Abstract
The annual premium for a life assurance contract is obtained by equating the expected discounted value of the sum payable on death to the expected discounted value of the series of premiums, and loading the resultant net premium for expenses and contingencies. The approach is essentially deterministic. An adequate stochastic model of mortality is readily available, but it is of limited practical value. A life office writes a large number of policies on independent lives and, apart from the effects of a few very large policies, the overall mortality behaviour of its portfolio is effectively deterministic.
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