A Consistent System of Investment and Bonus Distribution for a Life Office

Extract

The object of this paper is to continue the discussion on the valuation and bonus problems of a life office that was recommenced in the recent papers by A. T. Haynes and R. J. Kirton (T.F.A. xxi, 141) and by F. M. Redington (J.I.A. lxxviii, 286). Both of these papers were concerned, inter alia, with the principle of matching assets to liabilities or, in Redington's graphic phrase, of immunizing the life fund against the effects of a change in the general level of interest rates. Immunization of a life fund containing with-profits policies was shown by Redington to have far-reaching implications, and it was clear from the discussion on his paper that different opinions were held about the exact character of the immunization that might be most appropriate. For a non-profits fund total immunization may or may not be a suitable ideal with which to compare the practical position, and this would depend, in particular, upon the relative size of the capital and other free resources available and upon the level of the surrender and paid-up-policy options granted. But it is the purpose of this paper to argue that, for a with-profits fund, far from being a suitable ideal to be either aimed at or departed from, total immunization (including absolute matching) represents a dividing line between a zone of rational departure from another and more natural ideal and a zone in which a change in the level of interest rates would produce indefensible results.