Competing risks
We have considered only contingencies where a life is exposed to death only.
If a life is subject to more than one contingency or transition then those transitions are referred
to as a set of competing risks.
For e.g. under a pension fund, a member could be exposed to the competing risks of retiring
or dying (whichever comes first).
Or if a person in good health takes a health insurance policy would be exposed to the
competing risks of becoming sick and dying.
Health insurance contracts
Insurance contracts exist that pay benefits contingent upon death or survival.
There are also contracts that pay benefits contingent upon the state of health of a person. In
this case a policyholder can be considered to be subject to the competing risks of death and
of becoming sick.
Types of Product
Income Protection Insurance Contract
- An income protection insurance contract pays an income to the policyholder while
that policyholder is deemed as being “sick” (with the definition of sickness being
carefully specified in the policy conditions). If the policyholder recovers, the cover
under the policy usually continues, so that subsequent bouts of qualifying sickness
would merit further benefit payments.
- Such policies are usually subject to a deferred period (eg 3 months) of continuous
sickness that has to have elapsed before any benefits start to be paid, and during
which no benefit is payable.
- Premiums for these policies would normally be regular (eg monthly) and would
typically be waived during periods of qualifying sickness. This means that premiums
would not be paid at the same time as benefits are payable.
Critical Illness Insurance Contract
- Critical illness insurance, which normally pays a lump sum on diagnosis of a defined
“critical” illness (such as cancer)
Long-term care insurance
Long-term care insurance, which pays an income contingent upon the policyholder requiring
long-term care, and hence supports the costs of receiving that care.
Multiple state models
Multiple state models of the type described in Subject CT4 are well suited to valuing cashflows
that are dependent on multiple transitions, such as of health insurance contracts.
The model will be chosen to include the relevant states, and transitions between states, that
are necessary to replicate the required cashflows for the contract concerned.
For example, for the simple income protection policy described in the previous section (with
no deferred period), the general three-state healthy-sick-dead model would be suitable.
Example
Example:
Example 2
Example
Example
Deriving probabilities from transition intensities
We can use the Kolmogorov forward differential equations to derive transition
probabilities, as in the case of multiple state models. In the multiple state model, this
produces the following general result:
We now have formulae for the dependent probabilities in terms of transition intensities.
So, if we can estimate the transition intensities, it is very easy to estimate the dependent
probabilities using these formulae.
Example
Example
Example
Constructing a multiple decrement table
Obtaining dependent probabilities
From the forces of decrement
The most logical starting point is to begin with the relevant forces of decrement,
and assume these are constant over single years of age. Formulae such as (1),
(2) and (3) below can then be used to calculate the dependent probabilities directly.
From an existing multiple decrement table
Here we will need to calculate the implied (constant) forces of decrement underlying
the existing table. Taking formula (2) from Section as an example
(where we have decrements of sickness and mortality):
Example
From the forces of decrement
Example
From an existing multiple decrement table
We now wish to extend the multiple decrement table we constructed in the previous example
to include decrements of withdrawal (w ). It is believed that the independent forces of
withdrawal will conform to those underlying the withdrawal decrement in the multiple
decrement table given below.
Calculate the first line of the triple decrement table (ie between ages 50 and 51) incorporating
the three decrements d , s and w . You should assume that the forces of sickness and mortality
are unchanged.
We will first need the independent force of withdrawal from the table:
Calculate the second line of the new triple decrement table.
From the multiple decrement table given in the question we can calculate:
Example
From existing single decrement tables
Following on from the previous example, it is now desired to construct a double
decrement table for mortality and sickness only, where the forces of sickness are
unchanged from before but the independent forces of mortality will be 80% of the
forces of mortality according to the ELT15-Males mortality table. As before, all forces
of decrement are assumed to be constant over individual years of age. Calculate the
first line of the revised double decrement table.
FURTHER EXAMPLES
