1.1 At the 1984 seminar of the Institute's General Insurance Study Group the author presented a draft of some guidance notes which were intended to be the starting point for establishing a framework of recognized good practice for United Kingdom actuaries working in general insurance. The draft. amended to take into account comments made at and subsequent to that seminar. appears as Appendix A, with the title “Notes on recommended practice (abbreviated to NORP) for actuarial reporting in general insurance”. It was felt that in presenting the notes to the profession at large. an introductory paper would be helpful, not only in explaining some of the issues covered in the proposed NORP but in discussing more generally the role of the actuary in general insurance and what an actuary should be prepared to advise on.

1.1.1. In the course of the discussion of the paper by Praetz at the International Congress of Actuaries in Sydney, reference was made to the existence of the ongoing Expense Investigation conducted amongst life offices in the United Kingdom. Considerable interest was aroused and it was subsequently suggested that a paper describing this investigation be presented to the actuarial bodies in order that data on life office costs might be made available to the profession and its significance discussed. In agreeing to present such a paper the authors considered that its scope should be extended to include a study of the attitudes of offices and actuaries to expense analysis and control and of the uses made by offices and actuaries of the results of the Expense Investigation and other expense analyses.

This paper has been written to assist Actuaries making an acquaintance with the London reinsurance market and needing assistance with the practical difficulties involved when applying known reserving methods to that market. Examples are given throughout to illustrate every point made and to give emphasis to difficulties that arise in practice. To make the exercise fully realistic, all examples (except a few that are purely illustrative) are ones that have actually arisen in practice. The names of the relevant offices arc not given and all cohorts of values have been multiplied by arbitrary constants which further conceal the identity without derogating from the value of the information that they contain. Graphs are used extensively.

Data have been generously supplied by the Faculty of Actuaries Withdrawals Research Group. These data cover the lapse or withdrawal experience for the calendar year 1976 of seven Scottish life offices. An extensive analysis has been published by the Research Group although, for reasons we shall discuss later, we believe that the approach outlined here is better able to describe the structure of the data than the detailed (and somewhat pedestrian) tabulations of this earlier paper.

Vadiveloo et al (1982) introduced a criterion for choosing, among the various net risk premium payment plans, the so-called optimum one. They considered a life insurance situation where benefits were payable at the end of the year of death. Of course, premiums cease after death! This optimum criterion was the minimization of the discounted net profit variance. Their model can be mathematically described as follows. Consider an insured life aged exactly x having a death benefit with present value, if death occurs at time t, denoted by B(t). If the present value of the total premiums paid up to time t is R(t) and the random variable T denotes the time of the death of x, then the profit at death has present value Z(T) where Z(T)=R(T)−B(T).

The optimum net premium payment plan, R*(t), is the one that minimizes Var[Z(T)] subject to E[Z(T)] = 0.

In the market for fixed-interest securities, several variants of the yield to redemption (YTR) concept are used. The YTR of a stock is simply the internal rate of return which the holder can expect to receive if he she holds the stock until maturity. Since income tax has to be paid by some, if not all investors on the interest received, and in some cases on the capital gain as well, a distinction is made between the gross YTR and the net YTR.

J.I.A. 113, Part I

P. 4, penultimate line: for ‘Truckell’ read ‘Truckle’.