It is regretted that in these two places Jhr. G. M. M. Alting von Geusau was wrongly described as Chairman of the Association of Dutch Life Offices (Nederlandse Vereniging ter Bevordering van het Levensverzekeringwezen).

1.1. Section 78 of the Insurance Companies Act 1974 makes provision for Regulations to be made for the valuation of assets and liabilities. Regulations relating to the valuation of assets, although not published at the time of writing, are expected to be laid before Parliament in the near future.

It is expected that the corresponding Regulations for the valuation of liabilities will be issued later in 1975.

1.2. The Department of Trade has consulted interested bodies, including the Faculty and the Institute, with regard to proposals for the content of the Valuation of Liabilities Regulations and with its permission part of the relevant Consultative Note is reproduced in Appendix I.

In the course of work undertaken as members of the Executive Committee of the Continuous Mortality Investigation Bureau in the preparation of graduated tables of mortality for the experiences of 1979–82, we have had occasion to make use of and develop a number of statistical techniques with which actuaries may not be familiar, and which are not fully discussed in the current textbook by Benjamin & Pollard (1980), though some of them have been referred to in previous papers by the CMI Committee (1974, 1976). We therefore felt that it would be useful to the profession if we were to present these methods comprehensively in one paper. We do this with the permission of the other members of the CMI Committee, who do not, however, take responsibility for what follows, whether good or bad.

1.1 A paper about the Appointed Actuary is essentially a paper about prudential supervision of life insurance companies. The system which has operated in the UK since the mid-1970's is only partly one of Government supervision. Through the professional role of the Appointed Actuary, it also contains elements of a system of self-regulation with the Institute and Faculty of Actuaries standing in place of SRO's. Unlike the self-regulatory arrangements of the Financial Services Act, though, this second part of the system has grown up by custom and practice and in certain respects it is not codified. However it enables the Insurance Companies Act to be operated successfully.

This paper considers some of the properties of the jump-equilibrium model suggested by Smith (1996). A more detailed description of the model's derivation is provided. The model is represented in a discrete time format and a number of statistics are derived and discussed.

In 1839, in the Penny Cyclopædia (article “Mortality”), I wrote as follows, referring to Mr. Gompertz's well-known hypothesis on the law of mortality:—

“We enter into some detail of it the more readily, that it is necessary as an act of justice to Mr. Gompertz, whose ideas have been adopted by a recent writer on the subject, without anything approaching to a sufficient acknowledgment.”

The development of an economic capital model requires a decision to be made regarding how to aggregate capital requirements for the individual risk factors while taking into account the effects of diversification. Under the Individual Capital Adequacy Standards framework, UK life insurers have commonly adopted a correlation matrix approach due to its simplicity and ease in communication to the stakeholders involved, adjusting the result, where appropriate, to allow for non-linear interactions. The regulatory requirements of Solvency II have been one of the principal drivers leading to an increased use of more sophisticated aggregation techniques in economic capital models. This paper focusses on a simulation-based approach to the aggregation of capital requirements using copulas and proxy models. It describes the practical challenges in parameterising a copula including how allowance may be made for tail dependence. It also covers the challenges associated with fitting and validating a proxy model. In particular, the paper outlines how insurers could test, communicate and justify the choices made through the use of some examples.

There have been many sales of insurance companies in recent years, but there is nothing in the literature of the Institute which deals with valuation for this purpose. It is hoped that this paper and the discussion on it will fill this gap.

Following a brief outline of the origins of the actuarial profession in the United Kingdom, the paper traces the involvement of actuaries in the supervision of insurance in the U.K., and recalls the origins and early development of actuaries in government. In 1919, the Government Actuary's Department (GAD) was formed, and the paper explores the developing role of GAD in the supervision of insurance and how insurance supervision has evolved into a close partnership between the actuarial profession and the supervisors.

The remarks which I have to offer for the consideration of this meeting have reference not to the deduction of the probabilities of living and dying from the facts observed, but to the mode of dealing with those probabilities, in their rough state, with the view of rendering them fit for the purpose for which they may ultimately be required.

As an organization increases in size, so must its management increasingly depend on statistical measurement of performance and statistical presentation of fact. The nature and range of the statistics will be governed largely by the functions of the organization concerned but, if the staff is of more than modest size, personnel statistics will certainly be among them.

This paper is concerned with the development and operation of Continuing Care Retirement Communities (CCRCs). The paper examines the financial structure of a CCRC, being developed by the Joseph Rowntree Housing Trust, and describes a population model utilising transition probabilities to project care needs and financial performance.

The paper then explores the possibility of commercial organisations becoming involved in this market, and examines the risks that such a venture would entail and the strategies that may be adopted to reduce these risks.

All tabular numbers drawn directly from observations, especially those appertaining to statistics, are more or less affected by unavoidable imperfections arising from defective information, insufficiency in the number of observations recorded by the experience, and other known or unknown incidental causes. When a consecutive series of tabular numbers is taken and differenced up to a certain order, the existence of the imperfections or errors alluded to, is at once revealed by the differences, which exhibit a conspicuous disturbance of their law of progression. To eradicate the errors and effect a proper adjustment of the original numbers is, however, an operation of peculiar and somewhat novel difficulty, and a critical examination of the empirical expedients, usually resorted to for such purpose, will show that instead of meeting the indispensable requirements of the problem, they only evade its most essential conditions, and thereby impregnate the results with a new series of theoretical errors, which too readily evade detection in consequence of the systematic uniformity of their law.

The Solvency II Directive introduces the idea of a formal Actuarial Function to have responsibility over delivering the requirements of Article 48 of the Directive. Article 48 describes the responsibilities as being concerned with technical provisions, an opinion on reinsurance adequacy, an opinion on underwriting policy and contributing to the risk management system. Considerable documentation has been produced by the Prudential Regulation Authority (PRA), the Institute and Faculty of Actuaries (IFoA) and the European Insurance and Occupational Pensions Authority on the subject, much of it very recent to the publication of this paper. The purpose of this paper is to provide the reader with some practical insights and suggestions around addressing the requirements of Article 48 of the Solvency II Directive in general insurance firms, taking into consideration the publications of the aforementioned regulatory authorities. It is not our intention to give advice, nor to be seen to give advice, but rather to make suggestions and observations that we hope the reader will find useful. The Regulations lay down the tasks of the Actuarial Function, so insurers should consider the need for formal terms of reference, backed up by proportionate governance procedures. The Regulations also require the production of an Actuarial Function Report to document the tasks undertaken by the Actuarial Function and its results. Such a report can be an aggregate report, made up of individual component reports completed at suitable points in the Actuarial Function’s work cycle, so long as it reports on all the required tasks. The technical provisions section should cover at least all the areas laid down in the Delegated Acts. The opinions required covering reinsurance adequacy and underwriting policy are not formal “sign offs”, but contributions to the effective running of the insurer by applying the skills and knowledge of actuaries to areas for which they are not normally responsible. Again, the Delegated Acts mandate the minimum contribution the Actuarial Function should make. The responsibility for delivering the work of the Actuarial Function does not have to be given to a member of the IFoA; however, the PRA is going to require (at least) one person to be designated the “Chief Actuary”, defined as the person responsible for delivering the requirements of Article 48 of the Directive. In response, the IFoA has stated its intention to require its members holding the role of Chief Actuary, as defined by the PRA, to hold a practicing certificate. Any Actuarial Function will need to consider issues of governance, independence and conflicts of interests. The PRA intends to require the Actuarial Function to be independent of an insurer’s revenue-generating functions. In addition, normal good governance requires a degree of separation between those who perform Actuarial Function work and those who review and supervise it. There are numerous stakeholders in the Actuarial Function’s work. Some of these will rely on the output of the Actuarial Function, others will provide inputs to its work. Setting out stakeholder responsibilities clearly and in advance will be of vital importance. Good communication and coordination between these groups will be important to the efficient running of the insurer. Bringing together issues of governance, independence and meeting the Directive and regulators’ requirements will require a suitable organisational structure which will also need to consider practical issues, such as the availability of suitable staff. Many such arrangements may be possible, but all will require trading off advantages and disadvantages. The Actuarial Function is primarily about good practice and getting the most out of the actuarial skills available. For many insurers, meeting the requirements should not be unduly burdensome.

Actuaries tend to use deterministic rather than stochastic methods and confine their calculations to the computation of expectations. The adverse effects of statistical fluctuations are usually avoided by including contingency margins in the calculations and professional judgment plays a large part in the determination of the margins. In this paper, we show how the results of two recent theoretical papers can be used to supplement professional judgment in the area of premium loadings for non-participating business. The methods are also of interest in connection with participating business.

Some years ago I read before the Institute a paper bearing on this subject (see Journal, vol. xi., p. 90) in which I examined at considerable length the method of valuation which has been on various occasions so strongly advocated by Mr. Tucker, and which is denominated by him the “reinsurance method.” This term, however, appeared to me unsuitable, and I termed the method the “hypothetical method” of valuation; because the sums assured and the premiums are valued by means of a hypothetical table of the values of reversions and annuities, deduced by an inverse process from the premiums actually charged by the office. In that paper I compared Mr. Tucker's method with the net-premium method of valuation, and gave my reasons for believing the latter to be not only greatly superior to the former, but the method that should be generally employed. Subsequent consideration has however satisfied me that the net-premium method of valuation is also open to very serious objections, and that it is not applicable in all cases; and I propose on the present occasion, first to point out some of these objections, and then to consider briefly what method of valuation should be followed when the net-premium method is inapplicable. The subject however is a very wide one; and the present paper must be considered rather as a contribution to the discussion of a question that is all-important to those who have the responsibility of advising as to the liabilities of Life Insurance Companies, than as claiming to be itself a complete essay on the subject.

1. After the discussion on Sir George (then Mr) Epps's paper on ‘Superannuation Funds’, the President in proposing a vote of thanks said: ‘It is of the highest importance that we should exchange views with one another and try to come to a common opinion on matters of practice so that the world at large will bring against us no charge of inconsistency in the advice which we respectively give to those who consult us.’ In 1921, when Epps's paper was presented, actuaries were faced with the position that current yields on new investments were very much higher than had been anticipated in earlier valuations, while most of the older funds had suffered very heavy depreciation in values of existing investments. Today the circumstances are reversed. The rate of interest which can be earned on new investments is very low, but there has been substantial appreciation in values of existing investments. It is in the hope of provoking an exchange of views on the best method of dealing with this present situation that this paper has been written.

This report, which was sponsored by the Life Board of the Faculty and Institute of Actuaries, was originally published in November 1997.

Because it is referred to several times in the paper ‘Reserving, Pricing and Hedging for Policies with Guaranteed Annuity Options’, and in the discussions of the paper, and because it is not easily accessible elsewhere, it is printed here as a background paper for reference.