Actuaries have become increasingly involved in general insurance, and in particular, in the London Market. This paper examines the management of the pricing process in the context of the London Market, and deals with concepts such as profit testing, risk and reward, and setting underwriting targets. The key area covered is the communication of a strategy in a meaningful way that can be controlled at the operating level.

This abstract relates to the following paper: LiJ., LiJ. S. H., TanC. I. and TickleL. (2018) Assessing basis risk for longevity transactions – phase 2 presented by Dr Jackie Li and Dr Chong It Tan, IFoA Longevity Basis Risk Working Group ‐ Abstract of the London Discussion. Annals of Actuarial Science. Cambridge University Press, doi: 10.1017/S1748499518000179.

Diversification across asset classes has declined markedly in the last decade and concerns abound about the ability (or lack) of the financial system to weather another 2008-like event. There is a growing volume of academic literature seeking to derive measurement variables for detecting systemic risk. There is clearly a role for the actuarial profession within this discussion and we hope that this paper can engender further discussions and papers on this specific issue.

Just as diversification across conventional asset classes has decreased there has been greater attention paid to the broader array of potential investment strategies that can be accessed via derivatives. The paper explores the prudent management of derivatives in pension funds and general asset portfolios to improve portfolio efficiency both in terms of implementing investment strategies and in broadening the range of investment opportunities for building an efficient investment portfolio from a risk-based perspective.

The paper presents a theoretical framework for the valuation of a general insurance company to actuaries, but also aims to provide reference work for non-actuarial users of appraised values. It distinguishes between the price that may be paid for an insurance operation from what may be called the economic or appraised value. The paper describes the elements of the appraised value calculation, selection of parameters, the uses of such evaluations and explores the future development into explicit stochastic modelling rather than the implicit methodology. Theoretical and practical considerations are illustrated and example valuations of a single line insurer are given.

It is more than 25 years since the subject of Index Numbers and their application to Investment Policy was last discussed by the Faculty (See C. M. Douglas, T.F.A. 12 and A. C. Murray, T.F.A. 13). When these papers were written, ordinary shares were only just beginning to be recognised as suitable investments for Life Assurance Funds. Douglas and Murray anticipated that as ordinary shares became more popular with the offices, index numbers would be useful for the following purposes:—

(1) Assessing the current position relative to the trade cycle; if this could be achieved, the timing of share purchases and sales would be greatly facilitated.

(2) Comparing the prospects for the different industries.

As a result of these original papers, the Actuaries Index Service commenced in 1930.

In this paper, the authors review developments that have taken place in investment policy over the last 25 years, and study the contribution to these policy considerations that the Actuaries Index and other Index Numbers can provide. The paper is divided into five parts as follows:—

Part I deals with the various economic and market factors which affect the level of share prices; usually share prices are closely correlated with the level of business activity. Sometimes, however, as in 1949 share prices fall, due to conditions overseas, without a corresponding decline in business activity. Practical uses of the Index are discussed in Part II. Particulars are given of the numerous applications of Share Indexes to problems arising in day-to-day investment management. In this part also, the authors describe certain techniques, developed to deal the first objective of Douglas and Murray (i.e. that of assessing the current position relative to the trade cycle). It is suggested that these techniques, which involve comparison of the Share Index with Activity Indexes, and with the Financial Times Industrial Profits Tables, merit investigation, and provide an interesting field for research. Finally, details are given of an investigation into the results of a portfolio of ordinary shares held over 25 years. This investigation shows that the appreciation of ordinary shares, both as regards capital and dividends, has to a large extent kept in step with the very considerably increased cost of living, sustained during this period.

In Part III, reference is made to recent Institute Papers, where the principle has been developed of selecting investments according to the “expected yield” (See J. B. H. Pegler, J.I.A. 74 and H. G. Clarke, J.I.A.80). An attempt is now made to extend these ideas and consideration is also given to the link up between the “expected yield” of an ordinary share, the “earnings yield”, and the return provided by new money invested in the company concerned. Part III concludes with an investigation, based on Actuaries Investment Index data, showing the comparative results of purchasing shares carrying low, medium or high dividend yields. For the period 1950 to 1955, the advantage appeared to lie with that group of shares providing the lowest dividend yield (but presumably affording exceptional earnings or growth prospects).

The construction and maintenance of Index Numbers are discussed in detail in Part IV. This Part deals with the initial selection of the securities, the methods of weighting, averaging and grouping, together with the procedure for keeping the Index up to date. For this purpose, the methods used by the Actuaries Index are compared with the corresponding procedures employed for the Share Index of the London and Cambridge Economic Service.

The authors' conclusions regarding Investment Policy are discussed in Part V. Their main points are:—

(1) For the Institutional investor, interested largely in income, a well spread and managed ordinary share portfolio should produce over the long-term a much higher return than fixed interest investments.

(2) To build up and maintain such a share portfolio to the best advantage, an active policy should be pursued, keeping the “expected yield” as high as possible. For this purpose, the Actuaries Industrial Group Index Tables should be of use, to keep the maximum interest in the more progressive industries, and to reduce participation in the declining trades.

The European Economic Community (Common Market) was established by the Treaty of Rome signed by six countries, namely, Belgium, France, Germany, Italy, Luxembourg and the Netherlands, in 1957.

Many of the eleven basic aims of the Treaty have some bearing on insurance business. The free movement of persons, services and capital is of the greatest technical interest to insurers but the measures designed to promote the economic growth of the Community which will include the expansion and improvement of capital markets could be of even greater interest—particularly to life assurers. Another aim of the Treaty, viz. to ensure fair competition within the Community, could act as a constraint on the introduction of liberalizing measures.

The general programme for the progressive establishment of the Common Market over a transitional period of 12 years (extended if necessary) included a specific timetable for the introduction of freedom of establishment and freedom of services in respect of insurance transactions. The implementation of this programme as it concerns insurance has fallen into arrears and only one of the five directives which were scheduled has so far been promulgated. Nevertheless, the achievement of the aims of the Treaty of Rome must eventually result in the gradual harmonization of legislation affecting insurance business within the member states. Chiefly because of the need to avoid any distortion of competition, the measures introduced are likely to apply to all insurers within the E.E.C. irrespective of whether they transact business in one or more member states.

It is premature to consider in detail the likely terms and conditions of the E.E.C. legislation as this is still a long way off. Insofar as the present pattern of insurance control legislation of most E.E.C. countries is more restrictive—particularly for long-term business—than in the United Kingdom, any short-term solution for harmonizing legislation would seem likely to involve British companies in more stringent rules. It is hoped that the E.E.C. will take into account the outcome of the discussions on similar issues which have taken place over the last decade within international organizations such as the Organization for Economic Co-operation and Development and the Comité Européen des Assurances on which the United Kingdom is represented. E.E.C. thinking may also be influenced in the direction of the progressive liberalization of insurance control legislation by the record of life assurance business in the United Kingdom and by the need to encourage the development of capital markets to which life assurance is an important contributor as a source of long-term and regular savings. Thus the ultimate pattern of E.E.C. legislation may well reflect the British system of freedom, provided such a system is well presented within the E.E.C. negotiations. Generally, problems for the British actuary will arise from the imposition of new rules within the E.E.C. not only for insurance transactions but for the many other commercial transactions with which the actuary is professionally interested as advisor or participant.

Special areas of long-term business such as pension schemes; life reassurance; equity-linked contracts and private sickness insurance are described. Last but not least, in connexion with the introduction of freedom of mobility of labour, it may be necessary to consider to what extent actuarial qualifications earned in another member country can be recognized as enabling an actuary to practise in the United Kingdom.

1. Kennedy & Howroyd (1956) have discussed the application of the Lagrangian multiplier technique to actuarial problems. This technique permits the analytical solution of constrained optimization problems, where both the function to be optimized and the constraints must satisfy stringent analytical conditions. In particular, the first derivatives of all functions must exist.

When constraints comprise inequality as well as equation restrictions, as is the case in linear and non-linear programming, then the conditions required for the Lagrangian multiplier technique do not hold. It was therefore found necessary to develop a new body of techniques, known as mathematical programming techniques, for the solution of constrained optimization problems involving inequality constraints.

1.1 1992 has become a symbol. A symbol of change in a Europe which feels itself threatened by the economic might of America in the West and Japan in the East. 1992 really does mean that millions of people, despite wide gulfs of language and culture, and a history of often bloody conflict between them, are making one more effort of collective will to club together in the belief that the one thing they have in common, geography, is sufficient reason to disguise differences and create a powerful economic union for the greater benefit of European suppliers and consumers.

The object of the actuary, in applying the science of vital statistics to pecuniary transactions, being to determine the values of payments dependent upon conditions of human survivorship, and therefore necessarily deferred for periods of longer or shorter duration, it is obvious that the rate of interest at which money may be increased is an element of his calculations, nearly if not quite as important as the probable risk of mortality that may affect the lives involved. The labours of actuaries have been generally directed to determining with precision the laws of mortality, rather than towards the present more humble branch of inquiry–the usefulness of which, however, must always become apparent with the earliest professional experience. Believing that an extensive and well digested collection of facts relating to the rate of interest would lead to some valuable and important conclusions as to future fluctuations, I trust that the present attempt to contribute to such a result will not be without interest for the members of the Institute, although I make no pretension to give a complete view of the whole subject, still less to discuss the important and intricate questions arising out of it; my object being merely to offer a general historical sketch, leaving the full prosecution of the inquiry to others, possessing more leisure and better qualifications for the task. Apart from its professional, the subject is one of historical interest. Men's pecuniary affairs afford unfailing indications of their characters, habits, and inclinations; and it has been truly remarked by a philosophical writer, that “a right measure and manner in getting, saving, spending, giving, taking, lending, borrowing and bequeathing, would almost argue a perfect man.” What is true in this respect of individuals is true to nearly the same extent of communities; and hence the conviction, becoming every day more general, of the importance of financial, for the illustration of general history.

Two valuable contributions to what may perhaps be called the “Finance of Life Assurance” appear in the Assurance Magazine; both by eminent Members of this Institute. The first in 1858 by our present President “On the Investments of the Funds of Assurance Companies;” the second in 1862 by Mr. A. H. Bailey, “On the Principles on which the Funds of Life Assurance Societies should be invested.”

The history of the actuarial profession in South Africa starts, as far as is known, during the last decade of the nineteenth century when three actuaries arrived in the Cape Colony from the United Kingdom. Two of these took up positions with the two South African life offices which were then in existence and the third became Government Actuary to the Cape Colony. By the time the Union of South Africa was established in 1910, four more actuaries had arrived from the United Kingdom, and a further four had arrived by 1920. Some of these gentlemen established permanent homes in this country, while others returned overseas after varying periods of time. It was no doubt due to these early beginnings that the actuarial homes of South African actuaries are today London and Edinburgh.

The first South African-born actuary qualified as a Fellow of the Faculty in 1921, and since that time increasing numbers of South Africans have become qualified, mostly as Fellows of the Faculty.

Many assurance offices are in the early stages of changing to a computer for the mechanization of their business. Each office has its own problems which frequently arise from its historical record of amalgamations, changes in management policy, etc.

2. Probably the biggest problem for the office is the standardization of its data into a form which can be read by the computer. When this has been accomplished the small-size computer can readily take over practically all the work which has already been mechanized, usually giving a better product in a shorter time and with reduction in manual work. There is also a simplification of diverse mechanical systems into a single medium.