Modelling mortality with actuarial applications

Modelling Mortality with Actuarial Applications Actuaries have access to a wealth of individual data in pension and insurance portfolios, but rarely use its full potential This book will pave the way, from methods using aggregate counts to modern developments in survival analysis Based on the fundamental concept of the hazard rate, Part One shows how and why to build statistical models based on data at the level of the individual persons in a pension scheme or life insurance portfolio Extensive use is made of the R statistics package Smooth models, including regression and spline models in one and two dimensions, are covered in depth in Part Two Finally, Part Three uses multiple-state models to extend survival models beyond the simple life/death setting, and includes a brief introduction to the modern counting process approach Practising actuaries will find this book indispensable and students will find it helpful when preparing for their professional examinations a n g u s s m ac d o na l d is Professor of Actuarial Mathematics at Heriot-Watt University, Edinburgh He is an actuary with much experience of modelling mortality and other life histories, particularly in connection with genetics, and as a member of Continuous Mortality Investigation committees s t e p h e n j r i c h a r d s is an actuary and principal of Longevitas Ltd., Edinburgh, a software and consultancy firm that uses many of the models described in this book with life insurance and pension scheme clients worldwide i a i n d c u r r i e is an Honorary Research Fellow at Heriot-Watt University, Edinburgh As a statistician, he was chiefly responsible for the development of the spline models described in this book, and their application to actuarial problems I N T E R NAT I O NA L S E R I E S O N AC T UA R I A L S C I E N C E Editorial Board 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 and 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 synthesising 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 A complete list of books in the series can be found at www.cambridge.org/statistics Recent titles include the following: Claims Reserving in General Insurance David Hindley Financial Enterprise Risk Management (2nd Edition) Paul Sweeting Insurance Risk and Ruin (2nd Edition) David C.M Dickson Predictive Modeling Applications in Actuarial Science, Volume 2: Case Studies in Insurance Edited by Edward W Frees, Richard A Derrig & Glenn Meyers Predictive Modeling Applications in Actuarial Science, Volume 1: Predictive Modeling Techniques Edited by Edward W Frees, Richard A Derrig & Glenn Meyers Computation and Modelling in Insurance and Finance Erik Bølviken MODELLING MORTALITY WITH ACTUARIAL APPLICATIONS A N G U S S M AC D O NA L D Heriot-Watt University, Edinburgh STEPHEN J RICHARDS Longevitas Ltd, Edinburgh IAIN D CURRIE Heriot-Watt University, Edinburgh University Printing House, Cambridge CB2 8BS, United Kingdom One Liberty Plaza, 20th Floor, New York, NY 10006, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia 314–321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 79 Anson Road, #06–04/06, Singapore 079906 Cambridge University Press is part of the University of Cambridge It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence www.cambridge.org Information on this title: www.cambridge.org/9781107045415 DOI: 10.1017/9781107051386 © Angus S Macdonald, Stephen J Richards and Iain D Currie 2018 This publication is in copyright Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published 2018 Printed in the United Kingdom by Clays, St Ives plc A catalogue record for this publication is available from the British Library ISBN 978-1-107-04541-5 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 Contents Preface PART ONE page xi ANALYSING PORTFOLIO MORTALITY 1 Introduction 1.1 Survival Data 1.2 Software 1.3 Grouped Counts 1.4 What Mortality Ratio Should We Analyse? 1.5 Fitting a Model to Grouped Counts 1.6 Technical Limits for Models for Grouped Data 1.7 The Problem with Grouped Counts 1.8 Modelling Grouped Counts 1.9 Survival Modelling for Actuaries 1.10 The Case Study 1.11 Statistical Notation 3 6 11 13 15 15 17 19 Data Preparation 2.1 Introduction 2.2 Data Extraction 2.3 Field Validation 2.4 Relationship Checking 2.5 Deduplication 2.6 Bias in Rejections 2.7 Sense-Checking 2.8 Derived Fields 2.9 Preparing Data for Modelling and Analysis 2.10 Exploratory Data Plots 20 20 20 25 25 26 29 29 32 36 41 v vi Contents The Basic Mathematical Model 3.1 Introduction 3.2 Random Future Lifetimes 3.3 The Life Table 3.4 The Hazard Rate, or Force of Mortality 3.5 An Alternative Formulation 3.6 The Central Rate of Mortality 3.7 Application to Life Insurance and Annuities 45 45 47 49 50 53 54 55 Statistical Inference with Mortality Data 4.1 Introduction 4.2 Right-Censoring 4.3 Left-Truncation 4.4 Choice of Estimation Approaches 4.5 A Probabilistic Model for Complete Lifetimes 4.6 Data for Estimation of Mortality Ratios 4.7 Graduation of Mortality Ratios 4.8 Examples: the Binomial and Poisson Models 4.9 Estimating the Central Rate of Mortality? 4.10 Census Formulae for E cx 4.11 Two Approaches 56 56 58 60 61 64 67 69 71 72 73 73 Fitting a Parametric Survival Model 5.1 Introduction 5.2 Probabilities of the Observed Data 5.3 Likelihoods for Survival Data 5.4 Example: a Gompertz Model 5.5 Fitting the Gompertz Model 5.6 Data for Single Years of Age 5.7 The Likelihood for the Poisson Model 5.8 Single Ages versus Complete Lifetimes 5.9 Parametric Functions Representing the Hazard Rate 75 75 76 78 79 80 86 88 90 92 Model Comparison and Tests of Fit 6.1 Introduction 6.2 Comparing Models 6.3 Deviance 6.4 Information Criteria 6.5 Tests of Fit Based on Residuals 6.6 Statistical Tests of Fit 6.7 Financial Tests of Fit 94 94 94 95 97 100 102 109 Contents vii Modelling Features of the Portfolio 7.1 Categorical and Continuous Variables 7.2 Stratifying the Experience 7.3 Consequences of Stratifying the Data 7.4 Example: a Proportional Hazards Model 7.5 The Cox Model 7.6 Analysis of the Case Study Data 7.7 Consequences of Modelling the Data 112 112 115 120 122 124 125 129 Non-parametric Methods 8.1 Introduction 8.2 Comparison against a Reference Table 8.3 The Kaplan–Meier Estimator 8.4 The Nelson–Aalen Estimator 8.5 The Fleming–Harrington Estimator 8.6 Extensions to the Kaplan–Meier Estimator 8.7 Limitations and Applications 132 132 133 134 140 141 141 142 Regulation 9.1 Introduction 9.2 Background 9.3 Approaches to Probabilistic Reserving 9.4 Quantile Estimation 9.5 Mortality Risk 9.6 Mis-estimation Risk 9.7 Trend Risk 9.8 Number of Simulations 9.9 Idiosyncratic Risk 9.10 Aggregation 145 145 145 147 148 150 151 153 155 155 157 PART TWO REGRESSION AND PROJECTION MODELS 161 Methods of Graduation I: Regression Models 10.1 Introduction 10.2 Reading Data from the Human Mortality Database into R 10.3 Fitting the Gompertz Model with Least Squares 10.4 Poisson Regression Model 10.5 Binomial Regression Model 10.6 Exponential Family 10.7 Generalised Linear Models 163 163 165 166 172 173 177 178 10 viii Contents 10.8 Gompertz Model with Poisson Errors 10.9 Gompertz Model with Binomial Errors 10.10 Polynomial Models 179 181 182 11 Methods of Graduation II: Smooth Models 11.1 Introduction 11.2 Whittaker Smoothing 11.3 B-Splines and B-Spline Bases 11.4 B-Spline Regression 11.5 The Method of P-Splines 11.6 Effective Dimension of a Model 11.7 Deviance of a Model 11.8 Choosing the Smoothing Parameter 11.9 Overdispersion 11.10 Dealing with Overdispersion 185 185 187 189 191 193 198 199 201 203 205 12 Methods of Graduation III: Two-Dimensional Models 12.1 Introduction 12.2 The Lee–Carter Model 12.3 The Cairns–Blake–Dowd Model 12.4 A Smooth Two-Dimensional Model 12.5 Comparing Models 208 208 210 214 216 222 13 Methods of Graduation IV: Forecasting 13.1 Introduction 13.2 Time Series 13.3 Penalty Forecasting 13.4 Forecasting with the Lee–Carter Model 13.5 Simulating the Future 13.6 Forecasting with the Cairns–Blake–Dowd Model 13.7 Forecasting with the Two-Dimensional P-Spline Model 13.8 Model Risk 224 224 225 232 236 238 243 247 251 PART THREE 253 14 MULTIPLE-STATE MODELS Markov Multiple-State Models 14.1 Insurance Contracts beyond “Alive” and “Dead” 14.2 Multiple-State Models for Life Histories 14.3 Definitions 14.4 Examples 14.5 Markov Multiple-State Models 14.6 The Kolmogorov Forward Equations 255 255 256 258 260 262 264 Contents 14.7 14.8 14.9 14.10 14.11 Why Multiple-State Models and Intensities? Solving the Kolmogorov Equations Life Contingencies: Thiele’s Differential Equations Semi-Markov Models Credit Risk Models ix 269 271 274 276 278 15 Inference in the Markov Model 15.1 Introduction 15.2 Counting Processes 15.3 An Example of a Life History 15.4 Jumps and Waiting Times 15.5 Aalen’s Multiplicative Model 15.6 The Likelihood for Single Years of Age 15.7 Properties of the MLEs for Single Ages 15.8 Estimation Using Complete Life Histories 15.9 The Poisson Approximation 15.10 Semi-Markov Models 15.11 Historical Notes 279 279 280 282 284 285 286 288 289 290 292 293 16 Competing Risks Models 16.1 The Competing Risks Model 16.2 The Underlying Random Future Lifetimes 16.3 The Unidentifiability Problem 16.4 A Traditional Actuarial Approach 16.5 Are Competing Risks Models Useful? 294 294 296 298 300 304 17 Counting Process Models 17.1 Introduction 17.2 Basic Concepts and Notation for Stochastic Processes 17.3 Stochastic Integrals 17.4 Martingales 17.5 Martingales out of Counting Processes 17.6 Martingale Central Limit Theorems 17.7 A Brief Outline of the Uses of Counting Process Models 307 307 308 312 314 317 319 320 Appendix A A.1 A.2 A.3 A.4 R Commands Introduction Running R R Commands Probability Distributions Appendix B Basic Likelihood Theory B.1 Scalar Parameter Models: Theory 329 329 330 330 330 334 334 356 References Cairns, A J G., Blake, D and Dowd, K 2006 A two-factor model for stochastic mortality with parameter uncertainty: Theory and calibration Journal of Risk and Insurance, 73, 687–718 Cairns, A J G., Blake, D., Dowd, K., Coughlan, G D., Epstein, D., Ong, A and Balevich, I 2009 A quantitative comparison of stochastic mortality models using data from England and Wales and the United States North American Actuarial Journal, 13(1), 1–35 Camarda, C G 2012 MortalitySmooth: An R package for smoothing Poisson counts with P-splines Journal of Statistical Software, 50, 1–24 Carstairs, V and Morris, R 1991 Deprivation and Health in Scotland Aberdeen 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British Actuarial Journal, 16(I), 1–62 (with discussion) Makeham, W M 1860 On the law of mortality and the construction of annuity tables Journal of the Institute of Actuaries and Assurance Magazine, 8, 301–310 McCullagh, P and Nelder, J A 1989 Generalized Linear Models, second edn Monographs on Statistics and Applied Probability, vol 37 Chapman & Hall, London McCutcheon, J J 1985 Experiments in graduating the data for the English Life Tables (No 14) Transactions of the Faculty of Actuaries, 40, 135–147 McCutcheon, J J and Eilbeck, J C 1975 Experiments in the graduation of the English Life Tables (No 13) data Transactions of the Faculty of Actuaries, 35, 281–296 McLoone, P 2000 Carstairs Scores for Scottish Postcode Sectors from the 1991 Census Public Health Research Unit, University of Glasgow, Glasgow Neill, A 1986 Life Contingencies Heinemann, London Nelder, J A and Wedderburn, R W M 1972 Generalized linear models Journal of the Royal Statistical Society: Series A, 135, Part 3, 370–384 Nelson, W 1958 Theory and applications of hazard plotting for censored failure times Technometrics, 14, 945–965 Pawitan, Y 2001 In All Likelihood: Statistical Modelling and Inference Using Likelihood Oxford University Press, Oxford Perks, W 1932 On some experiments in the graduation of mortality statistics Journal of the Institute of Actuaries, 63, 12–40 References 359 Perperoglou, A and Eilers, P H C 2010 Penalized regression with individual deviance effects Computational Statistics, 25, 341–361 Philips, L 1990 Hanging on the metaphone Computer Language, 7(12), 39–43 Prentice, R L., Kalbfleisch, J D., Peterson, A V., Jr., Flournoy, N S., Farewell, V T and Breslow, N E 1978 The analysis of failure times in the presence of competing risks Biometrics, 34, 541–554 Press, W H., Teukolsky, S A., Vetterling, W T and Flannery, B P 1986 Numerical Recipes in C++: The Art of Scientific Computing, second edn Cambridge University Press, New York Ramlau-Hansen, H 1988 Hattendorff’s theorem: 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method of graduation Proceedings of the Edinburgh Mathematical Society, 41, 63–75 Willets, R C 1999 Mortality in the Next Millennium Staple Inn Actuarial Society (SIAS), London Willets, R C 2004 The cohort effect: Insights and explanations British Actuarial Journal, 10, 833–877 Williams, D 1991 Probability with Martingales Cambridge University Press, Cambridge Wood, S N 2006 Generalized Additive Models: An Introduction with R Chapman & Hall, London Author Index Aalen, O O., 140, 293, 304, 307 Akaike, H., 98, 201 Andersen, P K., 59, 72, 293, 308, 319, 320, 322, 324 Arjas, E., 312 Bailey, W G., 306 Balevich, I., 173, 203, 209, 216 Baxter, S., 34 Beard, R E., 52, 93 Benjamin, B., 87, 92, 185, 186, 188, 300, 304, 305, 324 Bielecki, T R., 278 Blake, D., 173, 203, 209, 214, 216, 243 Booth, H., 224 Borgan, Ø., 59, 72, 293, 308, 319, 320, 322, 324 Bowers, N L., 55 Breslow, N E., 305 Brouhns, N., 173, 203, 212 Cairns, A J G., 173, 203, 209, 214, 216, 243 Camarda, C G., 196, 205, 220, 221, 233 Carstairs, V., 33, 35 Carter, L., 209, 210, 225, 238, 242 CMI, 61, 276–278, 293 Collett, D., 100, 141 Conte, S D., 273 Coughlan, G D., 173, 203, 209, 216 Cox, D R., 71, 100, 101, 124 Crowder, M., 299, 307 Currie, I D., 16, 27, 32, 36, 147, 174, 186, 203, 205, 207, 209, 211, 216, 220, 223, 231–233, 235, 238, 251, 252 de Boor, C., 273 Delwarde, A., 238 Denuit, M., 173, 203, 212, 238 Dickson, D C M., 55, 276, 302 Dimitrova, S., 186 Djeundje, V A B., 205, 207 Dobson, A J., 169, 170 Dowd, K., 173, 203, 209, 214, 216, 243 Durban, M., 186, 203, 209, 220, 233, 235 Durbin, J., 108 Efron, B., 242 Eilbeck, J C., 186 Eilers, P H C., 186, 194, 196, 198, 201, 203, 207, 209, 220, 233, 235, 238 Epstein, D., 173, 203, 209, 216 Euler, L., 50 Farewell, V T., 305 Feller, W., 279 Firth, D., 212, 213 Flannery, B P., 273 Fleming, T R., 141, 308, 319, 320 Flournoy, N S., 305 Forfar, D O., 81, 88, 92, 109, 185 Gaches, A., 34 Gerber, H U., 55, 276 Gill, R., 59, 72, 293, 308, 319, 320, 322, 324 Girosi, F., 211 Gompertz, B., 75, 79, 93, 163, 185, 344, 346 Green, P J., 186 Greenwood, M., 139 Haberman, S., 173, 186 Halley, E., 50 Hannan, E J., 99 Hardy, M R., 55, 147, 148, 207, 276, 302 Harra, P., 312 Harrington, D P., 141, 308, 319, 320 Hastie, T J., 186, 198 Hattendorff, K., 328 361 362 Author Index Haycocks, H W., 16, 47, 306 Hickman, J C., 55 Hoem, J M., 293 Hurvich, C M., 98 Pollard, J H., 87, 92, 185, 186, 188, 300, 304, 305, 324 Prentice, R L., 305, 319 Press, W H., 273 Jones, D A., 55 Jones, G L., 33 Quinn, B G., 99 Kahan, W., 344 Kaishev, V K., 186 Kalbfleisch, J D., 305, 319 Kannisto, V., 93 Kaplan, E L., 134 Karr, A F., 318 Kaufhold, K., 341 Keiding, N., 59, 72, 293, 308, 319, 320, 322, 324 Kendall, M G., 108 King, G., 211 Kirkby, J G., 32, 186, 220, 233 Kleinow, T., 154, 242 Lawless, J F., 207 Lee, R D., 209, 210, 225, 238, 242 Li, J S H., 207 Macdonald, A S., 298, 320 Maclaurin C., 50 Madrigal, A., 34 Makeham, W M., 93, 185 Marx, B D., 186, 194, 196, 198, 201 Matthews, F., 34 McCullagh, P., 96, 97, 101, 177, 200, 207 McCutcheon, J J., 81, 88, 92, 109, 185, 186 McLoone, P., 33, 35 Meier, P., 134 Miller, H D., 71, 100, 101 Morris, R., 33, 35 Neill, A., 300 Nelder, J A., 96, 97, 101, 177, 178, 200, 207 Nelson, W., 140 Nesbitt, C J., 55 Ong, A., 173, 203, 209, 216 Patel, D., 34 Perks, W., 16, 47, 93, 185 Perperoglou, A., 207 Peterson, A V., Jr., 305 Philips, L., 28 Ramlau-Hansen, H., 326 Redington, F M., 306 Renshaw, A E., 173 Richards, S J., 8, 16, 27, 32–34, 36, 42, 81, 93, 110, 111, 113, 138, 147, 154, 186, 211, 220, 224, 231–233, 242, 251, 252, 341, 342, 344, 345 Ritchie, G P., 147, 231, 251, 252 Rosenbusch, S., 341 Rutkowski, M., 278 Schwarz, G E., 99, 203 Shumway, R H., 227 Silverman, B W., 186 Spencer, J, 186 Stoffer, D S., 227 Stuart, A., 108 Sverdrup, E., 293 Tan, K S., 207 Teukolsky, S A., 273 Thatcher, A R., 93 Thurston, S W., 207 Tibshirani, R J., 186, 198, 242 Tickle, L., 224 Tsai, C L., 98 Tsiatis, A A., 299 Turner, H., 212, 213 Vaupel, J W., 93 Vermunt, J K., 173, 203, 212 Vetterling, W T., 273 Wand, M P., 207 Waters, H R., 55, 276, 293, 302 Watson, G S., 108 Wedderburn, R W M., 178, 207 Whittaker, E T., 97, 186, 187 Wiencke, J K., 207 Wilkie, A D., 81, 88, 92, 109, 185 Willets, R C., 32, 113, 341 Williams, D., 308, 310 Wood, S N., 186 Index B-spline basis, 189, 353 degree, 189 knots, 189 regression matrix, 191 P-spline model, 354 P-splines, 193 χ2 test, see goodness-of-fit tests 4GL, see fourth-generation language A/E comparison, 133 Aalen’s multiplicative model, 285 Acorn, see geodemographic classification activities of daily living, see insurance actuarial estimate, 174, 304 actuarial judgement, 153 administration system, 15, 20 migration, 38 aggregation of risk capital, 157 AIC, see information criterion annuity, 26, 50, 327 ARIMA(p, d, q) model, see time series ARMA(p, q) model, see time series AR(p) model, see time series autocorrelation coefficient, 109 autoregressive integrated moving average model, see time series autoregressive model, see time series autoregressive moving average model, see time series balance sheet, 145 baseline hazard, see proportional hazards BASIC, 329 basis risk, 153 Bernoulli distribution, 71, 87 random variable, 318 bias, 29, 36 bias test, see goodness-of-fit tests BIC, see information criterion binomial deviance, 96 distribution, 71, 87, 96 model, xiii, 71, 87, 88, 181 regression, 93, 173 bisection method, 343 stochastic version, 343 Black Death, 151 Boole’s rule, 346 bootstrapping, 152 Brownian motion, 314 C, 329 Cairns–Blake–Dowd model, xiv, 209, 214, 222, 243, 354 canonical parameter, 177 Carstairs index, 33 CBD, see Cairns–Blake–Dowd model censoring, 58, 281 censoring hazard, 77 interval censoring, 59 left-censoring, 59 non-informative censoring, 59, 69 random censoring, 59, 77 right-censoring, xiii, 57, 58, 61, 63, 65, 67, 76, 77, 87, 135, 136, 289–291, 317, 322 Type I censoring, 59 Type II censoring, 59 census formula, 73, 306 central exposed-to-risk, see exposed-to-risk central rate of mortality, 9, 54, 69, 72 Chapman–Kolmogorov equations, 260 choice of smoothing parameter, see smoothing 363 364 Index Cholesky factorisation, 332 CMI, see Continuous Mortality Investigation coherence, 148 cohort effect, 113 comma-separated values, 24, 81 competing risks model, xi, xv, 59, 294 census formula, 306 crude hazard rate, 297 dependent hazard rate, 297 independent hazard rate, 297 latent failure time, 296 latent lifetime, 296 multiple-decrement model, 59, 78, 294 net hazard rate, 297 unidentifiability problem, 299 concentration risk, 155 conditional tail expectation, 147 confidence interval, 169 consistency condition, see random future lifetime Continuous Mortality Investigation, 61, 73, 276 correlation matrix, 157 correlation of risks, 146 counting process, xv, 72, 257, 280, 285, 293, 307, 314, 315 Aalen–Johansen estimator, 324 compensator, xv, 317 conditional expectation, 309, 310 counting process martingale, 320 Doob decomposition, 317 Doob–Meyer decomposition, 317 filtration, xv increments, 284 Kaplan–Meier estimator, 324 kernel smoothing, 324 kernel, bandwidth, 324 kernel, Epanechnikov, 324 kernel, uniform, 324 likelihood, 326 Markov model, 321 martingale, xv, 308, 314, 317 martingale central limit theorem, 319 multiple-state model, 257 multivariate counting process, 281, 317, 324 Nelson–Aalen estimator, 324 orthogonality, 319 parametric model, 325 predictable process, 311 previsible process, 311, 327 product integral, 289, 324 Riemann–Stieltjes integral, 313 right-censoring, 322 semi-Markov model, 321 Stieltjes integral, 313 stochastic integral, xv, 312 Tower law, 311, 314, 316 covariate, 61, 113, 123, 125, 129, 325 age, 115 benefit amount, 116 categorical variable, 112 continuous variable, 112 gender, 113, 115, 125 interactions between, 125 pension amount, 113, 123, 125, 126 pension scheme type, 122 region of residence, 122 smoking status, 113, 115 socio-economic status, 115 vector, 113, 122 Cox model, 124 baseline hazard, 124 covariates, 124 partial likelihood, 124 proportional hazards, 124 credit rating, 278 cross-sectional mortality study, 64 crude hazard rate, 68, 69, 129 CSV, see comma-separated values file, 81, 331 CTE, see conditional tail expectation cumulative distribution function, 148, 330 curve of deaths, 52 data bias, 29, 36 corruption, signs of, 41 deduplication, 16, 26 exploratory plots, 41 extraction, 20 format, 24 heaping, 31 preparation, 37 relationship checks, 25 validation, 13, 25 date format, 24 European, 25 ISO 8601, 25 US, 25 deduplication, 26 key, 28, 35 delta method, 170, 176 density function, 330 deviance, 95, 199, 200, 353 Index information criterion (DIC), 99 residual, 101 DIC, see information criterion differentiation, 349 diversification benefit, 146 drift model, 226 parameter, 226 random walk with drift, 226 model, 239, 354 earliest activity date, 23 Ebola, 151 effective dimension, 198, 353 ELT, see English Life Table encapsulated Postscript, 333 endowment, see insurance English Life Table No.16, 49 equating reserves, 341 Euler scheme, see multiple-state models European Union, 146 event history analysis, 46 Excel, 24, 148 PERCENTILE() function, 148 expert judgement, 157 exponential family, 177 exposed-to-risk central exposed-to-risk, 9, 67 initial exposed-to-risk, 9, 87, 173 extensible markup language, 24 document type definition, 24 failure rate, 51 Fisher’s information function, 334 Fleming–Harrington estimator, see non-parametric estimate force of interest, 55, 275, 313 force of mortality, xiii, 50, 51 forecasting, 224, 354 Cairns–Blake–Dowd model, 243 Lee–Carter model, 236 mortality projection, xii penalty, 232 two-dimensional P-spline model, 247 fourth-generation language, 329 full model, 57, 59, 78, 125 GAO, see guaranteed annuity rate GAR, see guaranteed annuity rate generalised linear model, 10, 178, 179, 332 offset, 10, 180 geodemographic classification, 33 Acorn, 34 Mosaic, 34 365 GLM, see generalised linear model Gompertz law, 75, 79, 123, 163, 352 model, 69, 79, 80, 90, 115, 118, 124, 125, 166, 171, 173, 175, 179, 181, 352 paper, 75, 163, 185 goodness-of-fit, xii, xiii, 67, 125, 131, 306 goodness-of-fit tests χ2 test, 95, 102 bias test, 102, 107 bootstrapping, 109 lag-1 autocorrelation test, 108 runs test, 108 signs test, 107 standardised-deviations test, 102, 105 graduation, 19, 69, 70, 76, 129, 291, 306 Greenwood’s formula, 139 grouped counts, 6, 13 guaranteed annuity rate, 23 haemorrhagic fever, 151 hat-matrix, 168 Hattendorff’s theorem, 328 hazard rate, xiii, 50, 51, 66, 68, 71, 75, 114, 122, 129, 258, 285, 290, 291 Hessian matrix, 83, 86 HMD, see Human Mortality Database HQIC, see information criterion Human Mortality Database, 163, 165 reading data, 165 ICA, see Individual Capital Assessment identifiable, 210 idiosyncratic risk, 155 illness–death model, 258 indicator of being under observation, 89, 281, 289, 291 of censoring, 66 of death, 65, 67, 78, 284 Individual Capital Assessment, 147 influenza, 21, 150 information criterion, xiii, 95, 97, 122 AIC, 81, 85, 98, 115, 125, 129, 131, 198, 201, 353 AIC, small-sample correction, 98 BIC, 99, 198, 203, 353 DIC, 99 HQIC, 99 Schwarz, 99 information loss, 13 initial exposed-to-risk, see exposed-to-risk 366 Index initial rate of mortality, insurance activities of daily living, 256 benefit acceleration, 255 critical illness, 47, 255 disability, 47, 255, 258, 276, 292, 321 dread disease, 255 endowment, 26, 50 income protection, 255 life, 45, 46, 274, 327 long-term care, 47, 255 integral, 312 approximation, 345 Itˆo integral, 308, 312, 314 product integral, 289 Riemann–Stieltjes integral, 313 Stieltjes integral, 313, 314 stochastic integral, 312, 320 integrated hazard function, 53, 92, 96, 344 interval censoring, see censoring ISO 8601, 25 Kaplan–Meier estimator, see non-parametric estimate Kolmogorov forward equations, see multiple-state model Kronecker product, 215, 219, 331, 350 kurtosis, 333 lag-1 autocorrelation test, see goodness-of-fit tests latest usable end date, 23 late-reported deaths, 41 law of large numbers, 55 leap year, 82 least squares, 166, 167, 170, 171, 175 Lee–Carter model, xiv, 209, 210, 222, 236, 239, 353, 354 left-censoring, see censoring left-truncation, xiii, 16, 57, 60, 67, 69, 87, 135, 281, 289, 291, 317, 322 introducing bias, 60 level risk, 151 Lexis diagram, 61 life insurance mathematics, 55, 274 life table, 7, 49, 54, 63, 86, 274 radix, 49 select life table, 60 linear predictor, 178, 179, 181 link function, 179–181 logit, 175 log-likelihood, 95 longevity, 63 MA(q) model, see time series machine arithmetic overflow, 345 underflow, 344 Makeham model, see parametric model Markov Chain Monte Carlo methods, 99 Markov model, xv, 54, 262, 286, 291, 321 martingale, see counting process matrix positive semi-definite, 158 maximum likelihood theorem, 336 MCMC, see Markov Chain Monte Carlo median, 146, 148, 333 metaphone encoding, 28 mis-estimation risk, xii, 147 model choice, 94 model risk, 153, 251 mortality law, see parametric model mortality projection, see forecasting mortality ratio, 6, 45, 63, 67, 68, 73, 76, 80, 87, 91, 288, 291 Mosaic, see geodemographic classification moving average model, see time series multiple-decrement model, see competing risks model multiple-state model, 256, 279, 280, 328 absorbing state, 264 Chapman–Kolmogorov equations, 260 coffin state, 264 counting process, 257 Euler scheme, 273 indicator process, 257 Kolmogorov forward equations, xv, 264, 266, 270, 276, 292 Markov model, 262 occupancy probability, 259 reduced form credit risk model, 278 Runge–Kutta algorithm, 273 semi-Markov model, 263, 276 single-decrement model, 54, 260, 325 state space, 256 Thiele’s differential equation, 274 transition intensity, 51, 54, 259 Nelson–Aalen estimator, see non-parametric estimate non-informative censoring, see censoring non-parametric estimate, xiv, 63, 132 Aalen–Johansen estimator, 324 Fleming–Harrington estimator, 141 Kaplan–Meier definition, 134 Index Kaplan–Meier estimator, 43, 112, 134, 324, 332 Nelson–Aalen estimator, 140, 293, 324 product-limit estimator, 138 normal distribution, 69, 331 numerical integration, 333, 344 observational plan, 60 occurrence-exposure rate, 45, 288, 293 offset, see generalised linear model order statistic, 149 overdispersion, 203, 205, 353 parallel processing, 155 parameter error, 227 parameter space, 334 parametric model, 75, 92, 131, 290, 325 Beard, 92 Gompertz, 75, 92 Gompertz–Makeham family, 92, 94, 131 Heligman–Pollard family, 92 logit Gompertz–Makeham family, 92 Makeham, 92, 185 Makeham–Beard, 92 Makeham–Perks, 92 Perks, 92 partial likelihood, see Cox model PDF, see portable document format, 333 penalisation, 194 penalised likelihood, 196 penalty, 194 pension scheme, 17, 26 phased retirement, 26 PNG, see portable network graphic Poisson deviance, 96 distribution, 12, 76, 95, 100, 279, 290, 332 limits for grouped counts, 11 model, xiii, 9, 71, 72, 87, 88, 179, 286, 288, 290, 291 process, 71, 284, 290 quasi-Poisson model, 206 random variable, 291, 292 regression, 172 polynomial model, 182 portable document format, 333 portable network graphic file, 333 postcode, 30 code postal (France), 35 district, 35 Postleitzahl (Germany), 35 sector, 33 UK, 33 367 zip code, 33 Postscript, 333 prediction error, 229 prediction interval, 169 principle of correspondence, 73 probabilistic model, 45, 57, 60, 63–65, 67, 69, 71, 73, 76, 77, 281, 291 product integral, see counting process product-limit estimator, see non-parametric estimate proportional hazards, 122, 126 baseline hazard, 123 covariate, 123, 124 Cox model, 124, 326 protected rights, 26 p-value, 10 quantile, 148, 330, 342 quantile-quantile plot, 104, 333 quasi-likelihood, 205 quasi-Poisson model, see Poisson R, 5, 6, 82, 84, 137, 165, 183, 329 $ symbol, 166 : operator, 165 ; symbol, 166 < operator, 165 FullNegLogL() function, 82 Logit() function, 176 MASS library, 247 Mort1Dsmooth() function, 196, 198, 201, 205, 233–235, 332, 353, 354 Mort2Dsmooth() function, 220, 248, 332, 354 MortalitySmooth package, 196, 198, 220, 233 Mult() function, 212 NegLogL() function, 80 Read.HMD() function, 165, 352 Surv() function, 332 WhittakerSmooth() function, 189, 352 %*% operator, 237, 332 & operator, 166, 331 a:b operator, 331 abs() function, 331 apply() function, 240, 332 arima() function, 229 arima.sim() function, 242 astsa package, 227, 229, 237, 354 axis() function, 333 bdeg argument, 191 bootstrap() function, 110 368 R (cont.) bspline() function, 191, 353 c() function, 9, 83, 210, 212, 331 calculateDevianceResiduals() function, 96 cbind() function, 166, 332 chol() function, 158, 332 control option, 201 cumsum() function, 240, 331 deriv() function, 333 dev.off() function, 333 diag() function, 246, 332 diff() function, 226, 331 dim() function, 192, 246, 331 dnorm() function, 332 exp() function, 331 factor() function, 10, 212, 332 family option, 180 file option, 81 fit() function, 137, 332 for() loop, 199, 240, 331 function() function, 176, 199, 331 glm() function, 9, 10, 180, 182, 183, 192, 207, 332, 352, 354 gnm() function, 212, 332, 353, 354 gnm package, 212 gradient option, 84 gradtol option, 83 hdquantile() function, 333 header option, 81 help() function, 330, 331 hessian option, 83 install.packages() function, 329, 331 integrate() function, 53, 333, 344 kronecker() function, 215, 331 kurtosis() function, 333 legend() function, 184, 221, 333 length() function, 331 library() function, 191, 329, 331, 353 lines() function, 184, 333 lm() function, 167, 171, 175, 176, 332 load() function, 331 log() function, 331 ls() function, 331 lty option, 184 lwd option, 184 matlines() function, 333 matplot() function, 221, 240, 333 matpoints() function, 221, 333 matrix() function, 332 mean() function, 226, 333 Index median() function, 333 method option, 235 mvrnorm() function, 247 names() function, 166, 167, 331 ndx argument, 191 nlm() function, 76, 80, 82, 124, 333 offset() function, 180 optim() function, 333 optimise() function, 333 overdispersion option, 205 par() function, 184, 333 pch option, 184 pdf() function, 333 plot() function, 184, 333 png() function, 333 points() function, 184, 333 pord option, 235 postscript() function, 333 predict() function, 169, 180, 207, 235, 248, 332 qnorm() function, 237 qqnorm() function, 104, 333 quantile() function, 148, 240, 333 read.csv() function, 80, 81, 331 rect() function, 333 relevel() function, 332 rep() function, 212, 331 rnorm() function, 240, 331 rpois() function, 332 sarima() function, 229, 332 sarima.for() function, 229, 332, 354 save() function, 331 se.fit option, 207 seq() function, 331 setEPS() function, 333 skewness() function, 333 solve() function, 81, 84, 332 source() function, 165, 352 source.csv() function, 331 splitExperienceByAge() function, 67 sqrt() function, 331 summary() function, 9, 10, 167, 331, 332 survival package, 137 survreg() function, 332 t() function, 216, 331, 332 text() function, 333 typsize option, 83 var() function, 226, 331 vcov() function, 332 weights option, 171, 182 write.csv() function, 331 Index w option, 234 option, 83 packages, 329 programs, 351 random censoring, see censoring random future lifetime, 46, 47, 50, 57, 66, 258, 291 consistency condition, 48, 51, 57 density function, 52 distribution function, 46, 47, 50 survival function, 47 rate interval, 306 reduced form credit risk model, 278 regression model, 67, 93, 123 regulation of insurance companies, xi, 145 reinsurance treaty, 147 reliability analysis, 46 residuals, 100 deviance, 104, 115, 118, 125, 128, 129 Pearson, 101, 104 revaluation of pension amount, 18, 39 right-censoring, see censoring risk basis risk, 231 idiosyncratic risk, 231 mis-estimation risk, 231 model risk, 231 parameter risk, 231 stochastic risk, 231 volatility, 231 model, 251 roughness, 194 Runge–Kutta algorithm, see multiple-state model runs test, see goodness-of-fit tests saturated model, 95 score function, 177, 334 Scotland, 32 seasonal mortality, 63 secular mortality study, 64 semi-Markov model, 263, 277, 292, 321 significance financial, xi, 109, 126 statistical, xi, 102 Simpson’s 3/8 rule, 346 Simpson’s rule, 346 simulation, 238, 354 skewness, 333 smoothing choice of smoothing parameter, 201 369 smoothing parameter, 188, 196 Whittaker, xiv, 186, 187, 353 smoothing parameter, see smoothing SMR, see standardised mortality rate Solvency II, xi, 146–148, 153 SQL, 20 SST, see Swiss Solvency Test, 146 standard error, 10 standardised deviations test, see goodness-of-fit tests standardised mortality rate, 32 stochastic error, 229 stratification, xiv, 13, 87, 115, 120, 129, 131, 142, 263 Student’s t distribution, 331 subadditivity, 148 survival analysis, 15, 16, 46 survival time, Swiss Solvency Test, 146, 147 Thiele’s differential equation, 274–276, 293 sum-at-risk, 275 time lived, 6, time series, 225 ARIMA(p, d, q) model, 229, 332 ARMA(p, q) model, 229 AR(p) model, 228 autoregressive integrated moving average model, 229 autoregressive model, 228 autoregressive moving average model, 229 MA(q) model, 228 moving average model, 228 Tower law, see counting process transition intensity, see multiple-state model trapezoidal rule, 345 two-dimensional P-spline model, 209, 216, 222, 247 Type I censoring, see censoring Type II censoring, see censoring uncertainty, xii underwriting, 56, 61 United Kingdom, 32 valuation margin, 145 value-at-risk (VaR), 147 variance-covariance matrix, 347 waiting time, 284 well-specified models, 12, 19 Whittaker smoothing, see smoothing XML, see extensible markup language ... Frees, Richard A Derrig & Glenn Meyers Computation and Modelling in Insurance and Finance Erik Bølviken MODELLING MORTALITY WITH ACTUARIAL APPLICATIONS A N G U S S M AC D O NA L D Heriot-Watt... Professor of Actuarial Mathematics at Heriot-Watt University, Edinburgh He is an actuary with much experience of modelling mortality and other life histories, particularly in connection with genetics,.. .Modelling Mortality with Actuarial Applications Actuaries have access to a wealth of individual data in pension and