucially it is prudent. Why?
Thus, consider a whole of life assurance with a sum assured of 1 payable
immediately on the death of a life currently of exact age 𝑥.
Then, from Unit 1, the continuous random variable 𝑇 represents the complete
future lifetime of a life currently of exact age 𝑥.
And, the density function of 𝑇 is given by:
Assurances payable immediately
on death (2)
Thus, the whole of life assurance benefit will be payable immediately on death
at time 𝑇 𝑡 (for 0 𝑡 ∞), and the PV of the benefit outgo is a continuous
random variable given by:
Then, the EPV of the benefit outgo for whole of life assurance contract payable
immediately on death is given by:
Assurances payable immediately
on death (3)
Similarly, for an 𝑛-year term assurance with a sum assured of 1 payable
immediately on the death of a life currently of age 𝑥, the EPV of benefits is
given by integrating over all possible values of 𝑡 (i.e. between 0 and 𝑛).
Thus, we have:
Note: For an endowment assurance, the timing of the maturity benefit is
unchanged.
Thus, for an 𝑛-year endowment assurance issued to a life currently of age 𝑥
with a sum assured of 1 payable immediately on death or on survival to
maturity, the EPV of the benefit is given by:
Assurances payable immediately
on death (4)
How do we evaluate assurances payable immediately on death?
We use claim acceleration.
If the death benefit is payable immediately on death, then, for a life who dies
between age 𝑥 𝑘 and 𝑥 𝑘 1 , the benefit will be paid, on average, at
age 𝑥 𝑘 (i.e. halfway through the year of age 𝑥 𝑘 → 𝑥 𝑘 1).
This is equivalent to an assumption of a uniform distribution of deaths (UDD)
between integer ages.
Thus, for a whole life assurance with a sum assured of 1 payable immediately
on the death of a life currently of exact age 𝑥, the EPV of the benefit outgo is
approximated by:
Assurances payable immediately
on death (5)
Thus, we multiply by a claim acceleration factor of 1 𝑖 . as, on average,
the death benefit is payable half a year earlier (than at the end of the year).
Similarly, for a term assurance where the death benefit is payable immediately
on death, we can use the following approximation:
And, for an endowment assurance, where the death benefit is payable
immediately on death, we have:
Note: It is not correct to use the approximation:
Annuities payable continuously (1)
Previously, we considered annuities payable annually.
We now consider annuities payable continuously. Whilst unrealistic, this is often
used as an approximation for annuities payable very frequently (e.g. a pension
payable weekly).
In Unit 4, we will consider discrete annuities payable more frequently than
annual (e.g. quarterly or monthly), which are often useful for valuing premium
payments.
Consider an annuity of 1 per annum payable continuously to a life currently of
exact age 𝑥.
Then, the PV of the annuity benefit will be a random variable given by:
where 𝑇 is the complete future lifetime of a life currently of exact age 𝑥.
Annuities payable continuously (2)
Then, the EPV of the benefit is given by:
We can explain this by general reasoning:
• if 𝑥 is alive at time 𝑡 (with probability 𝑝 ), then payment received in
the small interval of time 𝑡, 𝑡 𝑑𝑡 is 𝑑𝑡, and PV of this payment at
time 0 is 𝑣 𝑑𝑡
o thus, EPV of payment received during 𝑡, 𝑡 𝑑𝑡 is 𝑣 𝑝 𝑑𝑡
• then, let 𝑑𝑡 → 0, and sum over all possible values of 𝑡 (for 0 𝑡 ∞)
Annuities payable continuously (3)
To evaluate this, we use the approximation:
i.e. we approximate the payment of 1 received continuously during each year by
a payment of ½ received at the start of the year and another payment of ½
received at the end of the year
⇒ payment received at time 0 is ½, payment received at time 1 is ½ + ½ = 1,
payment received at time 2 is ½ + ½ = 1, ...
Similarly, EPV of an 𝑛-year temporary annuity of 1 per annum payable
continuously to a life currently of exact age 𝑥 is given by:
And, to evaluate a temporary annuity payable continuously, we use:
Annuities payable continuously (4)
Example 2.8.1
(iii)
EPV of annuity benefit is:
Annuities payable continuously (5)
(iv)
EPV of assurance benefit is:
