In their text book, The Practice of Life Assurance, published in 1952, Coe and Ogborn devoted less than four pages to the methods of calculating premiums for varying temporary assurances, including family income policies. At that time decreasing temporary assurances were relatively uncommon except for a block of single-premium policies transacted mainly by a small number of offices which specialized in them.

Since that date, however, the transaction of this type of policy on an annual-premium basis has assumed very substantial proportions, particularly in connexion with mortgages, and the cover provided varies considerably among different offices. Some are prepared to go to considerable lengths to provide exact cover, whereas others appear reluctant to go into any great refinements. This is understandable as the calculation of premium rates is quite a formidable task whichever of the known methods is used. The not infrequent changes in building societies' interest rates add considerably to the difficulties.

British life offices transacting life assurance outside the United Kingdom have until now confined themselves almost entirely to the countries of the British Commonwealth—because among the countries with stable currencies the members of the Commonwealth have in the main been the ones with which we have had the largest numbers of other business contacts. Another influence has been the absence of a language barrier. Before the 1914–18 War some offices transacted business on the Continent of Europe but thereafter most of them pulled out; today as far as I know only one British office transacts life assurance in France, one in Germany and none in Italy.

One might be forgiven therefore for thinking that actuaries handling life office affairs need not concern themselves with life business on the Continent of Europe—particularly as, at the beginning of last year, the negotiations for Britain's entry into the European Common Market broke down.

1.1. The most significant development in the last decade so far as participating life assurance in the U.K. is concerned has been the increasing proportion of the funds invested in equity investments, i.e. ordinary shares and property, and the marked rising trend in the income from such investments associated with an even greater overall rise in their market values although there have of course been periods during which market values have fallen substantially. The fact that overall there has been a much greater rise in market values (as measured in the case of ordinary shares by Stock Exchange prices) than in dividends reflects the change from the situation up to 1959 when the dividend/price ratio of ordinary shares was greater than the yield on long term gilt-edged securities, the difference being regarded as a risk premium to cover the possibility of the current level of dividends not being maintained. Since that time the position has been reversed, the dividend/price ratio being less than the long term gilt-edged yield; this difference, known as the ‘reverse yield gap’, arises because the market value discounts expected future increases in dividend.

There is now no doubt that electronic computers have a wide application in the insurance industry. The main controversy during the next few years is likely to be over fields of application: we find ourselves in the position of a child who, having been presented with a costly and elaborate paint-box, looks around in trepidation for something to adorn which will not turn out to have been irreparably damaged by his efforts. The purpose of this paper is to describe the attempt of one life office, transacting ordinary life business, to sketch a preliminary outline before committing itself to the costly process of wholesale interior decoration.

The dispute over fields of application has already been given a rousing send-off by S. Benjamin's assertion that ‘the emphasis on data processing applications… has been an unfortunate mistake’ (Computers and Actuarial Science, J.S.S.17, 93). This paper will be concerned exclusively with such applications; however, it is hoped that this concern will not be regarded as retrogressive. It so happened that the investigation described here developed naturally from existing data processing methods within the office.

The imposition of a tax on capital gains invites enquiry into the effect on yields of redeemable fixed-interest securities purchased below their redemption prices. Attention has hitherto been focused on two yields in connexion with such securities, namely the yield ignoring tax, and the yield (net, or ‘grossed-up’) allowing for tax on interest payments but not on the capital gain at redemption date. Henceforth a third yield must also be considered, namely the yield (again net or ‘grossed-up’) allowing for tax on both the interest payments and the capital gain. The object of this note is to demonstrate certain relationships between these three yields, where the rate of tax payable on interest payments is assumed to be the same as that payable on the capital gain; otherwise the concept of a grossed-up net yield becomes ambiguous, if not meaningless.