Actuary · November 2009 Contents November 2009 TheActuary Eugene Dimitriou is the editorial team’s choice for November for his article on longevity swaps, and receives a £50 book

ActuaryPublished in London by the Staple Inn Actuarial Society

TheThe mAgAzIne for The AcTuArIAL ProfeSSIonwww.the-actuary.org.uk

A point of consistency

Sharper understanding of Solvency II’s technical provisions

november 2009

Plus: Roger Bootle Q&AManaging liquidity risk

Inside: Longevity swap pros and cons • Dynamic policyholder behaviour • Smaller consultancies • Latest jobs

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TheActuary

EditorialNovember 2009

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November 2009 �

Research and media reports indicate that fraud is on the increase in this recessionary environment. As a recent victim of identity fraud, I can certainly relate to those statistics. In an insurance context, the deceit exhibited by claimants comes full circle as consumers bear the cost of the crimes through increased premiums. As the state of the economy continues to be a popular subject, this edition of The Actuary carries an interview with Roger Bootle, honorary fellow of the Institute of Actuaries and renowned economist, sharing insight on his career and the economic environment.

One of the featured themes for November is life insurance and the end of the month will find large numbers at the Actuarial Profession’s Life Conference in Edinburgh, which promises to provide many interesting technical tutorials and an update on the current economic climate.

Thank you for the interesting comments I have received for ‘coining the actuarial phrase’, in response to my June editorial. Among some of your suggestions for definitions of actuarial science are ‘the physics of money’ (Scott Neville) and ‘financial statistics’ (Stephen Blake). Rosalind Rossouw provides an elaborate and entertaining response on the letters page.

As many of you will know, a number of dedicated volunteers from the profession staff The Actuary’s editorial team. At the end of this year we will bid farewell to Amy Guna, our people news editor. Amy will leave vacant arguably the hottest seat on the editorial team, being the first to hear about all the moving and shaking in the actuarial world.

If you are a ‘people person’ and feel you could contribute newsworthy items from around the profession, please get in touch. Students, associates and fellows alike are welcome to apply and your location is not a hindrance.

Marjorie [email protected]

The circle of life

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November 2009

Contents

November 2009 �www.the-actuary.org.uk

TheActuary

Eugene Dimitriou is the editorial team’s choice for November for his article on longevity swaps, and receives a £50 book token courtesy of

p24

Solvency II: A point of consistencyAndy Frepp, Craig Turnbull and Sandy Sharp highlight some unfortunate consequences of the Solvency II technical provisions

26 Risk: Managing liquidity riskPaul Sweeting and Patrick Kelliher compare the advice given by the CRO Forum and the BCBS

29 Q&A: Roger BootleOn the eve of the publication of his new book, The Trouble with Markets, Roger Bootle speaks with Marjorie Ngwenya about his life and work

32 Life: Another dimensionEd Morgan and Jeremy Kent consider the impact of dynamic policyholder behaviour in the life assurance arena

34 Pensions: On the wrong track?Amid the current vogue for longevity swap transactions, Eugene Dimitriou asks whether the protagonists have fully considered the consequences involved

36 IT: Size isn’t everythingAdvances in pensions IT are helping small consultancies compete, says Gary Tansley

38 Insurance: The winds of changePeter Maynard and Catherine Lyons present the results of a survey into insurers’ tele-underwriting usage

40 International: New ZealandJoe Benbow gives an overview of the actuarial community in New Zealand

Features

News

12 Profession

17 Education and research

18 Industry

21 SIAS notices

22 People/Society

46 Appointments and moves

Comment

3 Editorial Marjorie Ngwenya contemplates the circle of life

6 Letters In which actuaries discuss misbehaviour,

misunderstanding and misnomers

8 President’s addressRonnie Bowie on fashion’s fickle finger

10 SoapboxSteve Bee says its time for a wider debate on

the state pension

45 Book reviewRobert Walther reviews The Golden Age of

Government Bond Analysis (1961-1986)

Regulars

41 Arts Finn ventures into the staff canteen

42 Puzzles Win a £50 Amazon voucher in our prize puzzle

44 Student pageJean Eu discusses the merger vote

45 Actuary of the futureCharchit Agrawal of Ernst & Young

Writer of the month

n Extract from The Trouble with Markets by Roger Bootle www.the-actuary.org.uk/870181 n David Worsfold reviews Regulated Lives: Life Insurance and British Society 1800-1914 and The British Insurance Industry Since 1900 www.the-actuary.org.uk/870103

More content online

Editorial advisory panelPeter Tompkins (chairman), John Batting, William Bennett, Chris Daykin, Margaret de Valois, Matthew Edwards, Nigel Hayes, Martin Lunnon, Divyaa Mohan, Claire Ritchie, Andrew Smith, Chris Sutton, Paul Sweeting, Matthew Wheatley

EditorMarjorie NgwenyaE [email protected]

Features editorTracey BrownLane Clark & Peacock LLP,T +44 (0)20 7432 3071E [email protected]

Deputy features editorsJean EuAdam JornaE [email protected]

Profession news editorChris MorganT +44 (0)131 240 1322E [email protected]

Industry news editorPeter TompkinsE [email protected]

People/society news editorAmy GunaGrant Thornton UKT +44 (0)7879 453 949E [email protected]

Student page editorJean EuSCOR-SE UK branchT +44 (0)20 7173 3281E [email protected]

Arts page editorsMatthew FewsterJP MorganT +44 (0)20 7777 9707E [email protected]

Finn ClawsonKPMGE [email protected]

Puzzles editorTom BratcherWatson Wyatt Worldwide,E [email protected]

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Letters Your view

Unfunded pensions: Response to M. WealeTwo items gave me pause in Martin Weale’s Soapbox article in the September 2009 issue of The Actuary:

First, he says: “If pension rights were properly funded... then it would be clear how public and private sector pay compared.” I suggest that this mixes apples and oranges.

A private plan is not ‘properly funded’ until assets are brought up to the value of benefit expectations, preferably with a safety margin. Until we reach this point, the plan sponsor may go out of business leaving benefit expectations unmet.

Government, by contrast, is not going out of business; more precisely, if it does, we will all have more pressing worries than pensions, so we can proceed on that assumption. Therefore, it is reasonable to try to fund public pensions as a level percentage of pay stretching as far as the eye can see. There is no compelling reason to work towards full funding, however defined; indeed, this may introduce a generational inequity. There are also drawbacks to having a huge pool

Letters to the editor

Sponsored by

Reviewers behaving badlyAs a long-standing proponent of the book The (Mis)Behaviour of Markets by Mandelbrot and Hudson, I was considerably disappointed to see such a belated and grudging review in your October edition.

It needs to be pointed out that, although better known for his endeavours in other mathematical fields, Mandelbrot has been expressing reservations about the bases for conventional financial theory for the best part of 50 years. This popularisation of his work was first published in the United States as long ago as 2004, well before many of the excesses that fuelled the financial meltdown of 2007/08 had built up to dangerous proportions. If more notice had been taken of it, the blind reliance on fundamentally flawed market models that certainly contributed to the crisis might not have become so pervasive.

It is true that the book does not provide a clear route to developing models that might, by taking into account greater frequency of extreme happenings and the development of widespread unanticipated correlations, stand a better chance of approximating to reality. However, it does point to this as an obvious direction for future research. The course that appears to be favoured by your reviewer, to apply sticking plasters to financial market models that were always unsoundly based and have now more clearly been undermined by recent events, seems bound to represent a blind alley.

John Bishop

26 September 2009

The writer of the letter of the month receives an iPod Shuffle and a £15 iTunes voucher kindly supplied by Hazell Carr

of investment capital slopping around the capital markets under the overall supervision of government. Norway, which is using temporary oil revenues to pre-fund, suggests one very defensible exception.

Second, Dr. Weale’s overall approach seems to point towards the idea that each employee should carry his own risks, although he only says so explicitly with respect to younger workers. I suggest that the traditional defined-benefit (DB) approach, which focuses more on the workforce as a whole and prioritises, to some extent, the needs of the older employees who are more likely to retire from the sponsoring employer, has much to recommend it.

DB plans certainly have their problems, but I think there are two major steps we could take to save them from oblivion. One is to recognise the tension between fixed-benefit entitlements and equity investment by introducing the idea of a basic pension benefit supplemented, on a year-to-year basis, by a bonus similar to a terminal dividend if that can be afforded. The concept works well in UK life insurance, but here I would suggest

that the bonus does not go over 50% or so. A 2% of pay per year of service plan certainly seems nicer than one giving 1% with year-to-year boosts of % likely but not guaranteed — but if that nicer plan cannot be maintained, the alternative looks attractive. The benefit fluctuations that this proposal could produce would not exceed those that we see now in defined contribution plans, and they would not rear their ugly heads anywhere near as often. Payment of bonus benefits should be permitted only if plan assets cover the basic benefits or if additional deposits are made to cover the cost on the same year-to-year basis. I would also allow accrual of basic benefits on a participation-over-participation basis.

Next, if we must have government guarantee funds despite the experience of PBGC in the US, I would suggest limitations on the amount guaranteed and would also require accrual of the guaranteed amount on a participation-over-participation basis. Such guarantees could probably work without the secondary-liability recapture that we have in the US, where PBGC’s commitments routinely exceed plan assets.

Brian A. Jones

5 October 2009

An actuarial vocation: Response to June’s editorialIn a recent issue you asked readers to submit their response to an explanation of what an actuary is/what an actuary does when they are asked by someone who doesn’t quite know. When I worked in the UK as a student, we were all given ‘Actuarial Profession’ cards, which had a definition on one side as follows:

‘Actuaries are respected professionals whose innovative approach to making business successful is matched by a responsibility to the public interest. Actuaries identify solutions to financial problems. They manage assets and liabilities by analysing past events, assessing the present risks involved and modelling what could happen in the future.’

Perhaps this is a bit longer than the ‘soundbite’ you were requesting, but it was easy to whip out the card and read its contents aloud.

I must admit, at times those who have a vague idea of what actuaries do pleasantly surprises me. The last recollection I have

Letter of the month

In which actuaries discuss misbehaviour, misunderstanding and misnomers

006-007_Actuary_1109_Letters.ind6 6 22/10/09 10:48:01

LettersYour view

November 2009 �www.the-actuary.org.uk

Due to the high volume of letters being received, we are currently publishing additional comments on The Actuary’s website. Visit http://bit.ly/4uk0al

The editorial team welcomes readers’ letters but reserves the right to edit them for publication. Please e-mail [email protected]. The deadline for receiving letters for the December issue is 12 November.

of such a response to someone asking me what I do for a living was, ‘So, you’re a smart one’. However, a colleague of mine sent me the following link which I thought to share with you as I’m certain readers will find the definitions contained therein most amusing: http://uncyclopedia.wikia.com/wiki/Actuary

Rosalind Rossouw

5 October 2009

The Canadian example: Response to D. WorsfoldIn his Soapbox article (September 2009), Mr Worsfold writes about the reform of financial services regulation without commenting at all on the Canadian system. It is generally acknowledged by G20 countries, financial services experts and others around the world that Canada’s financial services were best placed to weather the financial storms that hit last year. This is attributed to sound regulation.

I recall a friend of mine who was then (mid-1980s) a partner in a major investment bank in the City, visiting me here in Toronto after attending the IMF/World Bank meetings in Washington DC. I was complaining of the difficulty I’d had getting bank financing for my fledgling consulting firm. He told me not to complain too much as Canada’s banking system and its banks were regarded as the strongest in the world, and were the envy of many. I guess he was right then, and still is, much as I continue to dislike banks generally.

Peter Hirst

1 October 2009

The Actuaries’ Code — It means you!All members should have heard about the new Actuaries’ Code. Many will have read it. Some will have thought what does this mean to them. A few will have taken steps to ensure they are confident of meeting the code’s requirements A tiny few (I hope) will have ignored it.

The profession contacted the regional societies volunteering a presentation on the new code and its implications. The Yorkshire

Actuarial Society accepted this offer and we had the presentation on 13 October, given by Tony Hewitt of the Professional Awareness Committee. Having a presentation certainly brought the code to life, and the situations discussed gave it even more impetus. I would highly recommend that other societies still considering whether to do this go ahead with having a presentation or, if members are unable to get to one of these meetings, try and get to a presentation, if given, at any of the actuarial conferences.The overriding message was it does affect all of us and ignore it at your peril. So be aware!

Malcolm Slee

14 October 2009

What’s in a name?: Response to J. NelsonJames Nelson, in his letter in your October 2009 issue, has hit the nail firmly on the head. I am proud to be an FIA and proud of the other fellowships that I hold, but to be a fellow of ‘a Profession’? Leaving aside the scope for jokes about ‘FCAPs’, the whole concept of a body being called the ‘Chartered Actuarial Profession’ was, in my view, an absurd compromise. I am, however, glad that councils did put forward the CAP name: if they had not, their proposed merger, flawed on many other counts, would probably be a done deal by now.

There is nothing wrong with ‘Faculty and Institute of Actuaries’ (F&IoA). However, I suggest that ‘Institute and Faculty of Actuaries’ (I&FoA) would be even better. Of course, I am biased, but my reason is that the Institute is the older, and by far the larger, body. In contrast, F&IoA has the merit merely of alphabetical order. I add that, if we were fellows of I&FoA, we would be FIFAs, a description rather more euphonious than FFIAs (from F&IoA) would be. Yes, I do realise that there is another FIFA out there somewhere, but I don’t think there is much danger of confusion!

Finally, and doffing my biased hat for a moment, I note that either I&FoA or F&IoA

would make it much easier (and more logical) to allow current fellows to continue to use their FIA/FFA initials than the CAP name would have done.

David Purchase

2 October 2009

The name of the gameThe suggested name of the amalgamated actuarial bodies personally affects me not one jot, as I retired from being secretary-general of the Institute some 18 years ago. I always felt, however, that it was incomprehensible for actuaries to be apparently completely satisfied by the omission of the word ‘chartered’ from the title of their professional body.

Most professions seem to be only too keen to be able to use the term that actuarial bodies in the UK have been entitled to use since the 19th century. I endorse the remarks of James Nelson in his letter dated 6 September. ‘Chartered Actuarial Profession’ would lead to wording difficulties in descriptive terms for its members. I earlier thought of a title which would not, for obvious reasons, include Institute or Faculty in its wording: ‘Chartered Institution of Actuaries’ or, alternatively, ‘Chartered Actuarial Association’ would be suitably concise and inoffensive.

Perhaps I was wrong in believing that actuaries like being aphoristic. Coming to reflect on it, during my life at Staple Inn that may not have been a characteristic!

Clive Mackie

26 September 2009

Your letters

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8 November 2009 www.the-actuary.org.uk

President’s address

In the northern hemisphere, we are well into late autumn. With the chill in the air we have reached for the protection of our winter wardrobe. Non-actuaries

may jest that the difference between the summer and winter wardrobes of many male actuaries is hard to discern. I would accept that actuaries are not, by temperament, likely to be followers of haute couture.

Fashionable concepts, which are based mostly on show rather than substance and fi t only a tiny minority of the population, are unlikely to fi nd favour with most of our members. Actuaries are more likely to be interested in garments with high levels of functionality. Will it withstand a Scottish winter, or will it survive the punishment of London’s commuter trains while retaining its shape and integrity? For us, ‘shower-proof’ is not enough. We want our protection to remain effective even in relatively extreme conditions.

Indeed, we are constantly looking for ways to improve that functionality. We want to fi nd our own versions of high-tech, weather-resistant materials that improve certain aspects of functionality without detracting from others.

We also have very high standards of quality. Our exams ensure that only the best craftsmen can use the ‘actuarial’ designation, our CPD scheme requires our craftsmen to stay up-to-date and our disciplinary scheme is there to give the public confi dence that, on a rare occasion when the appropriate standards are not adhered to, then action will be taken. Our Actuaries’ Code also ensures that it is not just the technical quality of our garments which is exceptional but so too are our ethics.

Our badge of quality is much admired. The number of people who wish to join our craft continues to grow (particularly overseas) and in certain core markets we enjoy an enviable dominance. A number of our members have successfully branched

out into new areas, not typically those associated with our craft, demonstrating that our skills and values have a wider relevance.

However, we face a challenge. On the European fi nancial services catwalks this autumn, the overriding theme has been ‘risk management’. Whether it be from established sources such as Solvency II or from new sources like Sir David Walker, the theme is the same. The fi nancial services world must adopt new safety standards which will, in turn, increase demand for hard-wearing safety clothing.

We have two challenges: fi rst, we need to capture our share of the safety clothing market. Second, we need to position ourselves as experts in overall safety management.

We know that we can design and make the safety clothing. The techniques we have used in our traditional markets are capable of adaptation and wider application, with many successful examples to support these claims. The forthcoming Chartered

Enterprise Risk Actuary qualifi cation (CERA), which will be available to be awarded in Spring 2010, will help to establish our credentials in the safety wear market just

as they have been in our traditional markets. We are working to maximise the benefi t to our members of the launch of this qualifi cation.

Establishing ourselves as leaders in broader safety management will be hard and will take longer. However we can, and will, publicise this and celebrate role models such as Philip Scott FIA, the retiring fi nance director of Aviva who will shortly take up a non-executive director position with Royal Bank of Scotland and will chair its newly formed Risk Committee. We congratulate Philip on his appointment and believe it to be an excellent model for the future.

What appears on the catwalks eventually appears on the high street. The current fashion for risk management will persist and, as a profession, we must ensure that we are at the heart of this exciting new development.

Ronnie Bowie

Fashioning a successful future

Faculty president Ronnie Bowie assesses current trends and seeks to position actuaries as in vogue

» For us, ‘shower-proof’ is not enough «

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Soapbox

The basic UK state pension is a widely held entitlement and, as such, comes at significant cost to the public purse. The contributions paid by millions

of citizens for their pension entitlements were not put aside as they were paid over the weeks, months, years and decades that people made them. That money was used up at the time it was paid; the entitlements built up by people therefore will need to be paid for as they arise.

The basic pension was clipped back in 1980/81 when annual increases were linked to increases in prices rather than increases in the average level of earnings as was previously the case.

That has meant that each year since then, the basic pension has become worth less when compared to the general level of earnings. Left that way it would eventually have become, quite literally, worthless. The latest round of pension reforms seeks to restore the link to earnings, thereby stopping the rot that has set in to the basic pension. This has the support of all the major political parties and, although they may differ

on the implementation date, is

something that should be achieved by 2015 at the latest. That, of course, will add to future costs to the public purse.

At the same time, other cost-saving changes are in place with the aim of reducing the cost of providing the old-age pension. The state pension age for women is already set to gradually increase from age 60 to 68 and, for men, from age 65 to 68. As things stand, those changes will be complete by 2046. What is being spoken of these days by the Conservative Party is a possible acceleration of that process; there has been plenty of talk elsewhere, too, of increasing the state pension age to 70 and maybe even

older as time goes on. That is to be expected, of course; high-

cost entitlements can yield substantial savings if they are cut back in value.

Moving the state pension age is doubly

useful for the public purse. It is the point at

which we can claim our old-age pension, but it is also

the point at which we cease to be required to pay national

insurance contributions. So every year that

the state

pension age goes up means one less year that it will have to be paid out, but also one more year that it will have to be paid for; a

double-whammy for those affected.

As we live ever longer, are we bound to see politicians bowing to financial pressures to reduce the value of our state pension entitlements? It

would be naïve of us to think otherwise. What we need to do before the gradual creep of attrition sets in is to look again not just at what we think ‘old age’ is, but at what we think the old-age pension is for. We would all be better off, in my opinion, if our old-age pension entitlement was increased greatly in value but paid from a much older age, say 75 or 80. It would then be useful if people’s retirement savings could be used to buy fixed-term annuities (aimed to end as the more generous level of state pension kicks in) rather than a pension for life.

If that were the case, then annuity rates would not be subject to volatility and people would know while they were saving exactly how many ‘pension pounds’ they were saving up for. The average pension pot these days does not go far when purchasing a lifelong income; the same money would give pensioners a greater weekly income if it was aimed at providing a fixed-term income.

The time has come for ideas like this to become part of the wider public debate on pensions. The argument should not be, ‘How can we amend what we’ve already got?’ — it should instead be, ‘Is the system we’ve inherited from the past a sensible one for us to maintain in the future?’

No quick fix

Steve Bee says it is time for a wider debate on the state pension

Steve Bee is head of pensions strategy at the Royal

London Group (Scottish Life)

Steve Bee

10 November 2009

» We would all be better off, in my opinion, if our old-age pension entitlement was increased greatly in value but paid from a much older age, say 75 or 80 «

010_Actuary_1109_Soapbox.indd 10 21/10/09 11:58:43

www.the-actuary.org.uk12 November 2009

At the Institute AGM on 28 September, Adrian Baskir, Helen Crofts, Justyn Harding, Malcolm Kemp and Trevor Llanwarne were all elected to Council. Wendy Beaver, Charles Cowling, Sally Dixon, David Hindley and Michael Pomery retired from Council. Nigel Masters, president of the Institute of Actuaries, thanked the retiring members for their service.

It was noted that 13 members of the

Institute had not received voting papers for the election. These Institute members were also members of the Faculty, and had the Faculty as their ‘primary body’. Because of a selection error they were omitted from the list supplied to Electoral Reform Services. However, they were all subsequently contacted and given the opportunity to vote.

All reports and accounts were passed and the meeting was closed.

At the sessional meeting that followed, David Hartman, a distinguished American actuary, was elected as an honorary fellow of the Institute.

Mr Hartman is a long-standing member and servant of the US actuarial profession and is past president of both the Casualty Actuarial Society and the American Academy of Actuaries. He has also been active internationally and is a past president of the International Actuarial Association.

Mr Rudi Stumpf FIA 1995, South Africa (the Respondent)

On 3 September 2009 the adjudication panel considered a complaint that the Respondent:a) For the CPD year 1 July 2007 to 30 June 2008 failed to declare the appropriate CPD category as required by the Actuarial Profession and set out in the CPD schemes contained with the CPD Handbook 2007 (version 12) on page 7; the CPD Handbook 2007 (version 13) on pages 7 and 12; and the CPD Handbook 2007/08 (version 14) on pages 8, 9 and 13.b) For the CPD year 1 July 2007 to 30 June 2008, failed to maintain an online record of CPD undertaken as required by the Actuarial Profession and set out in the CPD Handbook 2007 (version 12) on pages 10, 13 and 23; the CPD Handbook 2007 (version 13) on pages 8, 9, 10, 13 and 23; and the CPD Handbook 2007/2008 (version 14) on pages 9, 10, 11, 14 and 24.

And, in failing to do all of the above, he failed to maintain and observe the highest standards of conduct expected of a member, contrary to paragraph 2.1 of version 2.3 of the Professional Conduct Standards and paragraphs 1.2 and 2.1 of version 3.0 of the Professional Conduct Standards, which is therefore misconduct in terms of rule 1.6(b)

of the disciplinary scheme for the Institute of Actuaries as constituting conduct falling below the standards of behaviour, integrity, or competence which other members or the public might reasonably expect of a member.

The panel determined that the case report and the evidence annexed to it disclosed a prima facie case of misconduct in respect of the allegations made against the Respondent in accordance with rule 4.2(b)(i) of the Institute’s disciplinary scheme and that the Respondent should be invited to accept that there had been misconduct, but that no sanction was necessary.

The panel’s reasons were as follows:1 The Respondent agreed the facts alleged and there had been no misunderstanding of the requirements of the scheme.

The Respondent admitted that he had not given the CPD requirements sufficient attention despite receiving correspondence from the Profession. Despite being based abroad, the Respondent was not regulated by a local regulator and, as such, should have complied with the Institute’s requirements.2 The information and reminders about the CPD scheme in general circulars were not prominent. For example, in the 14 March 2008 circular, the item on CPD followed items on the merger with the Faculty, meetings in Edinburgh and

general insurance. E-mails sent addressed BCC to the

Respondent referred to his being “in default of the CPD Scheme” without reference to the disciplinary procedures. To understand the potential for a reference to the disciplinary procedures, the Respondent would have been required to find, download and examine the CPD scheme from the Profession’s website.

However, the letter of 12 March 2008 to the Respondent did give a warning of a reference to the disciplinary processes for the following year. The panel took the view that this was sufficient and should have alerted the Respondent to the seriousness of his obligations under the scheme. 3 The panel is satisfied that the Respondent is now correctly classified as a category 3 actuary under the CPD scheme and note that he has recorded his CPD for the year 2008/09.4 Considering all the circumstances of this complaint and the guidance issued by the disciplinary board, the panel did not believe it appropriate to impose a fine or reprimand on the Respondent. The panel felt that as the Respondent was working in a non-actuarial position, in a country some distance from the UK, that no sanctions were necessary.

Life Conference 2009: Changing times The conference and exhibition is the premier professional event for UK life actuaries and is attended by more than 900 delegates. This year’s conference will take place at the Edinburgh International Conference Centre from 25-27 November 2009. For more information visit www.actuaries.org.uk/events/Life2009

ASHK Risk Management ConferenceHosted by The Actuarial Society of Hong Kong, the 2nd ASHK Risk Management Regional Conference, ‘Post-financial crisis: a new world?’ takes place at the Grand Hyatt, City of Dreams, Macau from 31 January to 2 February 2010. Registration begins this month. The official conference website will be launched shortly. For further information please visit the ASHK website at www.actuaries.org.hk

News Profession

New faces elected to Council at Institute AGM

Determination report for adjudication panel

Left to Right: Newly

elected Council

members Adrian

Baskir, Helen Crofts,

Justyn Harding,

Malcolm Kemp and

Trevor Llanwarne

012-016_Actuary_1109_ProfNews.in12 12 21/10/09 11:44:33

November 2009 13www.the-actuary.org.uk

Mr Rudi Stumpf FIA 1995, South Africa (the Respondent)

On 3 September 2009 the adjudication panel considered a complaint that the Respondent:a) For the CPD year 1 July 2007 to 30 June 2008 failed to declare the appropriate CPD category as required by the Actuarial Profession and set out in the CPD schemes contained with the CPD Handbook 2007 (version 12) on page 7; the CPD Handbook 2007 (version 13) on pages 7 and 12; and the CPD Handbook 2007/08 (version 14) on pages 8, 9 and 13.b) For the CPD year 1 July 2007 to 30 June 2008, failed to maintain an online record of CPD undertaken as required by the Actuarial Profession and set out in the CPD Handbook 2007 (version 12) on pages 10, 13 and 23; the CPD Handbook 2007 (version 13) on pages 8, 9, 10, 13 and 23; and the CPD Handbook 2007/2008 (version 14) on pages 9, 10, 11, 14 and 24.

And, in failing to do all of the above, he failed to maintain and observe the highest standards of conduct expected of a member, contrary to paragraph 2.1 of version 2.3 of the Professional Conduct Standards and paragraphs 1.2 and 2.1 of version 3.0 of the Professional Conduct Standards, which is therefore misconduct in terms of rule 1.6(b)

of the disciplinary scheme for the Institute of Actuaries as constituting conduct falling below the standards of behaviour, integrity, or competence which other members or the public might reasonably expect of a member.

The panel determined that the case report and the evidence annexed to it disclosed a prima facie case of misconduct in respect of the allegations made against the Respondent in accordance with rule 4.2(b)(i) of the Institute’s disciplinary scheme and that the Respondent should be invited to accept that there had been misconduct, but that no sanction was necessary.

The panel’s reasons were as follows:1 The Respondent agreed the facts alleged and there had been no misunderstanding of the requirements of the scheme.

The Respondent admitted that he had not given the CPD requirements sufficient attention despite receiving correspondence from the Profession. Despite being based abroad, the Respondent was not regulated by a local regulator and, as such, should have complied with the Institute’s requirements.2 The information and reminders about the CPD scheme in general circulars were not prominent. For example, in the 14 March 2008 circular, the item on CPD followed items on the merger with the Faculty, meetings in Edinburgh and

general insurance. E-mails sent addressed BCC to the

Respondent referred to his being “in default of the CPD Scheme” without reference to the disciplinary procedures. To understand the potential for a reference to the disciplinary procedures, the Respondent would have been required to find, download and examine the CPD scheme from the Profession’s website.

However, the letter of 12 March 2008 to the Respondent did give a warning of a reference to the disciplinary processes for the following year. The panel took the view that this was sufficient and should have alerted the Respondent to the seriousness of his obligations under the scheme. 3 The panel is satisfied that the Respondent is now correctly classified as a category 3 actuary under the CPD scheme and note that he has recorded his CPD for the year 2008/09.4 Considering all the circumstances of this complaint and the guidance issued by the disciplinary board, the panel did not believe it appropriate to impose a fine or reprimand on the Respondent. The panel felt that as the Respondent was working in a non-actuarial position, in a country some distance from the UK, that no sanctions were necessary.

When the credit crunch broke, many commentators claimed that it had been obvious for years that problems in the financial system were looming and it would all go badly wrong.

This set me thinking about whether, looking 10 years into the future, there were any major problems looming in the fields where actuaries have some experience. Could we identify a future social crisis stemming from the financial world and do something in advance to mitigate the harmful effects? I believe there is one such potential danger on ‘our patch’.

Final salary schemes began closing to new entrants about 15 years ago and what was a trickle of closures has turned into a flood in the last few years. We have not yet seen significant numbers retiring from the replacement DC schemes, but they will gradually increase and, by 2020, could be substantial. Many of those retiring or approaching retirement 10 years from now will be very disappointed in the outcome because the contribution levels going into most DC schemes are inadequate to provide a decent pension from a reasonable age — as we actuaries know well. We can hardly claim in 2020 that we did not see the crisis coming.

This expected outcome is supported by evidence from frequent surveys which show that people in general have high aspirations for their quality of life in retirement but are making hugely inadequate provision for that lifestyle. When they discover the reality of their

financial position, there are going to be large numbers of extremely disappointed people. When I was president, I talked about ‘a generation sleepwalking towards an impoverished retirement’.

If the country is storing up major problems for the future and we, as actuaries, are painfully aware of this, what can we do about it? To begin to meet this challenge, the Public Affairs Advisory Committee (PAAC) proposed, and the management board approved, a thought-leadership project on just this topic.

Many of our members have told Councils

that they want the Profession to show leadership in commenting on public interest issues in our field of expertise. To do this, we need to develop a sound and consistent line to take on each issue. This project aims to provide the research and ideas to enable the Profession to stimulate a national debate on saving for retirement and make a significant contribution to that debate.

We are currently putting together a team of people to steer this project. If you would like to be involved, please contact the PAAC secretary, Margaret Marchetti at [email protected]

Life Conference 2009: Changing times The conference and exhibition is the premier professional event for UK life actuaries and is attended by more than 900 delegates. This year’s conference will take place at the Edinburgh International Conference Centre from 25-27 November 2009. For more information visit www.actuaries.org.uk/events/Life2009

ASHK Risk Management ConferenceHosted by The Actuarial Society of Hong Kong, the 2nd ASHK Risk Management Regional Conference, ‘Post-financial crisis: a new world?’ takes place at the Grand Hyatt, City of Dreams, Macau from 31 January to 2 February 2010. Registration begins this month. The official conference website will be launched shortly. For further information please visit the ASHK website at www.actuaries.org.hk

Profession News

News in brief

What areas will the project cover?1 Work on the project could be grouped into two main categories: first, the quantum of savings and how to save, and second, the provision of financial and investment education and advice to the general public.2 The target audiences were identified as policymakers; organisations such as the Citizens Advice Bureau which provide (often generic) financial advice directly to people; and the press writing on financial issues.3 The main messages aimed at the general public should highlight the consequences of inadequate savings in retirement and the vast disconnect that currently exists between many peoples’ stated aspirations for their future retirement and what their current savings levels are likely to provide.

Emphasis should also be placed on communicating to the general public the fact that DC schemes are not risk-free, and that the outcome in retirement of current levels of saving in DC schemes and ISAs will be a lot less than the two-thirds of final salary that many current pensioners receive from their DB schemes. 4 In all the work undertaken, it will be important to avoid making value judgments, as saving should not be considered inherently good in all circumstances nor debt inherently bad. The material should instead be framed around communicating and being realistic about the expected outcomes — for example, anticipated level of income in retirement — of certain actions, such as current level of savings.

One potentially powerful way of illustrating this point may be to work up a number of case studies showing what the likely retirement income would be for various categories of people each contributing 5% of current salary to a DC scheme. The overall project, however, could be wider than saving for retirement and include savings issues related to saving for both planned and unexpected expenses prior to retirement.5 It is recommended that a scoping study be undertaken initially to ascertain exactly what work has already been produced in relevant areas by other organisations and academics to help ensure that the Profession’s outputs will be relevant and an additional contribution to the debate. The scoping study could look at work done on barriers to saving, communicating risks associated with DC schemes, saving for retirement generally, surviving in retirement and level of income in retirement. 6 It was recognised that engaging policymakers was likely to be more effective if the project outputs could include at least some element of new research.

‘Sleepwalking’ towards the next crisisMichael Pomery of the public affairs advisory committee calls for volunteers to steer a thought-leadership project on retirement savings



The Joint Councils of the Faculty and the Institute have launched a consultation on the current governing documents (Charter, Bye-laws and Regulations) for both bodies. The Councils believe these documents would benefi t from change, regardless of whether or not the Faculty and the Institute were to progress towards a merger.

This consultation, with members and students, was launched in October. All members and students will have the opportunity to make any comments or raise any concerns about the governing documents.

A consultation paper, available at www.actuaries.org.uk/consultation_governing_documents.pdf, has been developed and explains the principles behind any potential change to the current governing documents, posing some specifi c questions.

Two consultation meetings will take place to allow members to share their views and comments on the documents: 17 November, 17.00-19.00 at Staple Inn, High Holborn, London WC1V 7QJ and 19 November, 17.00-19.00 at Maclaurin House, 18 Dublin St, Edinburgh EH1 3PP.

Comments about the documents can also be made as follows:■ By e-mail to [email protected] ■ By completing the online consultation response form at www.actuaries.org.uk/members/consultation_governing_documents (log-in is required).■ By post to: Joint Consultation Response, Staple Inn Hall, High Holborn, London WC1V 7QJ■ On the merger discussion board at www.actuarialforums.com

The deadline for the receipt of responses

to the consultation is 17.00 on Friday, 20 November 2009. These will then be considered by Joint Councils at a meeting in December.

Survey outcomeA number of eligible members took part in a recent online survey, designed to help Councils understand the factors that may have infl uenced voting behaviours in July. The online survey was sent to eligible members for whom the Profession holds an e-mail address, to maximise response rates and avoid the current disruption to UK postal services. The online survey gave respondents the opportunity to share their views about any factors that may have infl uenced their voting behaviours.

The two key messages that came out of the online survey were that most respondents believe that a single body is desirable in principle but many respondents had concerns about the proposed name and the proposed designatory letters that members could use. Joint Councils would like to fi nd out more about members’ views on the issue of a name and designatory letters, and a survey of all members and students, specifi cally on these issues, will be launched in November.

Sessional meetings in NovemberThere will be no formal registration for any of the autumn sessional meetings. Please come along and sign in on the evening. Tea will be served from 16.30 and all meetings will commence at 17.00. All meetings will be followed by a drinks reception.

Management actions in a with-profi ts fund: update This Faculty sessional meeting, on 2 November at the Royal College of Physicians of Edinburgh, will debate a paper by James Tuley. For further details, visit http://bit.ly/1Ymo7C

Reserving and uncertaintySubtitled ‘A meta-study of the GRIT and ROC research in this area between 2004 and 2009’, this Institute sessional meeting will take place on 2 November at Staple Inn, London. The debate will be based on a paper co-ordinated by the General Insurance Reserving Oversight Committee. For more information, visit http://bit.ly/1n9go7

The Faculty LectureSir Michael Atiyah, fellow of the Royal Society of Edinburgh, will give the biennial Faculty Lecture, ‘Lessons from the Age of Enlightenment’, at the Faculty sessional meeting in the Hawthornden Lecture Theatre, National Gallery of Scotland, Edinburgh on 23 November. For further details, visit http://bit.ly/1QxgSA

Solvency ll and ESGs This topic will be introduced by Elliot Varnell at the Institute’s sessional meeting on 23 November at Hilton Deansgate, Manchester. It is likely to be of interest to actuaries working in enterprise risk management, fi nance and investment and life insurance. For more information, visit http://bit.ly/2RORK5

Membership subscriptions Subscriptions were due on 1 October. If your subscription is not received by 31 October, a 10% surcharge is applicable. Check whether your subscription has been paid by logging in to the members’ section of the website. Payment can be made online or by cheque made payable to ‘The Actuarial Profession’ and sent to: Membership and Certifi cates team, Maclaurin House, 18 Dublin Street, Edinburgh EH1 3PP. For any enquiries, please e-mail [email protected]

Responses to a number of key external consultations have been submitted over the past month. These include submissions to the Board for Actuarial Standards on the Technical Actuarial Standard — Pensions (TAS-P), the Government Equalities Offi ce on the Equalities Bill, HM Treasury on Reforming Financial Markets and the Walker Review on its Review of Corporate Governance in UK banks and other fi nancial industry entities. Copies of these and other submitted consultation responses are available at http://bit.ly/3KNtMl

News Profession

News in brief Joint Councils launch consultation with members

Cyprian Njamma, Zawar Saleemi and Joanne Richmond each won a pair of tickets and a programme voucher to see Sir David Hare’s latest play, The Power of Yes, at the National Theatre on Thursday 1 October. They were among 58 people who entered a competition in the September issue of The Actuary.

The play was commissioned by the National Theatre and gives a dramatist’s view of the global fi nancial crisis.

For more details about the production, visit http://bit.ly/ebtvA

The power of yes Consultation responses

consultation on the current governing

to the consultation is 17.00 on



The Board for Actuarial Standards (BAS) issued a generic Technical Actuarial Standard on Reporting Actuarial Information (TAS R) on 24 September. On the same date, the BAS also issued amendments to its Scope & Authority of Technical Standards, which have the effect of bringing a wide range of actuarial work within the scope of the new standard. Both documents are available at http://bit.ly/40sJFo

TAS R will apply to all aggregate reports within scope completed on or after 1 April 2010 and it is important that all actuaries are familiar with the terms in advance of that date. Under the requirements of the disciplinary scheme, members must have regard to the requirements of all applicable standards published by the BAS, including TASs and BAS-adopted guidance notes, in addition to any standards published by the Profession.

TAS R is the first of a number of TASs which will be published in the coming months. Generic TASs on Data (TAS D) and Modelling (TAS M) are expected to be published later this year and specific TASs for certain areas of work, including pensions and insurance, will be published next year. When these and subsequent TASs are published, a message will be included in the monthly general e-newsletter to members and, where relevant, in the regular practice area newsletters. To ensure you receive the newsletters which are of interest to you, please log on to the website and amend your personal profile or e-mail [email protected]

The Profession is considering ways of ensuring that members are aware of and understand the TASs and how they should be interpreted in practice. More details will be available in the coming weeks.

Networking evenings are nothing new to the Profession — they are regular events on the Staple Inn and Maclaurin House calendars — and are a chance for actuaries to catch up, renew old acquaintances and form new ones.

However, 24 September saw a more unusual venue for a networking evening in the glamorous surroundings of the LK Bennett shop in Covent Garden. It was an opportunity for members to sip champagne, mingle with friends and colleagues and take advantage of the 20% discount on offer.

Laura Mason, one of the attendees, said: “It was good having an event which was not just focused around an actuarial matter. It was also good to see us actuaries doing our part to restart the economy with a bit of shoe retail therapy!”

Jenny Blackford, who also attended, added: “It was a great choice of venue and, judging by the amount of boxes

piled up behind the till, everyone took full advantage of the discount on offer. It would be nice to have some similar events in future — any excuse to buy shoes is definitely appreciated!”

With some attendees travelling from York, the event was a great success and the Profession will be planning similar networking evenings in the future.

If you have any suggestions for an unusual venue or theme for a networking event, contact [email protected]

Edinburgh processionThe Faculty of Actuaries took part, alongside other professions, in a procession from the City Chambers to St Giles’ Cathedral to mark the 63rd Edinburgh International Festival on Sunday 16 August 2009. The Faculty was represented by John Hylands and Mike Dick.

Momentum conferenceThe Momentum conference this year runs from 7-9 December at Hilton Glasgow. It is designed for professionals working in pensions, life insurance, general insurance, investment or health and care. The conference programme has been developed for actuarial students just joining the Profession through to recently qualified actuaries, and those with up to five years’ post-qualified experience. The two days will include a full programme of technical and non-technical sessions with three interactive plenary sessions.

Maynard Leigh Associates will be providing workshops to develop delegates’ softer skills and provide CPD hours and there will be audience participation in the plenary session on the current global financial crisis. For more information, visit http://bit.ly/1hgWwc

Merger surveyOf those members who were eligible to vote in July 2009 on the proposed merger, 73.5% of voting Faculty members voted for the merger, and 71.6% of voting Institute members voted for the merger.

Notice of clarificationFollowing the publication of the UK Actuarial Profession merger vote results in The Actuary (page 12, September 2009 issue), the editor wishes to clarify that the voter statistics in that notice are applicable to the proportion of the eligible membership that voted rather than the entire eligible membership.

News Profession

Reporting standard published

Schmooze and shoes at LK Bennett event

The Actuarial Society of South Africa and the International Actuarial Association invite you to attend the 29th International Congress of Actuaries. The five-day congress will take place at the Cape Town International Convention Centre in the heart of cosmopolitan Cape Town, at the foot of the iconic Table Mountain. Registration is now open, with early registration discounts available until 13 November, as well as

discounts for low-GNP countries, full-time academics and large groups.

Contact [email protected] or register online at www.ica2010.com/reg.php

ICA essay prize winnerThe winner of The Actuarial Profession’s ICA 2010 essay prize competition is Marian Elliott. Further details of Marian’s winning essay will appear in the December issue of The Actuary.

Register now for ICA 2010

News in brief



Education News

Earlier in the year, the Profession identifi ed the need to have a dedicated manager to develop and promote the Profession’s research activity. This was timely, as better publicised research was one of the key themes that emerged in this year’s membership survey. Ruth Loseby took up the post of research manager on 1 September 2009. Her role includes:■ Developing the strategic direction of the Actuarial Profession’s research activities on a long-term basis in conjunction with relevant committees■ Working with universities and other research providers to develop and maintain a framework of research activities■ Working with practice area executive committees and member interest groups to identify research topics and disseminate fi ndings■ Identifying research funding opportunities■ Developing the reputation of the Profession’s journals.

Ruth is based at Napier House in Oxford reporting to Trevor Watkins, head of learning, and has a background as a life offi ce actuary and, more recently, in research management in the university sector. She is currently undertaking to meet people with an interest in actuarial research including those in the Profession’s practice areas, at universities, in regulatory functions, at government funding bodies and from other professions where collaboration could be benefi cial.

She also plans to attend the Profession’s main conferences, especially those with a particular focus on research, over the next year in order to hear members’ views. Ruth would be interested to hear from anyone who wants to help ensure the Profession plays a leading role in research. E-mail [email protected] with your ideas.

The Actuarial Science department in the Faculty of Commerce at the University of Cape Town (UCT) is to receive an injection of R4.5m via the Actuarial Society of South Africa to help it facilitate the fi rst wholly local professional qualifi cation for actuaries.

The Actuarial Society of South Africa will offer a local professional qualifi cation from 2010. Currently aspiring actuaries in South Africa need to qualify through the Institute of Actuaries in London or the Faculty of Actuaries in Edinburgh.

While the South African qualifi cation will better equip students to practise in the South African context, the qualifi cation will also be recognised by international actuarial bodies. It will ensure closer interaction between the professional body and students.

President of the Actuarial Society of South Africa, Mr Garth Griffi n, said: “Our research has shown that at least two additional full-time posts are required in the department in order to provide for the fi ve specialist postgraduate courses for Western Cape-based students. Currently provision is made between UCT and the

University of Stellenbosch for tuition and there are examinations for only two of the fi ve courses.”

The Actuarial Society of South Africa has offered a minimum fi nancial contribution to UCT of R4.5m over three years. Head of Management Studies at UCT, Dr Shannon Kendal, said: “We have always had a solid relationship with the Actuarial Society — all our staff are members of the professional body and serve on various committees. Our links will now be much stronger as we build education infrastructure complying with the accreditation process“.

New research manager for the Profession

Ronnie Bowie, president of the Faculty of Actuaries, welcomed new fellows at a very enjoyable ceremony on 7 September 2009 at Merchants’ Hall, Edinburgh.

The president was especially pleased to

welcome six new fellows who had travelled from South Africa, Australia and Switzerland to be present. The president also presented diplomas to two new Faculty associates and to two Institute fellows.

Faculty of Actuaries welcomes new associates, Faculty fellows and Institute fellows

University of Cape Town expands programme to support local actuarial qualifi cation

Prize presentation at the OGM

Pictured: Ronnie Bowie, Donald Munro Budge, Scott Cadger, Barry Scott Dodds, Yoav Dogan, James

Dow, Ailsa Dunn, Rene Rene Ferreira, Moira Anne Gault, Jane Lesley Gregson, Rishta Harilal, Steven

Kransdorff, Irene Lai, Siew Yen Joanne Law, John Riaan Lizamore, Christine Willemien Lutsch, Laura

McLaren, Candice Ming, Saye Mkangama, Wilhelmus Joannes Pieterse, Robert Bruce Rice, Ilona

Jane Roberts, Sally Elizabeth Smith, Darren Marc Stein, David James Walker, Gary Blair Welsh, Freya

Alexandra Williams and Ellen Yang

Nigel Masters presents Simon Hubbard with the

Watson Wyatt prize for Financial Economics for his

performance in the CT8 examination in April 2009

017_Actuary_1109_EducationNews.i17 17 21/10/09 16:15:29


The Competition Commission recently proposed radical changes to the payment protection insurance (PPI) market, including a ‘point of sale prohibition’ (POSP) — in other words, a ban on selling PPI at the time that credit is arranged.

Barclays Bank has been successful in its appeal against the Commission’s findings. The Competition Appeal Tribunal has concluded that the Commission had failed to take into account the loss of convenience which would flow from the imposition of the POSP in assessing whether it was proportionate to include it in its proposed remedies package. The Tribunal decided to quash that part of the report which imposes the POSP as part of the proposed remedies package and remit the question whether a POSP should be so included for the further consideration of the Commission.

According to analysis published by the Department of Communities and Local Government, the value of assets in local government pension funds in England and Wales fell by £24bn during the year to 31 March 2009. This is roughly equivalent to all of the money local authorities collected in Council Tax that year.

According to John Ball, head of defined benefit pensions at Watson Wyatt, “When councils up and down the country are struggling to trim their budgets, the last thing councillors will want to hear is that their pension funds have lost a full year’s worth of council tax. The good news is that it is not quite as bad as it looks. March was the worst time to take a snapshot of pension schemes’ assets and strong stock market performance since then means some of the money lost will have been recovered.”

The government is consulting on ways to water down funding targets for the local government pension scheme in order to “stabilise the treatment of scheme

liabilities”. According to John Ball, “There is a big hole in local government pension funds that will have to be filled sooner or later. The government is worried that even a 20-year payback period could require council tax rises that the electorate will not stomach. It has therefore been suggested kicking the problem into the long grass by letting councils target a funding level below 100%. Since the pensions to be paid out would be the same, this just means asking future generations to pick up the tab. It is a different story in the private sector, where the Pensions Regulator has told employers that massaging down funding targets to mask the impact of

market movements on funding levels is completely unacceptable.”

Currently, councils have to aim to hold assets equal to their liabilities. The measures of liabilities used are often less cautious than the equivalent targets selected by private sector employers, partly reflecting the fact that taxpayers will stand behind the scheme if things go wrong. In a consultation letter dated June 2009, the DCLG says that “measuring the scheme...against an actuarially-defined notional 100% funding target automatically creates the concept of a deficit event whenever the funding ration falls below 100%”, which “has implications for Council Tax payers”. The DCLG is consulting on alternatives to a 100% funding target.

The local government pension scheme in England and Wales has 1.8m active members (current employees who are building up new pension entitlements), 1.2m deferred members (former employees who are not yet drawing a pension) and 1.2m pensioner members.

To avoid the unwelcome publicity that a 75 pence-a-week rise in pensions brought a few years ago, the government introduced a minimum level of state pension increase of 2.5%, however low inflation became. Next April, pensioners are to reap the reward of that with a 2.5% increase when inflation as measured by the RPI fell 1.4% in the year to September.

The combined effect will be a one-off boost of 4% to pensions in real terms and, of course, a 4% increase in the state pension outgo this year and for all future years. This is welcome to those on a pension but perhaps less welcome to the politicians seeking to square the public sector deficit when they find that this is a permanent increase of £2bn a year to add to the hole in the finances they already knew about.

For private sector pensions, the situation may be rather mixed. Some schemes may freeze pensions when inflation is negative and increase them again if and when it picks up. Others may claw back any negative inflation so that for a future increase it would need to rise more than 1.4% next year if a 1.4% negative had been

recorded this year. Whatever the situation, actuaries need to understand what their clients are likely to be doing before they do their modelling for valuations.

News Industry analysis

Point-of-sale ban on PPI appealed

Local government pension funds lose a year’s worth of Council Tax

Low inflation brings pensioner bonus but public spending increases

18 November 2009

018-019_Actuary_1109_IndustryNew18 18 22/10/09 10:04:40


The government has released consultation documents on the introduction of the new employer obligations on pension schemes from 2012. It has held to its 2012 date (October in fact, which hardly fi ts in with normal business timetables) but put back full completion of the introduction until 2015. In the fi rst year, available contributions must total at least 2% of pay (1% being from the employer), with the 8% goal only to be achieved by October 2015. According to Paul Macro of Watson Wyatt: “The Turner report envisaged that auto-enrolment would begin in 2010. Now, it will be October 2015 before the new rules apply across the board.”

For any idle HR or fi nance departments planning what this means for them, there are 200 pages of consultation to chew over in only six weeks. By the time this magazine is printed, the deadline of 5 November will be upon us. It is astonishing how much material a simple defi ned contribution requirement generates. Maybe a look over our shoulders at the size of today’s Finance Acts will make us realise that pensions is merely in the same boat now as tax. But it is still another pile of administration that businesses hardly welcome.

It’s two steps forward, one step back again for the Equitable saga, as the High Court has ruled that the government’s rejection of the Parliamentary Ombudsman’s recommendations ‘lacked cogency’. The Treasury has 21 days to respond and say what it will do now, in place of the very limited compensation arrangements announced at the beginning of the year, overseen by Sir John Chadwick.

One specifi c decision of the High Court was to backdate from the date that compensation emanates to 1991, which will potentially bring in both more policyholders for compensation and larger sums to be considered.

Watch this space, but do not hold your breath for a quick denouement.

The judicial review was brought by the

Equitable Members Action Group (Emag). It challenged the refusal of the government to accept all the fi ndings of the Ombudsman’s report into the role of government departments in the Equitable Life collapse, published last year.

The Ombudsman, Ann Abraham, found 10 examples of maladministration, which she said had contributed to the losses suffered by Equitable pension savers after the society was forced to close in 2000.

Paul Braithwaite of Emag said: “If Emag’s members had not paid for this legal action, there’s little doubt that, despite the Parliamentary Ombudsman’s recommendations for compensation, the government would have got away with limiting payments to a small number of Equitable’s victims for losses post-1999”.

Industry analysis News

As the latest date for a UK election draws near, the annual conferences of the political parties provided the opportunity for ideas for future manifestos to be tested on the public — or at least on the newspapers that the public reads.

It is always diffi cult for a ruling party to appear radical; the charge of, ‘Why haven’t you done this already if it is such a good idea?’ would be diffi cult to answer. So this year it seems, at least in the area of pension saving, that the Conservatives have been pushing out many new thoughts.

The state pension age increase, planned by the Labour government to rise to 68 over the next 30 years, would rise to 66 for men as soon as 2016 — in other words, only, at most, a six-year lead-in. For women, the plans were more ambiguous, as the existing programme of increases for women from 60 to 65 — the fact that this was introduced by the last Conservative government did not feature in the party conference speeches — would remain until 2020. Interestingly, back in 1995 the Conservatives felt that 25 years was needed to give fair notice to those affected.

George Osborne, shadow chancellor, made other suggestions in his speech, including an attack on “Gordon Brown’s disastrous tax raid on pensions”. He made a promise to “reverse [its] effects and get our country saving again”.

He was short on what this would mean, since restoring advanced corporation tax relief and its recovery by pension funds would create a huge hole in the fi nances. Watch for the manifesto when it comes out.

Electoral phony war Miles more red tape

Equitable — Here we go again

The High Court has decided

in the Heyday case that a default retirement age of

65 can be justifi ed. Employers can continue to require employees to retire at 65 without being found to have been discriminating on the grounds of age.

A number of lobbyists have argued that EU law should not allow an employee to be forced to retire at age 65. The European Court of Justice confi rmed that a national retirement age is permitted as long as it can be justifi ed, for example to facilitate workforce planning.

The High Court was left to decide whether the government could justify the UK’s default retirement age and has accepted that the government’s desire to protect the integrity of the labour market was suffi cient to justify the adoption of the default retirement age. On balance, in 2006 it agreed that it was proportionate to choose 65 as the default retirement age. In the short term, employers will be hugely relieved by the decision. Hundreds of retirement-related age discrimination claims currently before employment tribunals will be dismissed.

However, according to Lovells, “This sense of relief seems certain to be short-lived. The High Court reluctantly accepted that 65 was the appropriate retirement age and clearly thought that a higher age such as 68 or 70 would have been more consistent with the purpose of the regulations.” The government has already said that it will conduct a review of the default retirement age in 2010 to see whether it is still appropriate and necessary. It seems almost certain that the retirement age will rise at that point, if it survives at all.

Hey ho, hey ho, it’s out of work we go

The Actuary welcomes industry news for this column, particularly from the insurance and pensions sectors. Please send news or press releases to [email protected]

CONTRIBUTIONS

018-019_Actuary_1109_IndustryNew19 19 22/10/09 13:29:07


Arson in the UKAllister Smith, property risk manager at Aviva, has claimed that more than 40% of fires in industry and commerce are now due to arson, and that this is a major cause of the 20% increase in fire claims between the first half of 2007 and the equivalent period in 2009, as recently reported by the Association of British Insurers.

AIG and other fall-out from the global financial crisisAt the end of August, Robert Benmosche, AIG’s new chief executive, revealed that he had been in regular contact with Hank Greenberg, boss of AIG until 2005, with a view to bringing new sources of capital to the group. Greenberg confirmed that he was happy to assist. Benmosche also said that he intended to slow the sale of assets, as selling them too rapidly would result in depressed prices, which would not allow the company to pay off its federal loans.

Members of the AIG board are said to be concerned by Benmosche’s confrontational approach towards various political figures, especially New York attorney general Andrew Cuomo. The matter was expected to be raised at a board meeting in September.

Joseph Cassano, the former head of AIG financial products, is under investigation by the Justice Department and the Securities & Exchange Commission. These bodies are considering whether he misled investors by overstating the value of credit default swaps issued by AIG and/or failed to report material facts to the

company’s auditors. In particular, they are interested in statements made by Cassano in a December 2007 conference call to investors. If he is charged, he would be one of the most senior figures to be charged in connection with offences which relate to the financial crisis.

Solvency IIThe Association of British Insurers has followed its German counterpart (as reported last month) in asking the government to mitigate the effect on insurers’ capital requirements of the introduction of the new Solvency II regime. In a letter to the Chancellor of the Exchequer, it suggests that requirements for capital and free reserves for British insurers could increase by between £30bn and £70bn, virtually doubling the current requirement. The letter further suggests that such an increase would put European insurers at a competitive disadvantage against those from other jurisdictions.

The 26 consultation papers issued by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) with a deadline of 11 September generated over 20 000 comments from 105 stakeholders. This has led to a suggestion that the European Commission will not implement CEIOPS’ latest recommendations. CEIOPS was considering the comments and drawing final conclusions at its members’ meeting in late October before issuing a final tranche of consultation papers with a deadline of 11 December.

Solvent schemes of arrangementIn relation to the Scottish Lion Insurance Company, a Scottish court has ruled that schemes of arrangement for solvent companies should only be approved if 100% of creditors are in favour. This appears to have considerable potential implications for solvent schemes in general, although the scheme adviser (Dan Schwarzmann of PricewaterhouseCoopers) said that his client intends to appeal the decision on the grounds that this would mean that a single creditor would have the right of veto of the scheme, which he contends to be contrary to the intention of the Companies Act.

UK motor insuranceThe UK government has announced plans to tighten controls against uninsured motorists, making it a criminal offence to keep an uninsured vehicle and not just to drive one. Under the new system the insurance industry will work with the Driver and Vehicle Licensing Agency to identify uninsured vehicles and give their owners a limited period to obtain insurance — failure to do so will result in a £100 fine and potential seizure and destruction of the vehicle. The problem currently costs law-abiding motorists more than £400m annually.

From the world of general insurance

More news on the following items can be found on the website:n Regulatory and legal developmentsn Monte Carlo rendezvousn Marine and aviation developments n Capital markets transaction n Fraud in the USA n Mergers and acquisitions n Job cutsn US state catastrophe insurancen Large lossesVisit www.the-actuary.org.uk/870291

for more GenerAl InSUrAnce newS

Pollution developmentsVictims of alleged contamination from a toxic waste dump in the Ivory Coast have called on Trafigura, one of world’s largest oil traders, to ensure a full clean-up. Trafigura has prepared an offer for 31 000 locals in the Ivory Coast who claimed the dump caused a range of illnesses. The case relates to an incident in 2006, when hundreds of tons of “slops” from the Probo Koala, a ship Trafigura had hired, were allegedly dumped near Abidjan, the African country’s commercial capital. The sum being discussed is based on the range of short-term symptoms claimed by the victims. Tens of thousands of people in Abidjan claim they have been affected by fumes. The firm had, according to reports, tried to dispose of the cargo in several countries before it finally ended up in West Africa. Trafigura stated that they continued

to deny any liability for events that occurred in the Ivory Coast. The claimants allege that evidence shows at least 15 people died and thousands were sickened by toxic waste, as reported in a United Nations report released in September.

news Industry

20 November 2009

020_Actuary_1109_GeneralInsuranc20 20 22/10/09 13:27:41


For details of events, visit www.sias.org.uk

Tuesday 17 November Programme event

SIAS Jubilee Lecture

Staple Inn Hall,

High Holborn, London

5.30pm for a 6pm start

We are very pleased to announce that John

Coomber will be delivering this year’s Jubilee

Lecture, the highlight of the SIAS programme

calendar. The lecture is entitled ‘Being profitable is

compatible with climate protection’.

John has enjoyed a 33-year career with Swiss

Reinsurance Company, retiring in 2005 from his

position as Group CEO. Today he is CEO of Pension

Insurance Corporation and serves as a non-

executive on the board of Swiss Re Group and

Qatar Insurance Services. He is also chairman of the

trustees of The Climate Group and a member of the

Deutsche Bank Climate Advisory Panel. John is a

fellow of the Institute of Actuaries and an honorary

fellow of The Chartered Insurance Institute.

Please note that there is no need to register in

advance, and that following the lecture there will

be free drinks and a buffet supper at a nearby pub.

Friday 27 November Social event

SIAS dinner

From Russia with love —

The revolution

Billingsgate Vaults,

Lower Thames Street,

London EC3

SIAS invites you to a luxurious Russian palace

for our annual supper! Let us take you back in

time to the drama of the Russian Revolution,

where we will combine the opulence of Tsarist

royalty with the beauty of a frozen Siberian

forest. For further information or to book

tickets, visit www.sias.org.uk or contact Alvin

Kissoon at [email protected]

Tuesday 8 December Programme event

Variable annuities

Staple Inn Hall,

High Holborn, London

5.30pm for 6pm start

Paul Shallis, Gareth Jones, Iain Buckle and Mark

Hills from the Variable Annuities Member Interest

Group will be presenting a paper entitled Variable

Annuities: Past, Present and Perfect? They will look

at the mixed experiences so far for the developing

UK variable annuity market, consider in detail the

extent to which variable annuity products can

meet real customer needs and then present some

possible scenarios for the future of the market.

There is no need to register for this event in

advance, and a free buffet supper will be provided

at a nearby pub after the meeting.

Call for papers Programme

We are now looking for papers to be presented at

our programme meetings in 2010. We particularly

would like to include papers that will be of interest

to younger members, and that are likely to

stimulate a lively discussion.

We also encourage younger members of

the profession to consider writing a paper and

presenting their ideas to a friendly audience.

Please contact [email protected] for more

information.

021_Actuary_1109_SIAS.indd 21 19/10/09 12:03:32


News People/Society

Dominic Clark, an actuary with Milliman, hiked over 250km of the John Muir trail this August to raise money for research into a rare form of uveitis, an eye condition suffered by his sister, which affects the retina and leads to vision loss. Here he describes the challenge.

“The John Muir trail runs through California’s Sierra Nevada from Yosemite to Mount Whitney, the highest peak in the contiguous United States. The trail passes through some of the most remote back-country in the USA, continuing for days without crossing a road, power line or passing through a village. Having only been able to skirt this beautiful area by car, I had always been tempted by the idea of hiking the trail. However, this idea suffered from the fact of my almost total inexperience, having never camped before nor walked much further than the kitchen.

“After some amusingly naïve ‘training’ in the mountains near my home in Spain, I found myself setting off from Tuolumne Meadows with a small group. Over the next 15 days we hiked and camped among the lakes, forests and high mountain passes of the Sierra Nevada. The heavy backpack required for such remote through-hiking limited us to around 10 to 12 miles a day, but the odd storm and an encounter with an inquisitive bear while sleeping out also tested our skills.

“We eventually emerged grimy, tired and, in my case, also usefully rather thinner. Making our way to the town of Bishop, we checked into a cheap motel where intensive showering failed to remove the ingrained dirt of a hot, dusty but truly spectacular trail.”

Dominic is raising money for research initiatives led by professor Susan Lightman at Moorfields Eye Hospital. Donations can be made via cheques payable to University College London and sent to: Sarah Mayhew, PA to professor Susan Lightman, Institute of Opthalmology, Moorfields Eye Hospital, City Road, London, EC1V 2PD, UK.

Worthy cause for Worshipful carols

This year the Worshipful Company of Actuaries’ annual carol concert is open to all members of the profession and their families. It will be held at 7.15pm on Thursday, 10 December at the Church of St Bartholomew the Great, West Smithfield, London EC1A 9BU. The church is just South of Smithfield Market and is close to Barbican tube station.

St. Bartholomew’s is the oldest surviving church in the City of London. It is a magnificent and unusual building dating from 1123. It is said that if Richard the Lionheart was alive today he would only recognise two buildings in the City of London: The Tower and St. Bartholomew’s.

Not only will you be able to sing some well-known Christmas hymns but you will also enjoy the singing of the Canticum Choir. After the service, wine, soft drinks and mince pies will be served.

As well as giving you the chance to enjoy an evening of music and the surroundings of St. Bartholomew’s church, we are also supporting The Cure Parkinson’s Trust. Tickets cost £25 per head (£15 for children). The closing date for applications is Tuesday, 1 December. Ticket numbers are limited. Contact [email protected] or write to Susan George, Barnett Waddingham LLP, Cheapside House, 138 Cheapside, London EC2V 6BW.

Blazing a trail in the USA

Clark on the scenic John Muir trail

22 November 2009

Review by Iain Ritchie The SIAS pool tournament took place on 28 August with the teams eager to pot for glory. The winners of the last four years, the KPMG Boys, were unable to attend to defend their title, so it was very much up for grabs. A few of the teams were out to seek revenge on opponents from the previous year while others were keen to see how they would fare against the pick of the actuary crop. It looked to shape up to an exciting tournament.

After the usual discussions on the rules, the games got under way. Forty-one teams turned up and were divided into 12 groups of three or four teams. The best from each of the groups proceeded to the knockout tournament. The four best runners-up from the groups also made it into the latter stages. This was decided by the results against the top three teams in each of the groups — nothing like a bit of calculation during a pool tournament. Group three was very closely contended between three of the four teams, who finished equal in terms of number of games won. However, Vu Vuong and Ming Hav from Prudential managed to go through by leaving more of their opponents’ balls on the tables

than any other team. Oliver Payne and his partner were hoping to do well after winning their company pool tournament, however they were unsuccessful in getting past the group stages. Clearly the standard of pool skills is very high in the actuarial profession.

With the knockout games under way, the tension was building. However, it never fazed Amanda Ryan from Canada Life, who managed to pot the black to put her and Paul David into the semi-finals but their challenge was destined to end there. In the meantime, last year’s runners-up Dipesh Mehta and Mitesh Tailor from Hewitt carried on potting their way to the final in the hope that this year the trophy would be theirs. Their opponents, Tom Hargreaves and Harsil Shah from Barnett Waddingham, had other plans. It was not to be for Dipesh and Mitesh, with Tom and Harsil winning two-nil. Congratulations to them.

After the tournament, the players carried on playing and drinking into the night. Many discussions were heard on how it could have been different if only their partner had potted an easy ball.

We hope that you all had an enjoyable evening and look forward to seeing you next year for a re-match.

SIAS pool tournament

022-023_Actuary_1109_SocialNews.22 22 22/10/09 10:33:42


People/Society News

By Brian Ridsdale

Liverymen of the Worshipful Company of Actuaries will not be surprised to hear that past master Chris Ide has been going up the wall recently.

In September Chris Ide and I went to Gilwell Park, the home of scouting in the UK and a training and activity centre for scouts and their leaders, for the formal opening of ‘The Lid’. This is a large, covered activity area, featuring a new bouldering wall built with a donation of £8 000 from the livery company, part of the money raised on its Wainwright Walk in 2007. The wall is designed to encourage young people to try climbing — simple at first, more challenging when they are ready. It is not too high, and comes with a cushioned floor.

UK chief commissioner of The Scout Association, Wayne Bulpitt explained that scouting is “on the up” and particularly strong in inner cities where few other youth organisations feature. Scouting has 500 000 members in the UK, of whom 80 000 are adults. The biggest problem is that 33 000 young people would like to take up scouting and cannot because of a shortage of adult helpers. You do not have to look good in shorts to help — the organisation utilises people with all sorts of skills. Numeracy could be helpful, enthusiasm would be a winner and if any readers are minded to respond, the website is http://scouts.org.uk/

Unable to resist a challenge, Chris persuaded the chief commissioner to support him in a small ascent. Chris may be a past master but he is far from past climbing. Having survived Gilwell, his next target is to climb his final few ‘Wainwrights’, the 214 Lake District fells described by Alfred Wainwright in his famous pictorial guides. This will be capped by a champagne celebration on his last peak, hopefully on 4 September 2010. He has invited friends who have accompanied him on his walks over the years, including those who played a significant role in the Wainwright Walk in 2007, to join him.

Deathsn The partners of Pope Anderson are sad to report that Peter Kerr, the founder of their predecessor business, passed away on 3 September 2009. Peter had been ill for some time but died peacefully in his sleep.

Peter established his own business in 1992 after working with Punter Southall Kerr, Mercer, Duncan C Fraser, Callund & Co and Abbey Life. He was a larger-than-life character and will be missed by many former colleagues and clients, many of whom also became friends. A memorial service was held on 30 September 2009.n Mr Michael Alan Hogg died on 22 February 2009, aged 87. He became a fellow of the Faculty in 1958.n Ross Arthur Collins died on 1 December 2008, aged 56. He became a fellow of the Institute in 1985.n Michael Curtis Eastoe died recently, aged 74. He became a fellow of the Institute in 1961.n Alan John Kempson died on 8 July 2009, aged 80. He became a fellow of the Institute in 1963.n Ronald Henry Rawlinson died recently, aged 81. He became a fellow in 1964.

The Worshipful Company of Actuaries is inviting all members of the profession, their friends and families to view the Lord Mayor’s Show on Saturday, 14 November and the fireworks on the Thames early that evening.

Although the procession can be viewed from the streets, there will be a limited number of places available in the Barnett Waddingham offices at 138 Cheapside, which overlook the procession route. You should arrive by 10.30am, and tea and coffee will be provided.

Also, as in previous years, we have booked a private room at Doggett’s Coat and Badge next to Blackfriars Bridge on the South Bank so that you can enjoy a wonderful view of the fireworks. We will meet in the Doggett’s bar at 2.30pm for a curry buffet lunch at 3.00pm, followed by the fireworks at 5.00pm, launched by the new Lord Mayor from a barge moored on the river between Blackfriars and Waterloo Bridges. Again, space is limited, so please

book early to avoid disappointment. Tickets for the lunch are £15 each.

If you would like to attend please write to: John Harsant, Newton House, Well Lane, Heswall, CH60 8NF ([email protected]) by 7 November. Let him know the names of those attending and whether they want to attend the view of the procession, the view of the fireworks and the curry, or both. For those attending the fireworks, please enclose a cheque for £15 per person made payable to ‘The Worshipful Company of Actuaries‘. Please also provide your home and e-mail address, together with any special dietary requirements for your party.

Past master goes up the wall

Wayne Bulpitt and Chris Ide

master the climbing wall

Curry and fireworks at the Lord Mayor’s Show

If you have any newsworthy items for these pages, please e-mail Amy Guna at [email protected]

PEOPLE NEWS

n SIAS has announced its key speaker for its Jubilee Lecture. John Coomber enjoyed a 33-year career with Swiss Re, retiring in 2005. Today he is CEO of Pension Insurance Corporation. He is also a fellow of the Institute of Actuaries and an honorary fellow of The Chartered Insurance Institute.

The lecture is entitled ‘Being profitable is compatible with climate protection’.n Back Issues of The Actuary — 2006Due to an oversight, there is a set of magazines missing from an archive of The Actuary. If anyone has retained a full set from 2006 which they would be prepared to donate, please contact [email protected] n The October issue report on the Ironman UK triathlon incorrectly labelled Peter Redhead as ‘Peter Thompson’. Peter Redhead came fifth and was the second Brit out of the over-45s from a total field of 1600 competitors.

NOticES

Send news items to [email protected]

022-023_Actuary_1109_SocialNews.23 23 22/10/09 10:33:54


Risk-free rates, extrapolation and liquidity premiaCP40 considers the important issue of establishing how the risk-free term structure used for discounting liability cash flows is derived. There are three key questions that need to be addressed when defining this methodology:1 What risk-free assets should be used to derive the risk-free term structure — for instance, government bond yields or swap rates?2 Insurance liabilities will often have cash flows that will arise beyond the longest maturity of observable risk-free assets. How should the risk-free yield curve that is derived from observable market prices be extrapolated in order to value these liability cash flows? 3 Some insurance liabilities are highly illiquid, much more so than the above risk-free assets, the obvious example being fixed annuity business where no surrender option is available to the policyholder. There is a widely-held belief that a financial instrument with such illiquidity would have a market value that incorporates a discount for this illiquidity. Should an allowance be made for the illiquidity of (some) insurance liabilities in defining the risk-free yields that are used to discount the cash flows?

CP40 states that government bond yields should be used as the starting point for deriving the risk-free yield curve. This differs from established practice in some other areas of market-consistent insurance liability valuation. For example, Market Consistent Embedded Value (MCEV) uses swaps as its reference risk-free assets. Swaps will usually yield more than government bonds, so the decision to use government bond yields may result in higher values for the technical provisions than are produced under MCEV.

CP40 recognises that extrapolation of the yield curve will be necessary, but does not give any specific methodology for how this should be done. This will have a major impact on the technical provisions calculation of long-term liabilities.

Finally, CP40 also states that no allowance for the illiquidity of insurance liabilities should be incorporated into the risk-free yield curve. While it is accepted

The introduction of Solvency II in 2012 aims to raise the standard of insurance company risk and financial management. Although

the formal implementation of Solvency II is still over two years away, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has already issued a large number of consultation papers (CPs) containing detailed proposals for implementation measures. The CPs give a strong indication of the issues that insurers will face in implementing Solvency II. At the time of writing, CEIOPS has recently issued a series of CPs covering, among other things, the calculation of technical provisions.

This calculation is central to the Solvency II process and CPs 39 to 42 cover much of the detail, the core of the proposals being a market-consistent valuation of liabilities.

A market-consistent valuation embraces the goal of putting a mark-to-market value on insurance liabilities while recognising that these liabilities will often have features (ultra-long-term, path-dependency, and so on) that are not readily replicated by observable market prices. As a result, market-consistent valuation of insurance liabilities will inevitably involve a significant amount of judgment. The detailed proposals in the CPs aim to provide guidance on how these areas of judgment should be implemented in the calculation of the technical provisions, and they introduce some new and complex issues in doing so.

by many that a liquidity premium exists, its quantification and the circumstances in which it can be used in valuing liabilities remain contentious. CEIOPS recognises this, stating that a best-practice method is still to emerge in this area. While this is undoubtedly true, it is a topic that will see much research in the coming months and recent practice in MCEV assessments has seen extensive use of liquidity premiums in the market-consistent valuation of insurance liabilities.

Market risk and the Solvency II risk marginThe technical provisions are made up of a best estimate and a risk margin. The risk margin in the technical provisions has to be calculated wherever the liability cash flows cannot be reproduced by values derived from marketable assets. Currently, marketable assets are not available that reproduce cash flows affected by certain liability risks such as mortality risk, so there is ‘unavoidable’ uncertainty and a risk margin is required in the technical provisions.

CPs 39 to 42 introduce guidance on when values derived from market prices are ‘reliable’ and can be used without a risk margin calculation. As currently drafted, many markets generally understood to

produce ‘reliable’ market prices, such as

Andy Frepp, left, is a director at Barrie & Hibbert

Ltd and leads its corporate development and

product proposition team, Craig Turnbull, right,

is Barrie & Hibbert’s regional head of North

America and Sandy Sharp is a consultant

A point of consistencyAndy Frepp, Craig Turnbull and Sandy Sharp highlight some unfortunate consequences of the Solvency II technical provisions

24 November 2009

Solvency II Technical provisions

024-025_Actuary_1109_Frepp.indd 24 22/10/09 10:57:03


over-the-counter (OTC) derivatives, may not meet the CP definition of ‘reliable’. This means that there is ‘unavoidable’ market risk and a risk margin is required in calculating the technical provisions. This is a change from the QIS4 specification, where ‘unavoidable’ market risk was not recognised in the calculation.

Unavoidable market risk in the risk margin calculationThis raises many interesting issues:n Rules to define markets that produce ‘reliable’ prices will have to be developed. Is this really a binary decision? For example, even for the most ‘reliable’ asset prices, it is highly unlikely that a large block of insurance liabilities could be matched at that price. The size of major insurance liability blocks means that some market price impact is inevitable in the event of trying to switch to the matching or replicating portfolio. n For markets that do not meet the ‘reliable’

test, then on what basis will the best-estimate calculation be done? Extrapolating the implied volatility values of

‘reliable’ prices would introduce a market risk margin that

would duplicate

the Solvency II risk margin. There is a similar issue with yield curve extrapolation formulae, again potentially resulting in a double-counting of the risk margin. n A process must be created by insurers to calculate the risk margin. The CPs suggest that the risk margin is calculated using a cost-of-capital approach. This requires a valuation of the cost of future capital requirements for the asset whose risk margin is being calculated. Calculating the risk margins in option prices would be an extremely demanding modelling exercise, likely requiring a calibration to the market prices of ‘unreliable’ assets, and so would produce results that are very similar to simply using ‘unreliable’ market prices to derive a market-implied risk margin.

Another approachThe International Accounting Standards Board (IASB) has recently published an exposure draft on fair values. This proposes a three-level hierarchy for inputs to the fair value calculation:Level 1 — quoted prices in active markets. Level 2 — inputs, other than quoted prices included within Level 1, that are observable, either directly or indirectly. Level 3 — inputs that are not based on observable market data but which reflect the assumptions that market participants would use when pricing the asset or liability,

including assumptions about risk. The CEIOPS proposal stops at Level 1 and

appears not to use the information on how the market prices risk for Level 2 or Level 3. This is an area where some consistency of approach between IASB and CEIOPS could produce an efficient outcome.

What does this all mean?Although there is a long way still to go in the Solvency II process, the foundations are now being set. CEIOPS’ initial proposals suggest there will be some significant inconsistency with other reporting standards, necessitating some highly complicated calculations that are not required by the other market-consistent reporting standards.

We believe this is the right time to take a step back and recall that the fundamental objective of Solvency II is to better align firms’ market risk exposures with their regulatory capital assessment, so as to give incentive for better economic risk management behaviour and avoid regulatory arbitrage. Such an aim is best served by a methodology that is pragmatic and transparent, that makes the most use of available market prices, and which is coherently aligned with the emerging practice of other major reporting standards.

If you would like to comment on this article, please

e-mail [email protected]

November 2009 25

Technical provisions Solvency II

024-025_Actuary_1109_Frepp.indd 25 22/10/09 10:57:07


Paul Sweeting is a professor of Actuarial Science at the University of Kent. Patrick Kelliher is senior risk manager at Scottish Widows. Both are members of the Actuarial Profession’s Global Financial Crisis Group

companies and financial conglomerates. The second document is a set of principles from the Basel Committee on Banking Supervision (BCBS), which was published in September 2008. This supplements the guidance that already exists in Basel II.

Liquidity is an issue shared by banks and insurers, although arguably the former have a more serious issue, particularly when their business models include lending on a long-term basis while raising funds on a short-term basis. In contrast, life insurers take money in on a long-term basis and invest this mostly in marketable securities. However, it is worth comparing the guidance given to both types of organisation to see where lessons can be learned.

PrinciplesThe principles provided by the CRO Forum and the BCBS are broadly consistent, but there are differences reflecting the nature of the institutions. For example, the CRO Forum points out the importance of considering an insurer’s tolerance for liquidity risk in the context of other risks. The BCBS makes a similar point but goes

further, saying that banks should also consider their role in the financial system. This recognises a key fact: that bank failure can threaten the integrity of the financial system given the role of

banks in clearing payments, acting as counterparties to derivative transactions and providing liquidity to other institutions.

A point made in both documents is that liquidity has a cost. This cost has been discussed in a number of recent articles relating to liquidity premia in bonds. This is usually considered in terms of the rates of interest that should be used to value liabilities. However, the CRO Forum and the BCBS point out that it should also have an influence on product design. In particular, building an element of illiquidity into a product might help reduce its price.

The availability of funding is also discussed in both papers. The CRO Forum

Illiquidity has been a major factor in the recent global financial crisis. Losses arising from residential mortgages led ultimately to a broader uncertainty over

the ability of banks to meet other financial obligations. This led to a reluctance in the money markets to lend to banks, which itself meant the banks could not lend to businesses in the broader economy, a major contributor to the subsequent recession.

Illiquidity has also had an impact on individual policyholders. Investors in a number of funds have been unable to access their investments or have faced punitive charges as the markets for the assets supporting these contracts have dried up. Liquidity risk management should therefore be a key feature of broader risk management frameworks.

There has already been a great deal of academic and also practitioner-focused work on the issue of liquidity risk management. One of the roles of the Global Financial Crisis Group is to pull this work together and bring it to the attention of the profession. This has led to a focus on two particular documents that have emerged on liquidity risk management. The first is a document setting out best practice for insurers, issued in October 2008 by the Chief Risk Officer (CRO) Forum. The forum consists of the CROs of major insurance

points out the importance of allowing for a sudden collapse in liquidity in financial markets when analysing liquidity risk. It makes the point that this risk can be mitigated by having an ongoing presence in markets (including the sale and repurchase, or ‘repo’, market) where funds may be raised. This involvement makes it easier to monitor the capacity of markets to meet funding demands and allows a firm to build a reputation in those markets. The BCBS also recommends that the continued availability of funding, including that of retail deposits, is monitored. It goes further than the CRO Forum, actually having a requirement for banks to maintain an ongoing presence in its chosen funding markets, to diversify sources of funding and to gauge regularly its capacity to raise funds in those markets. This is particularly important given that the seizing-up of securitisation markets was a factor in the run on Northern Rock.

Both the CRO Forum and the BCBS suggest a written liquidity policy and stress management plan be regularly reviewed, maintained and approved by senior management. In other words, both

26 November 2009

Managing liquidity riskPaul Sweeting and Patrick Kelliher compare the liquidity risk management advice given by the Chief Risk Officer Forum and the Basel Committee on Banking Supervision

» Both organisations recognise the importance of embedding liquidity risk management into a firm’s risk management framework «

Risk management Liquidity risk

026-027_Actuary_1109_Sweeting.in26 26 21/10/09 15:35:52


organisations recognise the importance of embedding liquidity risk management into a firm’s risk management framework and ensuring that it is considered at a senior level within firms. This is consistent with broader principles of sound enterprise risk management, namely that risk management is woven into the way a firm carries out its business and is of interest to those at the highest level of an organisation.

One area that the BCBS describes that is consistent with a fundamental part of Basel II is the regular disclosure of sufficient information for the market to judge a bank’s approach to liquidity risk management. The idea behind this is that poor liquidity management will lower a firm’s value in the market’s eyes, thus having an adverse effect on a firm’s share price. Market discipline is not covered in the CRO Forum’s guidance — perhaps it should be. Even if it is not, it could be argued that insurers should be willing to advertise their liquidity management to the market. Such an approach could lower the cost of capital for those firms, increasing returns on capital for shareholders and policyholders.

The final area considered in detail by the BCBS, but not by the CRO Forum, is the role of the regulator. Given the difference in roles between the two bodies, this is understandable, but the level of detail given by the BCBS is instructive and perhaps suggests the extent to which insurers might be monitored in relation to liquidity in future.

Measuring liquidityBoth the CRO Forum and the BCBS consider how to actually measure liquidity, and both implicitly assume that the approach used will be stress and scenario-testing. This is sensible. Without considering specific scenarios, individual sources of liquidity risks might be missed; however, there is simply not enough data to consider stochastic liquidity modelling. Furthermore, stochastic approaches are at their weakest when considering the most extreme scenarios.

The BCBS recognises that no single metric can be used to measure liquidity and recommends metrics that consider the balance sheets as well as cash flow. In relation to scenario tests, the BCBS recommends

that these are tailored to the nature of a firm’s activities and specific vulnerabilities, reflecting the heterogeneity within the banking sector. They also point out that, while historical scenarios are helpful, they are not necessarily a good indicator of future problems — it is important to think more broadly than that.

The BCBS suggests a number of broad types of stress scenario, for example: short-term/protracted; institution-specific/market-wide; funding-related; operational; and currency-related. It also provides a long illustrative list of items for which assumptions are needed. Wider issues are also covered. The link between market liquidity (for instance, the ability to realise marketable securities) and funding liquidity (the ability to raise funds in the market) is discussed, as is the importance of allowing for simultaneous stress events. The BCBS recognises that there should be accurate time frames for the liquidation of other assets in the scenario analysis, and also sufficient allowance for the changing behaviour of counterparties.

The CRO Forum has briefer analysis of stress-testing. Its document considers some factors discussed by the BCBS, but the list of risks is shorter, reflecting the fact that banks have a wider range of funding issues than insurers. However, the CRO Forum does highlight some insurer-specific issues, such as interest rate risk (for example, higher market rates may trigger mass lapses on guaranteed return products), reinsurer behaviour, distribution issues and catastrophe risk. It also sets out some specific scenarios as well as the considerations scenarios should contain.

The papers produced by the CRO Forum and the BCBS are reassuringly well-aligned; however, insurers would be well advised to consider the additional advice given by the BCBS outlining how to carry out effective liquidity stress-testing in practice.

Useful links:

The BCBS and CRO Forum documents are available

at the links below. Also below is a link to a list of

useful publications on the ERM area of the Actuarial

Profession website.

n BCBS: http://bit.ly/28pxg4

n CRO Forum: http://bit.ly/3dSOma

n ERM area: http://bit.ly/Yg9bG

Liquidity risk Risk management

026-027_Actuary_1109_Sweeting.in27 27 21/10/09 15:36:04


avoid a repeat situation in the future? I don’t think we know quite what the lessons are because, in a sense, we are still arguing about it. History rarely repeats itself exactly. It’s a bit like generals fighting the last war. My guess is that, if we’re not careful, we’ll end up preventing a repeat of the last recession and, of course, it won’t be the last recession we’re confronted with, but the next one.

Your new book The Trouble with Markets: Saving Capitalism from Itself will be released in October. Briefly describe the essence of the book. It’s an attempt to get beneath the recent crisis to what I might say are the deep causes of it and to ask what, I think, are now the key questions — where are the appropriate boundaries between markets and government? And what is the role of government in restricting as well as encouraging markets? Where can markets go wrong and where do markets need to be constrained? It’s got both a domestic and an international aspect to it.

What inspired you to become an author? Was writing a skill that you could readily call upon? My first book was an academic textbook and it was written as a joint effort. I couldn’t write to save my life. Then I wrote a book called Index-Linked Gilts, which many an actuary might well have seen or

at least had recourse to on a shelf. I think what was driving me was that I found these things very interesting. The real change was The Death of Inflation. By that stage I’d done a lot more writing and I was more practised at it. I’d certainly written on an ad hoc basis for a number of newspapers for years. The motivation then was to try and produce something that would be on the stocks a bit longer and would leave a mark.

What led to the establishment of Capital Economics, the macro-economic research consultancy of which you are founder

What led to your interest in economics? I think it was largely through politics, economic issues being a large part of the political debate. I didn’t start off that interested in economics at all; at school my great love was history and, in fact, in many ways I am an historian-manqué. Then, when I started doing economics I found it intellectually quite attractive. I started to fall in love with the structure and way of arguing, and I found that it suited me quite well.

As a child, what were your aspirations for the future? Certainly not to become an economist. I probably wanted to become an engine driver, I suspect. I do recall at a very early age being extremely interested by politics and, at some stage, actually fancying the idea of becoming a politician. I was fascinated by politics in my teens, but that gradually wore off.

In which economic theory are your professional beliefs most grounded? There are all sorts of theories and thinkers to which I have some adherence. The thinker that I admire the most is Keynes and that has not changed since I was an undergraduate. I’ve also always admired John Kenneth Galbraith, although he has always been much more to the left of me, politically.

Has the ongoing financial crisis changed any of your views on economic theory? It has probably consolidated them, I suppose, and made me feel more strongly about things that I’ve felt all along. I’ve always been a believer in institutions, history, the power of accident and human action. This has made all those feelings much stronger and therefore I think economics should not be taught as some sort of abstract science.

What lessons have been learned and what measures should be taken now to

and managing director? I had reached the end of my tether with big organisations and I reached a point where I realised that I couldn’t go on with any integrity doing what I was doing. I didn’t believe in the model of providing research to clients from a base of that sort. There were enormous conflicts of interest, which I could see even then, and I disliked corporate politics. I’d always had a strong business sense, even though I’d been an academic. So far, we’ve done remarkably well. We’ve now got offices in London, Toronto and Singapore, I employ about 50 people and we’ve got just under 1 000 institutional clients around the world.

What is the greatest risk you have taken either personally or professionally? The set-up of Capital Economics was both a huge personal and professional risk. Since I made that decision, the overall climate of opinion with regard to independent research has completely changed. Whereas most people thought I was doing something unfathomable, the prevailing view now seems to be it is very important

Roger Bootle Q&A

On the eve of the publication of his new book The Trouble with Markets, economist Roger Bootle speaks with Marjorie Ngwenya about his life and work

Roger Bootle is the founder and managing director of Capital Economics. He is also a specialist adviser to the House of Commons Treasury Committee and an honorary fellow of the Institute of Actuaries

Continued on page 30

Capital gains

» I would like to establish and run a whole new course in economics which puts the subject on a sound footing and returns it to where it was 60 or 70 years ago «

029-030_Actuary_1109_Bootle.indd29 29 21/10/09 15:18:46


to have independent research. There was another risk, professional

rather than personal: my Death of Infl ation thesis. I stuck my neck on the block and took a real risk with a view, which could have proved to be totally wrong.

What do you consider your greatest professional achievement to date? I’m very proud of The Death of Infl ation and I hope in due course I’ll be even more proud of The Trouble with Markets. I’m also proud of the one that comes between, Money for Nothing. That’s the book in which I railed against the excesses of the property market. I suggested there was going to be a massive fi nancial crisis and I recall saying that it is only the strength of the property market that stands between us all and an enormous slump.

Building Capital Economics has given me enormous satisfaction. It’s been about the entrepreneurial risk and management

thereof and also the social aspects of creating the working environment. Although we work hard, it is a civilised environment — people enjoy it and I feel proud to have created it.

As an honorary fellow of the Institute of Actuaries, how do you believe actuaries can add value in the wider fi eld of economics? I’ve always felt that economists and actuaries needed to get together much more and actually discuss things. My appointment and those of a few other economists as honorary actuaries was part of an attempt by the profession to do that, but I don’t think economists have done enough in reaching out to talk to actuaries. Actuaries get their hands dirty metaphorically and deal with real problems. I’ve always thought that there’s potential for a lot of cross-fertilisation, if only the economists would climb down from their ivory tower and confront the structure of

real world problems to see how to deal with them.

How do you measure your success? What matters to me is feeling that I’m making a contribution and that I’m helping clients make good decisions. I get a kick out of making a judgment which proves correct. It gives me tremendous satisfaction. My reputation among people who know me is really how I measure my success.

With your role as a Daily Telegraph columnist and other professional commitments, when do you fi nd time to

relax and what is your favourite pastime? The sheer number of things I’m involved in probably gives a misleading impression of the amount of time I am working. I try to do a bit of sport: I play squash, I play bridge, I am interested in cinema, theatre, concerts, opera, seeing friends and holidaying with family. I am rather too interested in food and wine! I suppose over the last year I haven’t had a great deal of relaxation. I’ve been heavily involved in writing the book.

You have expertise in many areas from journalism to consulting. Are there other opportunities at which you would like to try your hand? I still have a fair bit to do at Capital Economics, but I would like, if the call came, to do something more in government. I’d enjoy making a contribution in that regard, to do something to help this country. It’s not often that economic theory is very important in a country’s history, but it is now. Over and above that, I have many things I want to do, one of which is to take part in and maybe establish and run a

whole new course in economics which puts the subject on sound footing and returns it to where it was maybe 60 or 70 years ago.

And if I had the money I would like to found an institute that does that. I’ve also got ambitions to write things completely outside the sphere of economics, in the realm of social affairs and public policy.

The complete interview with Roger Bootle can be found

at www.the-actuary.org.uk/870189

Continued from page 29

Q&A Roger Bootle

The Trouble with Markets by Roger Bootle is published by Nicholas Brealey Publishing (RRP £18). To order your copy for the special price of £16 with free UK postage, call +44 (0)20 7239 0360 with your credit card details quoting ‘The Actuary’. Offer closes 31 December 2009. For international postage rates please contact the publisher direct. Visit www.nicholasbrealey.comA review of The Trouble with Markets will appear in a future edition of The Actuary.

SPECIAL OFFER

» I’ve always been a believer in institutions, history, the power of accident and human action «

30 November 2009

An extract from the book can be found at www.the-actuary.org.uk/870181

029-030_Actuary_1109_Bootle.indd30 30 21/10/09 15:18:52


Ed Morgan, left, and Jeremy Kent are principals

with Milliman

The modelling of dynamic policyholder behaviour (DPB) can now be considered an essential part of the life actuarial tool-kit.

For instance, the European Insurance CFO Forum Market Consistent Embedded Value (MCEV) Principles require that DPB should be considered in the calculation of the Time Value of Financial Options and Guarantees (TVOG). The current Solvency II documents require DPB to be considered in both the calculation of technical provisions and the Solvency Capital Requirement (SCR).

There are a number of factors which often make deriving robust DPB assumptions problematic, including the following:(i) There will not be any historic experience for many economic scenarios, since even quite plausible situations may not have occurred in the recent past; for example, a sharp increase in long-term interest rates. (ii) It is diffi cult to assess the extent to which there may be secular trends over time which invalidate the use of past experience as the basis for estimating future experience. For instance, we might expect that policyholders may become more effective in using the options within their policies over time and, indeed, Solvency II CEIOPS Consultation Paper 39 requires that appropriate consideration is given to this possibility.

Although policyholder behaviour can take a number of forms, one of the key questions is how rational policyholders will be in reaction to changes in the values of their options. We can express this ‘level of rationality’ as being between zero and one, where zero represents neutral behaviour with no tendency to exercise options more when they become more valuable, and one represents fully rational behaviour with all policyholders exercising any option which is in the money.

Of course, cases of ‘irrational’ behaviour are not impossible, for instance due to a need for liquidity during an economic downturn. Nevertheless, it seems reasonable to assume that the level of rationality will generally be between zero and one.

The Solvency II Framework Directive requires companies to assess their required capital on the basis of the ‘true risk profi le’. If losses from particular economic circumstances are highly variable depending on the level of rationality of policyholders and there is signifi cant uncertainty as to what this will be, then the level of rationality itself can be an important part of this risk profi le.

We can therefore think of dynamic policyholder behaviour as a variable dependent on both the level of ‘in the moneyness’ of the option and the level of policyholder rationality.

This is illustrated by the surface in the three-dimensional graph (Figure 1) for the case of lapses dependent on the ‘in the

moneyness’ of the surrender guarantee:

If we simply choose a best-estimate DPB function then, in effect, we are choosing a best estimate of the level of rationality. This means that

we are overlooking the potential for signifi cantly heavier losses in the case that we eventually prove to have underestimated rationality.

The implication of this is that we may need to consider a stochastic approach to DPB in order to capture risks fully. In most models, while the level of ‘in the moneyness’ of options may be modelled stochastically, the level of policyholder behaviour for a given level of ‘in the moneyness’ is deterministic.

We discuss the case for using a stochastic approach to DPB in three common applications of DPB modelling below.

Calculation of TVOGThe fi rst question we should ask is, ‘How asymmetrical are the results of the company to differing levels of rationality?’ TVOG essentially arises due to asymmetries in value over the range of stochastic scenarios. If more or less rationality simply means proportionately heavier or lighter losses for the company, then the impact of under or over-estimating rationality could

Another dimensionEd Morgan and Jeremy Kent consider the impact of dynamic policyholder behaviour in life insurance

» The fi rst question we should ask is, ‘How asymmetrical are the results of the company to differing levels of rationality?’ «

Life Policyholder behaviour

032-033_Actuary_1109_KentMorgan.32 32 22/10/09 10:35:11


be symmetrical, meaning that a stochastic approach to DPB would not be required for the calculation of TVOG. A guaranteed annuity option might be an example of this.

On the other hand, where policyholder returns depend on asset values, we can have the situation where the ‘bad scenarios’ can be accentuated, whereas the ‘good scenarios’ may be dampened through positive and negative feedback loops.

For example, where policyholder returns depend on the book value of assets — as is the case in certain European markets — an increase in interest rates may leave the company with unrealised losses on its investments, which in turn can lead to expected policyholder returns which are below market interest rates.

In this case, we may get heavy volumes of lapses which necessitate the realisation of some of these losses, causing further reductions in policyholder returns and hence further lapses and a magnifi ed fi nancial impact.

The reverse situation, where we have falling interest rates and unrealised gains on assets, is not the mirror image of that above because, although we are likely to see reductions in lapses as policyholder returns exceed market returns, this will have the effect of creating extra liquidity

for the company to invest, which will then dilute the policyholder returns with lower new money yields, dampening rather than magnifying the effect. In this situation, there is a case to consider a stochastic approach to DPB in the calculation of TVOG.

It should be noted that the MCEV Principles require such asymmetries to be included in the ‘Cost of Residual Non-hedgeable Risks’ where they are not captured in the calculation of TVOG.

Calculation of standard formula SCRIn this case, we are considering adverse movements rather than averages over stochastic scenarios. Therefore, even in symmetrical cases as described above, an underestimate in the level of rationality could result in an underestimate in the level of economic capital required.

It could be countered that uncertainty about, for instance, lapse rates, is already allowed for in the lapse risk sub-module, but this refers essentially to the level of lapses consistent with economic assumptions underlying the calculation of technical provisions, rather than those applying under the various market risk module stresses.

It can be argued that the calculation of the SCR should include a component relating to the uncertainty over the level of policyholder rationality, which would increase the impact

of DPB under market stresses. The level of uncertainty under such stresses is likely to be increased where these scenarios have not occurred in the recent past.

Product design and pricing This is perhaps the most crucial area where we should consider the possibility for variations in the DPB function assumed. If the profi tability of a product is heavily infl uenced by the level of policyholder behaviour, the pricing actuary should be asking the following questions:(i) What actions can be taken to mitigate the exposure to DPB, for example, by modifying the surrender value rules?(ii) If the product is highly exposed to DPB, is it justifi able to launch it in that form?

It is clear that just considering a single best-estimate DPB model will not be suffi cient to determine the robustness of the product design. The sensitivity of profi tability to different values of the DPB model parameters and, indeed, different shapes for the DPB model, should be considered. As noted above, we might also expect policyholder rationality to increase in the future. Ignoring this possibility could result in products which are ultimately loss-making.

ConclusionUncertainty over the level of rationality of policyholders should be considered in the same way as uncertainty over other parameters, such as expenses and lapses. Indeed, as discussed above, there is probably greater uncertainty over the level of DPB than over other assumptions, which further increases the importance of such considerations.

While it is impractical today to build a fully stochastic ‘DPB model’, at the very least appropriate sensitivities and shocks to the DPB model and parameters should be considered. The potential for variations in the level of policyholder rationality should be fully appreciated in a company’s enterprise risk management approach.



Heavily out

Slightly out

On

Slightly in

Fairly in

Heavily in0

0.4

0.8

0%

5%

10%

15%

20%

25%

30%

35%

40%

Lapse rate

‘In the moneyness’

Rationality

35%-40%

30%-35%

25%-30%

20%-25%

15%-20%

10%-15%

5%-10%

0%-5%

Figure 1

Policyholder behaviour Life

032-033_Actuary_1109_KentMorgan.33 33 22/10/09 10:35:18


Eugene Dimitriou

works in RBS’s global

banking and markets

division

Probability of default A crucial first piece of analysis is to try to estimate the probability of default of protection providers.

One can infer the annual probability of default from current credit default spreads — the cost of protecting against bond default. The probability of default is simply the credit default swap (CDS) spread divided by the expected loss in the event of default. Using loss given default of 50% of face amount as a crude estimate, one might conclude that a counterparty whose CDS trades at 2% per year has an annual probability of default of around 4%. Note that public CDS quotes are not available for the smaller, unrated or new players and therefore these firms are excluded from the analysis.

Now look at the typical protection providers active in the market — we do so on a no-names basis, but the analysis can be reproduced for a particular name by referring to publicly available information on Bloomberg or similar data providers. Three years ago, typical protection providers’ CDSs traded at 0.09% with modest differences from name to name. In other words, one would pay £0.90 to protect against a default costing up to face value of £1000. Thus the market ascribed an annual probability of default of about 0.18% and annual probability of survival of 99.82%. Using simple compounding, one might estimate a 98% chance of survival after 10 years and 90% after 60 years. So a ‘set and forget’ approach for long-term hedges was quite defensible — counterparties were not expected to go bust.

Post-credit crunch, the picture has changed substantially. Today’s CDS spreads

In recent years, longevity swap transactions have become reasonably common. Typically, a protection buyer pays a fixed series of premiums

representing the expected liability cash flows plus a margin, for a pre-agreed set of annuitants and receives from a protection provider (usually, but not always, an insurer or reinsurer) a floating series of claims equal to the actual payments to those annuitants. These transactions are very long-dated — 60-year trades are typical.

Several commentators suggest that we may be at an inflection point in terms of demand for this product. At the same time, the credit crunch provides a useful backdrop to reflect on how these trades have been structured in the past and whether certain tweaks should be considered going forward.

While these ultra-long swaps clearly provide a close match to the underlying liabilities being hedged, they lead to an unacceptable and poorly understood increase in counterparty credit risk.

on the main participants in the longevity market are between four and 28 times wider than they were in 2006. The result is the current market suggests that, for protection providers with strong credit, the probability of surviving for 10 years is 93% and for 60 years 64%. For weaker protection providers (but still household names), the probability of surviving for 10 years is 59% and for 60 years virtually nil.

Note that CDS probabilities contemplate formal, legal default. Doubtless a far more likely scenario is substantial credit downgrade, but not default, and the protection provider being put into run-off with potential deterioration in quality of service and concomitant deterioration in the health of the protection buyer’s risk manager who now needs to worry about the counterparty daily. That’s not quite as bad as an actual default, but it remains highly sub-optimal.

It is also worth noting that the default probabilities suggested by CDS spreads are, in general, at their lowest level in the past 12 months — a few short months ago, the probabilities of survival would have been

On the wrong track?Amid the current vogue for longevity swap transactions, Eugene Dimitriou asks whether the protagonists have fully considered the consequences involved

Typical spread in 2006

Narrowest spread today

Widest spread today

CDS spread 0.09% 0.37% 2.54%

Probability of survival — one year 99.8% 99.3% 94.9%

Probability of survival — 10 years 98.2% 92.8% 59.4%

Probability of suvival — 60 years 89.8% 64.0% 4.4%

Table 1 — Credit risk pre-credit crunch and today

Longevity swapsPensions

34 November 2009

034-035_Actuary_1109_Dimitriou.i34 34 21/10/09 15:07:28


lower. The market is therefore saying that most longevity swaps transacted to date are more likely to default than run to term. Longevity swaps can no longer be perceived as ‘set and forget’ hedges.

Does collateral solve the problem?Some will argue that it does not really matter if a protection provider suffers a credit event if an appropriate collateral infrastructure is in place.

In theory, that may be so. In reality, many protection buyers will be sorely disappointed. The Lehman and AIG sagas show how collateral mechanisms can fail even for liquid derivative instruments whose market price is unambiguous. Illiquid trades, such as those based on longevity, introduce significant incremental complexity.

For example, many of the longevity swaps to date have contemplated an annual marking to model. The marking typically requires some form of actuarial consensus of fair value to be reached. A variety of escalation processes are contemplated in order to ensure lack of bias in fair value.

This is reminiscent of Nero fiddling while

Rome burns. It can take years for the process to fully conclude, namely culminating in negotiated commutation and/or forced novation, especially if one counterparty is behaving in an awkward or unhelpful manner. The reality is that stressed credits can become defaulted credits well before the natural conclusion of such processes.

Worse is the fact that the contracts typically seek to reflect an amorphous actuarial fair value, rather than price. If there is substantial deviation between the two, the protection buyer will find itself paying up, potentially significantly, in order to replace the hedge. Pricing dislocations should be expected in the longevity market in years to come where there are few potential counterparties, many of whom have similar risk profiles. One example would be UK-regulated life assurers whose capital positions, and therefore pricing, for any annuitant risks can be expected to change substantially post-Solvency II. Another example is reinsurance counterparties whose return on capital expectations is a function of hard and soft market cycles. Traditional collateral mechanisms may break down quite easily, especially in times of stress.

What is the solution? In time, a trading market in longevity may develop. Contract standardisation, transparency and liquidity will help mitigate the problems described above as it becomes easier for the market to value longevity risk in a consistent manner. But it may be quite some time before this happens.

In the meantime, the market should consider shorter-dated transactions with a fixed contract term and a maturity value calculated using a commutation methodology whose inputs are deterministic and/or observable. This approach also allows collateral to be calculated more regularly during the transaction and enables all sides to easily quantify exactly how much money they are expecting to make or lose.

The most common objection here is that using a pre-defined formula erodes the efficiency of the hedge. However, a cleverly constructed commutation factor based on observable data and deterministic calculations has a surprisingly high degree of correlation — over 90%.

The unspoken disadvantage of this approach, and one that I believe is a bigger obstacle than the maths described above, is that it catalyses uncomfortable questions about credit events and the use of forward-looking extrapolation methodologies at contract inception. There is no question that it is much easier to avoid these issues when negotiating a contract with a view to ‘agreeing to agree’ a solution if and when a counterparty’s credit deteriorates. But

this is simply poor risk management.

It is also worth noting that significant anecdotal evidence suggests that shortening transactions will substantially increase demand for longevity risk, particularly among

capital market participants who are interested in taking the risk but for shorter maturities. This should eventually help to foster more competition with potentially more attractive pricing available.

Conclusions The credit crunch has helped to put into sharp focus the difficulties of structuring long-term illiquid hedge contracts. The market is currently telling protection buyers to expect many hedge counterparties to default. Those protection buyers who have existing contracts should monitor them carefully and, if appropriate, renegotiate terms.

Those who are considering hedging now should consider shorter-dated structures. In essence, it is better to be very confident of a hedge which is highly, albeit not 100%, effective than to have a ‘perfect’ hedge which fails to perform when really needed.



» Significant anecdotal evidence suggests that shortening transactions will substantially increase demand for longevity risk «

Longevity swaps Pensions

034-035_Actuary_1109_Dimitriou.i35 35 21/10/09 15:07:38


Gary Tansley is a

senior actuary at

HamishWilson

but what about resources? The UK pensions environment is subject to ongoing, often daily, developments involving changes to legislation, landmark cases, ombudsman’s decisions and the issuance of new codes, not to mention the plethora of reports, surveys, industry statistics and so on. Can they keep up?

A decade ago, smaller consultancies would have had real difficulty answering such questions, as they could in no way match the information resources available to larger firms. However, IT developments over recent years, including the falling costs of hardware, have fundamentally changed this proposition. Additionally and paradoxically, smaller concerns can often take advantage of technological advances more easily than a larger, established business with their enterprise-wide networks and sometimes complex computer protocols.

As with many things in life, though, the medium alone can not produce the message — access to the world wide web in itself will not ‘cut the mustard’ today any more than the purchase of a copy of an act from Her Majesty’s Stationary Office would have done 10 years ago. And, again, there is good news for the smaller consultancy in that the last decade has seen an exponential growth in the availability of electronic pensions information providers. With the connectivity of broadband, remote working — the mode of choice for

many smaller consultancies — is both feasible and practicable.

The real challenge for the small consultancy is to ensure that consultants are kept fully up to date

with legislative changes, products and trends. One option is to subscribe to Perspective, which is perhaps the single most comprehensive electronic

Small and medium-sized actuarial and pension consultancy firms often market themselves under the aphorisms that there are “horses for

courses” and that “biggest is not always best”. Both of these may be true, but can smaller consultancies really match the quality of service of their larger, better resourced competitors?

Smaller firms may aim to provide a personalised, bespoke and committed service. However, prospective clients will or should quite rightly ask whether they can really offer more than the core actuarial services in order to advise them on all aspects of pensions.

The experience of the consultants is a key element in answering this question,

information service available to the UK pensions industry. Access to it means that smaller firms are working with the same electronic resource that is used by many of the largest UK consultancies. It is also significant to note that most electronic pensions information services themselves

cost in proportion to the scale of their clients’ operations. So although the cost-per-user may be higher, the absolute costs of subscribing to the service remain manageable.

With the availability of not only of a wealth

of information but also the functionality that would previously have been the full-time occupation of a substantial research department, today’s consultant can concentrate on serving clients and developing their business. Besides which, most consultants entered their profession to advise clients, not to be researchers.

For consultancies that are not yet subscribed to an electronic pensions information service, I would suggest that they critique prospective suppliers on the following criteria:n Range of source material on offern Functionality: searching, cross-referencing n The breadth and speed of availability of significant news and apposite commentn Provision of daily updates and e-mail alertsn The offering of added-value notes and cross-referencesn The ability to link with or even incorporate internal information/documentation.

In general, it is good business and sound management to be info-savvy, and in our business it is a fundamental cornerstone to almost everything we do. I would strongly suggest that this is an area to which my counterparts in similarly sized consultancies should pay close attention.



Size isn’t everythingGary Tansley explains how today’s electronic pensions information services have helped smaller consultancies compete with their larger counterparts

» The real challenge for the small consultancy is to ensure that consultants are kept fully up to date with legislative changes, products and trends «

36 November 2009

IT Smaller consultancies

036_Actuary_1109_Tansley.indd 36 22/10/09 13:40:31


Peter Maynard,

pictured, is the

director of SelectX

Ltd. Catherine Lyons is

the underwriting and

claims development

manager for SCOR

Global Life

Although it has been speeded up with point-of-sale rules engines, it is still expensive and time-consuming, especially when a doctor’s report is needed. It is no wonder that it is seen by advisers as a barrier to business and that chief executives wonder if it is necessary. In a minority of cases, the sales process itself can be a problem; the completion of the application form can sometimes result in ‘economies with the truth’ or, worse, non-disclosure of varying degrees.

The prime virtues of tele-interviewing are founded on the use of a trained interviewer having no connection with the sale and, on a recorded telephone call, ensuring privacy and no discomfort in discussing sensitive health matters one-to-one. Make no mistake — this combination is extraordinarily powerful. The theory is that non-disclosure rates are reduced and, as the interviewer understands what the underwriter wants to know, he or she can probe where necessary via a set of ‘drill-down‘ scripts, getting a notably high level of detail and avoiding the need to seek follow-up information. These twin benefits mean that tele-interviews are routinely replacing the bulk of the normal application form. But even in a more traditional process, a tele-interview can ably replace a doctor’s report for many medical disclosures, saving significant time and cost.

Can applicants really provide the sort of information demanded by underwriters, and can it be relied upon? The answer is ‘yes’ to both. But underwriters do have to adapt a bit: they need to interpret the tele-interview content — read between the lines — and resist calling for a doctor’s report anyway. Reassurers’ underwriting manuals need to adapt to provide more meaningful guidelines to assist the underwriter in the new process.

To what extent has tele-interviewing caught on? According to the survey, around three-quarters of companies in the UK, Ireland, North America, South Africa and Australia apply tele-interviewing in some form.

Nothing could really take the world of life and disability underwriting by storm, but there are winds of change blowing. That welcome

breath of fresh air is tele-underwriting — more correctly tele-interviewing — in which risk information is obtained over the telephone by a trained interviewer instead of via the traditional application form or doctor’s report.

The trend towards tele-interviewing is so significant that it prompted reinsurer SCOR Global Life and consultants SelectX, together with renowned US underwriting expert Hank George, to conduct a worldwide survey of insurers to gauge the extent of take-up, how it is being used and what the experience has been. But before looking at the survey results, consider the background against which tele-interviewing needs to be assessed. Underwriting tends to be a cumbersome process that has not changed significantly over the years.

Elsewhere, usage is very patchy but in some markets reaches 30% of life companies. Of those insurers not currently using tele-interviewing, about half are considering its introduction in most locations, notably Spain, Germany and parts of Asia. It is a relatively recent innovation everywhere except North America, where the concept originated, and where

experience goes back over 10 years.

It is interesting to look at why companies introduced tele-interviewing in the first place. In mature markets the main reasons were to save time and cost and to reduce dependence on doctors’ reports. In other markets — the less developed but

fast-growing economies — the interest was in lessening agent involvement, improving customer service and reducing anti-selection and non-disclosure.

The differences between the types of market illustrate two things. First, the overtly uncomfortable relationship between insurers and distributors in the less mature markets, and second, the fact that companies in those countries have come later to tele-interviewing but have learned from the experience of the earlier adopters elsewhere.

In fact, the biggest benefits of tele-interviewing lie in reducing the risk of non-disclosure, creating a better risk profile for the portfolio and potentially lower risk assumptions and/or reassurance cost.

In addition, it creates a new customer service proposition that is better in terms of experience and speed. There may be operational cost reduction, but it is often marginal, especially for routine tele-interviews which, if undertaken by the insurer, are an added cost. Nevertheless, just over half of survey respondents worldwide declared some sort of saving in acquisition costs, although around 10% reported an increase.

In the US and Canada, tele-interviewing is largely routine for all cases, replacing the traditional application form. Elsewhere, the picture is mixed. For example, in the UK and Ireland, of the companies using tele-

The winds of changePeter Maynard and Catherine Lyons present the results of a worldwide survey into insurers’ tele-underwriting usage and discover that change is under way

» In the US and Canada, tele-interviewing is largely routine for all cases, replacing the traditional application form «

38 November 2009

Insurance Tele-underwriting

038-039_Actuary_1109_Maynard.ind38 38 22/10/09 10:00:13


interviews, 44% said that the discretionary (doctor’s report replacement) model is predominant, compared with 36% who cited routine tele-interviewing for all cases and

12% who employ a combination of the two.

Does the theory of improved disclosure rates apply in practice? According to the survey the answer is ‘yes’. In the UK

and Ireland, 44% of companies reported an improvement, although another

48% said they did not have enough information to draw a

conclusion. Forty percent reported a modest increase in rated cases. In other mature markets, companies

responding positively represented around three-quarters of all those employing tele-interviewing. Companies also reported emphatically that the quality of disclosures has improved too.

Who is making these additional disclosures? Experience tells us that the value of tele-interviewing is highest among older applicants who naturally tend to have more ‘interesting’ health histories and therefore more to disclose. It is

surprising that some survey respondents reported that their tele-interview use

is skewed towards younger ages. Is this because they are

routinely getting doctor reports and they feel

an interview is redundant? This is an interesting finding as the value of the tele-interview rises with age — in line with the mortality and morbidity curves — and is often preferable to a doctor’s report.

Although tele-interviewing improves the volume and quality of risk information overall, it cannot be expected to eliminate non-disclosure completely. This is why it is important to have sound

processes associated with it — so that when it is necessary to challenge what

was disclosed at application, a fair challenge will succeed, whether

that occurs before a court or an

ombudsman or other official arbiter. Almost all UK and Irish companies in the

survey provide applicants with a summary of what they have told the interviewer; a quarter ask for a signature and for the document to be returned to the company. Notably, half have used the digital recording of the interview to resolve a dispute of some kind.

So far, the transition to tele-interviewing has not amounted to a revolution — not yet, anyway. But in our opinion, tele-interviewing will play an increasingly important role in most markets. Niche market segments aside, why would you not want to use a method of gathering risk information that:n Is separate from the sale processn Is demonstrably successful in reducing non-disclosure and in improving information qualityn Represents first-class evidence in the event of a disputed claim (no more conflicting stories from applicants on the one hand and advisers on the other)n Speeds up the new business process (giving a valuable improvement in conversion rates)n Has won approval from customersn Has won approval from regulators.

In most markets it is still relatively early days for tele-interviewing, and the survey shows that many companies have not followed best practice processes and need to polish up their act in some respects. For example, in some cases, firms just went ahead without carefully involving all stakeholders, particularly sales forces and brokers. For successful tele-interviewing you must have your distributors fully on board. Furthermore, a surprising number are failing to monitor the quality of interviews, conduct customer satisfaction surveys or routinely improve their scripts and drill-downs.

Tele-interviewing, when done well, provides a more robust risk selection process for the company, relieves the sales agent of a difficult part of the standard process and, most importantly, offers customers a far superior experience when taking out the vital insurance products our industry provides.



Tele-underwriting Insurance

038-039_Actuary_1109_Maynard.ind39 39 22/10/09 10:00:15


New Zealand insurance industryThe industry is very small by global standards, and this presents its own opportunities and challenges.

The life insurance sector is currently experiencing strong growth in non-savings business. However, the savings market has been flat for many years, in part due to a lack of tax incentives or compulsory superannuation. This is in contrast to Australia, where compulsory superannuation has been around since the early 1990s. Compulsion there has led to an explosion in growth, particularly in the group market.

New Zealand also offers the Accident Compensation Corporation (ACC) — a state-run ‘no-fault’ accident insurance scheme funded by government, employers and employees. Opinions are divided on the merits of ACC but it is clear to me that it provides valuable cover to a sector of society that would otherwise go uninsured.

As an industry, the challenges facing us are very similar to those faced overseas, such as an ageing population, inadequate savings for retirement, underinsurance and financial illiteracy.

Companies here are relatively small, so there is not usually enough work in any one area for actuaries to specialise. On the flip side, this provides actuaries with far wider exposure than they may experience in larger markets. For example, over the last 12 months I have been fortunate enough to work on reinsurance, underwriting, ERM, valuation and investment strategy — a range of work that would have been hard to come

New Zealand is world-renowned for its stunning scenery and laid-back lifestyle. But the country is not just about beautiful beaches, rugby

and bungee jumping. There is also a small but thriving actuarial community.

Actuarial profession in New ZealandThe New Zealand Society of Actuaries (NZSA — www.actuaries.org.nz) was founded in 1957 and has steadily grown since then. Today its membership consists of around 150 fellows and 100 students. There is no dedicated examination system in New Zealand, so students typically take the Australian or UK exams.

Most actuaries are based in Auckland or Wellington, the two largest financial centres, and the majority typically work for insurers or consultancies.

Actuaries in New Zealand are required to do 40 hours of Continuing Professional Development (CPD) per year. However, there is not as much focus on ‘verifiable’ CPD, so you can count reading papers and past conference publications as CPD. It is important to keep up with international developments in this way as there are fewer opportunities for educational and networking events with such a small community here. With 11 NZSA committees, there is also plenty of scope to get involved.

The Society recently ran its first-ever professionalism course, which attracted over 30 attendees and three experienced overseas presenters, and was very well received.

across in the UK.It is also worth mentioning how New

Zealand has been impacted by the global financial crisis. Although we are globally remote from the epicenters of the crisis, New Zealand has not emerged unscathed. The country has only just come out of the longest recession in its history and will take some time to recover. In saying that, low unemployment and high interest rates at the start of the recession meant that the impact has been cushioned somewhat more than in other countries.

Regulatory developmentsFuture prospects for the profession in New Zealand look very bright. On the domestic front, there is a huge amount of new legislation in the pipeline with which the profession is strongly engaged.

Prudential regulation of insurance: In late 2010, the Reserve Bank of New Zealand will assume responsibility as regulator of life, general and health insurers. As part of the new regulations, statutory funds will be required to separate different business types, each licensed insurer will require an appointed actuary and existing NZSA solvency standards will be given the force of law.

Life insurance taxation: New rules for taxation of life insurance business come into force in 2010 which will greatly increase the tax burden of life insurers. Assessing the impact and resultant product changes will be keeping life actuaries busy over the coming months.

Regulation of financial advisers: Due to be enforced by the end of 2010, this legislation will dramatically change the landscape for the provision of financial advice, which has suffered from negative publicity in recent years. And if that were enough to keep us busy, high demand for actuaries in neighbouring Asian countries will ensure there are always opportunities for those who wish to spread their wings internationally.

I therefore predict that there will be strong demand for actuaries in the ‘land of the long white cloud’ for many years to come.



New horizonsJoe Benbow provides an overview of the actuarial community in New Zealand

International New Zealand

40 November 2009

Joe Benbow emigrated to New Zealand a year ago and is the product actuary at Westpac Life in Wellington

040_Actuary_1109_Int'l.indd 40 22/10/09 10:28:44


subheadstext

text

Matt and Finn welcome your comments

and contributions. Please e-mail

[email protected]

[email protected] Matt & Finn Arts

Recommendation of the monthTate Modern — Pop Life: Art in a material world Tate Modern, South Bank’s art behemoth, is currently exhibiting a collection of some of modern art’s finest in an exploration of the legacies of Andy Warhol and the 1960s pop art revolution. The show brings together artists from the 1980s onwards who have embraced commerce and the mass media to build their own ‘brands’. Pop Life includes Andy Warhol, Damien Hirst, Jeff Koons, Takashi Murakami and more. On until mid-January, why not explore a bit of culture to brighten up the autumn weather?

Client entertainingSwiss Re — 39th floor

Only really an option if you have dining membership at 30 St Mary Axe, the restaurant on the 39th floor (and accompanying bar on the 40th) offers one of the most spectacular views across London. Gaze down with a certain smug feeling that most of those below will not get to share this line of sight. Oh, and the food is pretty good, too.

The credit crunch has us all tightening our belts. Gone are the lunch hours spent sipping fresh fruit smoothies and eating sashimi (I’m an actuary;

those lunch hours never really existed). In their place, for those fortunate enough, is the trusty staff canteen.

I gave up communal eating after the nightmare of school dinners. Do you really expect school children to like vegetables if they share the same consistency as soup? Given that one of the perks of my new(ish) job is access to a staff canteen, I have been forced to reassess this view.

So at 12pm every day — a bit early, but the benefit of the small queues far outweighs the negative of feeling peckish at 5.30pm — I head up to the 19th floor to discover what delights the chef has in store for me.

The canteen is actually rather excellent with a salad bar, deli bar and hot food counter — you really are spoiled for choice (when the benchmark is a sweaty sandwich, that isn’t difficult). Being an actuary, I usually have my safe default choice (chicken salad sandwich and a few pieces of fruit) but the hot food counter is high-stakes with beef stir-fry and noodles — a big hit; and fish fingers and chips — a definite miss. The benefits of the staff canteen are obvious, but the firm also does well out of it.

A trip to the canteen can take a matter of minutes; a trip to Pret a Manger in Canary Wharf at lunch hour can potentially take a lifetime. I’ve gone from taking an average of

one hour for lunch to 15-30 minutes. Given my charge-out rate, this is clearly beneficial to the firm, even after allowing for my £3 food allowance. It’s positive net present value.

There are also softer benefits to the staff canteen. I now spend far more time eating with colleagues than I used to, creating valuable team bonding time. The staff canteen helps to create a more egalitarian workplace. The big shots eat the same food as those lower down the pecking order. Food really does help break down the corporate barriers.

What’s more, my £3 allowance is a sort of sunk cost — I only benefit if I go to the canteen. This creates a great degree of persistency in my choice of where to go for lunch, ensuring the aforementioned company benefits do arise.

As with any relationship, my staff canteen does have a special place in my heart, but I have had my head turned by a couple of other canteens. In particular, a trip to Bloomberg’s office is a must — the place in undeniably cool. The canteen is more of a ‘help yourself’ collection of pods with smoothies, nuts, seeds and all manner of herbal teas. Best of all, it’s all free, even to interlopers like myself.

It is often said that the way to a man’s heart is through his stomach and quite rightly so. I have a lot of love for my staff canteen.

Matt and Finn welcome your comments and

contributions. Please e-mail [email protected]

Finn takes an affectionate look at the much-maligned staff canteenA legend in its own lunchtime

041_Actuary_1109_Arts.indd 41 22/10/09 10:37:11

Sponsored by

Mark Dainty (Director)www.highfinance.co.uk0207 337 8800Highfinance Actuarial

hf strip.indd 1 2/4/08 10:18:49


Xxx

Puzzles Coffee break

XxxPuzzle 650 Puzzle namePuzzle 649 Puzzle name

November prize puzzle The road to perfectionStart in square A1 with a prime number N and move from green square to green square. Your aim is to get to the fi nish in square D4 having visited all the other squares fi rst. At each step you may move left, right or straight ahead (i.e. move to any adjacent square other than the last one visited). Each step should leave you with a whole number between 1 and 100.

For your chance to win a £50 Amazon voucher courtesy of HighFinance Actuarial, send the shortest route you can fi nd (just setting out the squares visited, in order) to actuaryprizepuzzle@

incisivemedia.com by 16 November.

Start

Multiply by 13

Sum its digits

Square it

Add 6

Multiply by 13

Square it

Subtract 73

Take square root

Multiply by 18

Take cube root

Take cube root

Subtract 30

Divide by 23

Square it

Double and

add 2

Add 13

Divide by 19

Add a prime

Subtract from 192

Divide by 2

Add four distinct primes

Divide by 17

Add a perfect square

Divide by N

Finish

A B C D

1

2

3

4

The prize will be awarded for the entry with the shortest correct route received before the closing date. In the event of a tie the winner will be picked at random from the tied entries. The winner’s name will be announced in the next edition. Please note that the puzzles editor’s decision is fi nal and no correspondence will be entered into. We reserve the right to feature the winner’s name and a photo (if supplied) in The Actuary. Your details will not be passed to any third party in connection with this draw.

Terms and conditions

Puzzle 439 Six times seven equals...For each of the three grids shown, rearrange the letters within each column so that the rearranged letters spell out seven different six-letter words when read left to right.


hf strip.indd 1 2/4/08 10:18:49

AAAAAAA

ILORTVZ

ABEIKRT

BEILORT

ADEINSU

ADELORS

BBBBBBB

AEILORU

ILNORSZ

AEMNOTZ

ACELOPR

EINORSY

CCCCCCC

AHLORUY

AEGLMSU

EIMRTUV

EILNPSU

BCHINTY

incisivemedia.com by 16 November.

042-043_Actuary_1109_Puzzles.ind42 42 22/10/09 11:31:03


PuzzlesCoffee break

Solutions for October 2009

Puzzle 440 In the roundA rectangle measuring 4 metres by 5 contains two non-overlapping circles. Given this restriction, the total perimeter of the circles is as large as it can possibly be. But how big?

Puzzle 441 Area 51Which single letter is represented by the following arithmetical cypher? 5555511155511155 5555511115511155551111 555111155555115551111555555551111


hf strip.indd 1 2/4/08 10:18:49

The correct ordering of the words is shown below. October prize puzzle 4.033 x 1026

October prize winnerCongratulations to this month’s winner, Darren Wheeler of Mercer, who wins a £50 Amazon voucher courtesy of puzzles sponsor, HighFinance Actuarial.

a tone n ought

b land o pine

c lump p ion

d after q at

e lope r asp

f low s laughter

g rouse t axes

h eight u rate

i on v ending

j owl w right

k new x is

l isle y east

m arrow z any

Daddy eventually found the fi fty-sixth block of the set at the bottom of the goldfi sh bowl. More on which later…

7 5 7 91 2 8 24 5 1 46 6 4 4

Puzzle 436 Pile ‘em high

Uniquely, 12 128 farthings is equal in value to 12 pounds, 12 shillings and eight old pence.

Puzzle 437 Numerological numismatism

Puzzle 438 Cross multiplication

To access the puzzles archive or to try your hand at our new Predictor Pro game, visit www.the-actuary.org.uk/puzzles. The puzzles editor is pleased to receive ideas for new puzzles from readers at [email protected]

More puzzles and games online

This is not in fact a unique solution — thanks to Stelio Passaris for pointing this out.

PUZZLE 435 CLARIFICATION — FRUIT SALAD

Several people (including the rest of the editorial team) have asked for a further explanation of the answer to September’s ‘Fruit Salad’ puzzle.

The number of each fruit added to the salad is constructed from the number of vowels and consonants, plus the place in the alphabet of the fi rst letter, of that fruit (in its

singular format).So, for example, there

were 2 16 2 pears and 3 1 2 apples in the salad (i.e. number of consonants, fi rst letter, number of vowels). The number of oranges

therefore, by the same process, is 3 15 3.

place in the alphabet of the fi rst letter, of that fruit (in its singular format).

So, for example, there were 2 16 2 pears and 3 1 2

apples in the salad (i.e. number of consonants, fi rst letter, number of vowels). The number of oranges

therefore, by the same process, is 3 15 3.

042-043_Actuary_1109_Puzzles.ind43 43 22/10/09 11:31:14


Lqui eugait at accummod magnis alis nonsequat ut wisci eliquip euguerat prat.

THIS MONTH, DON’T FORGET...

[email protected] page

By Tendai Gotora Studying for actuarial exams is tough work. To relieve stress levels, I thought it would be good to share with my fellow students some comic relief that I came across on the web while searching for advice on how to pass an actuarial exam. I picked (and amended) my top 10 tips on how to fail an actuarial exam (besides using a prohibited calculator!) from an entry dated 17 December 2006 on the blog, Mike The Actuary’s Musings, entitled 50 Ways To Fail An Actuarial Exam — With Style. (Source: www.triskele.com/50-ways-to-fail-an-actuarial-examwith-style)1 Bring cheat sheets for a different exam and include them with your written answer papers with the comment: “Please use the attached notes for references as you see fi t”.

2 Every now and then, clap twice rapidly. If the invigilator asks why, tell him/her in a condescending tone, “the light bulb that goes on above my head when I get an idea is hooked to a clapper. Duh!”3 Show up completely drunk (completely drunk means at some point you should start crying for your mum).4 As soon as the invigilator hands you the exam, eat it. 5 Fifteen minutes into the exam, stand up, rip up all the papers into very small pieces, throw them into the air and yell, “Merry Christmas”. If you’re really daring, ask for another copy of the exam. Say you lost the fi rst one. Repeat this process every 15 minutes.6 Walk in, get the exam, and sit down. About fi ve minutes into it, run out

screaming, “I can’t take the stress any more!” (Surely someone, somewhere, must have done this before!)7 Talk the entire way through the exam. Read questions and debate your answers with yourself out loud. If asked to stop, yell, “I’m sooo sure you can hear me thinking”.8 Upon receiving the exam, look it over. While laughing loudly, say, “You don’t really expect me to waste my time on this drivel? Days of our Lives is on!”9 From the moment the exam begins, hum the theme to Countdown. Ignore the invigilator’s requests for you to stop.10 One word: Wrestlemania.

Good luck to all students who took exams in October!

Tendai Gotora is a junior consultant (Life Insurance) for

African Actuarial Consultants in Zimbabwe

The life of an actuarial student does not often extend much beyond studying, working and (for those clinging on to their university days)

partying until dawn. Indeed, often students are brushed aside as an inexperienced horde lacking knowledge in the ways of the actuarial world, consigned to menial spreadsheet work until they have gained appropriate actuarial/business acumen.

Consequently, there are often decisions made about the profession without any input from actuarial students — but is this justifi ed? Should students be cast aside and have their views ignored just because they are not qualifi ed?

What has caused me to get so riled up? The never-ending talks about the merger, of course. Despite the fact that this merger will affect the futures of actuarial students just as much as qualifi ed actuaries of the profession, students were not allowed to vote. When I questioned this, I was told:

“This is set out in the current by-laws and rules for the Faculty and the Institute”. This, clearly, did not directly answer my question and when I probed further I received no reply.

This leads me to conclude that the only reason students were not allowed to vote is that the rules say so and that no one really knows why this rule exists in the fi rst place.

Jean Eu discusses the right to vote, as Tendai Gotora takes a humorous glance at exam etiquette

Is this fair? Is it the sort of response we should expect from a supposedly forward-thinking profession?

Students were encouraged to pass their views on to a qualifi ed actuary who could vote on their behalf and also told, “you can still play a part in the process by encouraging your colleagues who are eligible to vote to do so”. But exactly how is the poor student supposed to have their views heard when the qualifi ed actuary is likely to vote with their own view?

I am no longer a student, having recently qualifi ed, but I was not allowed to vote because I did not fi nd out I was qualifi ed before 31 May… go fi gure.

To conclude, students are not second-class members of the profession — they are the future of the profession. So start treating them with the respect they deserve.

Should students get the vote? Write in to

[email protected] with your views

How to fail an actuarial exam with style

Give students the vote

Jean Eu

044_Actuary_1109_Student.indd 44 21/10/09 11:16:31


AOTF/Book review People/Comment

out major announcements. We had two direct telephone lines (to Bryce, Gordon and Mike Higgins at Greenwell). These brokers would also produce yield curves and other statistics that would throw up anomalies in the marketplace and form the basis of our transactions.

I would advise anyone interested in mathematics and economic history to read these papers. They are accurate, well written and some of the material will make you money today.

Robert Walther was chief executive of Clerical Medical from 1995-2001.

Charchit Agrawal Employer and area of workErnst & Young LLP, non-life.

Date entered ProfessionJuly 2005.

Describe yourself in three words Diligent, receptive, honest.

What’s your best attribute? Willingness to learn and appreciate out-of-the-box ideas.

And your worst habit? Snoozing past the alarm clock.

Alternative career? Environmentalist.

Tell us your formula for success Focused hard work combined with lots of travelling.

What is your greatest extravagance? Ties and cuff-links.

What is most likely to irritate you about others? Complaining about situations unnecessarily.

How do you relax away from the offi ce? Watching the news and movies, and reading blogs.

Tell us something unusual about yourself I am an excellent cook!

What three items would you take to a desert island? My music player with old Bollywood

songs, a book on desert fl ora and fauna and the mortality tables.

Do you have a famous look-a-like? The other handsome guy exists only in mirrors!

Best piece of advice you’ve been given? No knowledge ever goes to waste — my father told me that as a child.

Is the glass half full or half empty?Half full; I’m always optimistic, but am still looking to fi ll the remaining half.

What is the greatest risk you have ever taken? Leaving my job at EMB India and coming to the UK.

If you would like to nominate someone for Actuary of

the Future, please e-mail [email protected]

Book reviewRobert Walther reviews The Golden Age of Government Bond Analysis (1961-1986) by Mark Arnold, Bryce Cottrell, John Lewis, Gordon Pepper and Patrick Phillips

announcements.

direct telephone

that would throw

I was delighted to be asked to review this publication on two grounds: fi rstly, I know all the authors well — they were all highly respected partners of major gilt-edged brokers — and I know that their analyses worked. It has always bothered me that actuarial judgments are taken over such a long period of time, making it almost impossible to tell whether the judgment was correct or not.

In contrast, the gilt-edged market is a magnifi cent laboratory to test the validity of any hypothesis over any reasonable timescale. Security was (and, I hope, still is) absolute, marketability is exceptionally good and the cost of dealing has always been low. At this time, stockbrokers and stockjobbers were kept entirely separate and so there was no confl ict of interest between the broker and his client.

There were three reasons that Clerical Medical (for whom I worked at the time) made money on a consistent basis.

One: there was a high public sector

borrowing requirement over the period, whereby the government was forced to sell a large quantity of gilt-edged securities throughout — as anyone can tell you, a forced seller does not do well.

Two: taxation. The taxation rules affecting both income and capital gains were complicated but allowed both gross and net funds, particularly the latter, in order to save very signifi cant amounts of tax.

Three: the most important and interesting way of making money was from decisions based on this published analysis. Profi table switches between two different gilt-edged stocks could be made by identifying anomalies, by taking advantage of kinks in the yield curve or by taking a view on the direction of interest rates — the authors specialise in all three areas. It is hard now to explain the paucity of information which was then available: the only live information available was a closed-circuit, non-speaking television from Greenwell that updated prices three times a day and printed

Charchit Agrawal of Ernst & Young perseveres with his passions for cooking and snoozing

Actuary of the future

045_Actuary_1109_AOTF.indd 45 21/10/09 11:15:37


Appointments People moves

Mr Griffi n worked for Allied World Reinsurance (Bermuda) as international pricing actuary.

Euro Insurances Limited has appointed Anthony Collins as chief actuary. Mr Collins joins from ESG Shared Services Limited, where he was chief actuary for the ESG Re group of companies since June 2007. He will be leading

the actuarial team at Euro Insurances to develop its capabilities and to aid Euro Insurances in achieving its continuing expansion into new countries.

HSBC has appointed Dick Rae as managing director in the Insurance Services Group. Mr Rae was previously managing director for Deutsche Bank.

Milliman has appointed Scott Mitchell as a senior consultant in its Zurich life consulting practice. Mr Mitchell joins Milliman from Ernst & Young in Zurich where he was a senior manager.

Les Waters has been promoted to the position of head of international & specialty underwriting at Platinum Re. He will continue to be based in Bermuda.

The following senior appointments have been made at the Government Actuary’s

Department:George Russell has been appointed as deputy government actuary, succeeding Andrew Johnston, who has retired.Eddy Battersby has been appointed technical director and Bill Rayner has been appointed client relations and development

Deloitte has appointed Julian Leigh as a senior manager in its actuarial and insurance solutions practice, where he will be advising on reserving, capital management and Solvency II. Mr Leigh was previously a consultant working in the Property/Casualty practice of Tillinghast — Towers Perrin, and has also worked on Solvency II implementation policy at the FSA.

Finance Actuary in Dublinwww.gaaps.com +44 (0)20 7397 6200

London ● UK Wide ● France ● Europe ● South Africa ● Asia Pacifi c ● Australia

GAAPS Actuary Appointments banner 10-2009 special final.indd 1 12/10/09 12:08:09

director. Both have joined the GAD management board.Sandra Bell, Adrian Hale and Sue Vivian have been appointed as chief actuaries.

BWCI Group has announced the appointment of David Holmes in its Jersey offi ce.

Mr Holmes is Jersey’s fi rst resident consulting actuary. He previously spent four years working for BWCI in its Guernsey offi ce.

Pension Capital Strategies Limited (PCS) has appointed Antony Osborn-Barker as managing director of its investment advisory service. Mr Osborn-Barker joins from BNP Paribas where, as global head of pension advisory, he led teams in London and New York. Mr Osborn-Barker was formerly head of investment services at Deloitte.

Ariel Reinsurance (Bermuda) has announced the appointment of Keith Griffi n as vice president and actuary. Prior to joining Ariel Reinsurance,

Forward features in The ActuaryThe Actuary’s team welcomes contributions from members or contacts in and around the profession.

Below is a list of themes for the next few months along with the deadline for submission. If you would like to contribute, please contact Tracey Brown at [email protected] with suggestions.

Please note that these themes are not exclusive and the aim is for a strong variety of articles. If you have a burning topic you’d like to write about, please let us know. Actuary of the future

Is your career on the up? Are you the golden boy or girl of the actuarial world?If you think you deserve to appear as an Actuary of the Future, then we would like to hear from you. Either ask a colleague to nominate you or send your contact details with a reference direct to [email protected]

Anthony Collins

Please send news of moves, promotions, retirements and appointments to [email protected]

Have you moved?

January 2010 Online special edition (Published 12 January 2010, deadline 11 December)■ Recruitment/careers■ 2010 preview and predictions

January/February 2010 (Published 28 January 2010, deadline 11 December)■ Recruitment/careers■ Health and care■ ERM

046_Actuary_1109_PeopleMoves.ind46 46 22/10/09 10:21:30

Documents

Actuary · November 2009 Contents November 2009 TheActuary Eugene Dimitriou is the editorial team’s choice for November for his article on longevity swaps, and receives a £50 book