1.1 Medical expenses insurance, as we know it today, has been available in the United Kingdom since the late 1940s. In recent years the market has increased significantly to a point where we estimate approximately 6m people are now covered by medical expenses insurance, which represents over 10% of the population. Furthermore, there is evidence that the market is continuing to expand.

Actuarial models of the market in conventional British Government Stocks, also known as the Gilt-Edged market, are reviewed and contrasted with the methods which have been developed, during the last twenty years, by financial economists.

Following the Treasury's announcement in May 1995 (regarding the taxation of institutional bond holdings), the so-called ‘coupon effect’ has largely disappeared and gilt prices can now be fitted very closely by using the same simple discounting functions for both income and capital flows. A new model suitable for the calculation of yield indices is proposed and is contrasted with the model currently underlying the FTSE Actuaries Government Securities (FTSEAGS) Yield Indices. A number of new possible applications of the reformulated yield indices, such as forward pricing, asset/liability matching and stochastic simulation, are discussed. An analogous model for index-linked gilts leads to applications involving the forward market in the retail prices index.

A survey of professional users of the FTSEAGS Indices is described, and a revised presentation for the published yield indices is suggested. A summary of current statutory references to the indices is presented.

Statement of Standard Accounting Practice (SSAP) 24 required, for the first time, particular levels of disclosure in relation to firms’ pension arrangements. Whilst this was a major step forward, it allowed a significant degree of discretion. This discretion meant that SSAP 24 was an observable measure of the quality and quantity of accounting disclosure for firms. This information can be used to determine the types of firms that give less information or use weaker assumptions. In my analysis, I find some evidence that large firms give more complete disclosures, but also that they are more able to exert influence on their actuaries to use weaker assumptions for the valuation of pension scheme liabilities. There is also some evidence that more profitable firms disclose less, so firms with a higher average tax rate might want to overfund their pension scheme. Finally, there is evidence that highly levered funds are less likely to give complete disclosure, and that when they do disclose their assumptions, they use a weaker basis.

Having read with much pleasure and profit the several articles upon this subject, chiefly in the Assurance Magazine, from such able contributors as Messrs. De Morgan, Jellicoe, Brown, Sprague, Pattison and others, whose names are known and honoured on this side the Atlantic as well as at home, I have thought that, in return, a brief account of the method adopted in the recent distribution of the surplus of our largest American Life Company might be acceptable to the members of the Institute of Actuaries.

For the last thirty years the teaching of statistics in universities in this country has been dominated by the relative frequency theory of probability, exemplified in Richard von Mises's book, Probability, Statistics and Truth. This statistical definition along the lines of the long run frequency concept of probability can be illustrated by asking what meaning is to be given to the statement ‘the probability of getting a head on a single toss of a penny is one half.’ The relative frequency adherent would answer something like ‘in a long sequence of repeated tosses, the proportion of outcomes that are heads is one half’. In the last ten years, however, an alternative approach has come to the fore, under the general title of the Bayesian Approach to Statistics. A Bayesian adherent would answer something along the lines that he would be ‘prepared to offer even money on getting a head on a single toss’.

The paper is concerned initially with the admissibility of particular claim payment models. Admissibility is restricted by the requirement that, if claims escalation is excluded, the amount of outstanding claims at any epoch of development of a generation of claims should be independent of the future speed of finalization.

This simple requirement represents an invariance condition. The problem of admissibility of models can therefore be approached in the manner of invariance problems in physics. Standard techniques of variational calculus are used.

Unit-Linked life insurance can be simply defined as the application of unit trust principles to the ‘savings element’ of each premium paid and the application of insurance principles to the remaining ‘insurance element’ only. It has been appearing in various forms for some time now. In North America, it has been mainly of the variable annuity variety, commencing with CREF in approximately 1952. In the U.K. it has been mainly of the endowment assurance variety, commencing in approximately 1957 but not really making a big impact until 1962–63 when the unit trust groups first came on the scene. In Australia it has so far been limited to superannuation schemes with the so-called (by one life office) ‘E.F.G.’ approach the prime example, commencing in approximately 1965. In each country the position is the same—a remarkably favourable response from the public, particularly in the last few years, causing an urgent reassessment of previously held views, sometimes, unfortunately, most widely and eloquently recorded! There have also been legislative difficulties of varying degrees, most pronounced in North America, least pronounced in the U.K., with the position in Australia not clear.

Underwriting in the United States (US) life insurance marketplace has evolved tremendously over the last several decades. This paper will take a brief look at that history, from the older underwriting techniques still in use today to the introduction of smoker/nonsmoker distinctions in about 1980 to the evolution of preferred underwriting in the late 1980s, and finally to a movement toward simplified issue underwriting and a new approach to older age underwriting today.

The draft paper sets out the authors' views of what good practice for the actuarial aspects of internal models will look like in 2012, the year Solvency II is expected to be implemented. Actuaries working on internal models can expect to have to follow such practices if their internal models are to be approved for use in calculating regulatory capital. The paper is therefore relevant for actuaries who plan to work on internal model implementation for Solvency II.

Moreover, the risk quantification techniques discussed in the paper can also be used in the Own Risk Solvency Assessment (ORSA) process also required by Solvency II. The paper is therefore relevant to actuaries working in companies that are not planning to apply to use an internal model.

The paper covers both life and non-life insurance and reinsurance, and reviews current practice as well as setting out possible future practice. This leads to identification of areas for research by the Profession to prepare for 2012 and an indication of the directions this work might take.

The paper is effectively a work in progress, and readers should ask themselves what they should do in response to the ideas discussed.

The Working Party has developed some practical hints and tips for those developing integrated risk management (IRM) plans for UK defined benefit pension schemes in the context of the requirements of the Pensions Regulator. Four case studies are presented to illustrate its conclusions, which are encapsulated in the ten commandments for effective IRM. IRM is the consideration of investment, funding and covenant issues, and how these interact. Its purpose should be to aid decision making and so should have a clear outcome in mind. It should be a continuous process and should form part of everyday trustee governance – it is not simply a one-off exercise. Whilst most Trustees and advisors consider funding issues when setting their investment strategy and vice versa, fewer fully integrate covenant into their decision-making process. However, covenant underpins all risk taken in a pension scheme and so needs to form a regular part of trustee discussions and analysis by advisors.

Pollard and Pollard have considered a stochastic approach to certain actuarial problems. In their notation ãx denotes the random variable whose expected value is ax. The random variable ãx depends on the random variable, time until death and the (assumed constant) rate of interest. The authors show how to calculate the second and higher-order moments of some common actuarial random variables such as ãx and Ãx. The second moments, in particular, are useful in estimating confidence limits for the total liability in respect of a group of contracts.

When I agreed to prepare a paper for the consideration of the Institute of Actuaries, on the Life Assurance Companies Acts, 1870–72, I did not do so with a light heart. The task in any case would have been onerous, and events which have since transpired have not tended to increase my confidence. It has become a matter of public knowledge that the Council of the Institute had under consideration the laws relating to life offices, and that it was intended to take an early opportunity to debate the question. Moreover, it has been surmised that Government had in contemplation to take action in the matter, and, possibly in next session of Parliament, to bring in a Bill for the amendment of the law. I, therefore, cannot help feeling that a great responsibility rests upon me in opening a discussion of such importance, but I am emboldened to proceed, because, even if I fail to produce anything new or important, there are many here of far riper experience than myself, and a debate in such an assembly cannot but be instructive and useful.

At the end of 2013 the real yields that the UK government had to pay on its debt were negative over the whole curve. Several possible explanations are available for this phenomenon – central bank action, regulatory changes, demographic developments and economic conditions. The first two can result from deliberate interaction by the state into the financial markets and can be labelled as financial repression. We explain the historic precedents for Governments to use financial repression to manage their debt, look into the influence of regulation on asset allocation for insurers and pension funds, and introduce the concept of a balance-sheet recession.

The past session of Parliament has witnessed the passing of an Act for the regulation of Life Assurance Companies in the United Kingdom, which, while introducing great changes in the law, still stops very far short of the system of legislation which has been for several years in operation in a few of the United States of America, and which is warmly approved of and urgently recommended for adoption by some persons in this country. The present may therefore be considered a fitting time for reviewing what has been done and considering whether any further legislation is desirable, and if any, of what nature it should be.

This paper explores an approach to assessing the adequacy of capital resources for non-life insurance companies. It examines the range of risks faced by these companies and the factors that influence the analysis of their impact on an organisation's financial condition. The paper considers how the actuarial profession may contribute to this process, with particular reference to the regulatory regime envisaged in the United Kingdom.

We have chosen Investment Policy and Index Numbers as the title of this paper, because the origin of the Actuaries' Investment Index is to be found in a paper, The Statistical Groundwork of Investment Policy, by the late C.M. Douglas (T.F.A. 12, 173).

The main policy consideration discussed by Douglas was the extent to which offices should invest in equities. Douglas maintained that funds should only be invested in equities if greater security was thereby obtained. To establish the suitability of equities, it was necessary to study the relative variations in equity prices, debenture prices and business activity. For this purpose, index numbers were required.

From a study of index numbers covering the period 1924-28 Douglas concluded that share prices were related to the level of business activity, i.e. to the progress of the ‘trade cycle’, equity prices following the cycle directly, and debenture prices following the cycle inversely, but with a different tempo and interval. If, therefore, an investor could judge the future trend of business activity, a sound investment policy could be pursued.

In this paper we propose to review some of the developments that have taken place in the principles and practice of investment policy over the last twenty-five years, and to study the contribution to these principles that the Actuaries' Investment Index and other index numbers can provide. In addition, we propose to review the methods used in the construction and maintenance of the Actuaries' Investment Index in the light of current conditions.

By courtesy of Robin Michaelson, data derived from a United States of America life insurance experience (1970–75) for individually insured lives was made available. The data consisted of the proportions of smokers in the population and the ratio of smokers' mortality to that of non-smokers. In both cases separate data was collected for males and females and at integral ages from 15 to 84. From these data it was possible to construct separate life tables for smokers and non-smokers, which were subdivided for males and females. These tables are shown as Tables A–D at the end of this note.