Pension Business Research Articles

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.

Pension Plans and the Writing of Fully-Covered Exchange Traded Call Options

A question facing pension managers is whether fully-covered call option writing strategies should be pursued. This study is designed to provide an answer by comparing the risk and returns of two buy-and-hold option portfolios to those of the underlying stocks and the market as a whole for May 1973 through April 1977. The conclusions are: I ) covered call options reduce the risk of equity portfolios, 2) no evidence supports the belief that a learning period favorable to option writing existed during the early years of CBOE existence, and 3) options are most likely to improve the risk-adjusted returns of equity portfolios when overall market prices are declining. With the passage of the Employee Retirement Income Security Act (ERISA) of 1974, investment managers and other fiduciaries of pension funds found themselves subject to vague, but potentially strict standards of conduct. Among other requirements, ERISA provides that individuals in charge of pension assets must act the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims [29 U.S.C.A., sec. 404(a) (1974)]. Because of this requirement, some investment managers suggested that exchange-traded call options on some or all the common stocks in pension portfolios be written in order to derive additional income from the stock portfolio while obtaining some protection against stock price declines. Rather than causing insurers and trust departments to rush to the options market to write call options for their pension business, ERISA's prudence requirement usually has been cited as a major reason for ignoring options. Some of the specific fears have been: the absence of complete regulatory acceptance, the expenses associated with managing option portfolios, conSandra G. Gustavson is Assistant Professor of Finance in the College of Commerce and Business Administration, University of Illinois at Urbana-Champaign, where she specializes in risk and insurance. She holds the Ph.D. degree and has completed several examinations administered by the Society of Actuaries. The author thanks Sophie H. Chang, Doris Gustavson, and Kathleen A. Levy for their assistance in collecting and analyzing the data. The author also is indebted to Robert I. Mehr, Frank K. Reilly, and three anonymous referees of The Journatil of Risk andbl Insurance for their helpful suggestions. This research was financially supported in part by the Research Board of the Graduate College, University of Illinois at Urbana-Champaign, and by the Department of Finance, College of Commerce and Business Administration, University of Illinois at Urbana-Champaign. Thanks are due both these academic units.

A Note on Varying Rates of Interest

SynopsisLet us suppose, for the purpose of calculating premium rates, that interest rates will not fall below those of the straight lines from their present value io to in in n years' time (in < io), thereafter remaining constant at in. On the basis of this assumption we derive formulae for the (minimum) effective rates of interest on single and annual premium contracts of term m years (m ≤ n, or m > n) and give examples in which gross interest rates fall from 8%, 9%, 10%, 11%, to 4½% in 40 years' time, and other examples. We conclude with a discussion of modifications to the term of the contracts which enable our results to be used for pure endowments, with-return endowments, endowment assurances, deferred annuities and other policies in life assurance and pensions business, and we mention some objections to our methods.Our thanks are due to C. M. Stewart, F.I.A., F.S.S., for suggesting some improvements to this note.

New danish bases of calculation in life and pension insurance

Abstract A committee consisting of actuaries representing private life offices, private pension offices, and Statsanstalten for Livsforsikring (The State Life Insurance Institution) transacting both life and pension business, have compiled a complete set of calculation bases, which have been adopted by all Danish life and pension offices with effect as from January 1, 1966.

Distribution of Surplus Under a With-Profit Group Bonus System

SynopsisThe paper describes a with-profit group bonus system similiar to a rebate system being operated at the present time. It is suggested that, in view of the present high level of interest rates, the premium rates for such a scheme should be based on an immunization approach, and the paper describes how these rates can be calculated using a computer. It is envisaged that capital profits for with-profit group pension business will be distributed, and a system is outlined for arriving at the distributable surplus, and for distributing it. This system is based on reserves calculated on the premium basis and on a special “market value fund”.

Administration of Group Pension Schemes

In this paper, the main object of which is to promote a mutually helpful discussion, a deliberate attempt has been made to avoid going into detailed descriptions of methods of administration. These vary, of course, from office to office and it is quite reasonable that the difficulties which presented themselves should have been successfully surmounted in different ways. It is both interesting and informative to learn the various practices which have been adopted, but a close study of them may lead to an oversight of underlying problems and a disproportionate expenditure of time.It should also be mentioned that the title would be really more suitable for a whole book rather than for a short paper presented for a single evening's discussion. Consequently, two restraints have been imposed, both of which derive from the dynamic growth in size and complexity of group pension business over the last two or three decades.

Administration of Group Life and Pensions Business by Computer

It is now some ten years since it was accepted, cautiously at first, that computers might be of some value in performing ordinary clerical procedures. Since that time, they have been gradually installed at an everincreasing rate in offices of all kinds, including insurance offices. Our own Institute was, I believe, the first body to publish tables—the a(55) tables—which had been prepared by means of a computer, In some respects it is a pity that the insurance world in this country has not been more to the fore in utilizing this new equipment although, from the number of insurance people who attend any meeting connected with computers, it is not due to any lack of interest in new methods but rather to a cautious attitude concerning making use of equipment until it has been fully proved by actual field service. This is in contrast to the position in U.S.A. where the insurance offices have been well to the front in development of office use of computers; indeed, an insurance office there was the first non-governmental business user and that office now has four very large machines in full-time use. As a result of this we were fortunate to have had the very instructive surveys published by our sister body, the Society of Actuaries.

Valuation of the fund and analysis of its development

Abstract The content of this paper is a description of the valuation of the fund and the analysis of the development of that fund in a computation system constructed with special regard to a group pension business, which includes old age pension, sickness and disability pension, widow-and-orphans pension, death and endowment benefit and waiver of premium in case of sickness or disability. In that business more risks are involved than that for death, and for that reason the system of calculation must be more general than would be necessary if it were to be applied to life assurance only. As will be seen from the following description, however, it is presented in a form quite applicable to life assurance too.

The Profitability of Group Pension Business: An Essay in Assessment

SynopsisThe Paper sets out to examine whether existing group pension business written on certain premium bases will prove to be profitable or not. In the first part of the Paper the trends and effects of mortality, interest, income tax and expenses are examined in turn and a table of annuity values is constructed embodying the conclusions drawn.In the second part of the Paper the working of a model group pension scheme for the year 1955 and the results of the year's working are analysed, firstly according to the assumed experience basis, and secondly according to the premium basis.

The Taxation of Annuity Funds.

‘Income tax is another subject on which it is difficult for me to speak freely, but I cannot refrain from noting that the general taxation position, as it now affects life assurance and pensions business, has given rise to serious anomalies: …one has only to consider…that the terms quoted by offices for the purchase of life annuities vary to a quite remarkable extent, depending on the distribution of the company's business between various funds, as it exists at the moment, and the consequential incidence of tax;…’(J.I.A.Vol.LXXV, p. 7.)With these words Sir George Maddex, in his Presidential Address, directed our attention to the present system of taxation of annuity funds. M. E. Ogborn (1), on 27 October 1947, touched on the subject of uneven incidence of tax upon differing funds, and some uneasiness about the consequences was manifest in the discussion on that paper.Much has been written in recent years upon the general subject of taxation of annuities. S. J. Rowland and F. H. Wales (2), A. H. Shrewsbury (3), and M. E. Ogborn (1) have fully described and commented upon the present method. Relatively little attention, however, has been devoted to the effects of the system upon annuity funds, probably because it is only recently that we have become aware of its full implications. There is some need therefore to review the consequences and to investigate more closely the actuarial problems which follow.It is proposed here to analyse the effects of the system and, proceeding from some simple basic principles, to point to a method of solution of the actuarial problems connected with valuation, investment and the terms for new business and withdrawals.

The taxation of annuity funds

With these words Sir George Maddex, in his Presidential Address, directed our attention to the present system of taxation of annuity funds. M. E. Ogborn, on 27 October 1947, touched on the subject of uneven incidence of tax upon differing funds, and some uneasiness about the consequences was manifest in the discussion on that paper.‘Income tax is another subject on which it is difficult for me to speak freely, but I cannot refrain from noting that the general taxation position, as it now affects life assurance and pensions business, has given rise to serious anomalies: ...one has only to consider... that the terms quoted by offices for the purchase of life annuities vary to a quite remarkable extent, depending on the distribution of the company's business between various funds, as it exists at the moment, and the consequential incidence of tax;...’

Laxity in Pension Examiners.

Bloomsburg, Pa., Oct. 10, 1901. To the Editor: —In an article inThe Journalof October 5 on Laxity in Pension Examiners, the claim is made of certain abuses of serious carelessness, and that the public has conviction of a vast amount of fraud in the pension business, and that the publication of such as these confirm it. Let us examine the alleged facts. If they are true, then the above allegations stand. If they are false, then they fall. The facts consist of an experience with one board of pension examiners, who examined twenty applicants at once, from one section and found them all suffering from heart disease. These applicants were then examined before disinterested physicians who found no heart disease in any of the cases. Is this probable? Is it possible, that twenty soldiers aged from 55 to 75 years, who have suffered all the privations