185 Chapter 6 NET PREMIUMS Exercises in this area, namely, the relations among fully continuous, appor- tionable and semicontinuous premiums. The decomposition of an ‘endowment insurance premium appeared in a paper by Linton (1919) Section 6.1 6.1. Calculate the expectation and the variance of the present value of the financial loss for the insurance in Example 6.1, when the premium is determined by Principle I. Section 6.2 6.2. If the force of mortality strictly. increases with age, show that P(A.) > H.. Hint: Show that P(A, is a weighted average of Here f> 0) 6.3. Following Example 6.2, derive a general expression for 7A, ~Ay (6a,F where ji, = wand Bis the force of interest for f > 0. 6.4. If 6 = 0, show that PA) & 6.5. Prove that the variance of the loss associated with a net single remium whole life insurance is less than the variance of the loss associated with an annual premium whole life insurance. ‘Assume immediate payment of claims on death and continu- ous payment of net annual premiums. 6.6. Show that Section 6.3 6.7. On the basis of the Illustrative Life Table and an interest rate of 6%, calculate values for the annual premiums in the follow- ing table. Note any patterns of inequalities that appear in the matrix of results. Semicontinuous Fully Discrete PAsr) Psa) Pam) Pass PAsa) Pasay P(As) Pos PAL) Pras PAL ia) Pista, 6.8. Show that 0? sq ~ Pag = Pao.)Chapter 6 186 NET PREMIUMS 6.9. Generalize Example 6.4 where whe= (rh k= 012,000 That is, derive expressions in terms of r and i for A,, a, P, and CA,~ AD/a,y. Section 6.4 6:10. Using the information given in Example 6.9, calculate the vale 6.11. Using various formulas for a, show that the ratio fem @™ wea in (6.4.2) can be expressed as the reciprocal of a. a9? — pln) Phy b. aden) ~ Bom)(Py + d) oi - te 4 a. 2m 0 6.12. Refer to Example 6.9(b) and directly calculate Aam Bs using the Illustrative Life Table for the net single endowment premium in the numerator and for the life annuity value in the denominator. 6.13. If (Asem) 2.0 Pe 7 and P,3q = 0.040, what is the value of P\3,? Section 6.5 6.14. Arrange in order of magnitude. Indicate your reasoning. PBA) Plage), PA), Pgs), BA a=) 6.15. Given that evaluate 6.16. If P(A.) = 0.03, and if interest is at the effective annual rate of 5%, calculate the semiannual net premium for a 50,000 whole life insurance on (x) where premiums are apportionable.187 Chapter 6 NET PREMIUMS 6.17. Show that m4 ma) = Pa | Anz! POA ay) — PAu) Pao | 30%, Section 6.6 6.18. Give formulas, in terms of commutation functions, for a. P(A) b. P(A.) © P(A, s) de ,P Cass). 6.19. Using appropriate commutation functions, write an equation in the form of (6.6.1) for the net annual apportionable premium, payable annually for 20 years, on a decreasing term insurance for a life aged 30. The sum insured is initially 200,000, decreas- ing by 5000 at the end of each year until age 70 when the in- surance terminates. Section 6.7 6.20. Express 5 1- 20) Som as an annual premium. Interpret your result. 6.21. On the basis of the Illustrative Life Table and an interest rate of 6%, calculate the components of the two decompositions a. 1000 Psy = 1000 (Phx + Pao dy) = 1 b, 1000 Psy; = 1000 (Pos * =) im 6.22. Consider the continuous random variable analogue of (6.7.3), The loss, L=W-Aty, can be used with the equivalence principle to determine Aly, the net single premium for this special policy. Show that Pr any 8a b. EW = iq 7 201 + i)" Aly + = oP) fa+i"- IP.“0CmC”C~”~”~”~C~”TCOC™C™O oe Chapter 6 188 NET PREMIUMS Miscellaneous 6.28. 6.24. 6.25. 6.26. 6.27. Express AwPurs + (1 - Aa) Pa as a net annual premium. Interpret your result, a. Show that 1 1 = Pag eso, Samy b. What is the corresponding formula for 1 1 a, Eh c. Show that the amount of annual income provided by a sin- gle net premium of 100,000 where + the income is payable at the beginning of each month while (65) survives during the next 10 years, and + the single premium is returned at the end of 10 years if (65) reaches age 75, is given by 1 roa (ghe ty Sy where (B) denotes the answer to part (b) of this exercise. In terms of commutation functions, show that the annual income of part (c) can be expressed as Das ~ Drs NP oN® An insurance issued to (35) with level premiums to age 65 provides + 100,000 in case the insured survives to age 65, and + the return of the gross annual premiums with interest at the valuation rate to the end of the year of death if the insured dies before age 65. If the gross annual premium G is 1.1 7 where 7 is the net an- nual premium, write an expression for 7. If 15Pys = 0.038, Pygry = 0.056 and Aw = 0.625, calculate Pissy zz) = 100,000 (B) a 100,000 —* A 20-payment life policy is designed to return, in the event of death, 10,000 plus all gross premiums without interest. The re- turn-of-premium feature applies during both the premium pay- ing period and after. Premiums are annual and death claims are paid at the end of the year of death. Calculate, in terms of commutation functions, for a policy issued to (x), the gross an- nual premium if it is to be 110% of the net premium plus 25.189 Chapter 6 NET PREMIUMS 6.28. 6.29. 6.30. 6.31, Calculate, in terms of commutation functions, the initial net annual premium for a whole life insurance isstied to (25), sub- ject to the following provisions: + The face amount is to be 1 for the first 10 years and 2 thereafter. + Each premium during the first 10 years is 1/2 of each pre mium payable thereafter. + Premiums are payable annually to age 65. + Claims are paid at the end of the year of death. Rewrite, in terms of commutation functions, the premiums in Table 6.3 with proceeds payable at moment of death. Let Ly be the insurer's loss on a unit of whole life insurance, issued to (x) on a fully continuous net premium basis. Let L, be the loss to (x) on a continuous life annuity purchased for a net single premium of 1. Show that L; = Lz, and give a verbal explanation An ordinary life contract for a unit amount on a fully discrete basis is issued to a person aged x with an annual premium of 0.048. Assume d = 0.06, A, = 0.4 and 7A, = 0.2. Let L be the insurer's loss function at issue of this policy. a. Calculate E[L b. Calculate Var[L}. c. Now consider a portfolio of 100 policies of this type with face amounts given below. Face amount Number of policies 1 0 4 20 sume the losses are independent and use a normal approx- imation to calculate the probability that the present value of gains for the portfolio will exceed 20.