Some Thoughts on Solvency of Life Assurance Companies

Synopsis

In recent years, the insolvency of Life Assurance Companies has become a subject of practical importance to the actuarial profession. In April 1976 Mr. Peter Shore, then Secretary of State, stated in this connection that “prevention is better than cure”. The authors of this paper contend that prevention has been neglected because of the more immediate problems of recognition when insolvency is reached and the action required after the event.

After some comments upon the legislation, the authors discuss the role of the Appointed Actuary. They then consider the main causes of insolvency, and suggest that the basic cause of the recent financial difficulties of certain Life Offices was rapid expansion based upon inadequate capital and free reserves. The paper argues the need for explicit solvency margins in preference to implicit ones and proposes a method for determining the capital base of a life office and the maximum growth rates which can be supported.