The operation of the clearing has the effect of enabling all the payments from one bank to another to be performed without the passing of bank-notes; and the result is, that if any bank has to receive from the clearing, say, £50,000, the account of that bank at the Bank of England is better by £50,000 at 9 o'clock the next morning; and if a bank has to pay into the clearing £50,000, the amount of that bank is worse by £50,000.

The guide to the profession on this subject first appeared in the Faculty Year Book for 1975-76 and it was discussed at our sessional meeting in February 1976 (and at the Institute's sessional meeting in January 1976). In the time since these meetings there have been changes in the guide and additions to it. No doubt future changes in business conditions in the years ahead will bring forth further amendments. The reasons for devoting another sessional meeting to it at this time are, firstly, to review the manner of its production and to consider what weight it carries, and, secondly, to give members the opportunity of considering the detailed wording of the guide, as distinct from its general intention. The analogy that comes to mind is with an Act of Parliament. The Bill is prepared in a department of government, is drawn up with care and professional skill by parliamentary draftsmen, and receives two readings before the House of Commons when its general aims and intentions are approved: it then moves into the committee stage where, if time permits, every clause is gone over individually to see that it expresses clearly and unambiguously the intention of parliament. It then has its third reading and, if approved, may be expected to go on to become law. The sessional meetings here and in London in 1976 correspond in this analogy to the first two readings of the Bill, and they showed that the intention of the guide and its general terms had the approval of the profession.

Globe Insurance Company.—Early in the year 1799 a plan was laid before Mr. Pitt for forming a Chartered Insurance Office, for granting Insurance against Fire, and for Insurance of Lives; for buying and selling Annuities, and for receiving deposits from Friendly Societies, and the Industrial Classes: to be called the Globe or General Insurance Office. It was understood that the plan received that Minister's approval, and a Bill was introduced to Parliament embodying these objects. The measure encountered some opposition. In the first place, the Bank of England objected to the Deposit branch, and the clauses relating thereto were accordingly struck out. Then it was opposed by several of the Insurance Offices; but the Bill finally passed through both Houses, and received the Royal Assent.

The general subject of extra risks, and the special method of meeting such risks by making temporary deductions from the sum assured in lieu of charging an extra premium, have been more than once under discussion at this Institute. The latter problem in particular was somewhat exhaustively considered upon the occasion of a paper by the late Mr. Sunderland, “On a Method frequently adopted of treating Under-Average Lives for Assurance purposes, &c.” (J.I.A., xxix, 419).

In bringing before the members of the Institute of Actuaries a question so important to the prosperity of Assurance Companies as the investment of the funds, they will be prepared to admit that it is one which could not be fully treated within the limits usually allowed for a paper for discussion at the sessional meetings. All that I could hope for is, to throw out a few hints such as experience or reflection may suggest to me, and trust to elicit, from the practical knowledge and abilities of those present, the materials for a fuller debate of the subject.

The Presidential Address argues that, by acting in the public interest, the power of actuaries to benefit individuals financially can become a competitive advantage for the profession. This theme is explored by reference to professionalism being under threat, the negative impact of professional negligence claims, the need for unity in the profession, nationally and internationally, and the consequences for our education. The future of the profession will be brighter, and can be expansionist, if actuaries are recognised and valued for serving the public interest in the wider fields, but this will require effective public relations.

This problem concerns n couples around a circular table, husbands and wives seated alternately. The number of ways in which the n couples can be seated such that no husband and wife sit next to each other is required. This problem is not covered in the standard texts such as Feller (1950) or Whitworth (1901) who concentrate on the simpler linear problem, i.e. seating arrangements in a row. In this paper we obtain a solution for the circular problem, deriving thereby the probability that no such matching occurs when the seating is made at random, and showing finally that this probability has a limiting value when n is large.

The paper opens by showing how certain types of hedge funds can reduce the risk and increase the return on a traditional balanced managed fund. One of the key characteristics of such a hedge fund is that it has a low correlation with the balanced managed fund. The paper puts forward a new way of explaining correlation so that it can be more readily understood, and suggests methods of analysis for dealing with the fact that correlation is unstable. Volatility correlation is also examined because of its importance in reducing the risk of a portfolio.

An outline of the characteristics and risks of three types of hedge funds, namely, long/short equity, convertible arbitrage and merger arbitrage, together with some questions investors might put to prospective hedge fund managers is given in Section 5.

Some of the very basic statistical analysis techniques used in assessing the past performance of hedge funds are given in Section 6. Considerable emphasis is put on the need to examine daily return data as an insight into the quality of the manager's IT systems, his risk management, evidence of smoothing of returns, and to gain access to a higher number of data points for assessing the repeatability of performance.

An entire section of the paper is devoted to gaining a clear understanding of a prospective hedge fund manager's volatility management strategy because of its importance in the context of the fee structure of hedge funds and its importance for assessing the ability of a hedge fund to reduce the risk and increase the returns of a balanced managed fund.

Funds of hedge funds are examined in the final section, and the section concludes that large sophisticated institutional investors may wish to create a portfolio of hedge funds rather than invest in a fund of hedge funds.

This Presidential Address is a call for a debate about change, to meet the demands of the 21st century. Change in how actuaries are educated to encourage wider thinking and more flexible careers. Change in how the profession is governed, to introduce more external input, to encourage more challenge of accepted practices and standards and to encourage a greater readiness to embrace change itself. To boost our public image and our influence on public policy. Change in the United Kingdom's social security and pensions systems, the better to achieve a secure retirement for tomorrow's pensioners. Change in how insurers are regulated, ensuring that consumer protection is not diminished in the process. The importance of research is emphasised, as are our relationships with other professions. These are areas where the Faculty is particularly well placed to play its part in taking the U.K. profession forward.

The literature on ‘Term-Structure Models’ is extensive with many contributions from financial economists over the last twenty years. This paper reviews examples of term-structure models from different categories (‘equilibrium’, ‘evolutionary’ and ‘descriptive’) with particular emphasis on their intended application. The Vasicek (one-factor equilibrium), Richard (two-factor), and Hull & White (evolutionary) models are discussed in some detail.

The paper reviews a particular class of descriptive polynomial models which is flexible and in widespread use both in the academic and the practitioner community. The model is cast in terms of forward rates, applied to the gilt market, and techniques are used to determine how many terms in the polynomial expansion are statistically required in order to describe the market accurately. The model is a linear model of forward and spot rates and is stable; this allows the calculation of risk measures for each bond which give a superior approach, in principle, to portfolio hedging.

Selection of model should be driven by its application. If the objective is a reasonably accurate description of the curve and, by implication, an accurate indication of yields which can be obtained in the market, then a model which fits the market accurately is preferable. The ‘descriptive’ approach is therefore most appropriate in this context.

The paper describes the application of actuarial techniques to the financial management of unit trusts and other collective investment schemes. The main features of collective investment schemes are described and the financial issues facing managers of these schemes are highlighted. The unit trust industry in particular is facing a number of potentially significant changes and the paper explores the areas in which the actuarial profession can add value to this industry.

In a note in the introduction to Milne's Treatise on Annuities, the author remarks—“There can, I think, be no doubt but that the mortality is greater among the higher than the middle classes of society. They form too small a proportion of the population to have any sensible effect here; but it would be of importance to the Life Offices to determine the law of mortality among them.” Since the publication of this work, forty-six years ago, some attempts have been made to test the accuracy of this assertion, and to supply the desideratum; but none with which we are acquainted are by any means conclusive.

As already stated by the writer, in a former paper on the subject, “In the absence of any large collection of facts and observations in Jamaica, from which such a table could have been deduced, he has necessarily been compelled to proceed upon probability and approximation, according to the experience and opinions of persons whose age and long residence in the community, or whose peculiar means of information, would give weight and authority to their statements; and, as a consequence, to any system which might be based upon them.

A time-honoured convention in accounting has been that accounts should be based on the principle of historic cost, namely that all items should be recorded in terms of the purchasing power of the pound at the date of each transaction. This convention has the virtue that the accounts are based largely on factual monetary transactions and fewer items need be determined subjectively. It is a valid convention so long as the value of money remains constant, but in a period of inflation, accounts drawn up on this basis become distorted, and the higher the rate of inflation the greater the distortion. For example, amounts based on historic cost which are set aside for depreciation of plant and machinery will, in a period of rapid inflation, be totally inadequate either to provide funds for the eventual replacement of those assets or to maintain the real value of the shareholders' original capital investment. Similarly profits are overstated by the inclusion of profits on stock which arise solely from a general increase in price levels. Again, no account is taken of the real cost of holding cash or other monetary assets when money is losing its purchasing power. Conversely, no credit is taken for the gain derived from having borrowed money, when the liability for repayment of the loan is in real terms reduced.