The text of this paper, together with the abstract of the discussion held by the Institute of Actuaries on 25 November 1996, are printed in British Actuarial Journal, 3, II, 227-319.

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.

The statutory Minimum Funding Requirement (MFR) introduces fundamental change to the funding of pension schemes in the United Kingdom. While only a minority of schemes will actually be affected materially in terms of actual contributions or benefits, taken over a period of years, the influence of MFR will be much more widely felt. This is because the MFR is an absolute standard to be met, whereas long-term funding targets for ongoing schemes are, at least up to a point, optional and adjustable. The paper discusses the difference between MFR and long-term funding and suggests a variation on traditional actuarial methods to control explicitly the risk of MFR failure, based on a combination of traditional methods and the theories underlying asset/liability modelling. The paper also discusses the implications for pension expensing and communication of funding levels.

The text of this paper, together with the abstract of the discussion held by the Institute of Actuaries on 24 June 1996, are printed in British Actuarial Journal, 2, V, pages 1273-1322.

The Profession held a joint seminar on ‘Human Genetics: Uncertainties and the Financial Implications Ahead’ with the Royal Society of London in September 1996. Papers submitted to that seminar included four from the profession and several from the medical, legal, social and scientific communities.

This Sessional Meeting is designed to provide a forum for discussion amongst a wider actuarial audience. The topic is important to the profession, not only in relation to life insurance, but perhaps even more in relation to health insurance. The four papers by the actuarial authors are reproduced, together with a short third party summary of the whole seminar and a more detailed summary by C.D. Daykin of the actuarial, legal and social points raised in the discussions.

The meeting takes the form of a panel discussion. Each of the panellists is to be invited to make introductory comments on their papers to update them where appropriate in the light of developments since September 1996 (for example the ABI statement) and will also suggest specific topics for discussion at the meeting. There is then an opportunity for members and guests to raise and debate all relevant issues.

This paper forms notes for discussions about the European single currency at the Institute of Actuaries and the Faculty of Actuaries. The author assumes (and hopes) that the single currency will start on time in 1999, with most of the Member States of the European Union included. The key dates are 1 January 1999, when the exchange rates between currencies will become irrevocably locked and become conversion rates, and 2002, when euro notes and coins will be introduced, and the retail banking sector will convert to euros. The advantages of a single currency are potentially very great; the costs are also considerable. Governments of Member States will no longer be able to get a competitive advantage by devaluing their currency, or be able to choose an inflation rate that is different from that of the E.U. as a whole. The key document is the Maastricht Treaty, and the conversion criteria included therein are discussed. The author concludes that, if governments choose to interpret the criteria leniently, all countries, except possibly Greece, will be included in 1999, with Greece joining a year or two later. Some of the practical considerations for actuaries, including life insurance, general insurance, pensions, banking and investment are mentioned. The paper is not comprehensive, and is a personal contribution to stimulate discussion.

This paper develops the Daykin et al (1994) asset/liability model to examine specifically the effects of different reinsurance programmes on the capital of a direct insurance company. By modelling the gross premiums and claims separately from the impact of reinsurance on them, it is possible to examine directly the effects of different reinsurance programmes on a company's expected performance just as easily as changes in asset mix or business volumes. The paper goes on to discuss the necessary assumptions to be built into such a model, and then gives a worked example. The emphasis of the paper is on management reporting rather than on mathematical detail.

This report outlines proposals for the development of the Education and CPD strategy of the profession.

The first part of the report gives an introduction to the key issues which have been considered in developing the strategy. The main part of the report describes the proposed model and the rationale behind various aspects of the proposed model. In particular, there is a commentary on how key issues have been addressed.

The report has been discussed at a joint meeting of both Councils, and has received support for further development along the broad lines indicated. The key emphasis is on evolution from our present strategy. The report is now being issued for wider discussion by the profession.

Comments are particularly sought on the following issues:

(1) Is it necessary to specifically assess detailed country-specific legislation and regulation in any subject prior to Fellowship, or is it appropriate to assess this at Stage 3 through the problem solving activity as proposed in the paper?

(2) How useful will it be to members to seek intermediate qualifications from the Privy Council?

(3) Should the profession look to increasing the range of assessment methods used?

(4) The Fellowship qualification is defined as the level of an embryo actuary. How do we encourage actuaries to gain enhanced skills during the CPD stage?

(5) Is the approach to specialisation appropriate?

This discussion meeting was on the subject of business ethics, with particular reference to the work of actuaries.

As an introduction to the meeting, copies of the paper, ‘Business Ethics: the New Bottom Line’, by Sheena Carmichael, were distributed to members of the Institute.

Sheena Carmichael is the director of ETHOS, a consultancy dedicated to helping organisations identify and manage ethical issues. She is a research associate at the European Institute of Business Ethics at Nigenrode University in the Netherlands.

The paper ‘Business Ethics: the New Bottom Line’, was published in 1995 by Demos, which “is an independent think-tank committed to radical thinking on the long-term problems facing the United Kingdom and other advanced industrial societies.

It aims to develop the ideas — both theoretical and practical — that will shape the politics of the 21st century, and to improve the breadth and quality of political debate.” It is a registered charity.

The paper has not been reproduced in British Actuarial Journal, but further information can be obtained from:

Demos, 9 Bridewell Place, London, EC4V 6AP; telephone: 0171 353 4479; facsimile, 0171 353 4481; email, [email protected]

Increasingly, modern business and investment management techniques are founded on approaches to measurement of profit and risk developed by financial economists. This paper begins by analysing corporate pension provision from the perspective of such financial theory. The results of this analysis are then reconciled with the sometimes contradictory messages from traditional actuarial valuation approaches and the alternative market-based valuation paradigm is introduced. The paper then proposes a successful blueprint for this mark-to-market valuation discipline and considers whether and how it can be applied to pension schemes both in theory and in practice. It is asserted that adoption of this market based approach appears now to be essential in many of the most critical areas of actuarial advice in the field of defined benefit corporate pension provision and that the principles can in addition be used to establish more efficient and transparent methodologies in areas which have traditionally relied on subjective or arbitrary methods. We extend the hope that the insights gained from financial theory can be used to level the playing field between defined benefit and defined contribution arrangements from both corporate and member perspectives.

Using an empirical approach to capital market returns analogous to that used for mortality rates by Halley more than three centuries ago to establish life assurance on a sound and scientific footing, a theory of option pricing is built up in terms of the same three key components as for life assurance premiums, namely the expected cost of claims, an allowance for expenses, and a contingency margin as a reserve against the risk of insolvency. The dimensionality of the process describing security returns to any future point in time is increased from two to three by the addition of systematic variability around ‘central values’ to the standard descriptors of expected return and variance of return. It is shown that this approach, which involves only common sense principles and elementary mathematics, has important theoretical, practical and regulatory advantages over the Black-Scholes and related methodologies of modern finance theory.

These calculations of the Minimum Funding Requirement replace those that were issued with version 1.0 of GN27, which were made obsolete by the issue of version 1.1.

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.

The first part of the Address is a review of changes over the last 30 years in the actuarial management of a life office — ranging from the introduction of the Appointed Actuary system to some of the consequences of the Financial Services Act. It draws attention to some of the differences in the regulatory treatment of life assurance companies and other competing organisations in the savings field, highlights some of the shortcomings in the European solvency regime that is currently being reviewed by the authorities, comments on developments in the area of anti-discriminatory legislation and draws attention to some possible problems arising from such legislation.

The Address continues by outlining some of the issues that must be tackled if the profession is to expand into other fields, and the last part comments on developments in the day-to-day management of the United Kingdom actuarial profession and the Faculty's relationship with the Institute.

The paper examines the suitability of the stable family of distributions with the Maturity Guarantees Working Party's stochastic investment model (Ford et al, 1980). It then examines the effect of replacing the Gaussian assumption made by the working party with a more general stable distribution. It also explains how the appropriate stable distribution can be fitted.

This paper draws analogies between techniques used to reserve for, control and manage derivatives and techniques used by actuaries in other fields. It concentrates on equity derivatives. It also includes a review of the factors which significantly influence the appropriate size of reserves to hold for a derivatives portfolio. These include the likelihood of market jumps, uncertainty in future market volatility and the size of transaction costs, as well as on more obvious factors like position risk.

This paper examines the political economy of regulation, reviewing market socialist, neo-classical and public interest approaches to regulation and analysing the development of financial services and insurance regulation in these frameworks. However, the paper suggests that these approaches do not capture properly many of the features of a market and the behaviour of regulators. Public choice theory is discussed, and it is concluded that there has not been significant capture of the regulatory process by interest groups. Austrian economics is proposed as a possible framework within which to analyse markets and regulators. It is concluded that there is prima facie evidence to suggest that the Austrian view of the market is realistic and that regulation in insurance markets can have unforeseen and undesirable effects. The author also concludes that, until 1970, insurance regulation did not deviate from principles which are appropriate if either a public choice or Austrian view is taken. However, the Financial Services Act 1998 and the Pensions Act 1995 do deviate from those principles.