Published in London by the Staple Inn Actuarial Society
The www.the-actuary.org.uk ActuaryThe magazine for The Actuarial Profession November 2009 A point of consistency Sharper understanding of Solvency II’s technical provisions
Plus: Roger Bootle Q&A Managing liquidity risk
Inside: Longevity swap pros and cons • Dynamic policyholder behaviour • Smaller consultancies • Latest jobs
001_Actuary_1109_Cover.indd 1 22/10/09 10:14:44 The Actuary
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Print and distribution As the state of the economy continues to be a popular subject, this Benham Goodhead Print Ltd, Oxon edition of The Actuary carries an interview with Roger Bootle, honorary
Subscriptions fellow of the Institute of Actuaries and renowned economist, sharing For subscriptions from outside the insight on his career and the economic environment. actuarial profession: UK, Eire and Europe: £50 a year/£5 a copy. For the rest of the world: £75 a One of the featured themes for November is life insurance and the end year/£7.50 a copy. Please contact: of the month will find large numbers at the Actuarial Profession’s Life Alison Jiggins The Actuarial Profession, Conference in Edinburgh, which promises to provide many interesting Staple Inn, High Holborn, technical tutorials and an update on the current economic climate. London WC1V 2QT T +44 (0)20 7632 2100 E [email protected] Thank you for the interesting comments I have received for ‘coining the actuarial phrase’, in response to my June editorial. Among some Students on actuarial science courses at universities may join the Staple of your suggestions for definitions of actuarial science are ‘the physics Inn Actuarial Society for £6 a year. They will receive The Actuary as of money’ (Scott Neville) and ‘financial statistics’ (Stephen Blake). part of their membership. Apply Rosalind Rossouw provides an elaborate and entertaining response on to: Membership Department, The Actuarial Profession, Maclaurin House, the letters page. 18 Dublin Street, Edinburgh EH1 3PP. T +44 (0)131 240 1325 As many of you will know, a number of dedicated volunteers from E [email protected] the profession staff The Actuary’s editorial team. At the end of this year Changes of address should be we will bid farewell to Amy Guna, our people news editor. Amy will made known to the membership department at the same address. 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. For delivery queries please contact: Kim Ferrara E [email protected] If you are a ‘people person’ and feel you could contribute newsworthy items from around the profession, please get in touch. Internet The Actuary website: Students, associates and fellows alike are welcome to apply and your www.the-actuary.org.uk location is not a hindrance. SIAS website: www.sias.org.uk Actuarial Profession website: www.actuaries.org.uk Circulation 18 724 Marjorie Ngwenya (July 2007 to June 2008) Editor [email protected]
www.the-actuary.org.uk November 2009
003_Actuary_1109_EditorialNote.i3 3 21/10/09 15:39:59 The Actuary
Editorial advisory panel Peter Tompkins (chairman), Contents John Batting, William Bennett, Chris Daykin, Margaret de Valois, Matthew Edwards, Nigel Hayes, November 2009 Martin Lunnon, Divyaa Mohan, Claire Ritchie, Andrew Smith, Chris Sutton, Paul Sweeting, Solvency II: A point of consistency News Matthew Wheatley Andy Frepp, Craig Turnbull and Sandy Sharp Editor highlight some unfortunate consequences of 12 Profession Marjorie Ngwenya the Solvency II technical provisions E [email protected] 17 Education and research Features editor p24 Tracey Brown Lane Clark & Peacock LLP, 18 Industry T +44 (0)20 7432 3071 E [email protected] 21 SIAS notices Deputy features editors Jean Eu Adam Jorna 22 People/Society E [email protected]
Profession news editor 46 Appointments and moves Chris Morgan T +44 (0)131 240 1322 E [email protected] Comment Industry news editor Features Peter Tompkins 3 Editorial E [email protected] 26 Risk: Managing liquidity risk Marjorie Ngwenya contemplates the circle of life People/society news editor Paul Sweeting and Patrick Kelliher compare the advice Amy Guna given by the CRO Forum and the BCBS 6 Letters Grant Thornton UK T +44 (0)7879 453 949 In which actuaries discuss misbehaviour, E [email protected] 29 Q&A: Roger Bootle misunderstanding and misnomers On the eve of the publication of his new book, The Student page editor Jean Eu Trouble with Markets, Roger Bootle speaks with 8 President’s address SCOR-SE UK branch Marjorie Ngwenya about his life and work Ronnie Bowie on fashion’s fickle finger T +44 (0)20 7173 3281 E [email protected] 32 Life: Another dimension 10 Soapbox Arts page editors Matthew Fewster Ed Morgan and Jeremy Kent consider the impact of Steve Bee says its time for a wider debate on JP Morgan dynamic policyholder behaviour in the life assurance arena the state pension T +44 (0)20 7777 9707 E [email protected] 34 Pensions: On the wrong track? 45 Book review Finn Clawson Amid the current vogue for longevity swap transactions, KPMG Robert Walther reviews The Golden Age of E [email protected] Eugene Dimitriou asks whether the protagonists have Government Bond Analysis (1961-1986) fully considered the consequences involved Puzzles editor Tom Bratcher Regulars Watson Wyatt Worldwide, 36 IT: Size isn’t everything E [email protected] Advances in pensions IT are helping small consultancies 41 Arts Published by the Staple Inn compete, says Gary Tansley Finn ventures into the staff canteen Actuarial Society.
The editor, Faculty of Actuaries, 38 Insurance: The winds of change Institute of Actuaries and Staple 42 Puzzles Inn Actuarial Society are not Peter Maynard and Catherine Lyons present the results Win a £50 Amazon voucher in our prize puzzle responsible for the opinions put of a survey into insurers’ tele-underwriting usage forward in The Actuary. 44 Student page No part of this publication 40 may be reproduced, stored or International: New Zealand Jean Eu discusses the merger vote transmitted in any form or by any Joe Benbow gives an overview of the actuarial means, electronic, mechanical, community in New Zealand photocopying, recording or 45 Actuary of the future otherwise, without prior written Charchit Agrawal of Ernst & Young permission of the copyright owners. More content online
While every effort is made to Writer of the month ensure the accuracy of the content, n Extract from The Trouble with Markets by Roger Bootle the publisher and its contributors www.the-actuary.org.uk/870181 Eugene Dimitriou is the editorial team’s accept no responsibility for any n David Worsfold reviews Regulated Lives: Life Insurance choice for November for his article on material contained herein. longevity swaps, and and British Society 1800-1914 and The British Insurance © SIAS November 2009 receives a £50 book All rights reserved Industry Since 1900 www.the-actuary.org.uk/870103 token courtesy of ISSN 0960-457X
www.the-actuary.org.uk November 2009
005_Actuary_1109_Contents.indd 5 22/10/09 11:52:53 XxxxxxxxxLetters XxxxxxxxxxxYour view Sponsored by Letters to the editor In which actuaries discuss misbehaviour, misunderstanding and misnomers
that the bonus does not go over 50% or so. Letter of the month A 2% of pay per year of service plan certainly seems nicer than one giving 1% with year-to- Reviewers behaving badly year boosts of % likely but not guaranteed — As a long-standing proponent of the book The (Mis)Behaviour of Markets by Mandelbrot but if that nicer plan cannot be maintained, and Hudson, I was considerably disappointed to see such a belated and grudging review the alternative looks attractive. The benefit in your October edition. fluctuations that this proposal could produce It needs to be pointed out that, although better known for his endeavours in other would not exceed those that we see now in mathematical fields, Mandelbrot has been expressing reservations about the bases for defined contribution plans, and they would conventional financial theory for the best part of 50 years. This popularisation of his not rear their ugly heads anywhere near as work was first published in the United States as long ago as 2004, well before many of often. Payment of bonus benefits should be the excesses that fuelled the financial meltdown of 2007/08 had built up to dangerous permitted only if plan assets cover the basic proportions. If more notice had been taken of it, the blind reliance on fundamentally flawed benefits or if additional deposits are made to market models that certainly contributed to the crisis might not have become so pervasive. cover the cost on the same year-to-year basis. It is true that the book does not provide a clear route to developing models that might, I would also allow accrual of basic benefits on by taking into account greater frequency of extreme happenings and the development of a participation-over-participation basis. widespread unanticipated correlations, stand a better chance of approximating to reality. Next, if we must have government However, it does point to this as an obvious direction for future research. The course that guarantee funds despite the experience of appears to be favoured by your reviewer, to apply sticking plasters to financial market PBGC in the US, I would suggest limitations models that were always unsoundly based and have now more clearly been undermined on the amount guaranteed and would also by recent events, seems bound to represent a blind alley. require accrual of the guaranteed amount on John Bishop a participation-over-participation basis. Such 26 September 2009 guarantees could probably work without the secondary-liability recapture that we have in The writer of the letter of the month receives an iPod Shuffle and a £15 iTunes voucher the US, where PBGC’s commitments routinely kindly supplied by Hazell Carr exceed plan assets. Brian A. Jones 5 October 2009 Unfunded pensions: of investment capital slopping around the Response to M. Weale capital markets under the overall supervision An actuarial vocation: Two items gave me pause in Martin Weale’s of government. Norway, which is using Response to June’s editorial Soapbox article in the September 2009 issue temporary oil revenues to pre-fund, suggests In a recent issue you asked readers to submit of The Actuary: one very defensible exception. their response to an explanation of what an First, he says: “If pension rights were Second, Dr. Weale’s overall approach seems actuary is/what an actuary does when they properly funded... then it would be clear how to point towards the idea that each employee are asked by someone who doesn’t quite public and private sector pay compared.” I should carry his own risks, although he only know. When I worked in the UK as a student, suggest that this mixes apples and oranges. says so explicitly with respect to younger we were all given ‘Actuarial Profession’ cards, A private plan is not ‘properly funded’ workers. I suggest that the traditional defined- which had a definition on one side as follows: until assets are brought up to the value of benefit (DB) approach, which focuses more ‘Actuaries are respected professionals benefit expectations, preferably with a safety on the workforce as a whole and prioritises, whose innovative approach to making margin. Until we reach this point, the plan to some extent, the needs of the older business successful is matched by a sponsor may go out of business leaving employees who are more likely to retire responsibility to the public interest. benefit expectations unmet. from the sponsoring employer, has much to Actuaries identify solutions to financial Government, by contrast, is not going out recommend it. problems. They manage assets and liabilities of business; more precisely, if it does, we will DB plans certainly have their problems, by analysing past events, assessing the all have more pressing worries than pensions, but I think there are two major steps we present risks involved and modelling what so we can proceed on that assumption. could take to save them from oblivion. One could happen in the future.’ Therefore, it is reasonable to try to fund is to recognise the tension between fixed- Perhaps this is a bit longer than the public pensions as a level percentage of pay benefit entitlements and equity investment ‘soundbite’ you were requesting, but it stretching as far as the eye can see. There is by introducing the idea of a basic pension was easy to whip out the card and read its no compelling reason to work towards full benefit supplemented, on a year-to-year basis, contents aloud. funding, however defined; indeed, this may by a bonus similar to a terminal dividend if I must admit, at times those who have a introduce a generational inequity. There that can be afforded. The concept works well vague idea of what actuaries do pleasantly are also drawbacks to having a huge pool in UK life insurance, but here I would suggest surprises me. The last recollection I have
November 2009 www.the-actuary.org.uk
006-007_Actuary_1109_Letters.ind6 6 22/10/09 10:48:01 Your view Letters
of such a response to someone asking me Actuarial Society accepted this offer and we would make it much easier (and more logical) what I do for a living was, ‘So, you’re a smart had the presentation on 13 October, given to allow current fellows to continue to use one’. However, a colleague of mine sent me by Tony Hewitt of the Professional Awareness their FIA/FFA initials than the CAP name the following link which I thought to share Committee. Having a presentation certainly would have done. with you as I’m certain readers will find the brought the code to life, and the situations David Purchase definitions contained therein most amusing: discussed gave it even more impetus. I would 2 October 2009 http://uncyclopedia.wikia.com/wiki/Actuary highly recommend that other societies still Rosalind Rossouw considering whether to do this go ahead The name of the game 5 October 2009 with having a presentation or, if members are The suggested name of the amalgamated unable to get to one of these meetings, try actuarial bodies personally affects me not one The Canadian example: and get to a presentation, if given, at any of jot, as I retired from being secretary-general of Response to D. Worsfold the actuarial conferences. the Institute some 18 years ago. I always felt, In his Soapbox article (September 2009), Mr The overriding message was it does affect all however, that it was incomprehensible for Worsfold writes about the reform of financial of us and ignore it at your peril. So be aware! actuaries to be apparently completely satisfied services regulation without commenting at Malcolm Slee by the omission of the word ‘chartered’ from all on the Canadian system. It is generally 14 October 2009 the title of their professional body. acknowledged by G20 countries, financial Most professions seem to be only too keen services experts and others around the What’s in a name?: to be able to use the term that actuarial bodies world that Canada’s financial services were Response to J. Nelson in the UK have been entitled to use since best placed to weather the financial storms James Nelson, in his letter in your October the 19th century. I endorse the remarks of that hit last year. This is attributed to sound 2009 issue, has hit the nail firmly on the James Nelson in his letter dated 6 September. regulation. head. I am proud to be an FIA and proud ‘Chartered Actuarial Profession’ would lead I recall a friend of mine who was then of the other fellowships that I hold, but to to wording difficulties in descriptive terms for (mid-1980s) a partner in a major investment be a fellow of ‘a Profession’? Leaving aside its members. I earlier thought of a title which bank in the City, visiting me here in Toronto the scope for jokes about ‘FCAPs’, the whole would not, for obvious reasons, include after attending the IMF/World Bank meetings concept of a body being called the ‘Chartered Institute or Faculty in its wording: ‘Chartered in Washington DC. I was complaining of the Actuarial Profession’ was, in my view, an Institution of Actuaries’ or, alternatively, difficulty I’d had getting bank financing for absurd compromise. I am, however, glad that ‘Chartered Actuarial Association’ would be my fledgling consulting firm. He told me not councils did put forward the CAP name: if suitably concise and inoffensive. to complain too much as Canada’s banking they had not, their proposed merger, flawed Perhaps I was wrong in believing that system and its banks were regarded as the on many other counts, would probably be a actuaries like being aphoristic. Coming to strongest in the world, and were the envy of done deal by now. reflect on it, during my life at Staple Inn that many. I guess he was right then, and still is, There is nothing wrong with ‘Faculty and may not have been a characteristic! much as I continue to dislike banks generally. Institute of Actuaries’ (F&IoA). However, Clive Mackie Peter Hirst I suggest that ‘Institute and Faculty of 26 September 2009 1 October 2009 Actuaries’ (I&FoA) would be even better. Of course, I am biased, but my reason is Your letters The Actuaries’ Code — It means you! that the Institute is the older, and by far All members should have heard about the the larger, body. In contrast, F&IoA has the Due to the high volume of letters being new Actuaries’ Code. Many will have read it. merit merely of alphabetical order. I add that, received, we are currently publishing Some will have thought what does this mean if we were fellows of I&FoA, we would be additional comments on The Actuary’s to them. A few will have taken steps to ensure FIFAs, a description rather more euphonious website. Visit http://bit.ly/4uk0al they are confident of meeting the code’s than FFIAs (from F&IoA) would be. Yes, I do The editorial team welcomes readers’ requirements A tiny few (I hope) will have realise that there is another FIFA out there letters but reserves the right to edit ignored it. somewhere, but I don’t think there is much them for publication. Please e-mail The profession contacted the regional danger of confusion! [email protected]. societies volunteering a presentation on the Finally, and doffing my biased hat for a The deadline for receiving letters for the new code and its implications. The Yorkshire moment, I note that either I&FoA or F&IoA December issue is 12 November.
www.the-actuary.org.uk November 2009
006-007_Actuary_1109_Letters.ind7 7 22/10/09 10:48:02 President’s address Ronnie Bowie
Faculty president Ronnie Bowie assesses current trends and seeks to position actuaries as in vogue Fashioning a successful future
n the northern hemisphere, we are well out into new areas, not typically those Enterprise Risk Actuary qualifi cation (CERA), into late autumn. With the chill in the associated with our craft, demonstrating which will be available to be awarded in air we have reached for the protection that our skills and values have a wider Spring 2010, will help to establish our of our winter wardrobe. Non-actuaries relevance. credentials in the safety wear market just I may jest that the difference between the However, we face a as they have been in our summer and winter wardrobes of many male challenge. On the European » For us, traditional markets. We are actuaries is hard to discern. I would accept fi nancial services catwalks this ‘shower-proof’ working to maximise the that actuaries are not, by temperament, autumn, the overriding theme benefi t to our members likely to be followers of haute couture. has been ‘risk management’. is not enough « of the launch of this Fashionable concepts, which are based Whether it be from established qualifi cation. mostly on show rather than substance and sources such as Solvency II or from new Establishing ourselves as leaders in fi t only a tiny minority of the population, sources like Sir David Walker, the theme is broader safety management will be hard are unlikely to fi nd favour with most of the same. The fi nancial services world must and will take longer. However we can, and our members. Actuaries are more likely adopt new safety standards which will, in will, publicise this and celebrate role models to be interested in garments with high turn, increase demand for hard-wearing such as Philip Scott FIA, the retiring fi nance levels of functionality. Will it withstand safety clothing. director of Aviva who will shortly take up a a Scottish winter, or will it survive the We have two challenges: fi rst, we need non-executive director position with Royal punishment of London’s commuter trains to capture our share of the safety clothing Bank of Scotland and will chair its newly while retaining its shape and integrity? For market. Second, we need to position ourselves formed Risk Committee. We congratulate us, ‘shower-proof’ is not enough. We want as experts in overall safety management. Philip on his appointment and believe it to our protection to remain effective even in We know that we can design and make be an excellent model for the future. relatively extreme conditions. the safety clothing. The techniques we What appears on the catwalks eventually Indeed, we are constantly looking for ways have used in our traditional markets are appears on the high street. The current to improve that functionality. We want to capable of adaptation and wider application, fashion for risk management will persist and, fi nd our own versions of high-tech, weather- with many successful examples to support as a profession, we must ensure that we are at resistant materials that improve certain these claims. The forthcoming Chartered the heart of this exciting new development. 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
8 November 2009 www.the-actuary.org.uk
008_Actuary_1109_President'sAddr8 8 22/10/09 10:06:51 Soapbox Steve Bee
Steve Bee says it is time for a wider debate on the state pension
No quick fix
he basic UK state pension is a widely something that should be achieved by 2015 pension age goes up means one less year held entitlement and, as such, comes at the latest. That, of course, will add to that it will have to be paid out, but also one at significant cost to the public purse. future costs to the public purse. more year that it will have to be paid for; a The contributions paid by millions At the same time, double-whammy T of citizens for their pension entitlements other cost-saving changes We would all be for those affected. were not put aside as they were paid over are in place with the » As we live the weeks, months, years and decades that aim of reducing the cost better off, in my opinion, ever longer, are people made them. That money was used of providing the old- if our old-age pension we bound to see up at the time it was paid; the entitlements age pension. The state entitlement was increased politicians bowing built up by people therefore will need to be pension age for women to financial paid for as they arise. is already set to gradually greatly in value but pressures to reduce The basic pension was clipped back in increase from age 60 to paid from a much older the value of our 1980/81 when annual increases were linked 68 and, for men, from age, say 75 or 80 state pension to increases in prices rather than increases age 65 to 68. As things « entitlements? It in the average level of earnings as was stand, those changes will be complete by would be naïve of us to think otherwise. previously the case. 2046. What is being spoken of these days What we need to do before the gradual That has meant that each year since by the Conservative Party is a possible creep of attrition sets in is to look again then, the basic pension has become worth acceleration of that process; there has been not just at what we think ‘old age’ is, but at less when compared to the general level of plenty of talk elsewhere, too, of increasing what we think the old-age pension is for. We earnings. Left that way it would eventually the state pension age to 70 and maybe even would all be better off, in my opinion, if our have become, quite literally, worthless. The older as time goes on. That is to old-age pension entitlement was increased latest round of pension reforms seeks be expected, of course; high- greatly in value but paid from a much older to restore the link to earnings, thereby cost entitlements can yield age, say 75 or 80. It would then be useful if stopping the rot that has set in to the substantial savings if people’s retirement savings could be used basic pension. This has the support they are cut back to buy fixed-term annuities (aimed to end of all the major political parties in value. as the more generous level of state pension and, although they may differ Moving the state kicks in) rather than a pension for life. on the implementation pension age is doubly If that were the case, then annuity rates date, is useful for the public would not be subject to volatility and people purse. It is the point at would know while they were saving exactly which we can claim our how many ‘pension pounds’ they were old-age pension, but it is also saving up for. The average pension pot these the point at which we cease days does not go far when purchasing a to be required to pay national lifelong income; the same money would give insurance contributions. pensioners a greater weekly income if it was So every year that aimed at providing a fixed-term income. the state 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?’
Steve Bee is head of pensions strategy at the Royal London Group (Scottish Life)
10 November 2009 www.the-actuary.org.uk
010_Actuary_1109_Soapbox.indd 10 21/10/09 11:58:43 News Profession
New faces elected to Council at Institute AGM At the Institute AGM on 28 September, Institute had not received voting papers At the sessional meeting that followed, Adrian Baskir, Helen Crofts, Justyn for the election. These Institute members David Hartman, a distinguished American Harding, Malcolm Kemp and Trevor were also members of the Faculty, and actuary, was elected as an honorary fellow Llanwarne were all elected to Council. had the Faculty as their ‘primary body’. of the Institute. Wendy Beaver, Charles Cowling, Sally Because of a selection error they were Mr Hartman is a long-standing member Dixon, David Hindley and Michael omitted from the list supplied to Electoral and servant of the US actuarial profession Pomery retired from Council. Nigel Reform Services. However, they were all and is past president of both the Casualty Masters, president of the Institute of subsequently contacted and given the Actuarial Society and the American Academy Actuaries, thanked the retiring members opportunity to vote. of Actuaries. He has also been active for their service. All reports and accounts were passed and internationally and is a past president of the It was noted that 13 members of the the meeting was closed. International Actuarial Association.
Left to Right: Newly elected Council members Adrian Baskir, Helen Crofts, Justyn Harding, Malcolm Kemp and Trevor Llanwarne
Determination report for adjudication panel
Mr Rudi Stumpf of the disciplinary scheme for the Institute general insurance. FIA 1995, South Africa (the Respondent) of Actuaries as constituting conduct falling E-mails sent addressed BCC to the below the standards of behaviour, integrity, Respondent referred to his being “in default On 3 September 2009 the adjudication panel or competence which other members or the of the CPD Scheme” without reference to considered a complaint that the Respondent: public might reasonably expect of a member. the disciplinary procedures. To understand a) For the CPD year 1 July 2007 to 30 June The panel determined that the case report the potential for a reference to the 2008 failed to declare the appropriate and the evidence annexed to it disclosed a disciplinary procedures, the Respondent CPD category as required by the Actuarial prima facie case of misconduct in respect of would have been required to find, Profession and set out in the CPD schemes the allegations made against the Respondent download and examine the CPD scheme contained with the CPD Handbook 2007 in accordance with rule 4.2(b)(i) of the from the Profession’s website. (version 12) on page 7; the CPD Handbook Institute’s disciplinary scheme and that the However, the letter of 12 March 2008 2007 (version 13) on pages 7 and 12; and Respondent should be invited to accept that to the Respondent did give a warning of a the CPD Handbook 2007/08 (version 14) on there had been misconduct, but that no reference to the disciplinary processes for pages 8, 9 and 13. sanction was necessary. the following year. The panel took the view b) For the CPD year 1 July 2007 to 30 The panel’s reasons were as follows: that this was sufficient and should have June 2008, failed to maintain an online 1 The Respondent agreed the facts alleged alerted the Respondent to the seriousness of record of CPD undertaken as required by and there had been no misunderstanding of his obligations under the scheme. the Actuarial Profession and set out in the the requirements of the scheme. 3 The panel is satisfied that the CPD Handbook 2007 (version 12) on pages The Respondent admitted that he had Respondent is now correctly classified as a 10, 13 and 23; the CPD Handbook 2007 not given the CPD requirements sufficient category 3 actuary under the CPD scheme (version 13) on pages 8, 9, 10, 13 and 23; attention despite receiving correspondence and note that he has recorded his CPD for and the CPD Handbook 2007/2008 (version from the Profession. Despite being based the year 2008/09. 14) on pages 9, 10, 11, 14 and 24. abroad, the Respondent was not regulated by 4 Considering all the circumstances of And, in failing to do all of the above, he a local regulator and, as such, should have this complaint and the guidance issued by failed to maintain and observe the highest complied with the Institute’s requirements. the disciplinary board, the panel did not ASHK Risk Management Conference standards of conduct expected of a member, 2 The information and reminders about believe it appropriate to impose a fine or Life Conference 2009: Changing times Hosted by The Actuarial Society of Hong Kong, the 2nd ASHK Risk contrary to paragraph 2.1 of version 2.3 of the CPD scheme in general circulars reprimand on the Respondent. The panel The conference and exhibition is the premier professional event Management Regional Conference, ‘Post-financial crisis: a new the Professional Conduct Standards and were not prominent. For example, in felt that as the Respondent was working in for UK life actuaries and is attended by more than 900 delegates. world?’ takes place at the Grand Hyatt, City of Dreams, Macau from paragraphs 1.2 and 2.1 of version 3.0 of the the 14 March 2008 circular, the item on a non-actuarial position, in a country some This year’s conference will take place at the Edinburgh International 31 January to 2 February 2010. Registration begins this month. The Professional Conduct Standards, which is CPD followed items on the merger with distance from the UK, that no sanctions Conference Centre from 25-27 November 2009. For more official conference website will be launched shortly. For further therefore misconduct in terms of rule 1.6(b) the Faculty, meetings in Edinburgh and were necessary. information visit www.actuaries.org.uk/events/Life2009 information please visit the ASHK website at www.actuaries.org.hk
12 November 2009 www.the-actuary.org.uk
012-016_Actuary_1109_ProfNews.in12 12 21/10/09 11:44:33 Profession News
‘Sleepwalking’ towards the next crisis
Michael Pomery of the What areas will the project cover? public affairs advisory 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 committee calls for and advice to the general public. volunteers to steer a 2 The target audiences were identified as policymakers; organisations such as the Citizens thought-leadership Advice Bureau which provide (often generic) financial advice directly to people; and the press writing on financial issues. project on retirement 3 The main messages aimed at the general public should highlight the consequences of savings 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. When the credit crunch broke, many Emphasis should also be placed on communicating to the general public the fact that DC commentators claimed that it had been schemes are not risk-free, and that the outcome in retirement of current levels of saving obvious for years that problems in the in DC schemes and ISAs will be a lot less than the two-thirds of final salary that many financial system were looming and it would current pensioners receive from their DB schemes. all go badly wrong. 4 In all the work undertaken, it will be important to avoid making value judgments, as This set me thinking about whether, saving should not be considered inherently good in all circumstances nor debt inherently looking 10 years into the future, there were bad. The material should instead be framed around communicating and being realistic any major problems looming in the fields about the expected outcomes — for example, anticipated level of income in retirement where actuaries have some experience. — of certain actions, such as current level of savings. Could we identify a future social crisis One potentially powerful way of illustrating this point may be to work up a number of stemming from the financial world and case studies showing what the likely retirement income would be for various categories do something in advance to mitigate the of people each contributing 5% of current salary to a DC scheme. The overall project, harmful effects? I believe there is one such however, could be wider than saving for retirement and include savings issues related to potential danger on ‘our patch’. saving for both planned and unexpected expenses prior to retirement. Final salary schemes began closing to 5 It is recommended that a scoping study be undertaken initially to ascertain exactly Mr Rudi Stumpf of the disciplinary scheme for the Institute general insurance. new entrants about 15 years ago and what what work has already been produced in relevant areas by other organisations and FIA 1995, South Africa (the Respondent) of Actuaries as constituting conduct falling E-mails sent addressed BCC to the was a trickle of closures has turned into academics to help ensure that the Profession’s outputs will be relevant and an additional below the standards of behaviour, integrity, Respondent referred to his being “in default a flood in the last few years. We have not contribution to the debate. The scoping study could look at work done on barriers to On 3 September 2009 the adjudication panel or competence which other members or the of the CPD Scheme” without reference to yet seen significant numbers retiring from saving, communicating risks associated with DC schemes, saving for retirement generally, considered a complaint that the Respondent: public might reasonably expect of a member. the disciplinary procedures. To understand the replacement DC schemes, but they surviving in retirement and level of income in retirement. a) For the CPD year 1 July 2007 to 30 June The panel determined that the case report the potential for a reference to the will gradually increase and, by 2020, could 6 It was recognised that engaging policymakers was likely to be more effective if the 2008 failed to declare the appropriate and the evidence annexed to it disclosed a disciplinary procedures, the Respondent be substantial. Many of those retiring or project outputs could include at least some element of new research. CPD category as required by the Actuarial prima facie case of misconduct in respect of would have been required to find, approaching retirement 10 years from now Profession and set out in the CPD schemes the allegations made against the Respondent download and examine the CPD scheme will be very disappointed in the outcome financial position, there are going to be that they want the Profession to show contained with the CPD Handbook 2007 in accordance with rule 4.2(b)(i) of the from the Profession’s website. because the contribution levels going large numbers of extremely disappointed leadership in commenting on public interest (version 12) on page 7; the CPD Handbook Institute’s disciplinary scheme and that the However, the letter of 12 March 2008 into most DC schemes are inadequate people. When I was president, I talked issues in our field of expertise. To do this, we 2007 (version 13) on pages 7 and 12; and Respondent should be invited to accept that to the Respondent did give a warning of a to provide a decent pension from a about ‘a generation sleepwalking towards need to develop a sound and consistent line the CPD Handbook 2007/08 (version 14) on there had been misconduct, but that no reference to the disciplinary processes for reasonable age — as we actuaries know an impoverished retirement’. to take on each issue. This project aims to pages 8, 9 and 13. sanction was necessary. the following year. The panel took the view well. We can hardly claim in 2020 that we If the country is storing up major provide the research and ideas to enable the b) For the CPD year 1 July 2007 to 30 The panel’s reasons were as follows: that this was sufficient and should have did not see the crisis coming. problems for the future and we, as Profession to stimulate a national debate on June 2008, failed to maintain an online 1 The Respondent agreed the facts alleged alerted the Respondent to the seriousness of This expected outcome is supported actuaries, are painfully aware of this, what saving for retirement and make a significant record of CPD undertaken as required by and there had been no misunderstanding of his obligations under the scheme. by evidence from frequent surveys can we do about it? To begin to meet this contribution to that debate. the Actuarial Profession and set out in the the requirements of the scheme. 3 The panel is satisfied that the which show that people in general have challenge, the Public Affairs Advisory We are currently putting together a CPD Handbook 2007 (version 12) on pages The Respondent admitted that he had Respondent is now correctly classified as a high aspirations for their quality of life Committee (PAAC) proposed, and the team of people to steer this project. If you 10, 13 and 23; the CPD Handbook 2007 not given the CPD requirements sufficient category 3 actuary under the CPD scheme in retirement but are making hugely management board approved, a thought- would like to be involved, please contact (version 13) on pages 8, 9, 10, 13 and 23; attention despite receiving correspondence and note that he has recorded his CPD for inadequate provision for that lifestyle. leadership project on just this topic. the PAAC secretary, Margaret Marchetti at and the CPD Handbook 2007/2008 (version from the Profession. Despite being based the year 2008/09. When they discover the reality of their Many of our members have told Councils [email protected] 14) on pages 9, 10, 11, 14 and 24. abroad, the Respondent was not regulated by 4 Considering all the circumstances of And, in failing to do all of the above, he a local regulator and, as such, should have this complaint and the guidance issued by failed to maintain and observe the highest complied with the Institute’s requirements. the disciplinary board, the panel did not News in brief ASHK Risk Management Conference standards of conduct expected of a member, 2 The information and reminders about believe it appropriate to impose a fine or Life Conference 2009: Changing times Hosted by The Actuarial Society of Hong Kong, the 2nd ASHK Risk contrary to paragraph 2.1 of version 2.3 of the CPD scheme in general circulars reprimand on the Respondent. The panel The conference and exhibition is the premier professional event Management Regional Conference, ‘Post-financial crisis: a new the Professional Conduct Standards and were not prominent. For example, in felt that as the Respondent was working in for UK life actuaries and is attended by more than 900 delegates. world?’ takes place at the Grand Hyatt, City of Dreams, Macau from paragraphs 1.2 and 2.1 of version 3.0 of the the 14 March 2008 circular, the item on a non-actuarial position, in a country some This year’s conference will take place at the Edinburgh International 31 January to 2 February 2010. Registration begins this month. The Professional Conduct Standards, which is CPD followed items on the merger with distance from the UK, that no sanctions Conference Centre from 25-27 November 2009. For more official conference website will be launched shortly. For further therefore misconduct in terms of rule 1.6(b) the Faculty, meetings in Edinburgh and were necessary. information visit www.actuaries.org.uk/events/Life2009 information please visit the ASHK website at www.actuaries.org.hk
www.the-actuary.org.uk November 2009 13
012-016_Actuary_1109_ProfNews.in13 13 21/10/09 11:44:34 News Profession
News in brief Sessional meetings in November Joint Councils launch consultation with members There will be no formal registration for any The Joint Councils of the Faculty of the autumn sessional meetings. Please and the Institute have launched a come along and sign in on the evening. Tea consultation on the current governing will be served from 16.30 and all meetings documents (Charter, Bye-laws and will commence at 17.00. All meetings will Regulations) for both bodies. The be followed by a drinks reception. Councils believe these documents would benefi t from change, regardless Management actions in a of whether or not the Faculty and the with-profi ts fund: update Institute were to progress towards a This Faculty sessional meeting, on merger. 2 November at the Royal College of This consultation, with members Physicians of Edinburgh, will debate a and students, was launched in paper by James Tuley. For further details, October. All members and students to the consultation is 17.00 on visit http://bit.ly/1Ymo7C will have the opportunity to make any Friday, 20 November 2009. These will comments or raise any concerns about the then be considered by Joint Councils at a Reserving and uncertainty governing documents. meeting in December. Subtitled ‘A meta-study of the GRIT and A consultation paper, available at www. ROC research in this area between 2004 actuaries.org.uk/consultation_governing_ Survey outcome and 2009’, this Institute sessional meeting documents.pdf, has been developed and A number of eligible members took part will take place on 2 November at Staple explains the principles behind any in a recent online survey, designed to help Inn, London. The debate will be based potential change to the current governing Councils understand the factors that may on a paper co-ordinated by the General documents, posing some specifi c have infl uenced voting behaviours in July. Insurance Reserving Oversight Committee. questions. The online survey was sent to eligible For more information, visit http://bit. Two consultation meetings will take members for whom the Profession holds ly/1n9go7 place to allow members to share their an e-mail address, to maximise response views and comments on the documents: rates and avoid the current disruption to The Faculty Lecture 17 November, 17.00-19.00 at Staple Inn, UK postal services. The online survey gave Sir Michael Atiyah, fellow of the Royal High Holborn, London WC1V 7QJ and respondents the opportunity to share their Society of Edinburgh, will give the biennial 19 November, 17.00-19.00 at Maclaurin views about any factors that may have Faculty Lecture, ‘Lessons from the Age of House, 18 Dublin St, Edinburgh EH1 3PP. infl uenced their voting behaviours. Enlightenment’, at the Faculty sessional Comments about the documents can The two key messages that came meeting in the Hawthornden Lecture also be made as follows: out of the online survey were that Theatre, National Gallery of Scotland, ■ By e-mail to [email protected] most respondents believe that a single Edinburgh on 23 November. For further ■ By completing the online consultation body is desirable in principle but many details, visit http://bit.ly/1QxgSA response form at www.actuaries.org.uk/ respondents had concerns about the members/consultation_governing_documents proposed name and the proposed Solvency ll and ESGs (log-in is required). designatory letters that members could use. This topic will be introduced by Elliot Varnell ■ By post to: Joint Consultation Response, Joint Councils would like to fi nd out more at the Institute’s sessional meeting on 23 Staple Inn Hall, High Holborn, London about members’ views on the issue of a November at Hilton Deansgate, Manchester. WC1V 7QJ name and designatory letters, and a survey It is likely to be of interest to actuaries ■ On the merger discussion board at of all members and students, specifi cally working in enterprise risk management, www.actuarialforums.com on these issues, will be launched in fi nance and investment and life insurance. The deadline for the receipt of responses November. For more information, visit http://bit. ly/2RORK5 The power of yes Consultation responses Membership subscriptions Cyprian Njamma, Zawar Saleemi and Responses to a number of key external Subscriptions were due on 1 October. If your Joanne Richmond each won a pair of consultations have been submitted over the subscription is not received by 31 October, tickets and a programme voucher to see past month. These include submissions to a 10% surcharge is applicable. Check Sir David Hare’s latest play, The Power of the Board for Actuarial Standards on the whether your subscription has been paid by Yes, at the National Theatre on Thursday 1 Technical Actuarial Standard — Pensions logging in to the members’ section of the October. They were among 58 people who (TAS-P), the Government Equalities Offi ce website. Payment can be made online or entered a competition in the September on the Equalities Bill, HM Treasury on by cheque made payable to ‘The Actuarial issue of The Actuary. Reforming Financial Markets and the Profession’ and sent to: Membership and The play was commissioned by the Walker Review on its Review of Corporate Certifi cates team, Maclaurin House, 18 National Theatre and gives a dramatist’s Governance in UK banks and other fi nancial Dublin Street, Edinburgh EH1 3PP. For any view of the global fi nancial crisis. industry entities. Copies of these and enquiries, please e-mail membership@ For more details about the production, other submitted consultation responses are actuaries.org.uk visit http://bit.ly/ebtvA available at http://bit.ly/3KNtMl
14 November 2009 www.the-actuary.org.uk
012-016_Actuary_1109_ProfNews.in14 14 21/10/09 11:44:37 News Profession
News in brief Reporting standard published The Board for Actuarial Standards (BAS) TAS R is the first of a number of TASs issued a generic Technical Actuarial Standard which will be published in the coming on Reporting Actuarial Information (TAS R) months. Generic TASs on Data (TAS D) on 24 September. On the same date, the and Modelling (TAS M) are expected to BAS also issued amendments to its Scope be published later this year and specific & Authority of Technical Standards, which TASs for certain areas of work, including have the effect of bringing a wide range of pensions and insurance, will be published actuarial work within the scope of the new next year. When these and subsequent TASs standard. Both documents are available at are published, a message will be included http://bit.ly/40sJFo in the monthly general e-newsletter to TAS R will apply to all aggregate reports members and, where relevant, in the within scope completed on or after 1 April regular practice area newsletters. To ensure Edinburgh procession 2010 and it is important that all actuaries you receive the newsletters which are of The Faculty of Actuaries took part, are familiar with the terms in advance of interest to you, please log on to the website alongside other professions, in a procession that date. Under the requirements of the and amend your personal profile or e-mail from the City Chambers to St Giles’ disciplinary scheme, members must have [email protected] Cathedral to mark the 63rd Edinburgh regard to the requirements of all applicable The Profession is considering ways of International Festival on Sunday 16 August standards published by the BAS, including ensuring that members are aware of and 2009. The Faculty was represented by John TASs and BAS-adopted guidance notes, in understand the TASs and how they should Hylands and Mike Dick. addition to any standards published by be interpreted in practice. More details will the Profession. be available in the coming weeks. Momentum conference The Momentum conference this year runs from 7-9 December at Hilton Glasgow. Schmooze and shoes at LK Bennett event It is designed for professionals working Networking evenings are nothing new to in pensions, life insurance, general the Profession — they are regular events insurance, investment or health and care. on the Staple Inn and Maclaurin House The conference programme has been calendars — and are a chance for actuaries developed for actuarial students just to catch up, renew old acquaintances and joining the Profession through to recently form new ones. qualified actuaries, and those with up to However, 24 September saw a more five years’ post-qualified experience. The unusual venue for a networking evening two days will include a full programme of in the glamorous surroundings of the LK technical and non-technical sessions with Bennett shop in Covent Garden. It was an three interactive plenary sessions. opportunity for members to sip champagne, piled up behind the till, everyone took Maynard Leigh Associates will be mingle with friends and colleagues and take full advantage of the discount on offer. It providing workshops to develop advantage of the 20% discount on offer. would be nice to have some similar events delegates’ softer skills and provide Laura Mason, one of the attendees, said: in future — any excuse to buy shoes is CPD hours and there will be audience “It was good having an event which was definitely appreciated!” participation in the plenary session on the not just focused around an actuarial matter. With some attendees travelling from current global financial crisis. For more It was also good to see us actuaries doing York, the event was a great success and information, visit http://bit.ly/1hgWwc our part to restart the economy with a bit of the Profession will be planning similar shoe retail therapy!” networking evenings in the future. Merger survey Jenny Blackford, who also attended, If you have any suggestions for an Of those members who were eligible to added: “It was a great choice of venue unusual venue or theme for a networking vote in July 2009 on the proposed merger, and, judging by the amount of boxes event, contact [email protected] 73.5% of voting Faculty members voted for the merger, and 71.6% of voting Institute members voted for the merger. Register now for ICA 2010 discounts for low-GNP countries, full-time The Actuarial Society of South Africa and academics and large groups. Notice of clarification the International Actuarial Association Contact [email protected] or register Following the publication of the UK invite you to attend the 29th International online at www.ica2010.com/reg.php Actuarial Profession merger vote results Congress of Actuaries. The five-day in The Actuary (page 12, September congress will take place at the Cape Town ICA essay prize winner 2009 issue), the editor wishes to clarify International Convention Centre in the heart The winner of The Actuarial Profession’s that the voter statistics in that notice of cosmopolitan Cape Town, at the foot of ICA 2010 essay prize competition is Marian are applicable to the proportion of the the iconic Table Mountain. Registration is Elliott. Further details of Marian’s winning eligible membership that voted rather now open, with early registration discounts essay will appear in the December issue of than the entire eligible membership. available until 13 November, as well as The Actuary.
16 November 2009 www.the-actuary.org.uk
012-016_Actuary_1109_ProfNews.in16 16 21/10/09 11:44:41 Education News
Faculty of Actuaries welcomes new associates, New research manager Faculty fellows and Institute fellows for the Profession Ronnie Bowie, president of the Faculty of welcome six new fellows who had travelled Earlier in the year, the Profession identifi ed Actuaries, welcomed new fellows at a very from South Africa, Australia and Switzerland the need to have a dedicated manager enjoyable ceremony on 7 September 2009 at to be present. The president also presented to develop and promote the Profession’s Merchants’ Hall, Edinburgh. diplomas to two new Faculty associates and research activity. This was timely, as The president was especially pleased to to two Institute fellows. better publicised research was one of the key themes that emerged in this year’s Pictured: Ronnie Bowie, Donald Munro Budge, Scott Cadger, Barry Scott Dodds, Yoav Dogan, James membership survey. Ruth Loseby took up Dow, Ailsa Dunn, Rene Rene Ferreira, Moira Anne Gault, Jane Lesley Gregson, Rishta Harilal, Steven the post of research manager on Kransdorff, Irene Lai, Siew Yen Joanne Law, John Riaan Lizamore, Christine Willemien Lutsch, Laura 1 September 2009. Her role includes: McLaren, Candice Ming, Saye Mkangama, Wilhelmus Joannes Pieterse, Robert Bruce Rice, Ilona ■ Developing the strategic direction of the Jane Roberts, Sally Elizabeth Smith, Darren Marc Stein, David James Walker, Gary Blair Welsh, Freya Actuarial Profession’s research activities on a Alexandra Williams and Ellen Yang 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 University of Cape Town expands programme currently undertaking to meet people with to support local actuarial qualifi cation an interest in actuarial research including those in the Profession’s practice areas, The Actuarial Science department in the at universities, in regulatory functions, at Faculty of Commerce at the University of government funding bodies and from other Cape Town (UCT) is to receive an injection professions where collaboration could be of R4.5m via the Actuarial Society of South benefi cial. Africa to help it facilitate the fi rst wholly She also plans to attend the Profession’s local professional qualifi cation for actuaries. main conferences, especially those with a The Actuarial Society of South Africa will particular focus on research, over the next offer a local professional qualifi cation from year in order to hear members’ views. Ruth 2010. Currently aspiring actuaries in South would be interested to hear from anyone Africa need to qualify through the Institute who wants to help ensure the Profession of Actuaries in London or the Faculty of plays a leading role in research. E-mail Actuaries in Edinburgh. [email protected] with your ideas. While the South African qualifi cation will University of Stellenbosch for tuition and better equip students to practise in the there are examinations for only two of the Prize presentation South African context, the qualifi cation fi ve courses.” at the OGM will also be recognised by international The Actuarial Society of South Africa actuarial bodies. It will ensure closer has offered a minimum fi nancial interaction between the professional body contribution to UCT of R4.5m over three and students. years. Head of Management Studies at President of the Actuarial Society of UCT, Dr Shannon Kendal, said: “We have South Africa, Mr Garth Griffi n, said: “Our always had a solid relationship with research has shown that at least two the Actuarial Society — all our staff are additional full-time posts are required in members of the professional body and the department in order to provide for the serve on various committees. Our links fi ve specialist postgraduate courses for will now be much stronger as we build Nigel Masters presents Simon Hubbard with the Western Cape-based students. Currently education infrastructure complying with Watson Wyatt prize for Financial Economics for his provision is made between UCT and the the accreditation process“. performance in the CT8 examination in April 2009
www.the-actuary.org.uk November 2009 17
017_Actuary_1109_EducationNews.i17 17 21/10/09 16:15:29 News Industry analysis
Low inflation brings pensioner bonus Point-of-sale ban but public spending increases on PPI appealed 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 Competition Commission recently The combined effect will be a one-off proposed radical changes to the payment boost of 4% to pensions in real terms protection insurance (PPI) market, including and, of course, a 4% increase in the state a ‘point of sale prohibition’ (POSP) — in pension outgo this year and for all future other words, a ban on selling PPI at the time years. This is welcome to those on a that credit is arranged. pension but perhaps less welcome to the Barclays Bank has been successful in its politicians seeking to square the public appeal against the Commission’s findings. sector deficit when they find that this is a The Competition Appeal Tribunal has permanent increase of £2bn a year to add concluded that the Commission had failed to the hole in the finances they already to take into account the loss of convenience knew about. which would flow from the imposition For private sector pensions, the situation of the POSP in assessing whether it was may be rather mixed. Some schemes proportionate to include it in its proposed may freeze pensions when inflation is remedies package. The Tribunal decided to negative and increase them again if and quash that part of the report which imposes when it picks up. Others may claw back recorded this year. Whatever the situation, the POSP as part of the proposed remedies any negative inflation so that for a future actuaries need to understand what their package and remit the question whether a increase it would need to rise more than clients are likely to be doing before they do POSP should be so included for the further 1.4% next year if a 1.4% negative had been their modelling for valuations. consideration of the Commission.
Local government pension funds lose a year’s worth of Council Tax
According to analysis published by the market movements on funding levels is Department of Communities and Local completely unacceptable.” Government, the value of assets in local Currently, councils have to aim to government pension funds in England and hold assets equal to their liabilities. The Wales fell by £24bn during the year to 31 measures of liabilities used are often March 2009. This is roughly equivalent to less cautious than the equivalent targets all of the money local authorities collected selected by private sector employers, partly in Council Tax that year. reflecting the fact that taxpayers will stand According to John Ball, head of defined behind the scheme if things go wrong. In benefit pensions at Watson Wyatt, “When liabilities”. According to John Ball, “There a consultation letter dated June 2009, the councils up and down the country are is a big hole in local government pension DCLG says that “measuring the scheme... struggling to trim their budgets, the last funds that will have to be filled sooner or against an actuarially-defined notional thing councillors will want to hear is that later. The government is worried that even 100% funding target automatically creates their pension funds have lost a full year’s a 20-year payback period could require the concept of a deficit event whenever the worth of council tax. The good news is council tax rises that the electorate will not funding ration falls below 100%”, which that it is not quite as bad as it looks. March stomach. It has therefore been suggested “has implications for Council Tax payers”. was the worst time to take a snapshot of kicking the problem into the long grass The DCLG is consulting on alternatives to pension schemes’ assets and strong stock by letting councils target a funding level a 100% funding target. market performance since then means below 100%. Since the pensions to be paid The local government pension scheme some of the money lost will have been out would be the same, this just means in England and Wales has 1.8m active recovered.” asking future generations to pick up the members (current employees who are The government is consulting on ways tab. It is a different story in the private building up new pension entitlements), to water down funding targets for the sector, where the Pensions Regulator has 1.2m deferred members (former employees local government pension scheme in told employers that massaging down who are not yet drawing a pension) and order to “stabilise the treatment of scheme funding targets to mask the impact of 1.2m pensioner members.
18 November 2009 www.the-actuary.org.uk
018-019_Actuary_1109_IndustryNew18 18 22/10/09 10:04:40 Industry analysis News
Equitable — Here we go again Hey ho, hey ho, it’s It’s two steps forward, one step back again Equitable Members Action Group (Emag). It out of work we go for the Equitable saga, as the High Court challenged the refusal of the government to has ruled that the government’s rejection accept all the fi ndings of the Ombudsman’s of the Parliamentary Ombudsman’s report into the role of government recommendations ‘lacked cogency’. The departments in the Equitable Life collapse, Treasury has 21 days to respond and say what published last year. it will do now, in place of the very limited The Ombudsman, Ann Abraham, found compensation arrangements announced at 10 examples of maladministration, which she the beginning of the year, overseen by Sir said had contributed to the losses suffered by John Chadwick. Equitable pension savers after the society was The High Court One specifi c decision of the High forced to close in 2000. has decided Court was to backdate from the date that Paul Braithwaite of Emag said: “If in the Heyday case compensation emanates to 1991, which will Emag’s members had not paid for this that a default retirement age of potentially bring in both more policyholders legal action, there’s little doubt that, 65 can be justifi ed. Employers can for compensation and larger sums to be despite the Parliamentary Ombudsman’s continue to require employees to retire considered. recommendations for compensation, the at 65 without being found to have been Watch this space, but do not hold your government would have got away with discriminating on the grounds of age. breath for a quick denouement. limiting payments to a small number of A number of lobbyists have argued that The judicial review was brought by the Equitable’s victims for losses post-1999”. EU law should not allow an employee to be forced to retire at age 65. The European Miles more red tape Court of Justice confi rmed that a national Electoral phony war retirement age is permitted as long as it The government has released can be justifi ed, for example to facilitate As the latest date for a UK election draws consultation documents on the workforce planning. near, the annual conferences of the political introduction of the new employer The High Court was left to decide parties provided the opportunity for ideas for obligations on pension schemes from whether the government could justify future manifestos to be tested on the public 2012. It has held to its 2012 date the UK’s default retirement age and has — or at least on the newspapers that the (October in fact, which hardly fi ts in accepted that the government’s desire to public reads. with normal business timetables) protect the integrity of the labour market It is always diffi cult for a ruling party to but put back full completion of the was suffi cient to justify the adoption of appear radical; the charge of, ‘Why haven’t introduction until 2015. In the fi rst year, the default retirement age. On balance, in you done this already if it is such a good available contributions must total at 2006 it agreed that it was proportionate idea?’ would be diffi cult to answer. So this least 2% of pay (1% being from the to choose 65 as the default retirement year it seems, at least in the area of pension employer), with the 8% goal only to be age. In the short term, employers will be saving, that the Conservatives have been achieved by October 2015. According hugely relieved by the decision. Hundreds pushing out many new thoughts. to Paul Macro of Watson Wyatt: “The of retirement-related age discrimination The state pension age increase, planned Turner report envisaged that auto- claims currently before employment by the Labour government to rise to 68 over enrolment would begin in 2010. Now, tribunals will be dismissed. the next 30 years, would rise to 66 for men as it will be October 2015 before the new However, according to Lovells, “This soon as 2016 — in other words, only, at most, rules apply across the board.” sense of relief seems certain to be short- a six-year lead-in. For women, the plans were For any idle HR or fi nance lived. The High Court reluctantly accepted more ambiguous, as the existing programme departments planning what this means that 65 was the appropriate retirement of increases for women from 60 to 65 — the for them, there are 200 pages of age and clearly thought that a higher fact that this was introduced by the last consultation to chew over in only six age such as 68 or 70 would have been Conservative government did not feature weeks. By the time this magazine is more consistent with the purpose of the in the party conference speeches — would printed, the deadline of 5 November regulations.” The government has already remain until 2020. Interestingly, back in will be upon us. It is astonishing said that it will conduct a review of the 1995 the Conservatives felt that 25 years was how much material a simple defi ned default retirement age in 2010 to see needed to give fair notice to those affected. contribution requirement generates. whether it is still appropriate and necessary. George Osborne, shadow chancellor, made Maybe a look over our shoulders at It seems almost certain that the retirement other suggestions in his speech, including an the size of today’s Finance Acts will age will rise at that point, if it survives at all. attack on “Gordon Brown’s disastrous tax raid make us realise that pensions is merely on pensions”. He made a promise to “reverse in the same boat now as tax. But it CONTRIBUTIONS [its] effects and get our country saving again”. is still another pile of administration He was short on what this would mean, that businesses hardly The Actuary welcomes industry news since restoring advanced corporation tax welcome. for this column, particularly from the relief and its recovery by pension funds insurance and pensions sectors. Please would create a huge hole in the fi nances. send news or press releases to Watch for the manifesto when it comes out. [email protected]
www.the-actuary.org.uk November 2009 19
018-019_Actuary_1109_IndustryNew19 19 22/10/09 13:29:07 News Industry
Solvent schemes of arrangement From the world of general insurance In relation to the Scottish Lion Insurance Arson in the UK company’s auditors. In particular, they are Company, a Scottish court has ruled Allister Smith, property risk manager at interested in statements made by Cassano that schemes of arrangement for solvent Aviva, has claimed that more than 40% of in a December 2007 conference call to companies should only be approved if 100% fires in industry and commerce are now investors. If he is charged, he would be one of creditors are in favour. This appears to due to arson, and that this is a major cause of the most senior figures to be charged in have considerable potential implications of the 20% increase in fire claims between connection with offences which relate to for solvent schemes in general, although the first half of 2007 and the equivalent the financial crisis. the scheme adviser (Dan Schwarzmann period in 2009, as recently reported by the of PricewaterhouseCoopers) said that his Association of British Insurers. Solvency II client intends to appeal the decision on the The Association of British Insurers has grounds that this would mean that a single AIG and other fall-out from followed its German counterpart (as reported creditor would have the right of veto of the the global financial crisis last month) in asking the government scheme, which he contends to be contrary At the end of August, Robert Benmosche, to mitigate the effect on insurers’ capital to the intention of the Companies Act. AIG’s new chief executive, revealed that requirements of the introduction of the he had been in regular contact with Hank new Solvency II regime. In a letter to the Greenberg, boss of AIG until 2005, with a Chancellor of the Exchequer, it suggests view to bringing new sources of capital to that requirements for capital and free the group. Greenberg confirmed that he reserves for British insurers could increase was happy to assist. Benmosche also said by between £30bn and £70bn, virtually that he intended to slow the sale of assets, doubling the current requirement. The letter as selling them too rapidly would result in further suggests that such an increase would depressed prices, which would not allow put European insurers at a competitive the company to pay off its federal loans. disadvantage against those from other Members of the AIG board are said to be jurisdictions. concerned by Benmosche’s confrontational The 26 consultation papers issued by approach towards various political figures, the Committee of European Insurance especially New York attorney general and Occupational Pensions Supervisors Andrew Cuomo. The matter was expected to (CEIOPS) with a deadline of 11 September be raised at a board meeting in September. generated over 20 000 comments from 105 Joseph Cassano, the former head of AIG stakeholders. This has led to a suggestion financial products, is under investigation that the European Commission will not UK motor insurance by the Justice Department and the implement CEIOPS’ latest recommendations. The UK government has announced plans to Securities & Exchange Commission. These CEIOPS was considering the comments and tighten controls against uninsured motorists, bodies are considering whether he misled drawing final conclusions at its members’ making it a criminal offence to keep an investors by overstating the value of meeting in late October before issuing a uninsured vehicle and not just to drive one. credit default swaps issued by AIG and/ final tranche of consultation papers with a Under the new system the insurance industry or failed to report material facts to the deadline of 11 December. will work with the Driver and Vehicle Licensing Agency to identify uninsured Pollution developments vehicles and give their owners a limited Victims of alleged contamination from a period to obtain insurance — failure to do so toxic waste dump in the Ivory Coast have will result in a £100 fine and potential seizure called on Trafigura, one of world’s largest and destruction of the vehicle. The problem oil traders, to ensure a full clean-up. currently costs law-abiding motorists more Trafigura has prepared an offer for 31 000 than £400m annually. locals in the Ivory Coast who claimed the dump caused a range of illnesses. The for more general case relates to an incident in 2006, when insurance news hundreds of tons of “slops” from the More news on the following items can Probo Koala, a ship Trafigura had hired, be found on the website: were allegedly dumped near Abidjan, the n Regulatory and legal developments African country’s commercial capital. The n Monte Carlo rendezvous sum being discussed is based on the range n Marine and aviation developments of short-term symptoms claimed by the n Capital markets transaction victims. Tens of thousands of people in to deny any liability for events that n Fraud in the USA Abidjan claim they have been affected by occurred in the Ivory Coast. The claimants n Mergers and acquisitions fumes. The firm had, according to reports, allege that evidence shows at least 15 n Job cuts tried to dispose of the cargo in several people died and thousands were sickened n US state catastrophe insurance countries before it finally ended up in West by toxic waste, as reported in a United n Large losses Africa. Trafigura stated that they continued Nations report released in September. Visit www.the-actuary.org.uk/870291
20 November 2009 www.the-actuary.org.uk
020_Actuary_1109_GeneralInsuranc20 20 22/10/09 13:27:41 Tuesday 17 November Programme event
SIAS Jubilee Lecture We are very pleased to announce that John Staple Inn Hall, Coomber will be delivering this year’s Jubilee Lecture, the highlight of the SIAS programme High Holborn, London calendar. The lecture is entitled ‘Being profitable is 5.30pm for a 6pm start 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 SIAS invites you to a luxurious Russian palace for our annual supper! Let us take you back in From Russia with love — time to the drama of the Russian Revolution, The revolution where we will combine the opulence of Tsarist Billingsgate Vaults, royalty with the beauty of a frozen Siberian forest. For further information or to book Lower Thames Street, tickets, visit www.sias.org.uk or contact Alvin London EC3 Kissoon at [email protected]
Tuesday 8 December Programme event
Variable annuities Paul Shallis, Gareth Jones, Iain Buckle and Mark extent to which variable annuity products can Hills from the Variable Annuities Member Interest meet real customer needs and then present some Staple Inn Hall, Group will be presenting a paper entitled Variable possible scenarios for the future of the market. High Holborn, London Annuities: Past, Present and Perfect? They will look There is no need to register for this event in 5.30pm for 6pm start at the mixed experiences so far for the developing advance, and a free buffet supper will be provided UK variable annuity market, consider in detail the at a nearby pub after the meeting.
Call for papers Programme
We are now looking for papers to be presented at We also encourage younger members of our programme meetings in 2010. We particularly the profession to consider writing a paper and would like to include papers that will be of interest presenting their ideas to a friendly audience. to younger members, and that are likely to Please contact [email protected] for more stimulate a lively discussion. information.
For details of events, visit www.sias.org.uk
www.the-actuary.org.uk November 2009 21
021_Actuary_1109_SIAS.indd 21 19/10/09 12:03:32 News People/Society
SIAS pool tournament than any other team. Oliver Payne and Blazing a trail in the USA Review by Iain Ritchie his partner were hoping to do well after The SIAS pool tournament took place on winning their company pool tournament, Dominic Clark, an actuary with Milliman, 28 August with the teams eager to pot for however they were unsuccessful in getting hiked over 250km of the John Muir trail glory. The winners of the last four years, past the group stages. Clearly the standard this August to raise money for research into the KPMG Boys, were unable to attend of pool skills is very high in the actuarial a rare form of uveitis, an eye condition to defend their title, so it was very much profession. suffered by his sister, which affects the up for grabs. A few of the teams were out With the knockout games under way, retina and leads to vision loss. Here he to seek revenge on opponents from the the tension was building. However, it never describes the challenge. previous year while others were keen to see fazed Amanda Ryan from Canada Life, who “The John Muir trail runs through how they would fare against the pick of the managed to pot the black to put her and California’s Sierra Nevada from Yosemite actuary crop. It looked to shape up to an Paul David into the semi-finals but their to Mount Whitney, the highest peak in exciting tournament. challenge was destined to end there. In the the contiguous United States. The trail After the usual discussions on the rules, meantime, last year’s runners-up Dipesh passes through some of the most remote the games got under way. Forty-one teams Mehta and Mitesh Tailor from Hewitt back-country in the USA, continuing for turned up and were divided into 12 groups carried on potting their way to the final in days without crossing a road, power line or of three or four teams. The best from each the hope that this year the trophy would passing through a village. Having only been of the groups proceeded to the knockout be theirs. Their opponents, Tom Hargreaves able to skirt this beautiful area by car, I had tournament. The four best runners-up and Harsil Shah from Barnett Waddingham, always been tempted by the idea of hiking from the groups also made it into the latter had other plans. It was not to be for Dipesh the trail. However, this idea suffered from stages. This was decided by the results and Mitesh, with Tom and Harsil winning the fact of my almost total inexperience, against the top three teams in each of the two-nil. Congratulations to them. having never camped before nor walked groups — nothing like a bit of calculation After the tournament, the players carried much further than the kitchen. during a pool tournament. Group three on playing and drinking into the night. “After some amusingly naïve ‘training’ was very closely contended between three Many discussions were heard on how it in the mountains near my home in Spain, of the four teams, who finished equal in could have been different if only their I found myself setting off from Tuolumne terms of number of games won. However, partner had potted an easy ball. Meadows with a small group. Over the next Vu Vuong and Ming Hav from Prudential We hope that you all had an enjoyable 15 days we hiked and camped among the managed to go through by leaving more evening and look forward to seeing you lakes, forests and high mountain passes of their opponents’ balls on the tables next year for a re-match. 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 Worthy cause for Worshipful carols 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 This year the Worshipful Company of Not only will you be able to sing some College London and sent to: Sarah Mayhew, Actuaries’ annual carol concert is open to well-known Christmas hymns but you will PA to professor Susan Lightman, Institute all members of the profession and their also enjoy the singing of the Canticum of Opthalmology, Moorfields Eye Hospital, families. It will be held at 7.15pm on Choir. After the service, wine, soft drinks City Road, London, EC1V 2PD, UK. Thursday, 10 December at the Church of St and mince pies will be served. Clark on the scenic John Muir trail Bartholomew the Great, West Smithfield, As well as giving you the chance to enjoy London EC1A 9BU. The church is just an evening of music and the surroundings South of Smithfield Market and is close to of St. Bartholomew’s church, we are also Barbican tube station. supporting The Cure Parkinson’s Trust. St. Bartholomew’s is the oldest surviving Tickets cost £25 per head (£15 for children). church in the City of London. It is a The closing date for applications is Tuesday, magnificent and unusual building dating 1 December. Ticket numbers are limited. from 1123. It is said that if Richard the Contact susan.george@barnett-waddingham. Lionheart was alive today he would only co.uk or write to Susan George, Barnett recognise two buildings in the City of Waddingham LLP, Cheapside House, London: The Tower and St. Bartholomew’s. 138 Cheapside, London EC2V 6BW.
22 November 2009 www.the-actuary.org.uk
022-023_Actuary_1109_SocialNews.22 22 22/10/09 10:33:42 Send news items to [email protected] People/Society News
Deaths Past master goes up the wall n The partners of Pope Anderson are sad to report that Peter Kerr, the founder of their By Brian Ridsdale UK chief commissioner of The Scout predecessor business, passed away on Association, Wayne Bulpitt explained that 3 September 2009. Peter had been ill for scouting is “on the up” and particularly some time but died peacefully in his sleep. strong in inner cities where few other youth Peter established his own business in organisations feature. Scouting has 500 000 1992 after working with Punter Southall members in the UK, of whom 80 000 are Kerr, Mercer, Duncan C Fraser, Callund & adults. The biggest problem is that 33 000 Co and Abbey Life. He was a larger-than-life young people would like to take up scouting character and will be missed by many former and cannot because of a shortage of adult colleagues and clients, many of whom also helpers. You do not have to look good in became friends. A memorial service was held Wayne Bulpitt and Chris Ide shorts to help — the organisation utilises on 30 September 2009. master the climbing wall people with all sorts of skills. Numeracy n Mr Michael Alan Hogg died on could be helpful, enthusiasm would be a 22 February 2009, aged 87. He became a Liverymen of the Worshipful Company of winner and if any readers are minded to fellow of the Faculty in 1958. Actuaries will not be surprised to hear that respond, the website is http://scouts.org.uk/ n Ross Arthur Collins died on 1 December past master Chris Ide has been going up the Unable to resist a challenge, Chris 2008, aged 56. He became a fellow of the wall recently. persuaded the chief commissioner to support Institute in 1985. In September Chris Ide and I went to him in a small ascent. Chris may be a past n Michael Curtis Eastoe died recently, Gilwell Park, the home of scouting in the UK master but he is far from past climbing. aged 74. He became a fellow of the Institute and a training and activity centre for scouts Having survived Gilwell, his next target in 1961. and their leaders, for the formal opening is to climb his final few ‘Wainwrights’, n Alan John Kempson died on 8 July 2009, of ‘The Lid’. This is a large, covered activity the 214 Lake District fells described by aged 80. He became a fellow of the Institute area, featuring a new bouldering wall built Alfred Wainwright in his famous pictorial in 1963. with a donation of £8 000 from the livery guides. This will be capped by a champagne n Ronald Henry Rawlinson died recently, company, part of the money raised on celebration on his last peak, hopefully on aged 81. He became a fellow in 1964. its Wainwright Walk in 2007. The wall is 4 September 2010. He has invited friends designed to encourage young people to try who have accompanied him on his walks PEOPLE NEWS climbing — simple at first, more challenging over the years, including those who played If you have any newsworthy items for these when they are ready. It is not too high, and a significant role in the Wainwright Walk in pages, please e-mail Amy Guna at comes with a cushioned floor. 2007, to join him. [email protected] notices Curry and fireworks at the Lord Mayor’s Show n SIAS has announced its key speaker for its Jubilee Lecture. John Coomber The Worshipful Company of Actuaries is enjoyed a 33-year career with Swiss inviting all members of the profession, Re, retiring in 2005. Today he is CEO their friends and families to view the Lord of Pension Insurance Corporation. Mayor’s Show on Saturday, 14 November He is also a fellow of the Institute of and the fireworks on the Thames early Actuaries and an honorary fellow of that evening. The Chartered Insurance Institute. Although the procession can be viewed The lecture is entitled ‘Being from the streets, there will be a limited profitable is compatible with climate number of places available in the Barnett book early to avoid disappointment. protection’. Waddingham offices at 138 Cheapside, Tickets for the lunch are £15 each. n Back Issues of The Actuary — 2006 which overlook the procession route. You If you would like to attend please Due to an oversight, there is a set of should arrive by 10.30am, and tea and write to: John Harsant, Newton House, magazines missing from an archive of coffee will be provided. Well Lane, Heswall, CH60 8NF (john@ The Actuary. If anyone has retained a Also, as in previous years, we have harsant.uk.com) by 7 November. Let him full set from 2006 which they would booked a private room at Doggett’s Coat know the names of those attending and be prepared to donate, please contact and Badge next to Blackfriars Bridge on whether they want to attend the view of [email protected] the South Bank so that you can enjoy a the procession, the view of the fireworks n The October issue report on the wonderful view of the fireworks. We will and the curry, or both. For those attending Ironman UK triathlon incorrectly meet in the Doggett’s bar at 2.30pm for a the fireworks, please enclose a cheque labelled Peter Redhead as ‘Peter curry buffet lunch at 3.00pm, followed by for £15 per person made payable to Thompson’. Peter Redhead came fifth the fireworks at 5.00pm, launched by the ‘The Worshipful Company of Actuaries‘. and was the second Brit out of the new Lord Mayor from a barge moored on Please also provide your home and e-mail over-45s from a total field of 1600 the river between Blackfriars and Waterloo address, together with any special dietary competitors. Bridges. Again, space is limited, so please requirements for your party.
www.the-actuary.org.uk November 2009 23
022-023_Actuary_1109_SocialNews.23 23 22/10/09 10:33:54 Solvency II Technical provisions A point of consistency Andy Frepp, Craig Turnbull and Sandy Sharp highlight some unfortunate consequences of the Solvency II technical provisions
Risk-free rates, extrapolation by many that a liquidity premium exists, and liquidity premia its quantification and the circumstances in CP40 considers the important issue of which it can be used in valuing liabilities establishing how the risk-free term structure remain contentious. CEIOPS recognises used for discounting liability cash flows is this, stating that a best-practice method derived. There are three key questions that is still to emerge in this area. While this is need to be addressed when defining this undoubtedly true, it is a topic that will see methodology: much research in the coming months and 1 What risk-free assets should be used to recent practice in MCEV assessments has derive the risk-free term structure — seen extensive use of liquidity premiums Andy Frepp, left, is a director at Barrie & Hibbert for instance, government bond yields or in the market-consistent valuation of Ltd and leads its corporate development and swap rates? insurance liabilities. product proposition team, Craig Turnbull, right, 2 Insurance liabilities will often have cash is Barrie & Hibbert’s regional head of North flows that will arise beyond the longest Market risk and the America and Sandy Sharp is a consultant maturity of observable risk-free assets. Solvency II risk margin How should the risk-free yield curve that is The technical provisions are made up of a derived from observable market prices be best estimate and a risk margin. The risk extrapolated in order to value these liability margin in the technical provisions has to he introduction of Solvency II in cash flows? be calculated wherever the liability cash 2012 aims to raise the standard 3 Some insurance liabilities are highly flows cannot be reproduced by values of insurance company risk and illiquid, much more so than the above derived from marketable assets. Currently, financial management. Although risk-free assets, the obvious example being marketable assets are not available that T the formal implementation of Solvency II fixed annuity business where no surrender reproduce cash flows affected by certain is still over two years away, the Committee option is available to the policyholder. liability risks such as mortality risk, so of European Insurance and Occupational There is a widely-held belief that a financial there is ‘unavoidable’ uncertainty and a Pensions Supervisors (CEIOPS) has already instrument with such illiquidity would have risk margin is required in the technical issued a large number of consultation papers a market value that incorporates a discount provisions. (CPs) containing detailed proposals for for this illiquidity. Should an allowance be CPs 39 to 42 introduce guidance on implementation measures. The CPs give a made for the illiquidity of (some) insurance when values derived from market prices strong indication of the issues that insurers liabilities in defining the risk-free yields that are ‘reliable’ and can be used without a risk will face in implementing Solvency II. At the are used to discount the cash flows? margin calculation. As currently drafted, time of writing, CEIOPS has recently issued a CP40 states that government bond yields many markets generally understood to series of CPs covering, among other things, should be used as the starting point for produce ‘reliable’ market prices, such as the calculation of technical provisions. deriving the risk-free yield curve. This differs This calculation is central to the Solvency from established practice in some other II process and CPs 39 to 42 cover much of areas of market-consistent insurance liability the detail, the core of the proposals being a valuation. For example, Market Consistent market-consistent valuation of liabilities. Embedded Value (MCEV) uses swaps as its A market-consistent valuation embraces reference risk-free assets. Swaps will usually the goal of putting a mark-to-market value yield more than government bonds, so the on insurance liabilities while recognising decision to use government bond yields that these liabilities will often have features may result in higher values for the technical (ultra-long-term, path-dependency, and provisions than are produced under MCEV. so on) that are not readily replicated by CP40 recognises that extrapolation of observable market prices. As a result, market- the yield curve will be necessary, but does consistent valuation of insurance liabilities not give any specific methodology for will inevitably involve a significant amount how this should be done. This will have a of judgment. The detailed proposals in the major impact on the technical provisions CPs aim to provide guidance on how these calculation of long-term liabilities. areas of judgment should be implemented Finally, CP40 also states that no in the calculation of the technical allowance for the illiquidity of insurance provisions, and they introduce some new liabilities should be incorporated into the and complex issues in doing so. risk-free yield curve. While it is accepted
24 November 2009 www.the-actuary.org.uk
024-025_Actuary_1109_Frepp.indd 24 22/10/09 10:57:03 Technical provisions Solvency II
over-the-counter (OTC) derivatives, may the Solvency II risk margin. There is a including assumptions about risk. not meet the CP definition of ‘reliable’. similar issue with yield curve extrapolation The CEIOPS proposal stops at Level 1 and This means that there is ‘unavoidable’ formulae, again potentially resulting in a appears not to use the information on how market risk and a risk margin is required in double-counting of the risk margin. the market prices risk for Level 2 or Level 3. calculating the technical provisions. This is n A process must be created by insurers to This is an area where some consistency of a change from the QIS4 specification, where calculate the risk margin. The CPs suggest approach between IASB and CEIOPS could ‘unavoidable’ market risk was not recognised that the risk margin is calculated using produce an efficient outcome. in the calculation. a cost-of-capital approach. This requires a valuation of the cost of future capital What does this all mean? Unavoidable market risk in requirements for the asset whose risk Although there is a long way still to go in the the risk margin calculation margin is being calculated. Calculating the Solvency II process, the foundations are now This raises many interesting issues: risk margins in option prices would be an being set. CEIOPS’ initial proposals suggest n Rules to define markets that produce extremely demanding modelling exercise, there will be some significant inconsistency ‘reliable’ prices will have to be developed. Is likely requiring a calibration to the market with other reporting standards, necessitating this really a binary decision? For example, prices of ‘unreliable’ assets, and so would some highly complicated calculations even for the most ‘reliable’ asset prices, produce results that are very similar to that are not required by the other market- it is highly unlikely that a large block of simply using ‘unreliable’ market prices to consistent reporting standards. insurance liabilities could be matched at derive a market-implied risk margin. We believe this is the right time to that price. The size of major insurance take a step back and recall that the liability blocks means that some market Another approach fundamental objective of Solvency II is to price impact is inevitable in the event The International Accounting Standards better align firms’ market risk exposures of trying to switch to the matching or Board (IASB) has recently published an with their regulatory capital assessment, replicating portfolio. exposure draft on fair values. This proposes so as to give incentive for better economic n For markets that do not meet the ‘reliable’ a three-level hierarchy for inputs to the fair risk management behaviour and avoid test, then on what basis value calculation: regulatory arbitrage. Such an aim is best will the best-estimate Level 1 — quoted prices in active markets. served by a methodology that is pragmatic calculation be done? Level 2 — inputs, other than quoted prices and transparent, that makes the most Extrapolating the implied included within Level 1, that are observable, use of available market prices, and which volatility values of either directly or indirectly. is coherently aligned with the emerging ‘reliable’ prices would Level 3 — inputs that are not based on practice of other major reporting standards. introduce a market observable market data but which reflect risk margin that the assumptions that market participants If you would like to comment on this article, please would duplicate would use when pricing the asset or liability, e-mail [email protected]
www.the-actuary.org.uk November 2009 25
024-025_Actuary_1109_Frepp.indd 25 22/10/09 10:57:07 Risk management Liquidity risk Managing liquidity risk Paul Sweeting and Patrick Kelliher compare the liquidity risk management advice given by the Chief Risk Officer Forum and the Basel Committee on Banking Supervision
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 Paul Sweeting is a professor of Actuarial a long-term basis while raising funds on a Science at the University of Kent. Patrick short-term basis. In contrast, life insurers Kelliher is senior risk manager at Scottish take money in on a long-term basis and Widows. Both are members of the Actuarial invest this mostly in marketable securities. Profession’s Global Financial Crisis Group However, it is worth comparing the guidance given to both types of organisation lliquidity has been a major factor in to see where lessons can be learned. the recent global financial crisis. Losses arising from residential mortgages led Principles ultimately to a broader uncertainty over The principles provided by the CRO Forum Ithe ability of banks to meet other financial and the BCBS are broadly consistent, but obligations. This led to a reluctance in the there are differences reflecting the nature money markets to lend to banks, which itself of the institutions. For example, the meant the banks could not lend to businesses CRO Forum points out the importance in the broader economy, a major contributor of considering an insurer’s tolerance for to the subsequent recession. liquidity risk in the context of other risks. Illiquidity has also had an impact The BCBS makes a similar point but goes points out the importance of allowing for on individual further, saying that a sudden collapse in liquidity in financial policyholders. » Both organisations banks should also markets when analysing liquidity risk. Investors in a number recognise the importance consider their role in It makes the point that this risk can be of funds have been the financial system. mitigated by having an ongoing presence in unable to access their of embedding liquidity This recognises a markets (including the sale and repurchase, investments or have risk management into a key fact: that bank or ‘repo’, market) where funds may be faced punitive charges failure can threaten raised. This involvement makes it easier to as the markets for firm’s risk management the integrity of the monitor the capacity of markets to meet the assets supporting framework « financial system funding demands and allows a firm to build these contracts have given the role of a reputation in those markets. The BCBS also dried up. Liquidity risk management should banks in clearing payments, acting as recommends that the continued availability therefore be a key feature of broader risk counterparties to derivative transactions and of funding, including that of retail deposits, management frameworks. providing liquidity to other institutions. is monitored. It goes further than the CRO There has already been a great deal of A point made in both documents is that Forum, actually having a requirement for academic and also practitioner-focused work liquidity has a cost. This cost has been banks to maintain an ongoing presence on the issue of liquidity risk management. discussed in a number of recent articles in its chosen funding markets, to diversify One of the roles of the Global Financial relating to liquidity premia in bonds. This sources of funding and to gauge regularly Crisis Group is to pull this work together is usually considered in terms of the rates its capacity to raise funds in those markets. and bring it to the attention of the of interest that should be used to value This is particularly important given that the profession. This has led to a focus on two liabilities. However, the CRO Forum and the seizing-up of securitisation markets was a particular documents that have emerged BCBS point out that it should also have an factor in the run on Northern Rock. on liquidity risk management. The first is influence on product design. In particular, Both the CRO Forum and the BCBS a document setting out best practice for building an element of illiquidity into a suggest a written liquidity policy and insurers, issued in October 2008 by the product might help reduce its price. stress management plan be regularly Chief Risk Officer (CRO) Forum. The forum The availability of funding is also reviewed, maintained and approved by consists of the CROs of major insurance discussed in both papers. The CRO Forum senior management. In other words, both
26 November 2009 www.the-actuary.org.uk
026-027_Actuary_1109_Sweeting.in26 26 21/10/09 15:35:52 Liquidity risk Risk management
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 organisations recognise the importance of The final area considered in detail by stress-testing. Its document considers some embedding liquidity risk management into the BCBS, but not by the CRO Forum, factors discussed by the BCBS, but the list of a firm’s risk management framework and is the role of the regulator. Given the risks is shorter, reflecting the fact that banks ensuring that it is considered at a senior difference in roles between the two bodies, have a wider range of funding issues than level within firms. This is consistent with this is understandable, but the level of insurers. However, the CRO Forum does broader principles of sound enterprise risk detail given by the BCBS is instructive highlight some insurer-specific issues, such as management, namely that risk management and perhaps suggests the extent to which interest rate risk (for example, higher market is woven into the way a firm carries out its insurers might be monitored in relation to rates may trigger mass lapses on guaranteed business and is of interest to those at the liquidity in future. return products), reinsurer behaviour, highest level of an organisation. distribution issues and catastrophe risk. It One area that the BCBS describes that Measuring liquidity also sets out some specific scenarios as well as is consistent with a fundamental part of Both the CRO Forum and the BCBS consider the considerations scenarios should contain. Basel II is the regular disclosure of sufficient how to actually measure liquidity, and both The papers produced by the CRO Forum information for the market to judge a bank’s implicitly assume that the approach used and the BCBS are reassuringly well-aligned; approach to liquidity risk management. will be stress and scenario-testing. This however, insurers would be well advised to The idea behind this is that poor liquidity is sensible. Without considering specific consider the additional advice given by the management will lower a firm’s value in the scenarios, individual sources of liquidity risks BCBS outlining how to carry out effective market’s eyes, thus having an adverse effect might be missed; however, there is simply liquidity stress-testing in practice. on a firm’s share price. Market discipline is not enough data to consider stochastic not covered in the CRO Forum’s guidance liquidity modelling. Furthermore, stochastic Useful links: — perhaps it should be. Even if it is not, approaches are at their weakest when The BCBS and CRO Forum documents are available it could be argued that insurers should considering the most extreme scenarios. at the links below. Also below is a link to a list of be willing to advertise their liquidity The BCBS recognises that no single useful publications on the ERM area of the Actuarial management to the market. Such an metric can be used to measure liquidity Profession website. approach could lower the cost of capital for and recommends metrics that consider the n BCBS: http://bit.ly/28pxg4 those firms, increasing returns on capital for balance sheets as well as cash flow. In relation n CRO Forum: http://bit.ly/3dSOma shareholders and policyholders. to scenario tests, the BCBS recommends n ERM area: http://bit.ly/Yg9bG
www.the-actuary.org.uk November 2009 27
026-027_Actuary_1109_Sweeting.in27 27 21/10/09 15:36:04 Roger Bootle Q&A Capital gains 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
What led to your interest in economics? avoid a repeat situation in the future? I think it was largely through politics, I don’t think we know quite what the economic issues being a large part of the lessons are because, in a sense, we are still political debate. I didn’t start off that arguing about it. History rarely repeats interested in economics at all; at school itself exactly. It’s a bit like generals fighting my great love was history and, in fact, in the last war. My guess is that, if we’re not many ways I am an historian-manqué. Then, careful, we’ll end up preventing a repeat of when I started doing economics I found it the last recession and, of course, it won’t intellectually quite attractive. I started to be the last recession we’re confronted with, fall in love with the structure and way of but the next one. arguing, and I found that it suited me quite well. Your new book The Trouble with Markets: Saving Capitalism from Itself will be As a child, what were your aspirations released in October. Briefly describe the for the future? Certainly not to become an essence of the book. It’s an attempt to get economist. I probably wanted to become beneath the recent crisis to what I might an engine driver, I suspect. I do recall at a say are the deep causes of it and to ask very early age being extremely interested what, I think, are now the key questions by politics and, at some stage, actually — where are the appropriate boundaries fancying the idea of becoming a politician. between markets and government? I was fascinated by politics in my teens, but And what is the role of government in Roger Bootle is the founder and managing that gradually wore off. restricting as well as encouraging markets? director of Capital Economics. He is also a Where can markets go wrong and where specialist adviser to the House of Commons In which economic theory are your do markets need to be constrained? It’s Treasury Committee and an honorary fellow professional beliefs most grounded? got both a domestic and an international of the Institute of Actuaries There are all sorts of theories and thinkers aspect to it. to which I have some adherence. The and managing director? I had reached the thinker that I admire the most is Keynes What inspired you to become an author? end of my tether with big organisations and that has Was writing a skill that and I reached a point where I realised that not changed » I would like to you could readily call I couldn’t go on with any integrity doing since I was an establish and run a whole upon? My first book was what I was doing. I didn’t believe in the undergraduate. an academic textbook model of providing research to clients from I’ve also always new course in economics and it was written as a a base of that sort. There were enormous admired John which puts the subject joint effort. I couldn’t conflicts of interest, which I could see even Kenneth Galbraith, on a sound footing and write to save my life. then, and I disliked corporate politics. I’d although he has Then I wrote a book always had a strong business sense, even always been much returns it to where it was called Index-Linked Gilts, though I’d been an academic. So far, we’ve more to the left of 60 or 70 years ago which many an actuary done remarkably well. We’ve now got offices me, politically. « might well have seen or in London, Toronto and Singapore, I employ at least had recourse to on a shelf. I think about 50 people and we’ve got just under Has the ongoing financial crisis changed what was driving me was that I found these 1 000 institutional clients around the world. any of your views on economic theory? It things very interesting. The real change was has probably consolidated them, I suppose, The Death of Inflation. By that stage I’d done What is the greatest risk you have taken and made me feel more strongly about a lot more writing and I was more practised either personally or professionally? The things that I’ve felt all along. I’ve always at it. I’d certainly written on an ad hoc basis set-up of Capital Economics was both a been a believer in institutions, history, the for a number of newspapers for years. The huge personal and professional risk. Since power of accident and human action. This motivation then was to try and produce I made that decision, the overall climate has made all those feelings much stronger something that would be on the stocks a of opinion with regard to independent and therefore I think economics should not bit longer and would leave a mark. research has completely changed. be taught as some sort of abstract science. Whereas most people thought I was doing What led to the establishment of Capital something unfathomable, the prevailing What lessons have been learned and Economics, the macro-economic research view now seems to be it is very important what measures should be taken now to consultancy of which you are founder Continued on page 30
www.the-actuary.org.uk November 2009 29
029-030_Actuary_1109_Bootle.indd29 29 21/10/09 15:18:46 Q&A Roger Bootle
thereof and also the social aspects of relax and what is your favourite pastime? creating the working environment. The sheer number of things I’m involved in Although we work hard, it is a civilised probably gives a misleading impression of environment — people enjoy it and I the amount of time I am working. feel proud to have created it. I try to do a bit of sport: I play squash, I play bridge, I am interested in cinema, As an honorary fellow of the Institute theatre, concerts, opera, seeing friends and of Actuaries, how do you believe holidaying with family. I am rather too actuaries can add value in the wider interested in food and wine! I suppose over fi eld of economics? I’ve always felt the last year I haven’t had a great deal of that economists and actuaries needed relaxation. I’ve been heavily involved in to get together much more and actually writing the book. discuss things. My appointment and those of a few other economists as You have expertise in many areas from honorary actuaries was part of an journalism to consulting. Are there attempt by the profession to do that, other opportunities at which you but I don’t think economists have would like to try your hand? I still have done enough in reaching out to talk a fair bit to do at Capital Economics, to actuaries. Actuaries get their hands but I would like, if the call came, to do dirty metaphorically and deal with something more in government. I’d enjoy real problems. I’ve always thought making a contribution in that regard, to that there’s potential for a lot of cross- do something to help this country. It’s fertilisation, if only the economists not often that economic theory is very would climb down from their ivory important in a country’s history, but it is tower and confront the structure of now. Over and above that, I have many real world problems to see how to deal things I want to do, one of which is to An extract from the book can be found at with them. take part in and maybe establish and run a www.the-actuary.org.uk/870181 whole new course How do you measure your » I’ve always in economics Continued from page 29 success? What matters to me been a believer in which puts the to have independent research. is feeling that I’m making a subject on sound There was another risk, professional contribution and that I’m institutions, history, footing and rather than personal: my Death of Infl ation helping clients make good the power of accident returns it to where thesis. I stuck my neck on the block and decisions. I get a kick out of and human action it was maybe 60 took a real risk with a view, which could making a judgment which « or 70 years ago. have proved to be totally wrong. proves correct. It gives me tremendous And if I had the money I would like to satisfaction. My reputation among people found an institute that does that. I’ve also What do you consider your greatest who know me is really how I measure got ambitions to write things completely professional achievement to date? I’m my success. outside the sphere of economics, in the very proud of The Death of Infl ation and I realm of social affairs and public policy. hope in due course I’ll be even more proud With your role as a Daily Telegraph of The Trouble with Markets. I’m also proud columnist and other professional The complete interview with Roger Bootle can be found of the one that comes between, Money commitments, when do you fi nd time to at www.the-actuary.org.uk/870189 for Nothing. That’s the book in which I railed against the excesses of the property SPECIAL OFFER market. I suggested there was going to be a massive fi nancial crisis and I recall saying The Trouble with Markets by Roger Bootle is published by Nicholas Brealey Publishing that it is only the strength of the property (RRP £18). To order your copy for the special price of £16 with free UK postage, call market that stands between us all and an +44 (0)20 7239 0360 with your credit card details quoting ‘The Actuary’. Offer closes enormous slump. 31 December 2009. For international postage rates please contact the publisher direct. Building Capital Economics has given Visit www.nicholasbrealey.com me enormous satisfaction. It’s been about A review of The Trouble with Markets will appear in a future edition of The Actuary. the entrepreneurial risk and management
30 November 2009 www.the-actuary.org.uk
029-030_Actuary_1109_Bootle.indd30 30 21/10/09 15:18:52 Life Policyholder behaviour Another dimension Ed Morgan and Jeremy Kent consider the impact of dynamic policyholder behaviour in life insurance
he modelling of dynamic policyholder The Solvency II Framework Directive behaviour (DPB) can now be requires companies to assess their required considered an essential part of the life capital on the basis of the ‘true risk actuarial tool-kit. profi le’. If losses from particular economic T For instance, the European Insurance CFO circumstances are highly variable depending Forum Market Consistent Embedded Value on the level of rationality of policyholders (MCEV) Principles require that DPB should and there is signifi cant uncertainty as be considered in the calculation of the Time to what this will be, then the level of Value of Financial Options and Guarantees rationality itself can be an important part of (TVOG). The current Solvency II documents this risk profi le. Ed Morgan, left, and Jeremy Kent are principals require DPB to be considered in both the We can therefore think of dynamic with Milliman calculation of technical provisions and the policyholder behaviour as a variable Solvency Capital Requirement (SCR). dependent on both the level of ‘in the There are a number of factors which often moneyness’ of the option and the level of make deriving robust DPB assumptions policyholder rationality. problematic, including the following: This is illustrated by the surface in the (i) There will not be any historic experience three-dimensional graph (Figure 1) for the for many economic scenarios, since even case of lapses dependent on the ‘in the quite plausible situations moneyness’ of the may not have occurred » The fi rst question surrender guarantee: in the recent past; for we should ask is, ‘How If we simply choose example, a sharp increase a best-estimate DPB in long-term interest rates. asymmetrical are the function then, in (ii) It is diffi cult to assess results of the company effect, we are choosing the extent to which there to differing levels a best estimate of the may be secular trends over level of rationality. time which invalidate of rationality?’ « This means that the use of past experience as the basis for we are overlooking the potential for estimating future experience. For instance, signifi cantly heavier losses in the case that we might expect that policyholders may we eventually prove to have underestimated become more effective in using the options rationality. within their policies over time and, indeed, The implication of this is that we may Solvency II CEIOPS Consultation Paper 39 need to consider a stochastic approach requires that appropriate consideration is to DPB in order to capture risks fully. In given to this possibility. most models, while the level of ‘in the Although policyholder behaviour can moneyness’ of options may be modelled take a number of forms, one of the key stochastically, the level of policyholder questions is how rational policyholders will behaviour for a given level of ‘in the be in reaction to changes in the values of moneyness’ is deterministic. their options. We can express this ‘level of We discuss the case for using a stochastic rationality’ as being between zero and one, approach to DPB in three common where zero represents neutral behaviour applications of DPB modelling below. with no tendency to exercise options more when they become more valuable, and one Calculation of TVOG represents fully rational behaviour with all The fi rst question we should ask is, policyholders exercising any option which is ‘How asymmetrical are the results of the in the money. company to differing levels of rationality?’ Of course, cases of ‘irrational’ behaviour TVOG essentially arises due to asymmetries are not impossible, for instance due to in value over the range of stochastic a need for liquidity during an economic scenarios. If more or less rationality simply downturn. Nevertheless, it seems reasonable means proportionately heavier or lighter to assume that the level of rationality will losses for the company, then the impact of generally be between zero and one. under or over-estimating rationality could
32 November 2009 www.the-actuary.org.uk
032-033_Actuary_1109_KentMorgan.32 32 22/10/09 10:35:11 Policyholder behaviour Life
be symmetrical, meaning that a stochastic for the company to invest, which will then of DPB under market stresses. The level of approach to DPB would not be required dilute the policyholder returns with lower uncertainty under such stresses is likely to for the calculation of TVOG. A guaranteed new money yields, dampening rather than be increased where these scenarios have not annuity option might be an example magnifying the effect. In this situation, there occurred in the recent past. of this. is a case to consider a stochastic approach to On the other hand, where policyholder DPB in the calculation of TVOG. Product design and pricing returns depend on asset values, we can It should be noted that the MCEV This is perhaps the most crucial area where have the situation where the ‘bad scenarios’ Principles require such asymmetries we should consider the possibility for can be accentuated, whereas the ‘good to be included in the ‘Cost of Residual variations in the DPB function assumed. scenarios’ may be dampened through Non-hedgeable Risks’ where they are not If the profi tability of a product is heavily positive and negative feedback loops. captured in the calculation of TVOG. infl uenced by the level of policyholder For example, where policyholder returns behaviour, the pricing actuary should be depend on the book value of assets — as Calculation of standard formula SCR asking the following questions: is the case in certain European markets In this case, we are considering adverse (i) What actions can be taken to mitigate — an increase in interest rates may leave movements rather than averages over the exposure to DPB, for example, by the company with unrealised losses on its stochastic scenarios. Therefore, even in modifying the surrender value rules? investments, which in turn can lead to symmetrical cases as described above, an (ii) If the product is highly exposed to expected policyholder returns which are underestimate in the level of rationality DPB, is it justifi able to launch it in below market interest rates. could result in an underestimate in the level that form? In this case, we may get heavy volumes of economic capital required. It is clear that just considering a single of lapses which necessitate the realisation It could be countered that uncertainty best-estimate DPB model will not be of some of these losses, causing further about, for instance, lapse rates, is already suffi cient to determine the robustness reductions in policyholder returns and allowed for in the lapse risk sub-module, but of the product design. The sensitivity of hence further lapses and a magnifi ed this refers essentially to the level of lapses profi tability to different values of the DPB fi nancial impact. consistent with economic assumptions model parameters and, indeed, different The reverse situation, where we have underlying the calculation of technical shapes for the DPB model, should be falling interest rates and unrealised gains provisions, rather than those applying under considered. As noted above, we might also on assets, is not the mirror image of that the various market risk module stresses. expect policyholder rationality to increase above because, although we are likely to It can be argued that the calculation of the in the future. Ignoring this possibility see reductions in lapses as policyholder SCR should include a component relating to could result in products which are returns exceed market returns, this will the uncertainty over the level of policyholder ultimately loss-making. have the effect of creating extra liquidity rationality, which would increase the impact Conclusion Figure 1 Uncertainty over the level of rationality of policyholders should be considered in the same way as uncertainty over 40% 35%-40% other parameters, such as expenses and 35% 30%-35% lapses. Indeed, as discussed above, there is probably greater uncertainty over the level 30% 25%-30% of DPB than over other assumptions, which 20%-25% 25% further increases the importance of such 15%-20% considerations. Lapse rate 20% 10%-15% While it is impractical today to build a 15% 5%-10% fully stochastic ‘DPB model’, at the very 10% 0%-5% least appropriate sensitivities and shocks to the DPB model and parameters should 5% 0.8 be considered. The potential for variations 0% 0.4 in the level of policyholder rationality Rationality should be fully appreciated in a company’s y out out On avil 0 He irly in enterprise risk management approach. Slightly Slightly inFa ily in Heav ‘In the moneyness’ If you would like to comment on this article, please e-mail [email protected]
www.the-actuary.org.uk November 2009 33
032-033_Actuary_1109_KentMorgan.33 33 22/10/09 10:35:18 Pensions Longevity swaps On the wrong track? Amid the current vogue for longevity swap transactions, Eugene Dimitriou asks whether the protagonists have fully considered the consequences involved
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 Eugene Dimitriou of default. Using loss given default of 50% works in RBS’s global of face amount as a crude estimate, one banking and markets might conclude that a counterparty whose division 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 n recent years, longevity swap players and therefore these firms are transactions have become reasonably excluded from the analysis. common. Typically, a protection Now look at the typical protection buyer pays a fixed series of premiums providers active in the market — we do so I representing the expected liability cash on a no-names basis, but the analysis can flows plus a margin, for a pre-agreed set of be reproduced for a particular name by annuitants and receives from a protection referring to publicly available information provider (usually, but not always, an insurer on Bloomberg or similar data providers. or reinsurer) a floating series of claims equal Three years ago, typical protection to the actual payments to those annuitants. providers’ CDSs traded at 0.09% with on the main participants in the longevity These transactions are very long-dated — modest differences from name to name. In market are between four and 28 times wider 60-year trades are typical. other words, one would pay £0.90 to protect than they were in 2006. The result is the Several commentators suggest that we against a default costing up to face value of current market suggests that, for protection may be at an inflection point in terms of £1000. Thus the market ascribed an annual providers with strong credit, the probability demand for this product. At the same time, probability of default of about 0.18% and of surviving for 10 years is 93% and for 60 the credit crunch provides a useful backdrop annual probability of survival of 99.82%. years 64%. For weaker protection providers to reflect on how these trades have been Using simple compounding, one might (but still household names), the probability structured in the past and whether certain estimate a 98% chance of survival after 10 of surviving for 10 years is 59% and for 60 tweaks should be considered going forward. years and 90% after 60 years. So a ‘set and years virtually nil. While these ultra-long swaps clearly forget’ approach for long-term hedges was Note that CDS probabilities contemplate provide a close match to the underlying quite defensible — counterparties were not formal, legal default. Doubtless a far liabilities being hedged, they lead to an expected to go bust. more likely scenario is substantial credit unacceptable and poorly understood Post-credit crunch, the picture has downgrade, but not default, and the increase in counterparty credit risk. changed substantially. Today’s CDS spreads protection provider being put into run-off with potential deterioration in quality of Table 1 — Credit risk pre-credit crunch and today service and concomitant deterioration in the health of the protection buyer’s risk Typical spread Narrowest Widest spread manager who now needs to worry about the in 2006 spread today today counterparty daily. That’s not quite as bad as an actual default, but it remains highly CDS spread 0.09% 0.37% 2.54% sub-optimal. Probability of survival — one year 99.8% 99.3% 94.9% It is also worth noting that the default probabilities suggested by CDS spreads are, Probability of survival — 10 years 98.2% 92.8% 59.4% in general, at their lowest level in the past 12 months — a few short months ago, the Probability of suvival — 60 years 89.8% 64.0% 4.4% probabilities of survival would have been
34 November 2009 www.the-actuary.org.uk
034-035_Actuary_1109_Dimitriou.i34 34 21/10/09 15:07:28 Longevity swaps Pensions
Rome burns. It can take years for the process The most common objection here is to fully conclude, namely culminating in that using a pre-defined formula erodes negotiated commutation and/or forced the efficiency of the hedge. However, a novation, especially if one counterparty cleverly constructed commutation factor is behaving in an awkward or unhelpful based on observable data and deterministic manner. The reality is that stressed credits calculations has a surprisingly high degree can become defaulted credits well before the of correlation — over 90%. natural conclusion of such processes. The unspoken disadvantage of this Worse is the fact that the contracts approach, and one that I believe is a bigger typically seek to reflect an amorphous obstacle than the maths described above, actuarial fair value, rather than price. If is that it catalyses uncomfortable questions there is substantial deviation between the about credit events and the use of forward- two, the protection buyer will find itself looking extrapolation methodologies at paying up, potentially significantly, in order contract inception. There is no question to replace the hedge. Pricing dislocations that it is much easier to avoid these issues should be expected in the longevity market when negotiating a contract with a view to in years to come where there are few ‘agreeing to agree’ a solution if and when potential counterparties, many of whom a counterparty’s credit deteriorates. But have similar risk this is simply poor risk profiles. One example Significant anecdotal management. would be UK-regulated » It is also worth life assurers whose evidence suggests that noting that significant capital positions, shortening transactions anecdotal evidence and therefore will substantially suggests that shortening pricing, for any transactions will annuitant risks can be increase demand for substantially increase lower. The market is therefore saying that expected to change longevity risk demand for longevity most longevity swaps transacted to date substantially post- « risk, particularly among are more likely to default than run to term. Solvency II. Another example is reinsurance capital market participants who are Longevity swaps can no longer be perceived counterparties whose return on capital interested in taking the risk but for shorter as ‘set and forget’ hedges. expectations is a function of hard and maturities. This should eventually help to soft market cycles. Traditional collateral foster more competition with potentially Does collateral solve the problem? mechanisms may break down quite easily, more attractive pricing available. Some will argue that it does not really especially in times of stress. matter if a protection provider suffers a Conclusions credit event if an appropriate collateral What is the solution? The credit crunch has helped to put infrastructure is in place. In time, a trading market in longevity into sharp focus the difficulties of In theory, that may be so. In reality, may develop. Contract standardisation, structuring long-term illiquid hedge many protection buyers will be sorely transparency and liquidity will help mitigate contracts. The market is currently telling disappointed. The Lehman and AIG sagas the problems described above as it becomes protection buyers to expect many hedge show how collateral mechanisms can fail easier for the market to value longevity risk counterparties to default. Those protection even for liquid derivative instruments whose in a consistent manner. But it may be quite buyers who have existing contracts should market price is unambiguous. Illiquid trades, some time before this happens. monitor them carefully and, if appropriate, such as those based on longevity, introduce In the meantime, the market should renegotiate terms. significant incremental complexity. consider shorter-dated transactions with Those who are considering hedging now For example, many of the longevity a fixed contract term and a maturity should consider shorter-dated structures. In swaps to date have contemplated an annual value calculated using a commutation essence, it is better to be very confident of marking to model. The marking typically methodology whose inputs are deterministic a hedge which is highly, albeit not 100%, requires some form of actuarial consensus and/or observable. This approach also allows effective than to have a ‘perfect’ hedge of fair value to be reached. A variety of collateral to be calculated more regularly which fails to perform when really needed. escalation processes are contemplated in during the transaction and enables all sides order to ensure lack of bias in fair value. to easily quantify exactly how much money If you would like to comment on this article, please This is reminiscent of Nero fiddling while they are expecting to make or lose. e-mail [email protected]
www.the-actuary.org.uk November 2009 35
034-035_Actuary_1109_Dimitriou.i35 35 21/10/09 15:07:38 IT Smaller consultancies Size isn’t everything Gary Tansley explains how today’s electronic pensions information services have helped smaller consultancies compete with their larger counterparts
but what about resources? The UK pensions information service available to the UK environment is subject to ongoing, often pensions industry. Access to it means that daily, developments involving changes to smaller firms are working with the same legislation, landmark cases, ombudsman’s electronic resource that is used by many decisions and the issuance of new codes, of the largest UK consultancies. It is also not to mention the plethora of reports, significant to note that most electronic surveys, industry statistics and so on. Can pensions information services themselves they keep up? cost in proportion to A decade » The real challenge for the scale of their clients’ ago, smaller operations. So although Gary Tansley is a the small consultancy is consultancies the cost-per-user may senior actuary at would have had to ensure that consultants be higher, the absolute HamishWilson real difficulty are kept fully up to date costs of subscribing answering such to the service remain questions, as with legislative changes, manageable. they could in no products and trends « With the availability way match the of not only of a wealth information resources available to larger of information but also the functionality mall and medium-sized actuarial firms. However, IT developments over that would previously have been the and pension consultancy firms recent years, including the falling costs of full-time occupation of a substantial often market themselves under the hardware, have fundamentally changed this research department, today’s consultant aphorisms that there are “horses for proposition. Additionally and paradoxically, can concentrate on serving clients and Scourses” and that “biggest is not always smaller concerns can often take advantage developing their business. Besides which, best”. Both of these may be true, but can of technological advances more easily than most consultants entered their profession to smaller consultancies really match the a larger, established business with their advise clients, not to be researchers. quality of service of their larger, better enterprise-wide networks and sometimes For consultancies that are not yet resourced competitors? complex computer protocols. subscribed to an electronic pensions Smaller firms may aim to provide a As with many things in life, though, information service, I would suggest that personalised, bespoke and committed the medium alone can not produce the they critique prospective suppliers on the service. However, prospective clients will or message — access to the world wide web following criteria: should quite rightly ask whether they can in itself will not ‘cut the mustard’ today n Range of source material on offer really offer more than the core actuarial any more than the purchase of a copy n Functionality: searching, cross-referencing services in order to advise them on all of an act from Her Majesty’s Stationary n The breadth and speed of availability of aspects of pensions. Office would have done 10 years ago. And, significant news and apposite comment The experience of the consultants is a again, there is good news for the smaller n Provision of daily updates and e-mail alerts key element in answering this question, consultancy in that the last decade has seen n The offering of added-value notes and an exponential growth in the availability of cross-references electronic pensions information providers. n The ability to link with or even incorporate With the connectivity of broadband, internal information/documentation. remote working — the mode of choice for In general, it is good business and sound many smaller consultancies — is both management to be info-savvy, and in our feasible and practicable. business it is a fundamental cornerstone to The real challenge for the small almost everything we do. I would strongly consultancy is to ensure that suggest that this is an area to which my consultants are kept fully up to date counterparts in similarly sized consultancies with legislative changes, products should pay close attention. and trends. One option is to subscribe to Perspective, which is perhaps the If you would like to comment on this article, please single most comprehensive electronic e-mail [email protected]
36 November 2009 www.the-actuary.org.uk
036_Actuary_1109_Tansley.indd 36 22/10/09 13:40:31 Insurance Tele-underwriting The winds of change Peter Maynard and Catherine Lyons present the results of a worldwide survey into insurers’ tele-underwriting usage and discover that change is under way
Although it has been speeded up with Elsewhere, usage is very patchy but point-of-sale rules engines, it is still in some markets reaches 30% of life expensive and time-consuming, especially companies. Of those insurers not currently when a doctor’s report is needed. It is no using tele-interviewing, about half are wonder that it is seen by advisers as a considering its introduction in most barrier to business and that chief executives locations, notably Spain, Germany and parts wonder if it is necessary. In a minority of Asia. It is a relatively recent innovation of cases, the sales process itself can be a everywhere except North America, problem; the completion of the application where the concept originated, and where form can sometimes experience goes back over Peter Maynard, In the US and result in ‘economies » 10 years. pictured, is the with the truth’ or, worse, Canada, tele- It is interesting to look at director of SelectX non-disclosure of varying why companies introduced Ltd. Catherine Lyons is interviewing is degrees. tele-interviewing in the first the underwriting and The prime virtues of largely routine for place. In mature markets the claims development tele-interviewing are main reasons were to save manager for SCOR all cases, replacing founded on the use of a time and cost and to reduce Global Life the traditional trained interviewer having dependence on doctors’ no connection with the application form « reports. In other markets sale and, on a recorded — the less developed but telephone call, ensuring privacy and no fast-growing economies — the interest was discomfort in discussing sensitive health in lessening agent involvement, improving matters one-to-one. Make no mistake — this customer service and reducing anti-selection combination is extraordinarily powerful. and non-disclosure. The theory is that non-disclosure rates are The differences between the types of reduced and, as the interviewer understands market illustrate two things. First, the overtly what the underwriter wants to know, he or uncomfortable relationship between insurers she can probe where necessary via a set of and distributors in the less mature markets, ‘drill-down‘ scripts, getting a notably high and second, the fact that companies in those level of detail and avoiding the need to seek countries have come later to tele-interviewing othing could really take the world follow-up information. These twin benefits but have learned from the experience of the of life and disability underwriting mean that tele-interviews are routinely earlier adopters elsewhere. by storm, but there are winds of replacing the bulk of the normal application In fact, the biggest benefits of tele- change blowing. That welcome form. But even in a more traditional process, interviewing lie in reducing the risk of N breath of fresh air is tele-underwriting a tele-interview can ably replace a doctor’s non-disclosure, creating a better risk profile — more correctly tele-interviewing — in report for many medical disclosures, saving for the portfolio and potentially lower risk which risk information is obtained over the significant time and cost. assumptions and/or reassurance cost. telephone by a trained interviewer instead Can applicants really provide the sort of In addition, it creates a new customer of via the traditional application form or information demanded by underwriters, service proposition that is better in terms doctor’s report. and can it be relied upon? The answer is of experience and speed. There may be The trend towards tele-interviewing is ‘yes’ to both. But underwriters do have to operational cost reduction, but it is often so significant that it prompted reinsurer adapt a bit: they need to interpret the tele- marginal, especially for routine tele- SCOR Global Life and consultants SelectX, interview content — read between the lines interviews which, if undertaken by the together with renowned US underwriting — and resist calling for a doctor’s report insurer, are an added cost. Nevertheless, expert Hank George, to conduct a worldwide anyway. Reassurers’ underwriting manuals just over half of survey respondents survey of insurers to gauge the extent of need to adapt to provide more meaningful worldwide declared some sort of saving in take-up, how it is being used and what the guidelines to assist the underwriter in the acquisition costs, although around 10% experience has been. But before looking at new process. reported an increase. the survey results, consider the background To what extent has tele-interviewing caught In the US and Canada, tele-interviewing against which tele-interviewing needs to on? According to the survey, around three- is largely routine for all cases, replacing the be assessed. Underwriting tends to be a quarters of companies in the UK, Ireland, traditional application form. Elsewhere, the cumbersome process that has not changed North America, South Africa and Australia picture is mixed. For example, in the UK significantly over the years. apply tele-interviewing in some form. and Ireland, of the companies using tele-
38 November 2009 www.the-actuary.org.uk
038-039_Actuary_1109_Maynard.ind38 38 22/10/09 10:00:13 Tele-underwriting Insurance
interviews, 44% said that the discretionary ombudsman or other official arbiter. (doctor’s report replacement) model is Almost all UK and Irish companies in the predominant, compared with 36% who cited survey provide applicants with a summary of routine tele-interviewing for all cases and what they have told the interviewer; a quarter 12% who employ a combination of ask for a signature and for the document to be the two. returned to the company. Notably, half have Does the theory of improved used the digital recording of the interview to disclosure rates apply in practice? According resolve a dispute of some kind. to the survey the answer is ‘yes’. In the UK So far, the transition to tele-interviewing and Ireland, 44% of companies reported has not amounted to a revolution — not an improvement, although another yet, anyway. But in our opinion, tele- 48% said they did not have interviewing will play an increasingly enough information to draw a important role in most markets. Niche conclusion. Forty percent reported market segments aside, why would you a modest increase in rated cases. In not want to use a method of gathering risk other mature markets, companies information that: responding positively represented around n Is separate from the sale process three-quarters of all those employing tele- n Is demonstrably successful in reducing interviewing. Companies also reported non-disclosure and in improving emphatically that the quality of disclosures information quality has improved too. n Represents first-class evidence in the event Who is making these additional of a disputed claim (no more conflicting disclosures? Experience tells us that the stories from applicants on the one hand and value of tele-interviewing is highest among advisers on the other) older applicants who naturally tend to n Speeds up the new business process have more ‘interesting’ health histories (giving a valuable improvement in and therefore more to disclose. It is conversion rates) surprising that some survey n Has won approval from customers respondents reported that n Has won approval from regulators. their tele-interview use In most markets it is still relatively early is skewed days for tele-interviewing, and the survey towards shows that many companies have not younger followed best practice processes and need ages. Is this to polish up their act in some respects. because For example, in some cases, firms just they are went ahead without carefully involving all routinely stakeholders, particularly sales forces and getting doctor reports and they feel brokers. For successful tele-interviewing you an interview is redundant? This is an must have your distributors fully on board. interesting finding as the value of the tele- Furthermore, a surprising number are failing interview rises with age — in line with the to monitor the quality of interviews, conduct mortality and morbidity curves — and is customer satisfaction surveys or routinely often preferable to a doctor’s report. improve their scripts and drill-downs. Although tele-interviewing improves Tele-interviewing, when done well, the volume and quality of risk provides a more robust risk selection process information overall, it cannot be expected for the company, relieves the sales agent of to eliminate non-disclosure completely. a difficult part of the standard process and, This is why it is important to have sound most importantly, offers customers a far processes associated with it — so that superior experience when taking out the vital when it is necessary to challenge what insurance products our industry provides. was disclosed at application, a fair challenge will succeed, whether If you would like to comment on this article, please that occurs before a court or an e-mail [email protected]
www.the-actuary.org.uk November 2009 39
038-039_Actuary_1109_Maynard.ind39 39 22/10/09 10:00:15 International New Zealand New horizons Joe Benbow provides an overview of the actuarial community in New Zealand
New Zealand insurance industry across in the UK. The industry is very small by global It is also worth mentioning how New standards, and this presents its own Zealand has been impacted by the global opportunities and challenges. financial crisis. Although we are globally The life insurance sector is currently remote from the epicenters of the crisis, experiencing strong growth in non-savings New Zealand has not emerged unscathed. business. However, the savings market The country has only just come out of the has been flat for many years, in part due longest recession in its history and will take to a lack of tax incentives or compulsory some time to recover. In saying that, low superannuation. This is in contrast to unemployment and high interest rates at Joe Benbow Australia, where compulsory superannuation the start of the recession meant that the emigrated to New has been around since the early 1990s. impact has been cushioned somewhat more Zealand a year ago Compulsion there has led to an explosion in than in other countries. and is the product growth, particularly in the group market. actuary at Westpac New Zealand also offers the Accident Regulatory developments Life in Wellington Compensation Corporation (ACC) — a state- Future prospects for the profession in New run ‘no-fault’ accident insurance scheme Zealand look very bright. On the domestic ew Zealand is world-renowned for funded by government, employers and front, there is a huge amount of new its stunning scenery and laid-back employees. Opinions are divided on the legislation in the pipeline with which the lifestyle. But the country is not merits of ACC but it is clear to me that it profession is strongly engaged. just about beautiful beaches, rugby provides valuable cover to a sector of society Prudential regulation of insurance: In N and bungee jumping. There is also a small that would otherwise go uninsured. late 2010, the Reserve Bank of New Zealand but thriving actuarial community. As an industry, the challenges facing us will assume responsibility as regulator of life, are very similar to those faced overseas, general and health insurers. As part of the new Actuarial profession in New Zealand such as an ageing population, inadequate regulations, statutory funds will be required to The New Zealand Society of Actuaries savings for retirement, underinsurance and separate different business types, each licensed (NZSA — www.actuaries.org.nz) was founded financial illiteracy. insurer will require an appointed actuary in 1957 and has steadily grown since then. Companies here are relatively small, so and existing NZSA solvency standards will be Today its membership consists of around there is not usually enough work in any given the force of law. 150 fellows and 100 students. There is one area for actuaries to specialise. On the Life insurance taxation: New rules for no dedicated examination system in New flip side, this provides actuaries with far taxation of life insurance business come into Zealand, so students typically take the wider exposure than they may experience force in 2010 which will greatly increase Australian or UK exams. in larger markets. For example, over the last the tax burden of life insurers. Assessing Most actuaries are based in Auckland or 12 months I have been fortunate enough to the impact and resultant product changes Wellington, the two largest financial centres, work on reinsurance, underwriting, ERM, will be keeping life actuaries busy over the and the majority typically work for insurers valuation and investment strategy — a range coming months. or consultancies. of work that would have been hard to come Regulation of financial advisers: Due Actuaries in New Zealand are required to be enforced by the end of 2010, this to do 40 hours of Continuing Professional legislation will dramatically change the Development (CPD) per year. However, landscape for the provision of financial there is not as much focus on ‘verifiable’ advice, which has suffered from negative CPD, so you can count reading papers and publicity in recent years. And if that were past conference publications as CPD. It is enough to keep us busy, high demand for important to keep up with international actuaries in neighbouring Asian countries developments in this way as there are fewer will ensure there are always opportunities opportunities for educational and networking for those who wish to spread their wings events with such a small community here. internationally. With 11 NZSA committees, there is also I therefore predict that there will be strong plenty of scope to get involved. demand for actuaries in the ‘land of the long The Society recently ran its first-ever white cloud’ for many years to come. professionalism course, which attracted over 30 attendees and three experienced overseas If you would like to comment on this article, please presenters, and was very well received. e-mail [email protected]
40 November 2009 www.the-actuary.org.uk
040_Actuary_1109_Int'l.indd 40 22/10/09 10:28:44 [email protected] Matt & Finn Arts A legend in its own lunchtime Finn takes an affectionate look at the much-maligned staff canteen
Recommendationsubheads he credit crunch has us all tightening one hour for lunch to 15-30 minutes. Given text our belts. Gone are the lunch hours my charge-out rate, this is clearly beneficial to oftext the month spent sipping fresh fruit smoothies the firm, even after allowing for my £3 food Tate Modern — Pop Life: and eating sashimi (I’m an actuary; allowance. It’s positive net present value. Matt and Finn welcome your comments T those lunch hours never really existed). In There are also softer benefits to the staff Art in a material world Tateand contributions. Modern, South Please Bank’s e-mail art behemoth, their place, for those fortunate enough, is the canteen. I now spend far more time eating [email protected] currently exhibiting a collection of some trusty staff canteen. with colleagues than I used to, creating of modern art’s finest in an exploration I gave up communal eating after the valuable team bonding time. The staff of the legacies of Andy Warhol and the nightmare of school dinners. Do you really canteen helps to create a more egalitarian 1960s pop art revolution. The show brings expect school children to like vegetables if workplace. The big shots eat the same food together artists from the 1980s onwards they share the same consistency as soup? as those lower down the pecking order. who have embraced commerce and the Given that one of the perks of my new(ish) Food really does help break down the mass media to build their own ‘brands’. job is access to a staff canteen, I have been corporate barriers. Pop Life includes Andy Warhol, Damien forced to reassess this view. What’s more, my £3 allowance is a sort Hirst, Jeff Koons, Takashi Murakami and So at 12pm every day — a bit early, but of sunk cost — I only benefit if I go to more. On until mid-January, why not the benefit of the small queues far outweighs the canteen. This creates a great degree of explore a bit of culture to brighten up the the negative of feeling peckish at 5.30pm — I persistency in my choice of where to go autumn weather? head up to the 19th floor to discover what for lunch, ensuring the aforementioned delights the chef has in store for me. company benefits do arise. The canteen is actually rather excellent As with any relationship, my staff canteen with a salad bar, deli bar and hot food does have a special place in my heart, but counter — you really are spoiled for choice I have had my head turned by a couple (when the benchmark is a sweaty sandwich, of other canteens. In particular, a trip to that isn’t difficult). Being an actuary, I usually Bloomberg’s office is a must — the place have my safe default choice (chicken salad in undeniably cool. The canteen is more sandwich and a few pieces of fruit) but the of a ‘help yourself’ collection of pods with hot food counter is high-stakes with beef stir- smoothies, nuts, seeds and all manner of fry and noodles — a big hit; and fish fingers herbal teas. Best of all, it’s all free, even to and chips — a definite miss. The benefits of interlopers like myself. the staff canteen are obvious, but the firm It is often said that the way to a man’s also does well out of it. heart is through his stomach and quite rightly A trip to the canteen can take a matter of so. I have a lot of love for my staff canteen. minutes; a trip to Pret a Manger in Canary Wharf at lunch hour can potentially take a Matt and Finn welcome your comments and lifetime. I’ve gone from taking an average of contributions. Please e-mail [email protected] Client entertaining Swiss 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.
www.the-actuary.org.uk November 2009 41
041_Actuary_1109_Arts.indd 41 22/10/09 10:37:11 Sponsored by
Puzzles Coffee break Mark Dainty (Director) www.highfinance.co.uk Highfinance Actuarial 0207 337 8800
hf strip.indd 1 2/4/08 10:18:49
November prize puzzle The road to perfection Start in square A1 with a prime number N and move from green ABCD square to green square. Your aim is to get to the fi nish in square D4 Start Add 6 Take Add a having visited all the other squares fi rst. At each step you may move cube root prime 1 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 Multiply Take Double Divide square and number between 1 and 100. by 13 root add 2 by 17
For your chance to win a £50 Amazon voucher courtesy of Multiply Subtract Subtract HighFinance Actuarial, send the shortest route you can fi nd (just by 13 30 from 192 2 setting out the squares visited, in order) to actuaryprizepuzzle@ incisivemedia.com by Sum its Multiply Add 13 Add a perfect 16 November. digits by 18 square
Square it Divide Divide by 23 by 2 3
Square it Take Divide Divide cube root by 19 by N
Add four Subtract Square it distinct Finish 73 primes 4
Terms and conditions 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 correspondencePuzzle 649 will be entered into. We reservePuzzle the rightname to feature the winner’sPuzzle name 650 and a photo (if supplied) in ThePuzzle Actuary .name Your details will not beXxx passed to any third party in connection with this draw. Xxx
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. A I A B A A B A I A A E C A A E E B A L B E D D B E L E C I C H E I I C A O E I E E B I N M E N C L G M L H A R I L I L B L O N L O C O L R N I A T K O N O B O R O O R C R M T P N A V R R S R B R S T P S C U S U S T A Z T T U S B U Z Z R Y C Y U V U Y
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hf strip.indd 1 2/4/08 10:18:49 42 November 2009 www.the-actuary.org.uk
042-043_Actuary_1109_Puzzles.ind42 42 22/10/09 11:31:03 Coffee break Puzzles
Puzzle 440 In the round PUZZLE 435 CLARIFICATION — FRUIT SALAD A rectangle measuring 4 metres by 5 contains two non- overlapping circles. Given this restriction, the total perimeter of Several people (including the rest of the editorial team) have the circles is as large as it can possibly be. But how big? 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. Puzzle 441 Area 51 number of consonants, fi rst Which single letter is represented by the following letter, number of vowels). arithmetical cypher? The number of oranges 5555511155511155 therefore, by the same 5555511115511155551111 process, is 3 15 3. 555111155555115551111555555551111
More puzzles and games online
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]
Solutions for October 2009 October prize puzzle 4.033 x 1026 The correct ordering of the words is shown below. October prize winner a tone n ought Congratulations to this month’s winner, Darren Wheeler of Mercer, who wins a b land o pine £50 Amazon voucher courtesy of puzzles sponsor, HighFinance Actuarial. c lump p ion
d after q at Puzzle 436 Pile ‘em high Daddy eventually found the fi fty-sixth block of the set at the e lope r asp bottom of the goldfi sh bowl. More on which later…
f low s laughter Puzzle 437 Numerological numismatism Uniquely, 12 128 farthings is equal in value to 12 pounds, g rouse t axes 12 shillings and eight old pence.
h eight u rate Puzzle 438 Cross multiplication This is not in fact a unique i on v ending 7 5 7 9 solution — thanks to Stelio Passaris for pointing this out. j owl w right 1 2 8 2 k new x is
l isle y east 4 5 1 4
m arrow z any 6 6 4 4
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042-043_Actuary_1109_Puzzles.ind43 43 22/10/09 11:31:14 Student page Jean Eu [email protected]
LquiJean eugaitEu discusses at accummod the right magnis to vote, alis as nonsequatTendai Gotora ut wisci eliquip euguerattakes a humorous prat. glance at exam etiquette Give students the vote
he life of an actuarial student does Is this fair? Is it the sort of response we not often extend much beyond should expect from a supposedly forward- studying, working and (for those thinking profession? clinging on to their university days) Students were encouraged to pass their T partying until dawn. Indeed, often students views on to a qualifi ed actuary who could are brushed aside as an inexperienced vote on their behalf and also told, “you horde lacking knowledge in the ways of can still play a part in the process by the actuarial world, consigned to menial encouraging your colleagues who are eligible spreadsheet work until they have gained to vote to do so”. But exactly how is the appropriate actuarial/business acumen. poor student supposed to have their views Consequently, there are often decisions heard when the qualifi ed actuary is likely to made about the profession without any vote with their own view? input from actuarial students — but is this I am no longer a student, having recently justifi ed? Should students be cast aside and qualifi ed, but I was not allowed to vote have their views ignored just because they “This is set out in the current by-laws and because I did not fi nd out I was qualifi ed are not qualifi ed? rules for the Faculty and the Institute”. before 31 May… go fi gure. What has caused me to get so riled up? This, clearly, did not directly answer my To conclude, students are not second- The never-ending talks about the merger, question and when I probed further I class members of the profession — they are of course. Despite the fact that this merger received no reply. the future of the profession. So start treating will affect the futures of actuarial students This leads me to conclude that the only them with the respect they deserve. just as much as qualifi ed actuaries of the reason students were not allowed to vote is profession, students were not allowed to that the rules say so and that no one really Should students get the vote? Write in to vote. When I questioned this, I was told: knows why this rule exists in the fi rst place. [email protected] with your views
screaming, “I can’t take the stress any How to fail an actuarial exam with style more!” (Surely someone, somewhere, must By Tendai Gotora 2 Every now and then, clap twice rapidly. have done this before!) Studying for actuarial exams is tough work. If the invigilator asks why, tell him/her in 7 Talk the entire way through the exam. To relieve stress levels, I thought it would a condescending tone, “the light bulb that Read questions and debate your answers be good to share with my fellow students goes on above my head when I get an idea with yourself out loud. If asked to stop, some comic relief that I came across on is hooked to a clapper. Duh!” yell, “I’m sooo sure you can hear me the web while searching for advice on 3 Show up completely drunk (completely thinking”. how to pass an actuarial exam. I picked drunk means at some point you should start 8 Upon receiving the exam, look it over. (and amended) my top 10 tips on how crying for your mum). While laughing loudly, say, “You don’t really to fail an actuarial exam (besides using a 4 As soon as the invigilator hands you the expect me to waste my time on this drivel? prohibited calculator!) from an entry dated exam, eat it. Days of our Lives is on!” 17 December 2006 on the blog, Mike The 5 Fifteen minutes into the exam, stand 9 From the moment the exam begins, Actuary’sTHIS Musings,MONTH, entitled DON’T 50 FORGET...Ways To Fail up, rip up all the papers into very small hum the theme to Countdown. Ignore the An Actuarial Exam — With Style. (Source: pieces, throw them into the air and yell, invigilator’s requests for you to stop. www.triskele.com/50-ways-to-fail-an- “Merry Christmas”. If you’re really daring, 10 One word: Wrestlemania. actuarial-examwith-style) ask for another copy of the exam. Say Good luck to all students who took exams 1 Bring cheat sheets for a different exam you lost the fi rst one. Repeat this process in October! and include them with your written answer every 15 minutes. papers with the comment: “Please use the 6 Walk in, get the exam, and sit down. Tendai Gotora is a junior consultant (Life Insurance) for attached notes for references as you see fi t”. About fi ve minutes into it, run out African Actuarial Consultants in Zimbabwe
44 November 2009 www.the-actuary.org.uk
044_Actuary_1109_Student.indd 44 21/10/09 11:16:31 AOTF/Book review People/Comment
Actuary of the future Charchit Agrawal of Ernst & Young perseveres with his passions for cooking and snoozing
Charchit Agrawal Tell us your formula for success songs, a book on desert fl ora and fauna Focused hard work combined with lots of and the mortality tables. Employer and travelling. area of work Do you have a famous look-a-like? Ernst & Young LLP, What is your greatest extravagance? The other handsome guy exists only in non-life. Ties and cuff-links. mirrors!
Date entered What is most likely to irritate you Best piece of advice you’ve been Profession about others? given? July 2005. Complaining about situations unnecessarily. No knowledge ever goes to waste — my father told me that as a child. Describe yourself in three words How do you relax away Diligent, receptive, honest. from the offi ce? Is the glass half full or half empty? Watching the news and movies, and reading Half full; I’m always optimistic, but am What’s your best attribute? blogs. still looking to fi ll the remaining half. Willingness to learn and appreciate out-of- the-box ideas. Tell us something unusual What is the greatest risk you have about yourself ever taken? And your worst habit? I am an excellent cook! Leaving my job at EMB India and coming Snoozing past the alarm clock. to the UK. What three items would you take to Alternative career? a desert island? If you would like to nominate someone for Actuary of Environmentalist. My music player with old Bollywood the Future, please e-mail [email protected]
Book review Robert Walther reviews The Golden Age of Government Bond Analysis (1961-1986) by Mark Arnold, Bryce Cottrell, John Lewis, Gordon Pepper and Patrick Phillips
I was delighted to be asked to review this borrowing requirement over the period, out major publication on two grounds: fi rstly, I know whereby the government was forced to announcements. all the authors well — they were all highly sell a large quantity of gilt-edged securities We had two respected partners of major gilt-edged throughout — as anyone can tell you, a direct telephone brokers — and I know that their analyses forced seller does not do well. lines (to Bryce, worked. It has always bothered me that Two: taxation. The taxation rules Gordon and actuarial judgments are taken over such affecting both income and capital gains were Mike Higgins a long period of time, making it almost complicated but allowed both gross and net at Greenwell). impossible to tell whether the judgment was funds, particularly the latter, in order to save These brokers correct or not. very signifi cant amounts of tax. would also In contrast, the gilt-edged market is a Three: the most important and produce yield magnifi cent laboratory to test the validity interesting way of making money was curves and of any hypothesis over any reasonable from decisions based on this published other statistics timescale. Security was (and, I hope, still is) analysis. Profi table switches between two that would throw absolute, marketability is exceptionally good different gilt-edged stocks could be made by up anomalies in the marketplace and form and the cost of dealing has always been low. identifying anomalies, by taking advantage the basis of our transactions. At this time, stockbrokers and stockjobbers of kinks in the yield curve or by taking a I would advise anyone interested in were kept entirely separate and so there was view on the direction of interest rates — the mathematics and economic history to read no confl ict of interest between the broker authors specialise in all three areas. It is hard these papers. They are accurate, well written and his client. now to explain the paucity of information and some of the material will make you There were three reasons that Clerical which was then available: the only live money today. Medical (for whom I worked at the time) information available was a closed-circuit, made money on a consistent basis. non-speaking television from Greenwell that Robert Walther was chief executive of Clerical One: there was a high public sector updated prices three times a day and printed Medical from 1995-2001.
www.the-actuary.org.uk November 2009 45
045_Actuary_1109_AOTF.indd 45 21/10/09 11:15:37 Appointments People moves
Have you moved? Deloitte has Mr Holmes is appointed Julian Jersey’s fi rst resident Please send news of moves, Leigh as a senior consulting actuary. promotions, retirements and manager in its He previously spent appointments to peoplemoves@ actuarial and four years working the-actuary.org.uk insurance solutions for BWCI in its practice, where he Guernsey offi ce. Mr Griffi n worked the actuarial team will be advising on for Allied World at Euro Insurances reserving, capital Pension Capital Reinsurance to develop its management Strategies Limited (Bermuda) as capabilities and to and Solvency II. (PCS) has appointed international pricing aid Euro Insurances Mr Leigh was Antony Osborn- actuary. in achieving previously a Barker as managing its continuing consultant working director of its expansion into new in the Property/ investment advisory countries. Casualty practice of service. Mr Osborn- Tillinghast — Towers Barker joins from HSBC has appointed Perrin, and has also BNP Paribas where, Dick Rae as worked on Solvency as global head of managing director II implementation pension advisory, he in the Insurance policy at the FSA. led teams in London Services Group. Mr and New York. Mr Rae was previously Anthony Collins Les Waters has been Department: director. Both have Osborn-Barker was managing director promoted to the George Russell has joined the GAD formerly head of Euro Insurances for Deutsche Bank. position of head been appointed as management board. investment services Limited has of international deputy government Sandra Bell, Adrian at Deloitte. appointed Anthony Milliman has & specialty actuary, succeeding Hale and Sue Collins as chief appointed Scott underwriting at Andrew Johnston, Vivian have been Ariel Reinsurance actuary. Mr Collins Mitchell as a Platinum Re. He will who has retired. appointed as chief (Bermuda) has joins from ESG senior consultant continue to be based Eddy Battersby actuaries. announced the Shared Services in its Zurich life in Bermuda. has been appointed appointment of Limited, where he consulting practice. technical director BWCI Group has Keith Griffi n as was chief actuary Mr Mitchell joins The following senior and Bill Rayner announced the vice president for the ESG Re Milliman from Ernst appointments have has been appointed appointment of and actuary. Prior group of companies & Young in Zurich been made at the client relations David Holmes in its to joining Ariel since June 2007. where he was a Government Actuary’s and development Jersey offi ce. Reinsurance, He will be leading senior manager. Forward features in The Actuary The 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 Actuary of the future like to write about, please let us know. Is your career on the up? January 2010 Online January/February 2010 Are you the golden boy or girl of the actuarial world? special edition (Published (Published 28 January 2010, If you think you deserve to appear as an Actuary of the 12 January 2010, deadline 11 deadline 11 December) Future, then we would like to hear from you. December) ■ Recruitment/careers Either ask a colleague to nominate you or send your contact ■ Recruitment/careers ■ Health and care details with a reference direct to [email protected] ■ 2010 preview and predictions ■ ERM
London ● UK Wide ● France ● Europe ● South Africa ● Asia Pacifi c ● Australia Finance Actuary in Dublin www.gaaps.com +44 (0)20 7397 6200
46 November 2009 www.the-actuary.org.uk
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