This paper describes how statistical methods can be tested on computer-generated data from known models. We explore bias and percentile tests in detail, illustrating these with examples based on insurance claims and financial time series.

With the UK population ageing, deciding upon a satisfactory and sustainable system for the funding of people’s long-term care (LTC) needs has long been a topic of political debate. Phase 1 of the Care Act 2014 (“the Act”) brought in some of the reforms recommended by the Dilnot Commission in 2011. However, the Government announced during 2015 that Phase 2 of “the Act” such as the introduction of a £72,000 cap on Local Authority care costs and a change in the means testing thresholds1 would be deferred until 2020. In addition to this delay, the “freedom and choice” agenda for pensions has come into force. It is therefore timely that the potential market responses to help people pay for their care within the new pensions environment should be considered. In this paper, we analyse whether the proposed reforms meet the policy intention of protecting people from catastrophic care costs, whilst facilitating individual understanding of their potential care funding requirements. In particular, we review a number of financial products and ascertain the extent to which such products might help individuals to fund the LTC costs for which they would be responsible for meeting. We also produce case studies to demonstrate the complexities of the care funding system. Finally, we review the potential impact on incentives for individuals to save for care costs under the proposed new means testing thresholds and compare these with the current thresholds. We conclude that:

• ∙ Although it is still too early to understand exactly how individuals will respond to the pensions freedom and choice agenda, there are a number of financial products that might complement the new flexibilities and help people make provision for care costs.

• ∙ The new care funding system is complex making it difficult for people to understand their potential care costs.

• ∙ The current means testing system causes a disincentive to save. The new means testing thresholds provide a greater level of reward for savers than the existing thresholds and therefore may increase the level of saving for care; however, the new thresholds could still act as a barrier since disincentives still exist.

This abstract relates to the following paper: JarvisS., SharpeJ. and SmithA.D.Ersatz model tests ‐ Abstract of the London DiscussionBritish Actuarial Journal. doi:10.1017/S1357321717000137

The development of an economic capital model requires a decision to be made regarding how to aggregate capital requirements for the individual risk factors while taking into account the effects of diversification. Under the Individual Capital Adequacy Standards framework, UK life insurers have commonly adopted a correlation matrix approach due to its simplicity and ease in communication to the stakeholders involved, adjusting the result, where appropriate, to allow for non-linear interactions. The regulatory requirements of Solvency II have been one of the principal drivers leading to an increased use of more sophisticated aggregation techniques in economic capital models. This paper focusses on a simulation-based approach to the aggregation of capital requirements using copulas and proxy models. It describes the practical challenges in parameterising a copula including how allowance may be made for tail dependence. It also covers the challenges associated with fitting and validating a proxy model. In particular, the paper outlines how insurers could test, communicate and justify the choices made through the use of some examples.

This abstract relates to the following paper: KennyT., BarnfieldJ., DalyL., DunnA., PasseyD., RickayzenB. and TeowA. The future of social care funding: who pays? British Actuarial Journal. doi: 10.1017/S135732171600012X

This abstract relates to the following paper: AndroschuckT., GibbsS., KatrakisN., LauJ., OramS., RaddallP., SemchyshynL., StevensonD. and WatersJ. Simulation-based capital models: testing, justifying and communicating choices ‐ Abstract of the Edinburgh Discussion. British Actuarial Journal. doi:10.1017/S1357321717000071

Periodical Payment Orders (PPOs) have challenged actuarial professionals as they rose to prominence as a new means of settling third-party liability claims, consisting of regular payments in the future, usually for a claimant’s lifetime. This paper explores how this new settlement method has brought about new risks to consider for actuarial professionals working in Motor and Casualty insurance, or any other line where a claim for future periodical payments may arise. Life contingencies have entered the space of general insurance in a new way. In addition, actuarial professionals have investment risk to consider, and for PPOs the inflation risk is unusual, significant and not currently fully hedgeable. The paper highlights methods that could be considered for setting important assumptions, including mortality, indexation, investment return and PPO settlement propensity. For reserving actuaries, the paper explains that the nature of the liabilities does not lend itself to triangulation. Cash flow techniques are needed and actual-versus-expected results can be analysed for discount rate unwinding and mortality profit, for example. Scenario testing will be important to understand the sensitivity of the results and to explain them to senior management. Stochastic modelling is considered in the Capital Modelling section, amongst other significant considerations for actuarial practitioners working with PPOs in this field. Pricing is also affected, as PPOs are a proportion of large loss loadings. The paper also touches briefly on reporting requirements. This is to help provide some basic background for actuaries interacting with those undertaking financial reporting.

This paper examines the resilience of various retirement solutions in the context of factors that can influence their sustainability. First, by considering the desirable features of retirement solutions within the United Kingdom, the authors outline the key levers available to the architects of retirement vehicles to ensure stability. Second, to measure “resilience” the authors create a failure score to establish a method of determining if a vehicle has “failed”. Third and finally, we look at those external forces that influence the likely longevity of a retirement solution.

This paper seeks to establish good practice in setting inputs for operational risk models for banks, insurers and other financial service firms. It reviews Basel, Solvency II and other regulatory requirements as well as publicly available literature on operational risk modelling. It recommends a combination of historic loss data and scenario analysis for modelling of individual risks, setting out issues with these data, and outlining good practice for loss data collection and scenario analysis. It recommends the use of expert judgement for setting correlations, and addresses information requirements for risk mitigation allowances and capital allocation, before briefly covering Bayesian network methods for modelling operational risks.

This abstract relates to the following paper: KelliherP. O. J, AcharyyaM., CouperA., GrantK., MaguireE., NicholasP., SmeraldC., StevensonD., ThirlwellJ. & CantleN.British Actuarial Journal. doi: 10.1017/S1357321716000210

This abstract relates to the following paper: Information for actuaries valuing Periodical Payment Orders ‐ Abstract of the London Discussion. Information for actuaries valuing Periodical Payment Orders. British Actuarial Journal. doi: 10.1017/S1357321717000101

This abstract relates to the following paper: RichardsJ., HurdM., and ClacherI., Viable retirement solutions for the long-run: Are there any sustainable retirement solutions out there? ‐ Abstract of the London discussionBritish Actuarial Journal, doi: 10.1017/S1357321717000204

Recent changes made to the UK Corporate Governance Code require UK firms to report new or enhanced narrative information concerning their principal risks, their risk management processes and their future viability. This paper analyses whether the level and nature of voluntary compliance with these new requirements is consistent with alternative economic and political visibility incentives. We analyse relevant sections of financial reports produced by industry-matched samples of large-, mid- and small-cap UK-listed firms during the transitional 2013–2014 financial reporting years. Both specific and generic readability attributes of the reports are measured. We find that virtually no firm in our sample has provided any viability statement. Empirical analysis of disclosures concerning principal risk assessment and review processes appear to be primarily motivated by political visibility reasons. Examples of particularly good and cases of poor corporate risk reporting practices are also discussed. Possible implications for the actuarial profession are discussed.

The hedging practices survey took place towards the end of 2015 in the final few months prior to Solvency II regulations coming into force. At the point of completing the survey we would expect that companies would have largely transitioned their hedging approaches to work in a Solvency II environment. There may be some cases where further changes were planned but not implemented at the point of completing the survey. Further, as familiarity with working under the new regulations increases, approaches are expected to continue to develop over time. The working party hopes that this report is useful in summarising industry attitudes at this point in time and as a comparator in future years. Before launching the survey we did have several conjectures of what we may expect to see in the results. Some proved true, for some it was difficult to glean any strong conclusion from the data, and there were one or two where results countered what we expected to see.