In 1907 I had the honour of reading before the Institute a paper dealing with the Comparative Bonuses under Whole-Life and Endowment Assurances, and therein I pointed out that the method of apportioning the expenses between the two classes had a considerable effect upon the rates of bonus, and in the discussion more than one speaker referred to the relative premiums as vitally affecting the conclusions to be drawn from any investigation. The solution of the first problem will, mortality apart, also give us the key to the rates of premium which an office should charge for Whole-Life and Endowment Assurances respectively. As the premiums are the foundation of our business it is of the utmost importance that an analysis of the expenses should be made periodically in order to ascertain the adequacy of the remuneration the office receives for the risks it undertakes. The question of the office premiums has been frequently discussed, but I do not think any paper has been submitted to this Institute in which an agreement has been shown between the loadings adopted in obtaining the office premiums and the actual expenses of the office. The object of the paper is to elicit the views of the profession upon this subject.

The commission paid by the majority of offices is, for the principal classes of Assurance, usually a percentage of the sum assured on payment of the first annual premium and a percentage of the office renewal premiums. The loading required to provide for the commissions is therefore easily ascertained and requires no discussion.

The subject of sickness insurance does not appear to have been previously discussed before this Institute except in relation to Friendly Societies and the National Health Insurance Act. There is, however, a most comprehensive paper by Mr W. A. Robertson, the present President of the Faculty, in the Transactions, Vol. xiv, page 21. Disability in the sense of long-term sickness insurance has been considered on several occasions, but purely as an added benefit to life assurance contracts. The results shown by the American offices, who at one time transacted a large volume of this business, have been anything but encouraging.

The President in his inaugural address last session, expressed the opinion that “the time is ripe for another discussion on surrender-values.” In accordance with that suggestion, I have ventured to bring to your notice some considerations bearing on the subject of surrender-values and the principles which, it would appear, should underlie their calculation.

The focus of this paper is the identification, and more importantly, sustainable management, of risks embedded in guarantees attaching to unit linked savings and retirement contracts (as commonly referred to as GMxBs). In developing customer centric guarantees that are not readily transferrable to the capital markets, insurance undertakings require the skills and resources to hedge the guarantees within their own balance sheet (or with a temporary use of packaged solutions such as reinsurance). In taking on the guarantee manufacture task insurers are departing from areas of historic competence and need to develop a comprehensive understanding of all elements of market risk replication. These include both first order market exposures as well as the material second order risks associated with market micro structure. The paper seeks to integrate this comprehensive analysis within a practitioner focused framework and concludes with a senior executive summary of “Seven key considerations in successful guarantee manufacture”.

1.1. The concept of matching assets and liabilities has for many years been recognized as a crucial aspect of our professional work. Its importance is emphasized in the Institute's guidance notes entitled “Actuaries and Long-Term Insurance Business” and in many papers published in the Journal.

1.2. A particular form of matching, namely immunization, was developed by F. M. Redington in his paper “Review of the Principles of Life-Office Valuations” (J.I.A. 78, 286). Immunization signifies the investment of assets in such a way that the existing business is immune to a change in the rate of interest. One of the consequences of immunization is that the mean term of the asset-maturity dates is appreciably longer than the mean term of the value of the asset-proceeds and of the liability-outgo; and, at other than low rates of interest, a perpetuity can be too short to immunize a long-term contractual liability.

From the fact that a very large amount of capital has been of recent years invested in loans to foreign governments, the question of sinking funds and other kindred matters has come prominently into notice; and matters which at one time were only looked upon as belonging to the theory of compound interest, are now become of great moment to thousands of persons who have invested, or purpose to invest, their money in the above-mentioned class of security. Various causes appear to have led to the large increase in the popularity of foreign loans among certain classes of investors. No doubt, the rapid growth of unemployed capital has considerably reduced the rate of interest realizable on first-class home securities, and has induced persons anxious to obtain a high rate of interest to invest their money elsewhere. From the nature of the case, however, even a fairly high rate of interest would not generally be sufficient inducement for an investor to lend money to a perfectly irresponsible foreign government, which might at any time, if it thought fit, renounce all its past financial obligations. Whether the general practice of providing for the repayment of loans has arisen from the scruples of foreign governments to accumulate a large national debt like our own, or whether, on the other hand, it has been found necessary to give an undertaking to repay the loan over a term of years, in order to make the loan at all palatable to investors, I cannot say; but the fact none the less remains, that very generally provision appears to be made, in the case of loans by foreign governments, for repayment in a shorter or longer period of time.

The third Lecturer to the Faculty of Actuaries is Mr Karel Van Hulle. He is a lawyer by training, and is Head of Unit at the European Commission (Directorate-General ‘Internal Market and Services’), which he joined in 1984, after having served for eight years with the Belgian Banking Commission.

He was subsequently Head of Unit for Accounting Standards, Head of Unit for Financial Reporting and Company Law and Head of Unit for Accounting and Auditing. In that capacity he was closely involved with harmonisation in the fields of accounting, auditing and company law, both at European Union level and internationally, and served as the Commission's observer with the International Accounting Standards Committee. He was Secretary of the High Level Group of Experts on Company Law, which prepared the Commission's 2003 Action Plan on Company Law.

Since November 2004 he has been Head of the Insurance and Pensions Unit. In this function, his main responsibility is the preparation of the new solvency regime for insurance and reinsurance companies (Solvency II).

This paper considers the variety of social security and complementary pension scheme arrangements which have developed in different countries, and examines some recent trends in pension reforms, designed to address the problem of the ageing population and other structural shortcomings in existing structures.

This paper considers equity, or fairness, as being based on with-profits life insurers acting in accordance with their contracts. It uses the principles of with-profits business in conjunction with a legal approach to derive implied terms in with-profits contracts. The author examines certain situations of conflict between with-profits policyholders and shareholders. The paper does not regard all concerns put forward on behalf of policyholders’ interests as justified in practice: actuaries and regulators have been alert to issues and in many cases have taken appropriate action. However, it does suggest a number of practices that may be unfair. The paper also suggests that the current process for the reattribution of an inherited estate may favour shareholder interests over policyholder interests.

This paper describes how statistical methods can be tested on computer-generated data from known models. We explore bias and percentile tests in detail, illustrating these with examples based on insurance claims and financial time series.