Life Office Research Articles

Small Self-Administered Schemes in Practice.

In the last four years, the number of small self-administered pension schemes has increased from a few dozen to a figure that, if it has not already done so, must shortly pass the 10,000 mark and few major Life Offices, Consulting Actuaries or Pensions Consultants are now without such a weapon in their armoury. Considerable practical experience in the administration of these arrangements has been gained, often somewhat traumatically, over this period by actuaries and other practitioners and, with many schemes having recently had, or just coming up to, their first triennial actuarial report, it seemed a sensible time to consolidate this experience and to highlight some of the more contentious areas for discussion. Certain statements in the paper are based on my understanding of current Inland Revenue practice which is not necessarily consistent either with time or between different examiners. Finally, although the subject matter of the paper applies equally to fully self-administered schemes and to Life Office 'hybrid' schemes, I wish to apologize for any unintentional bias towards the latter that may have crept in. Better the devil you know, I suppose!

Immunized and Dedicated Bond Portfolios for U.K. Pension Funds.

Most of the published actuarial literature in the U.K. on immunization has been applied to the valuation of a life office. The authors have shown how the immunization techniques first introduced by Redington (3) in 1952 can be used to match the liability outgo of the office, to a greater or lesser extent. The purpose of this paper is to introduce the student to the underlying concept of immunization and to show how it can be utilized to produce a guaranteed rate of return with a high degree of probability, irrespective of the future course of interest rate levels. The term to maturity and duration (mean term) of a bond are discussed in §2. The maturity is only of limited help in characterizing a specific bond. The duration—a measure of the average time until the bond payments are received—is an easily determined figure which is more informative about a bond than maturity. The price sensitivity of a bond (i.e. volatility) is linearly related to the duration.

The Life Associations' Inter-Office Expense Investigation

1.1.1. In the course of the discussion of the paper by Praetz at the International Congress of Actuaries in Sydney, reference was made to the existence of the ongoing Expense Investigation conducted amongst life offices in the United Kingdom. Considerable interest was aroused and it was subsequently suggested that a paper describing this investigation be presented to the actuarial bodies in order that data on life office costs might be made available to the profession and its significance discussed. In agreeing to present such a paper the authors considered that its scope should be extended to include a study of the attitudes of offices and actuaries to expense analysis and control and of the uses made by offices and actuaries of the results of the Expense Investigation and other expense analyses.

The Matching of Assets to Liabilities

1.1. The concept of the matching of assets to liabilities is fundamental in matters of finance. In its broadest sense matching is relevant both to the investment of life office and pension funds and to actuarial calculations in relation to those funds.

Bonus Rates, Valuation and Solvency During the Transition Between Higher and Lower Investment Returns

1.1. The work for the paper was carried out by the authors as members of the Bonus and Valuation Research Group of the Faculty of Actuaries. The previous paper produced as a result of work done in the Bonus Research Group (Studies of Reversionary Bonus using a Model Office, TFA 37, 91) used a deterministic model office. Future interest rates and returns from equity investment were assumed known and the effects on reversionary bonus of variations in the valuation bases, rates of expansion and inflation of expenses were examined. The assumption of an exact knowledge of future investment returns was a great simplification and begged many of the important questions facing a life office actuary. In this paper the Research Group has paid attention to the change in the value of the assets under variations in financial conditions.

The matching of assets to liabilities

1.1. The concept of the matching of assets to liabilities is fundamental in matters of finance. In its broadest sense matching is relevant both to the investment of life office and pension funds and to actuarial calculations in relation to those funds.1.2. Matching is inherently connected with the uncertainty of future conditions, as measured by such indicators as rates of interest, inflation and currency exchange. It is when conditions do not work out as hoped for or expected that the risks associated with mis-matching can materialize. Whether considering investment policy or an actuarial calculation it is important that the nature of a portfolio which minimizes these risks be appreciated, and yet it is often difficult to specify such a portfolio with precision. This may not be a source of difficulty in practice when the judgement of the actuary is applied to the problem in hand, but there is evident scope for refinement of the concepts.

Recent Developments in Unit-Linked Whole Life Policies.

This paper is devoted to a particular type of unit-linked policy which was first introduced in 1977, and which has since been much copied and amended; there are now over 20 such policies on the market, with more being introduced at regular intervals.The essential features of this type of policy are:(a) The cost of mortality is met by the regular cancellation of units attached to the policy to the value of the current cost of the risk.(b) The policy conditions allow the office to review the premium and/or sum assured in the light of experience, in particular investment experience.The paper first describes the development of the policy in its various forms, and surveys the current state of the market.The decisions to be taken by the life office in designing such a policy are then reviewed.The pricing of the contract is then discussed, including the cost of various options which can be offered.

A Stochastic Investment Model for Actuarial Use

1.1. The purpose of this paper is to present to the actuarial profession a stochastic investment model which can be used for simulations of “possible futures” extending for many years ahead. The ideas were first developed for the Maturity Guarantees Working Party (MGWP) whose report was published in 1980. The ideas were further developed in my own paper “Indexing Long Term Financial Contracts” (1981). However, these two papers restricted themselves to a consideration of ordinary shares and of inflation respectively, whereas in this paper I shall present what seems to me to be the minimum model that might be used to describe the total investments of a life office or pension fund.

Group Life Insurance.

Group life insurance has attracted little formal discussion in British actuarial circles. Perhaps this is not so surprising. The technical problems posed by group life insurance seem relatively straightforward. Furthermore, there is little doubt that the evolution of present practice has been moulded more by pragmatism than strict theoretical development. None the less, group life insurance is an important sector of our life insurance industry. Figures produced by the Life Offices' Association reveal that in 1980 approximately 7½ million people were covered under group insurance contracts for a total sum assured of the order £63 billion. The development of the group insurance industry in this country has been closely associated with the expansion of private pension provision. Group life cover was seen as an inseparable, but very much secondary, adjunct to the more lucrative field of pensions business. However, over the last decade it has become more likely that a group life scheme will be tendered independently of any related pension business. Thus, the point has long been reached where the underwriting of group life business must be considered as a subject in its own right.

Analysis of a London Market Reinsurance Office's Accounts.

The paper by Messrs Abbott, Clarke and Treen on “Some Financial Aspects of a General Insurance Company”, submitted recently at a meeting of the Institute, dealt at some length with the accounts of an insurance office and the analysis thereof. A reinsurance office operating in the London reinsurance market differs in so many ways and tends to be so specialized that many different aspects of analysis arise and a somewhat altered approach is essential. Lest it be thought that the area of operations under consideration is too small to warrant much attention by actuaries, let it be pointed out that recent figures completed by the B.I.A. and by Lloyd's would seem to indicate that the reinsurance offices, once Lloyd's itself and the Home–Foreign departments of the large direct-writing insurance office are included, in all of which administration is carried out in the United Kingdom, involves an annual premium income very roughly equal to that of all direct general insurance business written in the U.K. and each is roughly equal to the U.K. premium income of the life offices.

Institutionally acceptable leases

The past 15 years have seen a substantial increase in the number of institutions established for the purpose of long‐term investment, and in the size of the aggregate funds available for that purpose. The new investing institutions are mainly pension funds and life offices, and their rise has been due to the introduction and growth of new occupational pension schemes. The same period has seen a marked change in investment policy on the part of almost all investing institutions, so as to give increasing prominence to investment in real property alongside the traditional areas of investment in government securities and in the equity markets. This policy change has been influenced by the concomitant growth of inflation, and the belief that real property offers the best protection against its damaging effects.

第一次大戦前イギリスにおける大規模兼営保険企業の出現

When we study the history of British insurance offices, especially in terms of comparative business history, it is paramount to consider 'composite' offices which handle various types of insurance -life, fire, marine and accident. There are no such insurance offices in the US, Germany, Japan and most other countries, but in Britain all major insurance offices, except a few, are large-scale composite offices.Composite offices, in the strict sense of the word, did not emerge until the turn of the century. During the years of 1904-14, some major insurance offices expanded their business by handling 'new-type' of insurance-personal accident, employers, liability, and so on-in addition to tranditional insurance. In other words, it was at this time that the British insurance offices undertook diversification of business.The purpose of this article is twofold. One is showing the process of the emergence of composite offices, and two, more importantly, presenting a picture of the historical character of British insurance business against the background of the maturity of the British economy. References used were the Board of Trade Returns and some insurance journals and yearbooks.The following are the conclusions of this article. Firstly, large-scale composite offices did not derive from life offices (e.g. Equitable, Standard Life), but from fire-life offices (e.g. Royal, North British and Mercantile) or fire-life-marine offices (e.g. Royal Exchange, Liverpool and London and Globe). Secondly, diversification, strictly speaking diversification to 'related business' according to R.P. Rumelt, was the result of amalgamations rather than internal growth. Furthermore, it was around this time that the post, of 'General Manager' emerged, bringing an 'Age of General Managers' to the British insurance business. Thirdly, traditional London based offices (e.g. London Assurance) and specialist life offices (e.g. Scottish Widows' Fund) continued to lose their shares in the insurance market. To the contrary, some active non-London insurance offices, which had a comparatively short history, gradually became of increasing importance.

Valuation of final-salary pension schemes

1.1 On coming into pensions consultancy after many years in a life office I looked for an indication of current thinking on the valuation of funded pension schemes. Official guidance by the profession is confined to the 1969 booklet from the Institute and Faculty; the memorandum on professional conduct concerns itself with independence and how we present ourselves. The Institute's examination textbooks pass over the main objectives lightly and concentrate on detail. While there have been papers on many aspects of pensions, they all seem to skirt the fundamental principles of valuing final salary schemes.1.2 This paper attempts to go some way to filling the gap. It provides an opportunity to review and discuss current practice. I have found it particularly illuminating to compare the way in which practice between the United Kingdom and North America diverges.

Government Interference in City Politics in the Early Eighteenth Century: The Work of Two Agents

WHEN the whigs gained power in 1715 they were acutely aware that their position, and indeed the Hanoverian regime's security, depended heavily on the capital. They had little to fear from the City's great financiers and overseas traders. The 'monied interest' was overwhelmingly whiggish in complexion and only too ready to support, and profit from, the government of the day. But the City Corporation, the square mile's ancient governing body, was much less compliant. Once there had been nothing to distinguish the financial and corporate Cities, but by this time the business magnates had largely emancipated themselves from Guildhall's regulations and they shunned the burdens of civic office. The corporation's government was tending to devolve on to lesser men, especially domestic tradesmen and retailers, for whom the 'freedom' was still operative and to whom the clubbishness and prestige of corporate life was attractive. Only in the Court of Aldermen did the City still appear to represent the wealthy and powerful. Among the 26 aldermen there was a solid phalanx of loyal whigs prepared to do the government's bidding and their tenure of office for life made them impervious to popular pressure. But below them in the constitutional hierarchy very different attitudes prevailed. The 234 Common Councilmen, annually elected by the freemen householders in the wards, were predominantly tory in mood and became more so as popular disgust at whig oligarchy mounted. Still more radical were the views of Common Hall, where some 8~,000liverymen of the City Companies met, not only to nominate the lord mayor and one of the two sheriffs, but also to elect London's four MPs. The City was not yet a 'shopkeeper democracy', but it was certainly moving in that direction. The City's toryism presented both a challenge and an affront to the politicians at the 'other end of the town'. Crypto-jacobites did their best to win the corporation for their cause, but though they found one or two friends in positions of trust they could induce very little in the way of practical action. Even the mob, demonstrating provocatively on the streets, was intent on damning the government, not subverting the dynasty. Opposition tory politicians had much more success, but they could never feel comfortable with their rumbustious allies. City toryism was no party construct, but a spontaneous expression of independence of government in general. The leader of the City tories for three decades was Alderman Sir John Barnard, who was certainly no party man. He would have preferred to be called a patriot or an independent rather than a tory. For the whigs, of course, these were mere nuances, which even if sincere did nothing to lessen the threat posed by the City Corporation. Successive administrations felt it imperative to do all in their power to curb the excesses of the Guildhall independents. For obvious reasons their activities have rarely been uncovered. However, the recent publication! of the minute-book of the H.S. (almost certainly 'Hanoverian Succession')2 club enables us to trace in detail the disbursement of £1,700 of public money given by James Craggs senior, the postmaster-general and whig 'manager' in the City, 3 to influence Common Council elections. '[he minutes also afford much information about the political configuration of the City, both in the wards and at Guildhall. But they provide only a few clues to the nature of the relationship between the government and the City whigs. An investigation of the careers of two political agents, both connected with the Post Office and both members of the H.S. club, will help to remedy this deficiency and illumine a grey area of Hanoverian life.

Income Measures, Ownership, Capacity Ratios and the Dividend Decision of the Non-Life Insurance Industry: Some Empirical Evidence

Dividend payout ratios and dividend yields for the non-life insurance industry are studied in detail. A dividend behavior model is developed for this industry. Income measures, ownership and capacity ratios are found to be important in determining insurers' dividend policy. The dividend policy of the firm is important for several reasons. An understanding of the factors influencing dividend payments contributes to the theory of corporate savings. Dividends may also influence the price per share of common stock; thus dividend behavior is of interest because it affects the maximization of shareholder wealth. In addition, dividend policy also plays a direct role in the firm's financing and investment decision. While the factors influencing the dividend policies of industrial firms have been studied in some detail by Lintner [ 12], Brittain [2], Fama and Babiak [5], Dhrymes and Kurz [4], and others, theories of dividend behavior have not been as extensively developed and explored for financial firms. The purpose of this research is to study the dividend behavior of one type of financial intermediary, the non-life insurer, to test whether existing dividend behavioral theories are applicable to non-life insurers. The financial management principles of financial institutions are not necessarily identical to those of industrial firms. Specifically, the non-life insurer deals with (1) different income measures, which affect reported earnings and retained earnings, (2) a unique borrowing-lending rate relationship, and (3) an asset portfolio comprised primarily of securities of industrial firms. In addition, most insurance stocks are traded over the counter instead of on the New Cheng-few Lee is a Professor of Finance at the University of Illinois at Urbana-Champaign. He earned his Ph.D. from the State University of New York at Buffalo. Dr. Lee taught at the University of Georgia before moving to Illinois and has been a visiting professor at SUNYBuffalo and Ohio State University. He is an Associate Editor of the Journal of Financial and Quantitative Analysis and a member of the Editorial Board of the Journal of Business Research. Stephen W. Forbes is Vice President of the Life Office Management Association. A Ph.D. from the University of Pennsylvania, he was on the faculty of the University of Illinois at Urbana-Champaign before joining LOMA. Both he and Dr. Lee have published articles in several professional journals. The authors gratefully acknowledge the financial support of the S. S. Heubner Foundation for Insurance Education of the University of Pennsylvania. We also acknowledge the assistance of Mr. Dongsae Cho, and the editorial comments of J. David Cummins.

The Financial Management of a Developing Life Office.

The Financial Management of a Developing Life Office.

Generalisierung von Kommutationsfunktionen; eine Anwendung im Computermodell einer Lebensversicherungsgesellschaft

Subject of the investigation described in this paper has been: To find the general form (as a function of time elapsed since date of entry) of the variable sum assured to be paid on death or of the variable intensity of payment of a continuous life annuity such, that the calculation of the actual value of the payments can be based on the rise of a finite number of commutation functions. It is shown that the general form of the functions sought for, contains so many parameters which can be freely chosen, that the sums assured represented by functions of time of another type can be approximated very well by appropriate choice of values of the parameters.The last statement is clarified by a demonstration of an approximation of a special type of the variable sum assured payable in case of death playing a role in a forecasting model of a life office in the ordinary branch.

Indexing Long-Term Financial Contracts

SynopsisThe prime purpose of the paper is to present the case for the issue of longterm index-linked stocks by the government and by other borrowers, for the issue of index-linked life assurance and annuity contracts by life offices and for the index-linking of pension scheme benefits, all of which the author believes are possible and would be beneficial to all parties.Part 1 of the paper uses the methods of statistical time-series analysis to study the way in which inflation has behaved in the U.K. over the long period 1661 to 1980 and over various shorter and more recent periods. While prices were far from static in the period up to 1914 the average change was nevertheless almost nil. However, during the 20th century prices have generally risen and in recent years this rise has accelerated. It is possible that the series has become unstable, and hyperinflation will result. It is certain that no one statistical model can satisfactorily “explain” the movements of prices. Future uncertainty is now very great.The author concludes from this that index-linking oflong-termcontracts, i.e. adjusting for price changes after they have occurred, is more satisfactory to both parties to the contract than to guess at a single fixed inflation rate and build that into the contract.Part 2 discusses the issue of long-term index-linked government stocks. It demonstrates the uncertainty attached to fixed interest borrowing and lending, and the harmful effect on the future PSBR of the government's present funding methods. The author discusses the Wilson Committee's view on index-linking, and supports their suggestions of tax changes to make practicable the issue by companies of index-linked loan stocks. Index-linked house purchase loans are also advocated.In Part 3 the author presents the advantages to life offices and their policyholders of policies with index-linked premiums and benefits, and discusses some of the complications of such policies, in particular the tax obstructions for certain types of policy.In Part 4 the author suggests that index-linked pensions are both desirable and possible for all pension schemes, not only those in the public sector, though possibly they should start at a reduced level. Evidence is presented to show that “negative real returns” on ordinary share investment were a temporary aberration of the mid 1970s, and that in more recent years ordinary shares have shown very satisfactory real returns, which may very well continue. Ordinary shares have nothing to fear from index-linked stocks, and pension funds should be able to earn satisfactory real returns on any assets other than long-term fixed interest stocks.

Life Offices' Association

Life Offices' Association

The Role of the PR and Advertising Agency in the Marketing of Financial Services

“Financial services” is a shroud which seems to unify a number of activities which are in reality quite diverse. Statistics of advertising are one indication of marketing activity in this sector. They include categories as diverse as “boroughs and corporations” advertising loans to the public, “credit cards” offering at one and the same time credit facilities and a means of payment, and “prospectuses” which are invitations to invest, usually in quoted securities, while “insurance and assurance companies” could include anything from life offices advertising their reversionary bonuses to insurance brokers commending their services as risk management consultants. The common factor throughout is money; usually money changing hands for a monetary return, but the market may be consumers, industry, or banks and other financial institutions worldwide.