This paper shows how the powerful and flexible tool of stochastic modelling can be applied to a range of business decisions extending far beyond the asset allocation solutions that are common to many asset/liability modelling studies. The example used to demonstrate these techniques is a general insurance case study, but similar principles can be extended to many different business situations. At each stage of the analysis we consider the implications of modern financial theory on the management decision process together with a practical perspective on observed behaviour in the real world. Opportunities are taken to suggest directions in which further research may be of benefit to the actuarial profession.

This paper looks at the reasons why a UK life insurance company would wish to consider expanding into an overseas market, the factors it ought to bear in mind when deciding upon which country or countries to enter and the entry routes open to a company wishing to expand overseas.

By way of examples of overseas life insurance markets, the paper provides a detailed description of the German and Indian life insurance markets.

Investment efficiency is a function of the risk, return and total cost of an investment management structure, subject to the fiduciary and other constraints within which investors must operate. Institutional investors implement their investment policies through investment management structures. In this paper the aim is to enhance the investment management structure by broadening the financial objectives, by recognising the effect of behavioural issues and by incorporating governance constraints. We therefore suggest that investment efficiency should be considered as a combination of financial efficiency and non-financial efficiency.

Modern portfolio theory had a revolutionary effect on portfolio construction. In the same way, we believe that investment management structures should be constructed in a more disciplined and quantitative manner. In this paper we outline the quantitative and qualitative methods by which these structures can be developed. The proposed new framework for designing investment management structures seeks to optimise net information ratios while simultaneously recognising the level of regret risk facing fiduciaries, minimising non-financially-productive behavioural biases and taking account of the resources available to the fiduciary to monitor these structures.

Actuaries should seek to understand the phenomenon of ‘professions’ because much of our working life is influenced by the belief that we are a ‘profession’. This paper considers various theories as to why professions exist — do they arise naturally to fulfil functions in society, or are they created by the efforts of the occupational groups which aspire to become professions? Professions are shaped by the society of which they are a part. Ongoing changes in society are affecting professions in general, and the actuarial profession in particular. The difficulties which the actuarial profession will face as it seeks to expand beyond its traditional territory are discussed. Finally the author speculates on what institutional forms might replace professions in the twenty-first century.

The traditional approach to United Kingdom pension fund valuations is to use an off-market approach to valuing assets and liabilities. This approach has been called into question for a number of reasons, such as changes to the taxation of U.K. share dividends and a growing understanding and appreciation of the key principles of financial economics. This paper looks at the history of the traditional approach and focuses on the drivers for change. We compare the properties of various methods that take assets into the balance sheet at market value against the traditional valuation method. Our principal aim throughout has been to produce a paper that is practical and helpful to pension scheme actuaries.

This Working Party has considered the pensions implications of a prolonged period of low inflation. Experience in the United States of America suggests weaker correlation between equity and bond returns and greater overall volatility of returns. Without a further significant increase in the valuation of equities relative to their underlying economic activity, the cost of pensions will rise, possibly as much as doubling within the next 15 years. It follows that for defined contribution schemes and personal pensions, current contribution levels are likely to produce disappointing and generally inadequate results. Similarly, the costs of defined benefit promises will increase. Future defined benefit provision is also vulnerable to the mismatch of mainly equity assets with mainly fixed liabilities and is therefore difficult to control. Many practical issues of scheme design still reflect past inflation and need to be addressed.

This paper describes how to calculate approximate prices of options if investment markets are being modelled according to the Wilkie investment model.

On 22 May 2000, 11 individuals were elected as Honorary Fellows of the Institute of Actuaries.

This paper addresses one of the fundamental issues faced by offices in the transacting of with-profits business, namely, the provision of equity-related performance along with maturity guarantees that increase over the lifetime of the policy. The approach commonly followed of using capital to cover the office's investment mismatch risk is considered from an individual policy viewpoint, and, through stochastic modelling, the degree of security represented by different reserve levels identified. An alternative approach using derivatives to provide similar levels of security is then presented and the range of policy proceeds resulting from the two methods compared. While it is recognised that the latter approach may have limited application in practice, the ideas presented could form the basis of a new approach to pricing guarantees under with-profits business that would be consistent with the pricing of current derivative-backed guaranteed products.

This is a discussion paper prepared by the Compliance/Peer Review Working Party of the Professional Affairs Board. It considers the monitoring of compliance with the professional conduct standard and guidance notes, how this is being done, and whether changes need to be made to the monitoring in the light of on-going changes to the regulation of financial services.

Consolidation of the FTSE Actuaries Share Indices in real time; internationalisation of the industry classification system; end of ‘gross’ yields.

General insurance syndicates at Lloyd's are required to obtain a Statement of Actuarial Opinion (SAO) in relation to their solvency reserves. This paper focuses on the reinsurance to close (RITC) process at Lloyd's, which is not currently subject to such opinions although some Lloyd's syndicates choose to obtain informal opinions from actuaries in relation to RITC. The paper analyses the current RITC process and suggests two types of opinion that actuaries could provide in relation to RITC. We also consider briefly financial condition opinions for Lloyd's syndicates. The International Accounting Standards Committee (IASC) published their issues paper on insurance accounting during the drafting of this paper, and we include some consideration of the application of the IASC's fair value concept to the future claim liabilities of Lloyd's syndicates. Lloyd's may be subject to unprecedented changes in the next few years, and we therefore consider the effect of these potential changes both on the existing actuarial solvency opinions and on our suggested opinions in relation to RITC. Our aim is to carry out an objective analysis of this unique reserving process and to offer suggestions as to how actuaries might add value to the process, taking into account how Lloyd's might change in future. Because of these changes, much of the paper has direct application to non-Lloyd's insurance companies.