1.1 A number of papers have been written in recent years that discuss the valuation of the business of a life office, examples of these are Burrows and Whitehead (1987) and Bunch (1986). These papers recognize the need to use a risk adjusted discount rate in the calculations. Burrows and Whitehead devote a section of their paper to the determination of such a rate. In their abstract they state that “…an entire paper could be devoted to this subject”. This latter point is supported by the existence already of a number of papers in the finance literature on the very topic of determining risk adjusted discount rates e.g. Robichek and Myers (1966), Fama (1977).

1.2 This paper outlines some results of the theory of determining risk adjusted discount rates and the valuation of risky cash flows as developed in the finance literature, and discusses the application of this theory to the determination of life office appraisal values. Some comments are made on Section 3 of the Burrows and Whitehead paper.

Until relatively recently life companies generally met their capital needs either from internal resources or by means of equity capital provided by shareholders. However, the financial pressures on life operations have led to more innovative alternatives being used. In response to these pressures different forms of capital support from reinsurers, banks or other group funds or companies have been developed. In April 1998 National Provident Institution (NPI) became the first life company to issue bonds to investors secured on the future profits expected to arise from part of its existing life business. This paper discusses: financing options available to life companies; the terms of NPI's securitisation; the relative merits of different financing and capital management alternatives; alternative forms of capital support; the implications for policyholders and their interests; and actuarial issues arising from the different forms of financing.

In recent years, the insolvency of Life Assurance Companies has become a subject of practical importance to the actuarial profession. In April 1976 Mr. Peter Shore, then Secretary of State, stated in this connection that “prevention is better than cure”. The authors of this paper contend that prevention has been neglected because of the more immediate problems of recognition when insolvency is reached and the action required after the event.

After some comments upon the legislation, the authors discuss the role of the Appointed Actuary. They then consider the main causes of insolvency, and suggest that the basic cause of the recent financial difficulties of certain Life Offices was rapid expansion based upon inadequate capital and free reserves. The paper argues the need for explicit solvency margins in preference to implicit ones and proposes a method for determining the capital base of a life office and the maximum growth rates which can be supported.

The earliest event of the year 1844 was the presentation to Parliament of the “First Report” of the Committee on Joint-Stock Companies, appointed in 1841. The report set out by stating that, as a good deal of the information affecting persons was in the nature of ex parte statements, caution would be required in promulgating it: hence much of the evidence collected would he stated summarily. I shall confine myself here to the passages bearing upon Insurance Associations.

After I had written the first draft of an article on the above subject, my attention was drawn to two articles by Mr. King “On Mortality amongst Assured Lives.” I had felt much diffidence in saying anything having the appearance of adverse criticism of the valuable works issued by the Institute; but now that I observe that Mr. King's articles, which are in some measure founded on opinions similar to my own, have been received with marked approval, I feel more confidence in stating plainly what appear to me defects in the HM and HM(5) Tables. But whatever I may say respecting them, I trust that my assurance will be accepted that I entertain feelings of the highest respect for the eminent knowledge and ability of the distinguished persons concerned in their preparation, with the most hearty and grateful appreciation of the benefits which they have conferred on the profession. I need hardly say that nearly all that I know of the subject of mortality amongst assured lives, is due to them.

The paper discusses developments resulting from (1) the recent passage by most of the state legislatures of the “Standard Valuation Law” and the “Standard Non-forfeiture Law,” and (2) the general adoption by the companies of a lower interest assumption in the calculation of premiums, reserves and non-forfeiture values.

After a brief review of the system of regulation of life insurance in the United States and of the more important differences in practice as compared with practice in the United Kingdom, the paper proceeds to outline the background which led to the appointment of the “Guertin Committee” by the National Association of Insurance Commissioners to study and report on the need for a new mortality table and related matters and (subsequently) on non-forfeiture benefits. The main recommendations of the Committee and the subsequent modifications thereof as adopted by the Commissioners and later embodied in the Standard Laws are detailed.

The effects on life insurance operations of the new Standard Laws in conjunction with lower interest assumptions and the marked upward trend in expenses are discussed. The paper concludes with a brief reference to two important changes being made by some companies in their policy conditions.

It is the object of the present article to put together a number of formulae which it may be useful to the actuary to find in one place. At the same time it may show all persons who possess an elementary knowledge of algebra, that they may, with no great amount of tables, and processes of very easy application, learn to compute the value of any benefit in which the duration of one life only is concerned. The same principles, with more extensive tables, apply to cases in which two or more lives are involved.

In this paper we present many investigations into the results of simulating the process of hedging a vanilla option at discrete times. We consider mainly a ‘maxi’ option (paying Max(A, B)), though calls, puts and ‘minis’ are also considered. We show the sensitivity of the variability of the hedging error to the actual investment strategy adopted, and to the many ways in which the simulated real world can diverge from the assumed option pricing model. We show how prudential reserves can be calculated, using conditional tail expectations, and how net premiums or fair values (which we present as the same) can be calculated, allowing for the necessary prudential reserves. We use two bond models, the very simple Black-Scholes one and a less unrealistic one. We also use the Wilkie model as an even more realistic real-world model, allowing for many complications in it to make it more realistic. We make observations on the important difference between real-world models and option pricing models, and emphasise the latter as the way of getting hedging quantities, and not just option prices.

Often as the method of estimating the liabilities of life assurance companies has been discussed by the Institute, there seem to me to be some reasons why it will not be entirely useless to devote another evening to the subject. The Act of 1870 has now been sufficiently long in force that, with one or two exceptions, all the existing companies have furnished the particulars required by the 5th and 6th schedules, which give, in considerable detail, the methods and results of their valuations. A tolerably minute examination of these documents, as they have from time to time appeared, has satisfied me that much difference of practice still exists even among those who would consider themselves in agreement on the main principles; and the 105th number of the Journal contains a paper by Mr. McCandlish, which, being an address ex cathedrâ to the Edinburgh students from the President of the Actuarial Society, may have an authority to which, as it seems to me, some of its doctrines are hardly entitled, and which therefore should not pass altogether unchallenged.

The subject of the money supply suddenly became most topical in the Autumn of 1968. It is of importance to investment, in general because of possible changes in the economic management of the United Kingdom, and in particular because of the possible implications for the gilt-edged market.

1. Capital is wealth appropriated to reproductive employment, and, in the words of the late J. S. Mill, “the gross profit on capital may be distinguished into three parts, which are respectively the remuneration for risk, for trouble, and for the capital itself, and may be called insurance, wages of superintendence, and interest.”

It is with the last of these, Interest, that we have at present to do.

2. In civilized communities wealth is measured in money, and therefore in our investigations it is of money that we shall speak; but evidently it is immaterial, in laying down general propositions, whether the standard units are of one actual value or of another, so long as we remain consistent with ourselves, and use the same standard throughout. We shall therefore, as the most convenient course to suit all currencies, treat of units of value, without specifying to what currency these units belong.

Some years ago I had the privilege of reading a paper on Contingent Reversions, &c., before this Institute, and the proposals I then made for the treatment of the premiums on the insurances to be set up in connection with reversionary transactions were received with general condemnation, nor have they since, so far as I know, met with any practical support, although I have seen no reason to alter my opinion of the soundness and practicability of the views I then put forward. I am not afraid on this occasion of meeting with like opposition, as the methods I am now going to deal with have been carried into practice already by the Society with which I am connected, and by way of reassurance, if not otherwise, have examples on the books of many of the life offices, both in England and Scotland.