This Working Paper should not be reported as representing the views of the IMF.

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

In today's financial system, complex financial institutions are connected through an opaque network of financial exposures. These connections contribute to financial deepening and greater savings allocation efficiency, but are also unstable channels of contagion. Basel III and Solvency II should improve the stability of these connections, but could have unintended consequences for cost of capital, funding patterns, interconnectedness, and risk migration.

Traditional life insurance accounting standards rely on various types of book and cost values, the result being that the income and balance sheet statements do not necessarily give a true and transparent picture of the result of the life business. As examples, assets are typically stated at a mix of cost, current and amortised cost values, whereas life insurance provisions are calculated according to the approved technical basis.

In this paper, it is suggested that this deficiency can be corrected by preparing life insurance accounts at current value. The proposed method implies that the life insurance provisions shall amount to the present value of the company's net liabilities to the policyholders including a provision for future bonus distribution. Moreover, any unrealized investment reserves are thrown into light, and it is shown how a bonus equalization provision at current value may serve as a key indicator of the financial strength of the company.

The method has been designed primarily for the Danish market, but aspects of the method should be of relevance more widely.

Finally, the results are illustrated by a number of numerical examples.

Health expectancy (HE) was only recently estimated for the Scottish population (Clark et al., 2004). The estimates were based on Sullivan's method, applying the morbidity prevalence in each age group to the expected number of years lived, to obtain the expected number of years lived in good health. First, we compare these estimates with a wide range of estimates in respect of the rest of the United Kingdom and the (pre-accession) countries of the European Union. We find that Scotland's HE is relatively low, especially for men. Second, we examine data comprising the responses to the 1998 Scottish Health Survey, linked to the hospital records of the respondents from 1981 to 2004, and death records from 1998 to 2004, with HE measurement in mind. Although time spent in hospital does not give a satisfactory measure of HE, the linkage presents a rare opportunity for statistical analysis of survey respondents' mortality and morbidity. We show the results of survival analyses, quantifying the effectiveness of various definitions of ‘unhealthy’ as predictors of future mortality and morbidity. The results suggest that enumerating recent serious hospital episodes might help to predict future patterns of demand for acute services.

Part I of the paper considers in relation to Pension Funds the financial problems so much discussed in recent years in a Life Office context, viz:

(a) asset distribution by date and by class,

(b) financial options against the Fund,

and states the author's conclusions.

In Part II are presented investment statistics and other information relating to a number of actual Pension Funds whose investments comprise 25% of all non Local Government Funds, some £300,000,000 in 1964.

The main conclusions reached in the paper are:

(1) that, normally, irredeemable investments should predominate in a Pension Fund portfolio and include a considerable equity share element;

(2) that financial options exist, but are of far less potential danger to the Pension Fund than to the Life Office;

(3) that, in practice, the Funds investigated are invested shorter than the author would have expected but include a considerable and increasing equity element.

The paper seeks to examine the fundamental principles underlying the periodic actuarial investigations of life insurance companies. It attempts to define the attributes of an equitable and efficient set of standards, to classify the causes of failure of life offices and to enumerate the realities of any life office. Having examined the background to the present situation it then proceeds to attempt to derive a general valuation standard.

This paper seeks to explain key characteristics of the New Zealand life insurance industry, in particular the important role played by overseas-controlled mutual companies, and the dearth of regulation relative to other countries. It proposes that the dominance of mutual companies reflects the historical development of the New Zealand life insurance market. It also examines how agency theory may help to explain how the market has come to be dominated by mutual companies, and suggests that the unregulated nature of the life insurance industry may reflect the New Zealand government's historical role of direct intervention in the market through the Government Life Office. Further light on this issue is shed by the economic theory of regulation. This theory suggests that cartelisation and reinsurance may help to explain the existence of the unregulated insurance market in New Zealand. The paper concludes that many socio-economic and historical reasons may account for the distinctive features of the New Zealand life insurance industry. The possibilities are presented in this paper as a stimulus for further insurance markets-based research.

The system of fire insurance has been practised in Great Britain, either by private societies, public companies, or corporate bodies, for more than 180 years. In an article on fire insurance in Vol. XII., Part II., of the Encyclopædia Britannica, 8th edition, recently published, Mr. F. G. Smith draws attention to the various attempts which were made to interest the Corporation of the City of London in the subject, and to the proposals which for this purpose were submitted to the Court of Common Council between the years 1669 and 1680, and more especially to one from Mr. Deputy Newbold, which appears to have been the most acceptable. The delay which occurred before the report of the Committee was presented, enabled other private individuals to originate a scheme for fire insurance; and by the advertisements of the day it appears that they offered to insure against damage by fire, brick houses at 6d. in the pound, and timber houses at Is. in the pound—rates which showed the little knowledge which at that time prevailed upon the subject, provided sufficient business could be reckoned upon to obtain an average of the risks. On the 13th October, 1681, the Court of Common Council decided to effect fire insurances on houses within the city and liberties, and engaged a sufficient fund and undoubted security by the Chamber of London, on lands and ground rents, to provide for the fulfilment of their contracts. The war that ensued between those private Societies which had been the first in the field, and the city insurers, gave rise to much amusing pamphleteering and advertisements in the Gazette. In 1681, 1682, and 1683, the journals of the Court of Common Council record the signing of many policies, and refer to the discussions and arguments of their opponents; but the city authorities appear to have been soon weary of the scheme, for, by a resolution of the 13th November, 1682, the Court decided to relinquish the business, to cancel the existing contracts, and to return the money accepted for them.

Under Common Law an employer has always been liable to his workmen for his own personal negligence, but it was not until 1897 that there was enacted the first of a series of Workmen's Compensation Acts which introduced a remarkable change in the law, inasmuch as the workman was given a statutory right to compensation for accident without requiring him to prove any negligence whatever.

The evolution of the law relating to Workmen's Compensation is traced through the successive Acts of Parliament, and the provisions of the Workmen's Compensation Act 1925, which codifies the law on the subject, are summarised so far as they relate to the liability covered by an Insurance Policy. Under the Act the employer is liable for personal injury to his workmen by accident “arising out of and in the course of” the employment or by certain scheduled industrial diseases.

An Insurance Policy covers the liability at Common Law and under the Employers' Liability Act 1880 as well as under the Workmen's Compensation Acts, and in addition makes the Insurance Company responsible for the cost of defending claims. The injured workman may have to consider whether he is likely to recover a larger sum by way of damages than he would receive in compensation by arbitration proceedings under the Workmen's Compensation Acts, and he can then elect which course to take.

A description is given of the Returns of Compensations made by Insurance Companies to the Home Office on behalf of the employers in certain selected industries as required by the Workmen's Compensation Act 1925.

The requirements of the Assurance Companies Act 1909 relating to Employers' Liability Insurance business are stated. In the Annual Returns to the Board of Trade under this Act, an Actuarial Valuation of the Outstanding Claims that have been in existence for five years or more is called for on an annuity basis, but no regulations are laid down for estimating the Liability in respect of Outstanding Claims of shorter duration. The present method is to take each of such claims and after considering the facts—nature of injury, rate of compensation, etc.—to make the best possible estimate of the ultimate cost to the Insurance Company. Later developments of the injury, however, may cause such estimate to be wide of the amount which the Company is called upon to pay. A plea is advanced for an investigation into the liability in respect of Outstanding Claims, in the hope that it may be found possible to arrive at average factors which could be used, with a suitable grouping of the Claims, to determine the Liability under the non-fatal Outstanding Claims from the first occasion of their becoming outstanding. When there is no recognised method based on past experience of making such an estimate, judgment may be influenced by factors not solely relevant to the ascertainment of the liability.

All the leading Offices transacting Employers' Liability Insurance business are members of the Accident Offices Association. This Association was formed after the passing of the Workmen's Compensation Act 1906, by which the scope of workmen's compensation was widely extended. The Association controls the rates and policy conditions of the Tariff Offices, but as the regulations are in great measure confidential, detailed information can only be given regarding what is already common knowledge.

A further step was taken in Government supervision of Insurance Companies by the Agreement made in 1923 between the Home Office and the Accident Offices Association, the effect of which is to limit to 37½% the expenses and profits in respect of the combined figures of the members of the Association.

The trend of probable future legislation as recommended by the Departmental Committee in the Insurance Undertakings Bill is described, and the questions of Compulsory Insurance and State Insurance are touched upon.

An account is given of an Undertaking made recently by the Accident Offices Association to furnish the Government with workmen's compensation statistics in connection with a Home Office Scheme of enquiry into the Incidence and Causation of Accidents.

The subject is so extensive that it has only been possible to deal with it in broad outline, but in conclusion reference is made to various aspects that could with advantage be expanded.

It is well known that the number of the physical sciences is continually increasing, by a process of development from within. We constantly see divisions and branches of existing sciences cultivated and developed until they acquire a separate existence as new and independent sciences. For it has long been impossible for a single person to master the whole, or even a considerable part of these sciences, and the necessity for a division of labour is continually becoming more and more felt here, as elsewhere. It is, however, comparatively seldom that the number of the sciences is increased by the addition to them of an entirely new one, and therefore the case of which I am about to speak appears to deserve our particular attention. For I shall presently prove that a department of science, which has not hitherto belonged to the physical sciences, is now being so developed and perfected, that in a very short time it will claim admission into the number on equal terms with the others. This department of science is Statistics. The science of Statistics in its present form has now existed a full century. It owed its birth, as well as its name, to Achenwall of Göttingen, about the middle of the last century.

It is probable that some of the points I venture to bring forward have already suggested themselves to other students, but in view of the interest at present attaching to selection, it seems an opportune time for putting forward any considerations that may help to throw light on a somewhat complicated subject.

Pension fund is created for what it will do while in full operation—not for what will emerge when it is wound up nor for what it might provide for members during their employment. Nevertheless, the dissolution provisions are important: they may reflect the philosophy on which, or the limitations within which, the fund is financed but it is of paramount importance that they should make llowance for the considerable problems that can and do arise on a dissolution acutally taking place.

1. The assessment of industrial ordinary shares has not yet been discussed by the Institute. This is surprising, both in view of the fact that British insurance companies hold ordinary shares to a value approaching £1000 million and also because actuaries are playing an increasing part in the investment world. The Institute is indeed the only professional body which examines candidates for membership in investment knowledge. Hitherto the examinations have been concerned mainly with general principles, but the widening of the scope of the syllabus since the war makes it necessary that the methods by which industrial shares are assessed should be discussed. It is the purpose of this paper to provide an opportunity for such a discussion.

Of the three major elements in the formulae for office premiums, mortality has been subjected to refined investigation; interest has been considered closely, particularly since the war; expenses alone have hardly been considered. We have found only four papers on the subject in the whole of J.I.A., three (19, 153; 44, 415; 49, 111) many years ago, and the fourth (69, 50) before the war. There have been a few papers since in T.S.A., notably Mr Pedoe's (4, 485).

Our object is to analyse the expenses of a group of British life offices, so as to provide a reliable basis for comparison of offices, to enable managements to test the efficiencies of their own offices against others, and to provide means for getting standard costs as a tool of administration.