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.

The President (Professor P. G. Moore): Gordon Bayley joined the Equitable as an actuarial student from Abingdon School in 1938; 41 years later he was to become Chairman of its Board of Governors. He served in the Royal Artillery in the later part of the last war, but with the temporary suspension of examinations from 1942 to 1945 it was not until 1946 that he qualified in what many have had me believe was a vintage year for qualification. He moved into consultancy in 1954 on becoming a partner in Duncan C. Fraser and then moved back to the world of the insurance companies a few years later by joining National Provident Institution in 1957; he became its chief executive in 1964 until his retirement earlier this year.

1.1 Lloyd's and the rest of the London market underwrite a significant part of the world's insurance and are a dominating influence on insurance world-wide. This paper looks at the data which is collected primarily for reserving purposes inside the market—or rather, the paper looks at some new and unusual but very simple ways of looking at that data. Experience is showing that these simple methods are proving to be more powerful aids to underwriters and auditors than was envisaged when they were first invented. They are graphical and hence easy to ‘see’.

The President (Professor P. G. Moore): After taking his degree at Cambridge, Sidney Benjamin joined the Prudential, becoming a Fellow of the Institute in 1957. Shortly after that he left the Prudential to join Ferranti Computers, but after a few years with them he moved on to the consulting firm of Bacon and Woodrow where he has remained ever since. He has been extremely active in Institute affairs, having served on Council with the statutory breaks for over 20 years. He has always been a staunch defender of the concept of professionalism, but his greatest contribution to Council has been his Chairmanship of the Research Committee, where he has done so much to stimulate research by a generation of members of the profession.

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.

In a discussion I had with Professor J. J. McCutcheon and Dr W. F. Scott, the authors of the new book on compound interest, An Introduction to the Mathematics of Finance (Heinemann 1986) it was suggested that a chapter describing the theoretical economic background to the determination of interest rates might be of interest to actuarial students. I therefore drafted the substance of this note as such a chapter. In the event it was felt that the subject fitted uneasily with the mainly technical and numerical approach to compound interest appropriate for students at that particular stage of the examinations, and that the more theoretical approach in this note would in any case be of wider actuarial interest. It is therefore presented as this note in the Journal. I am grateful to Professor McCutcheon and Dr Scott for agreeing to this, and to the discussions I had with them while the note was being drafted.

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.

The President (Professor P. G. Moore): I have the privilege this evening of presenting a Finlaison Medal to Mr Rodney Barnett. Earlier this year the Council reviewed the procedures for awarding medals and, whilst retaining the base metal, namely silver, decided to widen the eligibility of the old silver medal and to change its designation to a renamed Finlaison Medal.

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.

In your Presidential Address last year, Mr President, you argued eloquently for the necessity and the inevitability of change in the nation's economic life, and you examined both the opportunities for, and the barriers to, the sort of fruitful innovation which you saw as essential to future prosperity. I want to pick up your theme, and pursue it with particular reference to the role of science and scientists in this process.

1.1 The purpose of this paper is to review current practice regarding the pension aspects of takeovers and mergers of companies and businesses in the UK, with particular reference to the involvement and responsibilities of actuaries. Although there is an increasingly international aspect to such transactions, this is outside the scope of this paper.

1.2 Previous papers dealing with this subject either in part or in whole include those by Gilley, by Pomery and Jones, and by Chapman and Jagelman.

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.

The paper concerns the situation in which an evaluation of outstanding claims is discounted, in anticipation of investment return earned by the funds supporting that liability. Factors bearing upon the choice of an appropriate rate of return to be assumed in this evaluation are considered.

The ‘standard approach’ to this problem is criticized in two main respects:

(i) there is usually no statement (indeed, no consideration) of whether the discounted value of outstanding claims is to be associated with assets at book, market, or some other value;

(ii) the discounting of outstanding claims is often performed by means of an assumed ‘inflation gap’, i.e. an assumed difference between future rates of inflation and investment return.

Various other matters germane to the determination of an appropriate rate of investment return are listed in Section 2.

Sections 3 and 5 deal particularly with points (i) and (ii) raised above. It is suggested that, in certain circumstances, an evaluation of outstanding claims which fails to address (i) or is carried out on an ‘inflation gap’ basis will be virtually meaningless.

Section 4 deals with the case of an insurance fund in which assets are matched with technical liabilities by amount and term. The considerations which would cause the rate of investment return projected in these circumstances, to differ from that projected in the case of an absence of matching are discussed.

Section 6 deals with the issue of exactly which assets are to be regarded as supporting the liability for outstanding claims. It is apparent that the identification of such assets will affect the rate of return to be regarded as referable to outstanding claims. Particular matters considered include:

(i) assets to be associated with acquisition of new business (and hence not with outstanding claims);

(ii) debtor and creditor items. particularly outstanding premiums and inwards loans.

Section 7 gives a numerical example of the projection of future rates of investment return. This is done by means of a computer projection of various items of a hypothetical insurance fund, taking into account projected future:

(i) interest rates;

(ii) rate of growth of new premium;

(iii) the required distribution of assets by sector;

(iv) profitability of business underwritten.

Conclusions on the various matters considered are dotted through the paper. For convenience, they are collected together in Section 8.

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.

1.1. In 1979 the first set of graduated sickness rates derived from the data supplied by a number of insurance companies was published by the PHI Sub-Committee (C.M.I.R. 4, 1979).

Sickness is a much more complex phenomenon than mortality. I get the impression from working on the 1972–75 sickness experience of, as it were, a certain looseness and lack of coherence in the data which I have not found in mortality data. Some of this could be due to the much smaller size of the data and to the heterogeneity of the experience. Much of the latter has been removed in the Standard experience of 1975–78 but, not having studied these data, I can say nothing about the effect of this. It is therefore not surprising that the PHI Sub-Committee had considerable doubts “about the possibility of judging the success of the graduation by applying standard statistical tests” such as those normally used for mortality data.

The discussion on Maturity Guarantees, as applied to unit linked life assurance policies, has followed two quite distinct paths—the conventional or mainstream approach, as exemplified by Benjamin (1976) and endorsed by the Maturity Guarantees Working Party (MGWP 1980) on the one hand, and those who seek to reduce the risks associated with maturity guarantees by using an immunization strategy on the other (Brennan & Schwartz, 1976).