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Actuarial Mathematics for Life Contingent Risks
How can actuaries best equip themselves for the products and risk structures of the future? In this new textbook, three leaders in actuarial science give a modern perspective on life contingencies. The book begins traditionally, covering actuarial models and theory, and emphasizing practical applications using computational techniques. The authors then develop a more contemporary outlook, introducing multiple state models, emerging cash flows and embedded options. Using spreadsheet-style software, the book presents large-scale, realistic examples. Over 150 exercises and solutions teach skills in simulation and projection through computational practice. Balancing rigour with intuition, and emphasizing applications, this textbook is ideal not only for university courses, but also for individuals preparing for professional actuarial examinations and qualified actuaries wishing to renew and update their skills.

International Series on Actuarial Science
Christopher Daykin, Independent Consultant and Actuary Angus Macdonald, Heriot-Watt University The International Series on Actuarial Science, published by Cambridge University Press in conjunction with the Institute of Actuaries and the Faculty of Actuaries, contains textbooks for students taking courses in or related to actuarial science, as well as more advanced works designed for continuing professional development or for describing and synthesizing research. The series is a vehicle for publishing books that reflect changes and developments in the curriculum, that encourage the introduction of courses on actuarial science in universities, and that show how actuarial science can be used in all areas where there is long-term financial risk.

ACTUARIAL MATHEMATICS FOR LIFE CONTINGENT RISKS
D AV I D C . M . D I C K S O N
University of Melbourne

M A RY R . H A R D Y
University of Waterloo, Ontario

H O WA R D R . WAT E R S
Heriot-Watt University, Edinburgh

CAMBRIDGE UNIVERSITY PRESS

Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521118255 © D. C. M. Dickson, M. R. Hardy and H. R. Waters 2009 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2009 ISBN-13 ISBN-13 978-0-511-65169-4 978-0-521-11825-5 eBook (NetLibrary) Hardback

Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

To Carolann, Vivien and Phelim

Contents

Preface page xiv 1 Introduction to life insurance 1 1.1 Summary 1 1.2 Background 1 1.3 Life insurance and annuity contracts 3 1.3.1 Introduction 3 1.3.2 Traditional insurance contracts 4 1.3.3 Modern insurance contracts 6 1.3.4 Distribution methods 8 1.3.5 Underwriting 8 1.3.6 Premiums 10 1.3.7 Life annuities 11 1.4 Other insurance contracts 12 1.5 Pension benefits 12 1.5.1 Defined benefit and defined contribution pensions 13 1.5.2 Defined benefit pension design 13 1.6 Mutual and proprietary insurers 14 1.7 Typical problems 14 1.8 Notes and further reading 15 1.9 Exercises 15 2 Survival models 17 2.1 Summary 17 2.2 The future lifetime random variable 17 2.3 The force of mortality 21 2.4 Actuarial notation 26 2.5 Mean and standard deviation of Tx 29 2.6 Curtate future lifetime 32 2.6.1 Kx and ex 32 vii

viii 2.6.2

Contents The complete and curtate expected...
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