The President (Mr R. S. Bowie, F.F.A.): Tonight's topic is ‘100 years of state pension: — learning from the past’. I am reminded of the expression: why are the bankers so keen to find new ways of losing money when the old ways seem to have worked perfectly well!

The state pension has been going in a recognisable form for only 100 years and only for the last 60 as a universal pension; and only for the last 30 years in the form that we all might recognise today.

If the Actuarial Profession can bring value to something from the past, it is to bring a perspective and a context to it so that we can learn from it. In this way, the Profession can create an informed climate within which public debate on matters of public interest can take place. As you will all know, the Financial Reporting Council are pressing the Profession hard to give tangible evidence of its commitment to the public interest, and this book falls into that category, creating an informed background for debate on a matter of huge public interest.

For some while there has been a growing awareness from both internal and external stakeholders that the governance and risk management in United Kingdom (U.K.) insurance companies needed to be enhanced. The proposed European Union Solvency II Directive makes this very explicit and the current economic turmoil has put a much stronger emphasis on the whole process: it is being seen as the right thing to do, rather than simply a regulatory requirement. In this paper, we set out the background to and recent history of governance for U.K. insurance companies, and consider how enterprise risk management can bring together the various control frameworks needed to support that governance. Whilst no two companies are the same, and hence the solutions to these issues will vary, there are several common themes linked to successful implementation. Similarly, various barriers to success are identified, together with solutions to resolve them.

Mr M. R. Kipling, F.I.A.: This paper is entitled Governance and Risk Management in United Kingdom Insurance Companies. It is a very timely paper in light of the recent publication of the Turner review which, among other things, covers the governance of UK financial institutions.

Mr S. P. Deighton, F.I.A. (introducing the paper): The paper is the first formal output from the Research and Thought Leadership subcommittee of the Enterprise Risk Management (ERM) Practice Executive Committee (PEC). It may seem odd, therefore, that it contains no original research. There is not an equation in sight, and there is only one token diagram. This is because the most important of its key themes is that there is much more to ERM than complex models and fancy mathematics.

There are a number of areas associated with ERM. One of them is understanding the wider governance framework within which an insurance company must operate, and hence the introduction to that subject at the beginning of the paper. The second is how to run the very detailed identification and mitigation of the myriad of small risks across a wide group which is at the other end of the spectrum to the multi-million pound derivative transactions that manage equity risk. Our paper sees this as indistinguishable from the internal control framework that a company needs in order to comply on the governance front.

Investment strategy is often static, punctuated by infrequent reviews. For most long-term investors, this practice results in large risks being taken that could otherwise be managed with a more dynamic investment policy. The bulk of this paper is aimed at analysing and describing two multi-period investment strategy problems — in order to derive potential dynamic strategies. Along the way, we show how static investment strategies can fail to deliver an investor's long-term objectives and describe the relationship of our work to other areas of the finance literature. This paper does not cover trading strategies such as Tactical Asset Allocation.

This paper sets out two main approaches to the multi-period problem. The first approach optimises a utility function. The second approach uses partial differential equation (PDE) technology to optimise a target statistic (in this case, TailVaR) subject to return and long-only constraints.

The President (Mr N. B. Masters, F.I.A.): The subject of this evening is a paper by Adrian Lawrence, Stuart Jarvis and Sheng Miao on Dynamic Asset Allocation Techniques, very much a flavour of the day at the moment as we struggle with the gyrations of both the stock market and interest rates. If I may, I will ask Dr Jarvis to introduce the paper.

Dr S. J. Jarvis, F.I.A.: We are acutely aware that the paper has not been finalised yet and so thank you in advance for any help you can give us this evening in improving our paper.

In the absence of the final paper, we are going to spend a bit longer than is normal at these meetings to describe what our paper consists of and why we have written what we have written.

I am going to start off by talking about some of our motivations. The paper is a fairly technical paper. It focuses on investment, but our motivation comes from applications so we will spend a bit of time talking about those first. We will then talk about the formulation of problems, and some of the techniques that we apply to look at them. That is the focus of the paper—the methods that we found useful. Finally we will talk through some of our results.

Depression is a significant burden for the United Kingdom economy and despite conclusive evidence on the clinical efficacy of treatments and acknowledgements of the impact on quality of life, a high proportion still goes undiagnosed and untreated. The purpose of this paper is to present the economic case for a more structured approach to depression management, using techniques from the disciplines of health economics and actuarial science to demonstrate cost-effectiveness and return on investment. The results are presented first as an economic cost-effectiveness analysis, comparing the benefits of additional quality-adjusted life years (QALYs) with the costs, and secondly as a financial projection model of costs and savings, familiar to actuaries.

The results of the model show that from a societal perspective, disease management programmes for depression are likely to both reduce costs and increase quality of life for patients in the overall adult population. This is also true from the perspective of an employer who has the cost burden of direct medical costs and sickness absence. For a healthcare payer who is not bearing the cost of sickness absence, such as a primary care trust (PCT) or private insurer, disease management programmes are likely to improve quality of life, but increase direct healthcare costs. However, the additional cost per QALY is well below the commonly used threshold in the U.K. of £30,000; therefore, most health economists would deem disease management programmes for severe and moderate depression to be a good use of public healthcare funds. The actuarial calculations, which show an internal rate of return for 45% to 50%, validate this conclusion.

The Vice-President (Mr S. Creedon, F.I.A.): This evening we have an unusual, but very welcome, and excellent, paper from Mrs Joanne Buckle, who is going to introduce the key concepts for the paper to us.

Mrs J. L. Buckle, F.I.A.: This topic is close to my heart and I am not going to spend a lot of time talking about the paper per se. What I want to do is spend some time talking about some of the key concepts in the paper, and also to try to steer the discussion in a way that will reflect the differences between the approaches that health economists take to these kinds of questions and the approach that actuaries take, and how those two approaches can be reconciled.

I should explain a little bit about my background and about the background to this paper. I originally wrote this paper as part of my health economics postgraduate dissertation, so it was very health-economics focused. I was marked down for introducing too many actuarial concepts. The academic health economists were not very happy with my focus on return on investment and lack of focus on quality adjusted life years. And that was part of an eye-opening experience of doing my health economics postgraduate course.

This paper reviews the market structure of the U.K. with-profits life insurance market and the potential effect on how life insurers operate. We consider the competitiveness of the market, quantifying the increase in the degree of concentration since 2000, and establishing that inherited estates may offer some protection from competition for incumbent firms. However, there is a significant degree of mobility in market positions of leading firms. Analysis of costs indicates some large differences between firms, with larger firms experiencing lower cost ratios, indicative of economies of scale. There are some marked differences in insurers' prices, the data showing that charges tend to be lower on unit-linked than on with-profits policies. The paper suggests that while there are potential concerns about how the market operates for consumers, the impact is limited by the dramatic reduction in new with-profits business.