1.1. There are three starting points for this paper. The first is Marshall Field's challenging Presidential Address to the Institute of Actuaries in 1986 on the subject of “Risk and Expectation”. The second is the example, still fresh in our minds, of a medium-sized mutual life office which overstretched itself and found it necessary to merge with a competitor. The third is the impending requirement, stemming from the Financial Services Act 1986, to give an investment client, including the holder or prospective holder of an insurance savings contract, what is described as “best advice”.

In the course of work undertaken as members of the Executive Committee of the Continuous Mortality Investigation Bureau in the preparation of graduated tables of mortality for the experiences of 1979–82, we have had occasion to make use of and develop a number of statistical techniques with which actuaries may not be familiar, and which are not fully discussed in the current textbook by Benjamin & Pollard (1980), though some of them have been referred to in previous papers by the CMI Committee (1974, 1976). We therefore felt that it would be useful to the profession if we were to present these methods comprehensively in one paper. We do this with the permission of the other members of the CMI Committee, who do not, however, take responsibility for what follows, whether good or bad.

The Working Party was set up by the Institute of Actuaries' Research Committee. Subsequently the Faculty of Actuaries nominated J. P. Batting as a member, and M. C. Corbould of the International Department of the Association of British Insurers was invited to join the Working Party in view of his extensive involvement with the European insurance associations and relevant Common Market Directives.

1.1 The background to the production of this paper is somewhat involved, but is necessary for an understanding of why it contains what it does. Readers who are familiar with recent developments in the valuation field may proceed straight to Section 2.

1.2 Statutory valuations of long-term insurance business under the Insurance Companies Act 1982 (“the Act”, which superseded the 1974 and 1981 Acts) and the Insurance Companies Regulations 1981 (“the current Regulations”) have now been prepared by actuaries for some years. Similarly the guidance issued by the profession to Appointed Actuaries, specifically GN1 and GN8, has also remained substantially unchanged over that period. The time was opportune for valuation practice to be reviewed in the light of recent experience.

1.1 In recent years insurance companies have begun to employ marketing techniques in search of greater success in an increasingly competitive market place. Several companies have Marketing Departments. However, those who have used marketing techniques most efficiently are not necessarily those with the largest departments.

1.2 Too often marketing is confused with promotion which is but one facet of a multi-faceted discipline. Another common mistake is to regard marketing as a subset of selling. This is understandable because most senior marketing appointments in the insurance industry have gone to people with a sales background. Levitt in his classic article Marketing Myopia in Harvard Business Review said:

1.1 A paper about the Appointed Actuary is essentially a paper about prudential supervision of life insurance companies. The system which has operated in the UK since the mid-1970's is only partly one of Government supervision. Through the professional role of the Appointed Actuary, it also contains elements of a system of self-regulation with the Institute and Faculty of Actuaries standing in place of SRO's. Unlike the self-regulatory arrangements of the Financial Services Act. though, this second part of the system has grown up by custom and practice and in certain respects it is not codified. However it enables the Insurance Companies Act to be operated successfully.

This paper has the strictly practical objective of devising procedures for managing Equity portfolios to the best advantage.

First, Modern Portfolio Theory, (MPT) which has been developed over the last 35 years with just this objective, is critically examined; from a study of the history of MPT and of its philosophy, principles and practices, the authors conclude that this discipline makes no contribution whatever to improving the performance.

1.1 In the paper “Improving the Performance of Equity Portfolios” by Clarkson and Plymen (presented to the Institute of Actuaries on 25th April 1988) the authors concluded that Modem Portfolio Theory methods made no contribution whatever to improving the performance of equity portfolios and suggested that attention should be paid instead to the application of fundamental analysis, which—if carried out by skilled and experienced analysts—should lead to higher expected returns. The only practical application of techniques related to Modem Portfolio Theory appeared to be in the area of Index Funds, where it is desired to track the performance of a chosen index as closely as possible.