Insurance accounting has for many years proved a challenging topic for standard setters, preparers and users, often described as a “black box”. Will recent developments, in particular the July 2010 Insurance Contracts Exposure Draft, herald a new era?

This paper reviews these developments, setting out key issues and implications. It concentrates on issues relevant to life insurers, although much of the content is also relevant to non-life insurers.

The paper compares certain IFRS and Solvency II developments, recognising that UK insurers face challenges in implementing new financial and regulatory reporting requirements in similar timeframes. The paper considers resulting external disclosure requirements and a possible future role for supplementary information.

This paper presents latest thinking from the Institute and Faculty of Actuaries’ Model Risk Working Party and follows on from their Phase I work, Model Risk: Daring to Open the Black Box. This is a more practical paper and presents the contributors’ experiences of model risk gained from a wide range of financial and non-financial organisations with suggestions for good practice and proven methods to reduce model risk. After a recap of the Phase I work, examples of model risk communication are given covering communication: to the Board; to the regulator; and to external stakeholders. We present a practical framework for model risk management and quantification with examples of the key actors, processes and cultural challenge. Lessons learned are then presented from other industries that make extensive use of models and include the weather forecasting, software and aerospace industries. Finally, a series of case studies in practical model risk management and mitigation are presented from the contributors’ own experiences covering primarily financial services.

1. In the three years since projections of occupational pension scheme membership and expenditure were made for the Wilson Committee more data about schemes has become available, such as that from the Government Actuary's survey of Occupational Pension Schemes 1979 (the G.A.'s Survey), so the occasion of the publication of the Government Actuary's National Insurance Fund Long Term Financial Estimate (the Quinquennial Review or Q.R.) has been taken to revise and extend the Wilson Committee projections, using the starting date and earnings and prices assumptions of the Q.R.

The paper examines the suitability of the stable family of distributions with the Maturity Guarantees Working Party's stochastic investment model (Ford et al, 1980). It then examines the effect of replacing the Gaussian assumption made by the working party with a more general stable distribution. It also explains how the appropriate stable distribution can be fitted.

Gentlemen,—I have to express my most sincere and cordial thanks to you for the honour which you have conferred upon me, by having for the third time elected me as President of the Actuarial Society.

I have been a member of the Society almost from its commencement; and before the date of my becoming a member, I was permitted, as a young student, to attend some of the meetings. Thus it happened that I was present at the first meeting, and had the privilege of hearing the first inaugural address, delivered by the first President, the late Mr. William Thomas Thomson, a gentleman who was practically the Founder of this Society and also of the Faculty of Actuaries, and to whom both Societies are under very great obligations.

When recalling what took place in the first session of the Society, I may be permitted to refer to three notable papers by Mr. James Meikle, which I also had the privilege of hearing read, on the Nature, Calculation, and Sufficiency of the Premium required for Assurance of a Sum at Death, afterwards published under the title of “The Rationale of Life Assurance Premiums.” The author of these early papers has frequently filled the Presidential Chair, and has been extremely helpful to this Society throughout its whole existence; but if (instead of being the most extensive contributor to the Transactions of the Society) he had done nothing beyond giving us these papers, he would nevertheless have placed the Society deeply in his debt.

The work of science is to substitute facts for appearances and demonstrations for impressions.

1.1 .This paper is an attempt to describe the extent of ‘Subjectivist’ infiltration into theories of actuarial concern, and to present counter arguments defending the objective ‘classical’ actuarial position. The principal entry point for subjectivist ideas has been the ‘latter day rediscovery of the basically statistical nature of actuarial work’ (F. A. Menzler) which has introduced us to Bayesian Statistical Theory and the concept of Insurance Theory as a Theory of Risk. Classical actuarial theory, however, regards this use of Bayesian theory as fallacious, and the Theory of Risk as of relatively minor interest.

The initial object of this paper was to make general observations on the draft Insurance Companies (Winding-Up) Rules 1983 which were circulated for comment and would be made under Section 59 of the Insurance Companies Act 1982. They concern the identification of general and long-term assets and liabilities, and the evaluation of policyholders' claims, in a winding-up. The wider objective is to review insolvency law generally in relation to long-term insurers and in particular the interaction between the general law concerning companies and the specific law relating to insurance companies. This review leads the authors to set out the case for a radical new approach.

No mortality curve appears yet to have been devised which both fits the national statistics at all ages, and also has a simple philosophical explanation. The object of this paper may be stated as being the building up of a new mortality curve from its component parts, as many as possible of these parts having a philosophical background, and the whole being applicable to the national data.

The text of this paper, together with the abstract of the discussion held by the Institute of Actuaries on 25 October 2004, are printed in British Actuarial Journal, 11, I, 63-131.

Medical and social progress over the past 50 years has resulted in a large increase in the expectation of life, and this, together with a declining birthrate, has caused an increase in the proportion of old persons in the population. In 1901 less than 5% of the population of England and Wales was aged 65 and over; by 1949 the estimated percentage had increased to 11% and must inevitably increase still further in the future. A result of this is that more and more attention is being given to diseases of old age and in fact a new specialized branch of medicine, geriatrics, seems to have arisen. Heart diseases form by far the largest group of causes of death in old age and in 1949 were the certified cause of death in 37% of the deaths in England and Wales at ages 65 and over (Table 1). Even in the age-group 55-59 heart disease was responsible for 24% of all deaths in 1949.

The theme of this paper is that life office valuation can be based on an analysis of the characteristics of the individual cash flows which form the net cash flow of an office. These cash flows may be compared with the income and gains derived from traded securities such as equities and gilts in order to assess their values. Standard asset pricing models of modern portfolio theory enable one to allow for lapse, mortality and other risks.

The methodology outlined in the paper is illustrated by reference to the very different types of revenue generated by non-profit, unit-linked and with-profits products. It is also used, in the valuation of future new business, to allow for the risks that expected sales volumes and profitability levels will not be achieved.

The paper provides a rationale for the choice of discount rates used in the valuation of a life office and facilitates the comparison of life office and alternative investment opportunities.

Investment conditions have changed widely and rapidly in the post-war era; and since the publication of Mr Lewis G. Whyte's textbook, Principles of Finance and Investment, there has been a spate of papers on investment theory, each of them either covering a small part of the subject or setting forth a particular view.

The aims of this paper are:

I. To suggest a balanced and consistent approach to investment principles as they affect funds of actuarial interest.

II. To discuss the application of these principles to particular types of funds.

III. To discuss the characteristics of the securities that are available in present-day conditions to implement investment policy.

These aims may sound comprehensive, but within the limitations of a paper it is only possible to touch on them briefly.

The Presidential Address relates events which occurred during significant years in the life of the President with matters relevant to the Institute, past, present and still to come, and with what was written by previous Presidents. It considers actuarial education, and specially its links with universities, and then comments on the President's career as a life actuary.

The role of the Appointed Actuary is discussed, and also what an actuary is and does. The international actuarial perspective is covered through a description of the Groupe Consultatif and of the President's other international involvement, especially with Africa. Other subjects covered include with-profits contracts, the dispersion of actuaries throughout England and Wales, the role of the actuary in today's changing world, the relationship between the Institute and the Faculty, and the role of the President. Finally, the President looks forward to what actuaries might be and do in the future.

Using an empirical approach to capital market returns analogous to that used for mortality rates by Halley more than three centuries ago to establish life assurance on a sound and scientific footing, a theory of option pricing is built up in terms of the same three key components as for life assurance premiums, namely the expected cost of claims, an allowance for expenses, and a contingency margin as a reserve against the risk of insolvency. The dimensionality of the process describing security returns to any future point in time is increased from two to three by the addition of systematic variability around ‘central values’ to the standard descriptors of expected return and variance of return. It is shown that this approach, which involves only common sense principles and elementary mathematics, has important theoretical, practical and regulatory advantages over the Black-Scholes and related methodologies of modern finance theory.

Under the European Union’s Solvency II regulations, insurance firms are required to use a one-year VaR (Value at Risk) approach. This involves a one-year projection of the balance sheet and requires sufficient capital to be solvent in 99.5% of outcomes. The Solvency II Internal Model risk calibrations require annual changes in market indices/term structure for the estimation of risk distribution for each of the Internal Model risk drivers. This presents a significant challenge for calibrators in terms of:

• Robustness of the calibration that is relevant to the current market regimes and at the same time able to represent the historically observed worst crisis;

• Stability of the calibration model year on year with arrival of new information.

The above points need careful consideration to avoid credibility issues with the Solvency Capital Requirement (SCR) calculation, in that the results are subject to high levels of uncertainty.

For market risks, common industry practice to compensate for the limited number of historic annual data points is to use overlapping annual changes. Overlapping changes are dependent on each other, and this dependence can cause issues in estimation, statistical testing, and communication of uncertainty levels around risk calibrations.

This paper discusses the issues with the use of overlapping data when producing risk calibrations for an Internal Model. A comparison of the overlapping data approach with the alternative non-overlapping data approach is presented. A comparison is made of the bias and mean squared error of the first four cumulants under four different statistical models. For some statistical models it is found that overlapping data can be used with bias corrections to obtain similarly unbiased results as non-overlapping data, but with significantly lower mean squared errors. For more complex statistical models (e.g. GARCH) it is found that published bias corrections for non-overlapping and overlapping datasets do not result in unbiased cumulant estimates and/or lead to increased variance of the process.

In order to test the goodness of fit of probability distributions to the datasets, it is common to use statistical tests. Most of these tests do not function when using overlapping data, as overlapping data breach the independence assumption underlying most statistical tests. We present and test an adjustment to one of the statistical tests (the Kolmogorov Smirnov goodness-of-fit test) to allow for overlapping data.

Finally, we explore the methods of converting “high”-frequency (e.g. monthly data) to “low”-frequency data (e.g. annual data). This is an alternative methodology to using overlapping data, and the approach of fitting a statistical model to monthly data and then using the monthly model aggregated over 12 time steps to model annual returns is explored. There are a number of methods available for this approach. We explore two of the widely used approaches for aggregating the time series.

This paper considers the application of loglinear models to claims run-off triangles which contain negative incremental claims. Maximum likelihood estimation is applied using the three parameter lognormal distribution. The method can be used in conjunction with any model which can be expressed in lognormal form. In particular the chain ladder technique is considered. An example is given and the results compared with the basic actuarial method.

1.1 In the paper ‘Improving the Performance of Equity Portfolios’ by Clarkson and Plymen the authors concluded that Modern Portfolio Theory methods made no contribution whatever to improving the performance of equity portfolios and suggested that attention should be paid instead to the application of fundamental analysis, which—if carried out by skilled and experienced analysts—should lead to higher expected returns. The only practical application of techniques related to Modern Portfolio Theory appeared to be in the area of Index Funds, where it is desired to track the performance of a chosen index as closely as possible.