The paper overviews the application of existing actuarial techniques to operational risk. It considers how, working in conjunction with other experts, actuaries can develop a new framework to monitor/review, establish context, identify, understand and decide what to do in terms of the management and mitigation of operational risk. It suggests categorisations of risk to help analyses and proposes how new risk indicators may be needed, in conjunction with more normal quantification approaches.

Using a case study, it explores the application of stress and scenario testing, statistical curve fitting (including the application of extreme value theory), causal (Bayesian) modelling and the extension of dynamic financial analysis to include operational risk. It suggests there is no one correct approach and that the choice of parameters and modelling assumptions is critical. It lists a number of other techniques for future consideration.

There is a section about how ‘soft issues’ including dominance risk, the impact of belief systems and culture, the focus of performance management systems and the psychology of organisations affect operational risk. An approach to rating the people aspects of risk in parallel with quantification may help give a better overall assessment of risk and improve the understanding for capital implications.

The paper concludes with a brief review of implications for reporting and considers what future work will help develop the actuarial contribution. It is hoped the paper will sow seeds for the development of best practice in dealing with operational risk and increase the interest of actuaries in this emerging new topic.

The text of these papers, together with the abstract of the discussion held by the Faculty of Actuaries on 15 March 2004, are printed in British Actuarial Journal, 10, IV, 685-898.

The Report of the Equitable Life Enquiry, by The Right Honourable Lord Penrose, was delivered to Treasury Ministers on 23 December 2003, and was published on 8 March 2004 by The Stationary Office (also at www.hm-treasury.gov.uk).

Members were encouraged to read the report in advance of the meeting, in particular Chapters 19 and 20; Lord Penrose's evidence to the Treasury Select Committee on 16 March 2004; and the statement issued jointly by the Presidents of the Faculty of Actuaries and the Institute of Actuaries, which appeared on page 4 of the April 2004 copy of The Actuary.

The lecture describes the European Convention on Human Rights, how it differed from the legal system in England until the enactment of the Human Rights Act 1998, and what has happened since then, giving many examples.

Dynamic financial analysis has become one of the important tools that actuaries use to model the underwriting and investment operations of insurance companies. The first step in carrying out the analysis is to investigate the most important factors affecting company performance. This paper identifies the determinants of the performance of United Kingdom general insurance companies using a panel data set consisting of economic data and Financial Services Authority/Department of Trade and Industry returns over the period 1986 to 1999. Three performance measures are used to capture different aspects of insurance operations. These measures are related to a number of economic and firm specific variables, chosen on the basis of relevant theory and literature. An ordinary least squares regression model and two panel data models are estimated for each of three performance measures. This paper also addresses several important econometric problems that are usually ignored in applied work in the context of panel data analysis. Based on the empirical results, this study finds that liquidity, unexpected inflation, interest rate level and underwriting profits are statistically significant determinants of the performance of U.K. general insurers.

The asset allocation is a crucial decision for pension funds, and this paper analyses the economic factors which determine this choice. The analysis proceeds on the basis that, in the absence of taxation, risk sharing and default insurance, the asset allocation between equities and bonds is indeterminate and governed by the risk/return preferences of the trustees and the employer. If the employing company and its shareholders are subject to taxation, there is a tax advantage in a largely bond allocation. Risk sharing between the employer and the employees often means that one group favours a high equity allocation, while the other favours a low equity allocation. Underpriced default insurance creates an incentive for a high equity allocation. When taxation, risk sharing and underpriced default insurance are all present, it is concluded that the appropriate asset allocation varies with the circumstances of the scheme; but that a high equity allocation is probably inappropriate for many private sector pension schemes.