Some apology is needed, perhaps, for proposing to rediscuss a subject which has been handled so often, and by so many distinguished actuaries. But I am probably addressing gentlemen who have not had occasion to become familiar with all that has been written or said on the subject, and others to whom it may usefully be presented from a fresh point of view; and there are some important practical questions too on which the profession seem scarcely yet agreed, which will admit of further consideration. I shall not attempt to notice the various papers which from time to time have been contributed by actuaries towards the solution of the questions I am to consider. For many of the views I am to express I am necessarily indebted to those who have preceded me; and the aim of this paper is less to introduce what is new, than to enforce, and illustrate if possible, sound and correct opinions. I am anxious to set the subject in a light which will make it intelligible to others than actuaries, and to discuss principles rather than formulas.

This paper has been written to provoke discussion and will be used as background to the debate on 18 November 2002. An earlier version was produced by the Faculty of Actuaries Pension Research Group and presented as a paper to the Faculty of Actuaries Students' Society.

In the last three decades the life insurance industry was rocked by a series of mis-selling scandals such as endowment mortgage, personal pension and payment protection insurance mis-selling. Regulators have stepped in to try to address the underlying causes and improve customer protection by introducing more stringent regulation targeted at sales practices and remuneration, product design, disclosure and ongoing monitoring together with significantly larger financial penalties for non-compliance. Against this background, the paper considers whether customers understanding of risks and outcomes associated with life insurance products can be further improved and how poor customer outcomes can be avoided in the future. We acknowledge the complexity of these issues, which involve many stakeholders, covering all stages of the product lifecycle and customer journey and being impacted by a constantly changing regulatory landscape. We first review the current regulatory landscape across both the United Kingdom and other jurisdictions, concluding that whilst regulators have acted to improve customer protection, gaps still remain, particularly around the areas of disclosure and consideration of changing customers’ needs throughout product lifetimes. The paper then considers how the current situation could be improved for customers in a cost effective manner. We focus on improvements in disclosure, needs-based selling, ongoing assessment and communication as a means of ensuring that products continue to meet the customers’ needs and risk profile, and on introducing a duty of care which would force financial services firms to act in the best interests of their customers. In this paper we present our preliminary thoughts and recommendations. Some of the recommendations will cost something to implement, and should therefore be supported by cost-benefit analyses that would weigh these costs against the potentially larger benefits to both customers and the insurance industry.

This paper addresses the process of estimating loss reserves for a company or syndicate writing in the London Market. Particular emphasis is placed on insurers maximising the value of the process, and ensuring that the process is not simply a series of mathematical calculations. The use of sophisticated mathematical techniques should not distract from the importance of understanding the business and ensuring that data are correct. Sophisticated mathematical techniques can give rise to misleading impressions of confidence and accuracy to estimates, which are often subject to considerable uncertainty. The principles (rather than the detailed techniques) are illustrated by a case study based on a hypothetical London Market writer. Many of these principles are relevant to other markets.

Medicine-related research includes numerous studies on the hazards of mortality and what risk factors are associated with these hazards, such as diseases and treatments. These hazards are estimated in a sample of people and summarised over the observed period. From these observations, inferences can be made about the underlying population and consequently inform medical guidelines for intervention. New health interventions are usually based on these estimated hazards obtained from clinical trials. A lengthy lead time would be needed to observe their effect on population longevity. This paper shows how estimated mortality hazards can be translated to hypothetical changes in life expectancies at the individual and population levels. For an individual, the relative hazards are translated into the number of years gained or lost in “effective age”, which is the average chronological age with the same risk profile. This translation from hazard ratio to effective age could be used to explain to individuals the consequences of various diseases and lifestyle choices and as a result persuade clients in life and health insurance to pursue a healthier lifestyle. At the population level, a period life expectancy is a weighted average of component life expectancies associated with the particular risk profiles, with the weights defined by the prevalences of the risk factor of interest and the uptake of the relevant intervention. Splitting the overall life expectancy into these components allows us to estimate hypothetical changes in life expectancy at the population level at different morbidity and uptake scenarios. These calculations are illustrated by two examples of medical interventions and their impact on life expectancy, which are beta blockers in heart attack survivors and blood pressure treatment in hypertensive patients. The second example also illustrates the dangers of applying the results from clinical trials to much wider populations.

Decumulation Pathways are proposed to help achieve better retirement outcomes for those with Defined Contribution (DC) pensions. The DC fund is split into two parts, in proportions of the consumer’s choice. Most is allocated to the Pension Fund to provide a lifetime income, while the rest is placed in the Flexible Fund for flexible access and/or to leave as a legacy. The Flexible Fund is invested in flexi-access drawdown. The Pension Fund is invested in a guaranteed annuity, Collective Defined Contribution, or a Pooled Pension Fund which maintains individual DC funds but pools longevity risk between participants. An illustrative standard Decumulation Pathway is intended as a default solution, or can be tailored by the consumer. It uses the Pooled Pension Fund, an automated withdrawal strategy which ensures a lifetime income is provided and one that aims to increase in line with inflation, and a moderate risk investment strategy. The standard approach is evaluated using various metrics, indicating that it has as a strong chance of providing a higher income than could be obtained from an annuity or drawdown, with limited downside risk.

This paper highlights how actuarial thinking could contribute to the development of a justice perspective relating to biodiversity risks and also the implications for actuarial work. The impact of biodiversity loss as well as the use of ecosystem services is not equally distributed across society (both intra and inter generationally). The Biodiversity and Natural Capital Risk Working Party has been setup to proactively take forward a series of activities including think pieces, webinars and external engagement on these risks.

Increasing global concern over the impact of climate change has recently led to public scrutiny over the adequacy of existing risk management practices by insurance companies and pension schemes in dealing with these challenges that potentially impact both individual actuaries and the Institute and Faculty of Actuaries generally. Most recently, the Prudential Regulation Authority has issued further guidance concerning its expectations for the UK insurance industry regarding the development of an approach to disclosure on and management of the financial risks from climate change, while a Parliamentary Committee has demanded public clarification from UK pension scheme trustees regarding their degree of engagement with incorporating climate-related financial risks into their investment decision-making. The aim of this paper is to identify the dominating factors of the current evolvement of UK insurance companies’ and pension schemes’ climate risk disclosure practices. This paper analyses both the nature and extent of changes in the risk reporting practices of these entities that have evolved in order to meet these demands for increased accountability. We first analyse relevant sections of latest annual reports produced by a sample of 15 UK insurance companies and 15 pension schemes. We find only limited alignment of insurance firm and pension scheme annual reports with the 11 specific Task Force on Climate-Related Financial Disclosure’s (TCFD) recommended disclosures. We also examine what key financial risk and/or other organisational characteristics are most closely associated with the degree of alignment with TCFD specified disclosures related to governance, strategy, risk management and performance metrics. We find that incentives facing sample insurance companies to align their climate-related disclosures with TCFD recommendations are related to their management of reputation risk (measured on the basis of size and type of business). Whereas the incentives facing pension schemes are related to the desire to reduce information asymmetry (measured by liability risk) among their stakeholders concerning this issue. Further, consistent with a stakeholder theory explanation, it appears that only a minority of large, publicly listed insurance companies and large local government pension schemes are taking action to report on their actions to mitigate climate risk. We also discuss examples of best practice climate risk reporting. The implications for the actuarial profession in engaging with climate risk are discussed in line with the findings of the study.

Various definitions of mathematical probability are described and commented upon: (i) the classical formulation, based on the ratio of favourable to total “equally likely” aspects of a system; (ii) formulations based on relative frequency in a sequence of trials, or on the limit of relative frequency as the number of trials is increased indefinitely; (iii) von Mises' refinement of this, in which the sequences obey special postulates ensuring “randomness”; (iv) modern revisions of the classical definition, “equally likely” aspects being replaced by an aggregate, and ratio of aspects by relative measure of a sub-aggregate; (v) the approach of Keynes, in which probability is the “logic of uncertain inference,” developed by a symbolic algebra; (vi) the approach of Jeffreys, by axioms and conventions of procedure, based on the principle of indifference and the use of the rule of inverse probability. It is suggested that, whereas in formulations based on relative frequency, frequency cannot be held to afford any explanation of the facts of frequency, in the a priori formulations, on the other hand, any postulates put forward are still very far from explaining to inquiring minds the commonly observed phenomena of so-called chance. It is further suggested that in actuarial applications the nexus between axioms of probability and causes of mortality is especially obscure, with consequent need of caution in adopting and interpreting the more refined modern methods.

Unit-linked business has been with us for about 20 years. The original concept consisted of a life assurance policy under which the benefits were linked to the performance of a Unit Trust and the definition of unit pricing was therefore of no direct concern to the Insurance Company.

Subsequently, contracts were issued where the benefits were linked to the performance of an internal Unit Fund and the definition of unit pricing then became the direct concern of the Actuary.

This paper adopts a simplified approach to unit pricing and reviews some of the issues to be considered when calculating unit prices for an internal fund.

The paper does not consider the question of Unit Trust pricing nor have I attempted to provide a summary of historic and current practices or to provide any hard and fast rules, the aim being to concentrate on the principles involved.

The considerable public discussion of the past two years on the subject of our social insurance schemes and their post-war reconstruction has culminated in the publication of the Government's plans as a White Paper (Cmd. 6550–1). At present, social insurance in this country (now to be called National Insurance) is divided into a number of independent sections, each with its own statistical arrangements covering a large part of the population. At the same time some aspects of the whole population are regularly surveyed by the Registrars-General by means of an independent system of recording. The Government's plan greatly expands the field of insurance to cover all classes and groups. Before this unified plan can begin to function, fresh statistical machinery will have to be prepared, adequate to the task of keeping it efficiently in operation, and there will in consequence be a great opportunity for coordinating, simplifying and generally improving the national population records as a whole.

The ordinary member of a pension fund, if asked whether there is any connection between the high cost of living at present oppressing him and the security of the pension to which he looks forward to support him in his old age many years hence, would probably fail to discover that the one is related to the other. The financial position of pension funds is, however, fundamentally affected by the sudden drop in the purchasing power of the sovereign during the last few years and more directly by the enhanced scales of salaries or wages which have resulted from the change in the value of money, and it is to be feared that in many funds a very serious position has to be faced. The actuary who is called upon to advise as to the situation and to formulate remedies by which equilibrium may be restored has not only difficult professional problems to grapple with, but, having made up his mind as to the course to be recommended, he has to carry with him the responsible officers of the fund, who in their turn have to secure the co-operation of the employer and also the assent of the " ordinary member " of the fund, to whom I have referred above, to the remedies put forward.

It is now nearly a decade since the author had the honour of submitting a paper on the mortality of assured lives in India, and the manner of its reception by the members of the Institute has emboldened him to make a second venture. Particular impetus was given to the writing of this paper by the fact that, in the discussion that followed the reading of the earlier paper, several speakers observed that they would be interested to know the results of an analysis of the mortality prevailing in the large subcontinent of India, subject to varying climates and other conditions of life, according to geographical situation, and an attempt has now been made to give this information as revealed by the statistics of the “Oriental”. The words, “the more investigations were made into mortality in various parts of the world and in various types of business the better”, with which Sir (then Mr) William Elderton closed his observations on the earlier paper, are typical of the attitude of the Institute towards papers on mortality investigations, particularly as applied to countries like India, which are becoming very important from a life assurance point of view. Information concerning the mortality to which the various parts of the country are subject is, however, still very meagre.