Published in London by the Staple Inn Actuarial Society

The www.the-actuary.org.uk ActuaryThe magazine for The Actuarial Profession November 2008 Sucker punch A blow-by-blow account of market turmoil

Pensions risk-sharing • Life after QIS4 • The meaning of value • 26 pages of jobs

001_Actuary_Cover_1108.indd 1 22/10/08 14:39:05 The Actuary

See page 5 for full details of the editorial team Incisive Financial Publishing Editorial 32-34 Broadwick Street, London W1A 2HG November 2008 T +44 (0)20 7316 9000

Publisher Philip Harding T +44 (0)20 7316 9393 E [email protected] The actuary of today Managing editor Sharon Maguire On 6 October, in the midst of the market T +44 (0)20 7316 9016 E [email protected] collapse, Faculty of Actuaries president Ronnie

Recruitment advertising manager Bowie stood up and gave a presidential address Hazell Cockle that showed actuaries are well placed to assist T +44 (0)20 7316 9493 E [email protected] and add value in the recovery needed following

Designer the current financial crisis. Nicky Brown The address, which talked about Sub-editors ‘Tomorrow’s Actuary’, provided guidance David Whittam as to how actuaries could help provide Production manager Matt Parle financial stability following the credit crunch. T +44 (0)20 7316 9766 Ronnie also commented that we must truly E [email protected] understand risk and not simply be “slaves to models”, continuing a Group editor-in-chief Anthony Gould theme that has been regularly debated in The Actuary.

Group publishing director Ronnie stated that the world needs actuaries who are “curious, energetic Derek Peck and influential”. This requires us to look beyond our technical skills, and Print and distribution explore how we can use our expertise to deliver real solutions based on the Benham Goodhead Print Ltd., Oxon theory we learn. Again, this is a message that should be familiar to us all. Subscriptions One interesting point was Ronnie’s call to shift our actuarial focus from For subscriptions from outside the actuarial profession: UK, Eire, and pension scheme liabilities to assets, taking into account the risk capital of a Europe: £50 a year/£5.00 a copy. For the rest of the world: £75 a scheme sponsor and using an “economic” value of liabilities. Having seen a year/£7.50 a copy. Please contact: Maria Lyons move from discounted asset values to market values in the late 1990s, I am The Actuarial Profession, Napier intrigued to see how this debate will unfold. House, 4 Worcester St, Oxford OX1 2AW Pleasingly for me, there was relatively little attention paid to the possible T +44(0)1865 268236 E [email protected] merger of the Faculty and the Institute. Ronnie chose instead to reflect on what actuaries can bring to the pressing issues facing the financial Students on actuarial science courses at universities may join the Staple community at the moment. Inn Actuarial Society for £6 a year. They will receive The Actuary as In summary, the address provided some much welcome optimism part of their membership. Apply to: Membership Department, The for me and, once again, I am encouraged that our features and letters Actuarial Profession, Maclaurin illustrate that many actuaries are already doing the things that Ronnie House, 18 Dublin Street, Edinburgh EH1 3PP. refers to. This got me thinking — perhaps ‘Tomorrow’s Actuary’ should T +44 (0)131 240 1325 E [email protected] be re-branded as ‘The Actuary of Today’.

Changes of address should be made known to the membership Margaret de Valois department at the same address. Editor Internet The Actuary website: [email protected] www.the-actuary.org.uk SIAS website: www.sias.org.uk Actuarial Profession website: www.actuaries.org.uk Apology Features editor needed Published by the Staple Inn The October edition of The Actuary included We are currently looking for a new features Actuarial Society a feature by Lukas Steyn of J.P. Morgan editor to join The Actuary team with effect The editor, the Faculty of Actuaries, entitled Stronger, fitter, faster. Unfortunately from January 2009. the Institute of Actuaries and the Staple Inn Actuarial Society are not a graph was missing from the printed version responsible for the opinions put and readers may have found the piece If you are interested in this voluntary — but forward in The Actuary. misleading. The correct version can be found highly rewarding — role, please contact © SIAS November 2008 at www.the-actuary.org.uk/815744 and on [email protected] All rights reserved ISSN 0960-457X the page-turning pdf version on the website.

www.the-actuary.org.uk November 2008 

003_Actuary_1108_Ed.indd 3 20/10/08 15:23:55 The Actuary

Editorial advisory panel Peter Tompkins (chairman), John Batting, Timothy Bramham, Chris Daykin, Matthew Edwards, Gerard Contents Francis, Nigel Hayes, Martin Lunnon, Andrew Smith, Chris Sutton, Paul Sweeting, Matthew Wheatley November 2008

Editor Margaret de Valois HSBC Actuaries and Consultants Ltd, Level 16, 8 Canada Square, News London E14 5HQ T +44 (0)20 7991 3165 E [email protected] 10 Profession Features editors p32 16 Education and research Tracey Brown Lane Clark & Peacock LLP, A blow-by-blow account 30 Old Burlington Street, 18 Industry London W1S 3NN Shaun Krom shares his views T +44 (0)20 7432 3071 on the cause of recent 22 People/Society E [email protected] market turbulence Marjorie Ngwenya 26 SIAS notices Swiss Re Life & Health, 30 St Mary Axe, 27 Calendar and events London EC3A 8EP T +44 (0)20 7933 3163 Features E [email protected] 50 Appointments and moves 28 Intelligent design Industry news editor Derek Benstead considers a pension scheme sharing Louisa Lobo T +44 (0)7719 631 955 risk between sponsoring employer and employee Comment E [email protected] 3 Editorial 30 People/society news editor An option for capital efficiency Margaret de Valois on today’s actuary Amy Guna Jeff Wood illustrates the mechanics of securitisations as Grant Thornton UK T +44 (0)7879 453 949 a capital management tool 8 Letters E [email protected] Chance, risk and communication

Student page editors 36 Life after QIS4 Jennifer May Roger Austin, Simon Parrack and Anne Baxter provide 10 Soapbox Hewitt Associates, Joanne Hindle on the future of regulation 6 More London Place, an update on QIS4 for life insurers London SE1 2DA T +44 (0)20 7939 4000 47 Book review E [email protected] 38 Crunch time Super Crunchers by Ian Ayres Scott Eason explores the effect of the credit crunch on Jean Eu derivatives and structured assets and highlights related RGA UK, IFC Level 40, 25 Old Broad Street, issues for life insurers Regulars London EC2N 1HQ T +44 (0)20 7448 8255 40 The price is right? 24 Trailblazer E [email protected] The Actuary talks to BGI’s Lindsay Tomlinson Angus Sibley debates the notion of subjective valuation Arts page editors Matthew Fewster and its impact in a world dominated by free markets 45 Arts JPMorgan Alan Frost returns to raise the highbrow bar 125 London Wall London EC24 5AJ 42 Paying the bill T +44 (0)20 7777 9707 Charlie MacEwan asseses the arguments for sharing 46 Student page E [email protected] the costs of healthcare provision The saving grace of students Finn Clawson 47 Actuary of the Future Hewitt Associates 43 6 More London Place Conflicts of interest Daniel Wiltshire of RGA London SE1 2DA David Johnson exposes the dilemma faced by pension T +44 (0)20 7939 4435 fund trustees in the current market 48 Puzzles E [email protected] More brainteasers to test your mettle Puzzles editor Tom Bratcher More features online Watson Wyatt Worldwide, The following features can be found exclusively on The Watson House, London Road, Writer of the month Reigate, Surrey, Actuary website this month: RH2 9PQ n The cloud gathers for Solvency II Exploring the next Angus Sibley is the editorial team’s E [email protected] evolutionary stage for actuarial modelling using IT solutions choice for November for his article n Potential lawsuits for investment advisers Underlining on the notion of subjective valuation Circulation the duties of care observed by pension scheme advisers and receives a £50 book token 18,724 (July 2007 to n Financial planning — back to school Investment courtesy of SIAS. June 2008) strategies to secure your financial future n As good as New…Zealand Opportunities available to UK actuaries in the land of the long white cloud Visit www.the-actuary.org.uk/category/features

www.the-actuary.org.uk November 2008 

005_Actuary_1108_Contents.indd 5 22/10/08 17:01:49 Letters Your view Letters to the editor In which actuaries look to chance, risk and communication to move in the right direction Letter of the month

The right direction the reasons for expecting ex-post correlations to be related Thank you so much for publishing Solomon Green’s article Look closer, to ex-ante correlations. Similar considerations apply to the can you afford to rely on financial theory? (September 2008) I read it lack of rigour in deriving forecast returns for these supposedly with delight verging on euphoria. I heard myself exclaiming: “There uncorrelated assets. still are actuaries with both erudition and common sense”. A third example is the now clearly debunked theory that For some time as an adviser and a trustee, I have been by aggregating mortgage debt and then slicing, dicing and shocked by the assertion that the outputs of barely described distributing it, risk is magically reduced. What actually happened models are resilient and should be taken as gospel. Whatever was that the increase in quantity and the riskiness of the their complexity, the implications behind their assumptions debt churned out by the avaricious to the foolish considerably should be explained and their weaknesses clearly set out. exceeded any risk reduction. Unfortunately, too many academics, consultants and bankers The financial community has indulged in self-deception on a have failed to do this. grand scale but that is self-evidently not an acceptable plea in An obvious example is the naive use of Value at Risk, which mitigation. As long as there are Solomon Greens in the financial has brought a number of banks to their knees. Company community and, more to the point, in our profession, we shall be treasurers persistently used this statistic despite its limitations able to resist the unsubstantiated assertion, the false assumption and have wrongly believed that they have controlled risk at the and the questionable model. relevant confidence level of a probability distribution, which in most cases did not apply. Nassim Nicholas Taleb knew this, as Geoff Lindey did Green and many others, but too many remained silent 21 September 2008 or bemused. Another example is the search by pension funds and others The writer of the letter of the month receives a for ‘uncorrelated return’, without any thorough analysis of Venecia fountain pen kindly supplied by HBOS

Games of chance didn’t deny that God is the first cause of Not the cause In reference to the feature on Thomas all things. Some believed that participation “As an actuary, I can’t predict the Gataker and ‘chance’ (June 2008), an article in ‘games of chance’ was profane, as God future but I know that I hold a valuable by DR Bellhouse was referred to which provides revelation by the outcome, but qualification, which enables me to assist explains: “‘General providence’… [is] the Gataker held that whatever the place of lots companies and trustees in managing risks, ruling hand of God… the law of nature. in Divine revelation had been previously, and I can provide my clients with comfort ‘Special providence’ [is]… miraculous… ‘a this ceased after the completion of the Bible. when events unfold that are out of our particular act of direct divine intervention’.” To attribute revelation to such now would hands” (Margaret de Valois, The Actuary, Gataker co-authored the Westminster be to undermine the sufficiency of Biblical October 2008). Confession of Faith stating: “In… the… decree revelation. (Assuming financial gain is “O Actuary! In our house of ease, market- of God, the first Cause, all things come to not involved, which would involve theft friendly, keen to please. When pain and pass immutably, and infallibly; … by the and covetousness.) anguish wring the brow, a ministering angel same providence, He ordereth them to Augustus Toplady says Martin Luther thou!” (After Sir Walter Scott). fall out, according to the nature of second played “backgammon … after dinner, Ronnie Bowie, in the same issue of The causes, … necessarily, freely, or contingently.” in order, by unbending his mind, to Actuary, refers to us as “the profession (5:2). Among the Scripture references given, promote digestion”. that caused problems in pensions and Jeremiah 31:35 refers to God appointing the In Random Justice by Neil Duxbury we read, insurance”, and exhorts actuaries to be sun and moon as His instruments of giving “The Puritan[s]… expressed… light on earth. Divine control is always total. disagreement…; Gataker was The Westminster Confession of Faith asserts not a lone voice”. Letter of the month - “T” “God from all eternity did… freely and Bellhouse clarifies unchangeably ordain whatsoever comes to that no evidence exists “T” stands for talented. Our Bristol and Leeds teams are full of talented people, but there’s always room for a few more. If you’d like to work pass” (3:1). that a “religious alongside some of the best minds in the industry, here’s your chance. On the question, “Do ‘games of chance’ worldview…held up the Find out more by emailing [email protected] reveal specific Divine direction (special flowering of probability”. providence), or do they fall out “according to the nature of second causes” (laws of J L du Toit Sponsored by Equal opportunities for all - our policy is as simple as that. nature)?” Gataker held the latter view but 8 October 2008

 November 2008 www.the-actuary.org.uk

006+007_Actuary_1108_Letters.ind6 6 22/10/08 15:26:42 Your view Letters

more ‘market-friendly’. The value of communication needs “to market the skills and added value Actuaries did not cause the problems. Jean Eu’s article on the student page that actuaries can bring” (The Actuary, October However, one would expect a profession (September 2008) hit the nail on the head. 2008). Of course, he is absolutely correct but whose slogan is ‘making financial sense Jean points out that if students don’t that doesn’t just boil down to training in of the future’ to see the problems coming, apply the same effort to passing the communication skills and client relationship particularly when pointed out to them by communications paper as they do to the management — important as these are. It is one or two of their actuarial colleagues. Let technical papers, then it is no surprise that more important for the actuarial profession us have a look at some of the problems. the pass rate is lower. to speak out, publicly, so as to bring back Personal pensions mis-selling. Mortgage We set great store by technical expertise some basic economics and common sense to endowment mis-selling. Reckless bidding- and sometimes chuckle to ourselves about long-term financial planning (be it pensions, up of share prices to unrealistic levels. the proverbial ‘colleague in marketing’. insurance or personal finance). Employer’s pension contribution holidays. Communication skills are just another Had we done this years ago, the credibility The Equitable. The failure to foresee the sort of technical skill — as valuable and of our profession would not be in doubt and, stock market crash. The following demise of just as hard to learn. Journalists, barristers who knows, we might have been successful in many final salary pension schemes, and the and copywriters put a huge focus on helping avoid the madness which this focus decline in with-profit assurance business. communication skills and get results. on the short-term has produced. Finally, we now have the credit crunch upon We now recognise as a profession that us, anticipated, once again, by only one or good communications are very valuable. Edwin Topper two actuaries crying in the wilderness. Actuaries who pay the same respect to 3 October 2008 If anything, actuaries did not foresee excellence in communications as those the above problems because they were too devoted to technical skills are likely to be More heat, more risk ‘market-friendly’, unwilling to rock the boat. the ones that deliver that value. I absolutely In response to William Scott (Letters, Actuaries are superb mathematical accept that it is difficult, if not impossible, October 2008), I understand that there is technicians. They will not deserve to be to set the pace in both disciplines at the a 10-year global temperature cycle, based anything more until they can give fearless, same time, but at least as a profession we are on sunspot changes. We are just starting a independent, advice on what is likely to striving in the right direction. downward movement. go wrong. What is worrying about this is that it may Tim Cobb mask the upward movement as a result of Ivor Kenna 2 October 2008 global warming. So, for the next 10 years, the 1 October 2008 naysayers may deny global warming. When the 10-year cycle turns we will have much Time to speak out faster warming and may be less prepared. Maximising risk So it seems that ‘mark to market’ accounting I am more concerned about the TEAM In his article, The last post (September 2008), is part of the cause of the banking crisis we article. Hiding risk in reserves produces Matthew Edwards rightly warns of the dangers are experiencing. Even free market politicians the ‘hidden margin’ syndrome to which of “self-prophesying models”. However, he in America have had to come to terms with actuaries have been so prone. then claims that the risk of any error increases the fact that the market is not always ‘correct’ Much better to follow the FSA’s ICA and for smaller data sets and more lifestyle and produces unjustified excesses. The $700bn the Solvency II approaches and reserve categories. This is incorrect. The error referred rescue package will come with regulatory without margins but assess the risks in terms to is most likely where there are a small stipulations that will require banks to make of capital requirements. number of lives in each sub-group. loans (and remunerate) with a view to the Then we have more transparency. Ironically, the risk of this error is maximised long-term, and will allow them to produce when using the very postcode sectors the accounts which also take into account the Ian Reynolds author recommends. I checked this with a long-term nature of their business. 2 October 2008 medium-sized annuity portfolio, where the Isn’t this all somewhat familiar? FRS17 median number of lives per Mosaic type code and short-term drivers have been allowed Your letters was 3950. In contrast, the median number of to dominate the pensions landscape, and The editorial team welcomes readers’ lives per postcode sector was a mere 4. This the actuarial profession, collectively, needs letters but reserves the right to edit means that any imagined sector differentials to say ‘mea culpa’, in that we have been too them for publication. Please e-mail will just be random variation. internally focused rather than speaking out us at [email protected] against the current obsession with financial Stephen Richards, economics, and the perfection of markets. The deadline for receiving letters for 5 September 2008 Ronnie Bowie says that the profession the December issue is 7 November.

www.the-actuary.org.uk November 2008 

006+007_Actuary_1108_Letters.ind7 7 22/10/08 12:06:49 Soapbox Joanne Hindle

Joanne Hindle considers the future of financial regulation and the possible emergence of a new regime The future of regulation

s I write this, discussing the Indeed, we have seen this too in government after the next election. The future of regulation seems a fairly the retail sector since the mid-1990s current turmoil might sound a death esoteric topic — there may not with, first, pensions mis-selling, then knell for the FSA, and the model of one be any industry left to regulate endowment mortgage issues and now PPI, single regulator — itself. Europe has been byA the time this is published. There are where the Financial Services Authority’s considering introducing an overarching headlines of 2000 jobs cut in the City, and (FSA) warnings get ever more severe. EU regulator for some years, and now no doubt further upheaval to come. It may be too early to say whether may be the time. The enactment of However, I find myself in a privileged principles-based regulation contributed Solvency II may take longer than expected position in that I am currently not — almost certainly working for a major company, having left introducing a Unum earlier this year. In running my » The current turmoil might sound tougher regime own business I have the luxury of being a death knell for the Financial than that able to stand back and contemplate the Services Authority, and the model currently proposed. chaos around us with some detachment. Finally, under What is starting to emerge is that once of one single regulator — itself « the current model some dust settles, whenever that might firms themselves be, the question of how the industry is to the problems, or would have prevented are supposed to ensure that they have regulated in future will be centre stage. them if it had been a focus earlier on, sufficient capital for the risks to which Since the Gower report of the early however, so far it does not seem to have their products expose them. I think we 1980s and the initial Financial Services Act led to a rapid change in approach. will see legal action, either from 1986, the UK has adopted a model based The UK has always resisted the disgruntled investors or the regulator on financial supervision and conduct alternative model of product regulation. against the boards of those companies of business rules. In effect, one could The essence of this is that only products where it seems there was little sell what one wished, provided it was that the regulator approves may be sold understanding of these risks. sold according to the rules (for instance, — the selling process itself can then be a While no doubt it will take some years being suitable for the client) and that the lighter touch. The regulator would also, before all of these issues are worked company had sufficient capital for the risk before any sales take place, satisfy itself as through, the current market instability that product exposed it to. More recently, to the financial ability of the seller to back will be followed by a period of regulatory this has of course also been backed by a the product. Many of the arguments against change — almost certainly towards tighter focus on ‘principles’ rather than detailed this are familiar — that it stifles innovation, controls, more intervention and possibly rules, with Treating Customers Fairly (TCF) greatly slows the product development even a different structure. the most obvious example. A simplistic process and overly involves the regulator description perhaps but in light of what is in the day-to-day business of the regulated. Joanne Hindle is a consultant to the financial services happening currently, going back to basics However, I suspect that in the climate after industry. Contact: [email protected] may be no bad thing. this chaotic period, such arguments may We are in a situation where some of not hold sway. There is already talk of a In the September issue of The Actuary we mistakenly what was being sold at the sophisticated, need for more interventionist regulation. gave contributing writer Paul Wilmott the title of complex or wholesale end of the market Similarly, the structure of the Professor. Mr Wilmott would like it made clear that he seems not to have been understood by regulator itself is likely to be questioned is not a Professor. He is an independent consultant, many, either buying or selling. — particularly if we see a change of researcher and lecturer.

 November 2008 www.the-actuary.org.uk

008_Actuary_1108_soapbox.indd 8 20/10/08 16:28:27 News Profession

Newly qualified Faculty president Faculty of Actuaries fellow sets out aims Isobel Prowen Just over 200 people heard Faculty president is presented Ronnie Bowie give his presidential address at the with her award Royal Physicians Hall in Edinburgh on 6 October, for best Faculty which can be read online at www.actuaries.org. Ronnie Bowie (centre), with some of the authors of student overall uk/presidents/fac_add_2008.pdf the best sessional paper for 2007/2008, (l-r) Ken by Ronnie Bowie. In a very topical address, he highlighted the current Su, Colin Wilson, Dermot Corry and Colin Ledlie financial troubles and the growing need for actuaries with broader skills and a more challenging mindset. He also set out his four themes for the year ahead: developing world class member support and services, marketing the profession, building relationships with Stewart Ritchie regulators, and cultivating an actuarial community for is presented actuaries living and working in Scotland. with his past Before his address, which included the first president’s Professor Alexander McNeil, left, and Rob Curtis, screening of a short film featuring actuaries, Ronnie badge by right, with Ronnie Bowie after receiving their made a number of presentations (see right). Ronnie Bowie honorary fellowships

The purpose of the work strands will be to Merger work strands identified design the best possible structure for a future profession as well as addressing the concerns Faculty and Institute Councils met jointly on some members have, and an important part of that have been raised. After this, Faculty and 19 September to discuss the outcome of the this next phase of work will be to ensure these Institute Councils will decide whether to recent consultation with members regarding are addressed and alleviated where possible proceed to a formal merger vote. the future ‘shape’ of the profession. before any formal vote is held. For more details about the proposed The Councils were pleased with the The next phase will involve 10 merger, please visit www.actuaries.org. feedback and thanked members for taking the work strands to address issues such as uk/members/merger_discussion. Councils are time to contribute. Given the significant level development of an identity and name, the determined that work on the merger project of support for a merger, both Councils felt it legal and tax structure of the Profession, should not interrupt the normal working was appropriate to proceed with more detailed and consideration of how best to build on of the Profession and the delivery of its plans. They also recognised the reservations the history of the Faculty and the Institute. member-focused strategy. Consultation on future Actuaries in their own words image of the Profession Want to tell the As part of the Profession’s forward-looking world how great strategy, the Management Board has actuaries are? Why appointed the consultancy firm Living not be part of a Designs to help engage with, and gain new campaign to feedback from, members on the future present a different image of the Profession. image of actuaries, Working with the Profession, Living and show people Designs will facilitate a series of focus that an actuarial groups, and conduct additional research career can be from November onwards. This will enable interesting, diverse them to hear a range of views from and challenging. members, in order to develop a vision of The Profession the Profession’s future image. has partnered Living Designs are specialists in with White corporate branding and communications Boat TV, a video within the financial services sector. communications agency, to produce a series of short films featuring interviews with They were chosen for their hands-on actuaries – at work and play. The films will appear on the Profession’s website and be used approach and experience of working in presentations at the Profession’s events and activities, to promote actuarial careers to with professional and membership school and university students. Zoe Craig, pictured on location with White Boat TV, and organisations. Iain McGowan were the first two actuaries to take part. You can view the film atwww. To find out more about Living Designs, actuaries.org.uk/the_profession/actuaries_voices. If you are interested in taking part in a please visit www.livingdesigns-uk.com future film, please [email protected]

10 November 2008 www.the-actuary.org.uk

010-014_Actuary_1108_Prof.indd 10 21/10/08 17:09:35 Profession News

Sign up for member interest groups Faculty and FASS Welcome Day To date 1560 members have expressed interest in the 12 current The Faculty of Actuaries and the Faculty of Actuaries Students’ member interest groups. Society (FASS) Welcome Day took place at Merchants’ Hall The Profession wants to gauge the level of interest to establish in Edinburgh on 9 October. Held annually, it is aimed at new five new groups, which have been suggested by individual students. Harvard Lee, President of FASS, introduced the day, members. You can find details of all current and new groups at followed by Robert McGregor giving an introduction to the www.actuaries.org.uk/members/migs Profession and an overview of regulation. Trevor Watkins n Chinese Regional Society. This group, of potential interest followed with an overview of the qualification system. Staff to Chinese students, people with a background or interest in actuaries Georgina Warren and Helen Gregson talked about China, or actuaries living and working in China, seeks to provide work-based skills and the marking of papers. It concluded with opportunities for members to meet on a professional and social a question and answer session. More than 40 attendees then basis, and to provide informal examination support for those went on to a FASS drinks reception. following the UK actuarial syllabus. n Welsh Regional Society. This group, of potential interest to actuaries with a background or interest in Wales, or living and working in Wales, would provide professional and social networking opportunities for its members. n Gibraltar Regional Society. There is a small but growing actuarial community in Gibraltar. The focus of work for actuaries here tends to fall within the general insurance practice area. This group would be of potential interest to actuaries working in Gibraltar, and could work towards planning business-related events and seminars. n Mergers and Acquisitions (Pensions). This group would focus on pensions issues in corporate transactions, with the objective of improving the quality of advice given in relation to mergers and acquisitions. It is likely to be of interest to members working in this field in either corporate or private equity. • GB2232 EXACTVAL Advert 15/10/08 7:55 am Page 1 n Solvency II for private medical insurance. This group is likely to be of interest to actuaries working in the field of private medical insurance. The group wants to provide an online discussion forum External Actuarial Valuations to share information and knowledge among members. All members can join an existing or new group. Membership of member interest groups is open to all, and you can join more than one group. If you would like to join an existing or new group, visit the members’ section of the Profession’s website at www.actuaries. org.uk/members and update your profile within the transactions and personal information section, or e-mail [email protected] ExactVAL useful websites page

Faculty fellow scoops two research awards Faculty of Actuaries fellow Andrew Cairns has been awarded two prizes for his 2006 paper entitled Pricing death: Frameworks for the valuation and securitisation of mortality risk. In October, the Actuarial Foundation awarded the Heriot-Watt University academic the David Garrick Halmstad prize for the paper. The prize, awarded annually, is considered one of the most prestigious awards in actuarial science. Professor Cairns was also honoured by the International Actuarial Go to Association with the Bob Alting von Geusau prize. www.exactval.co.uk/websites.htm The award-winning paper sets out methods for calculating and you’ll be just one click away from all those the risk implications of changing longevity for mortality-linked sites which should really be on your favourites financial contracts such as pensions and insurance. Professor Cairns is well known for his research in financial risk list, including: management for pension plans and life insurers, and holds the position of professor of financial mathematics in the department of • PPF, FTSE gilt indices, Guidance Notes actuarial mathematics and statistics at Heriot-Watt. • Accounting standards, Pensions Ombudsman In the field of financial mathematics, he has developed a new model and Regulator for bond-price dynamics for use in the measurement and management • Statutory Instruments and Purple book of long-term interest-rate risks in pensions and life insurance. More • Actuarial jokes recently, he has been working on the modelling of longevity risk.

www.the-actuary.org.uk November 2008 11

010-014_Actuary_1108_Prof.indd 11 21/10/08 17:09:54 News Profession

Sub-prime crisis offers crucial lessons for insurers Insurers can learn from the errors of the n Allowing a misalignment or with expert judgment, and with simple banking world resulting in the credit disconnection of interests between monitoring of aggregate limits exposed; crunch, according to a paper presented at originators, intermediaries and risk takers underestimating correlations in stressed the Actuarial Profession’s General Insurance n Pricing products based off a period of conditions; and concentrating on net (GIRO) Convention in September. benign loss experience risk while ignoring possible basis risk The paper, Lessons from sub-prime, n Poor design of incentive programmes. in reinsurance protections, particularly outlined some of the lessons for the The paper was presented at the for extreme events (including the insurance industry as it faces today’s conference by the Securitisation of Non-Life unwillingness or inability of reinsurers to challenging environment. Insurance Working Party at the Profession’s pay in those very events). Mistakes from the sub-prime crisis that GIRO Convention from 23-26 September. He said: “The non-life insurance are outlined include: Working Party chairman Graham industry is entering a brave new world of n Succumbing to short-term, top-line Fulcher said insurance companies enterprise risk management, particularly pressure to expand business aggressively could also protect themselves by in Europe, with the advent of the Solvency by writing new business or irrationally avoiding such errors as: over-passive II regime. In many ways we are following defending a market leadership position reliance on external risk models (such the risk management footsteps of the n Failing to monitor the effect of weakening as catastrophe models); failing to banking industry and we can learn much terms and conditions challenge complex probabilistic models from their mistakes”

News in brief GIRO: Full impact of sub-prime crisis on insurance Open forum on Modelling and industry may not be known for years, actuary warns Matching Inflation-Linked Benefits Dariush Mirfendereski (UBS), Andrew It may take up to three years to count initial fear was Smith (Deloitte), and Alvar Chambers the cost of the damage to the general about laddering (Insight Investment) will present their insurance industry caused by the sub- claims but, in views on how the recent increases in price prime crisis, according to Alex Marcuson, the end, these inflation have affected how inflation is a speaker at the Actuarial Profession’s claims failed and modelled and the investment strategies General Insurance (GIRO) Convention. the real damage that can be used to hedge inflation-linked Mr Marcuson, chair of the GIRO Sub- was done by the benefits. The forum, 5.30pm for 6pm on Prime Working Party said that while extent of insured 4 November at Staple Inn, will be a chance the insurance industry had learnt many professional Alex Marcuson for members to share their views and lessons from the liability trough of the indemnity and experience. For more details and a booking turn of the century, the full extent of directors’ and officers’ losses. We may form, visit www.actuaries.org.uk/conf_ claim costs from the credit crunch, and well have large failures that repeat Enron flyer/InflationLinkedBenefits.pdf wider recessionary effects would take and Worldcom but these may not prove two or three years to quantify. to be the end of the story for many FRC appoints chairs of operating bodies “Where there is economic loss, there insurers, with the lower profile claims The Financial Reporting Council (FRC) are insurance claims, and the scale of also taking longer to resolve.” has completed the appointment of its losses here are huge and widespread. Mr Marcuson advised general insurers chairs, who will now become executive The complex and contentious nature of to carry out a careful review of their directors on the new FRC board. This this type of claim means that insurance asset exposures as well as examining change is in line with the arrangements information is thin on the ground and their liability positions, given the current for restructuring the FRC announced in likely to prove slow to emerge — expect turbulence in financial markets. March last year. The final step in the this to take some time.” He also spoke about the challenges process was taken in October when He likened the significance of the recent events placed on an industry the non-executive directors of the FRC fallout after sub-prime for insurers to the preparing for Solvency II, suggesting extended the tenure of Richard Fleck as dot-com crisis. that some insurers might be considering chair of the Auditing Practices Board until “When the dot-com bubble burst, the recalibrating their internal capital models. the end of his second three-year term on 31 March 2010. The Board now has its Webcast on Enterprise Risk Management full complement of 16 members. Actuaries and students will have the opportunity to learn from the global leaders in enterprise risk management in a two-way webcast on 10 and 11 December. Credit crunch forum now online The ‘Global Best Practices in ERM for Insurers and Reinsurers’ webcast will If you missed the recent open forum on offer accessible information and facilitate the discussion of practical and theoretical ‘The Credit Crunch: practical consequences ERM issues. for actuaries’, you can listen to the The programme will air in, and feature speakers from, the Americas, Asia Pacific and discussion and view the presentation Europe. Last year’s event attracted an audience of more than 1500 in 47 countries. at www.actuaries.org.uk/conf/ To register and learn more about the webcast, visit www.soa.org/meetings-and-events/event- creditcrunch20080910 detail/global-best-erm/default.aspx

12 November 2008 www.the-actuary.org.uk

010-014_Actuary_1108_Prof.indd 12 21/10/08 17:10:13 News Profession

Pensions actuaries to benefit from Dutch actuaries closer links with medical community open new offices The actuarial and medical professions came together at the ‘Medical factors shaping On a grey longevity’ conference in late September. The joint event was hosted by the Royal September Society of Medicine and the Profession, and aimed to improve understanding of afternoon current thinking and practice between the actuarial and medical professions in areas in Utrecht, of mutual interest. Dutch In his presentation, Faculty of Actuaries fellow Richard Willets said that actuaries cooperation between actuaries and the medical community would improve the celebrated accuracy of UK pensions estimates. the opening of the new modern premises He said: “We need to think about how we can work with the medical community for the Actuarieel Genootschap & Actuarial to gain data that is highly relevant in developing longevity estimates. Institut. The event included entertainment “In the past, actuaries have focused on past trends as the main building block, but and the dramatic unveiling of the gift there has been a movement towards drawing on medical data as an alternative or wrapping around the ‘black box’ building. complementary method. In practice, it makes sense for actuaries to exchange medical The UK Profession’s chief executive Caroline information but it is not yet a habit.” Instance was among 200 guests who Information that will be valuable in determining longevity projections includes witnessed the colourful event. medical advances, changes in lifestyle that impact on mortality and the prevalence of The office is named after Johan de Witt, a certain diseases. Dutch mathematician and statesman, and one Other presentations at the conference held at the Royal Society of Medicine in of the founders of the actuarial sciences in the London included What factors are changing longevity and can longevity be predicted? by Netherlands. The new location houses 25 staff Dr Martin O’Flaherty, from the University of Liverpool, and Old age and co-morbidity and will be a focus for developing the public — the actuary’s headache by Institute of Actuaries fellow Neil Robjohns. profile of the profession in the Netherlands. The building’s seminar rooms will be used as part of their educational programme. Pensions Regulator issues New interpretation service The Dutch Actuarial Association was guidance on effective for members of Profession established 120 years ago and has more than 1400 active members, of whom over 20 are member communications A new interpretation service has been also members of the Faculty or the Institute. Effective member communications can set up to help members of the Profession have a significant impact on financial understand the professional and technical News in brief outcome, particularly in relation to DC guidance of the Profession and the Board pension schemes. for Actuarial Standards (BAS). Groupe Consultatif’s 21st Colloquium The Pensions Regulator has issued The confidential service draws on the Solvable Solvency for Pensions will be guidance on member communications, experience of four panels of volunteers the subject of the Group Consultatif’s and an investment guide that can be in the areas of professionalism, pensions, 21st Colloquium at The Hague, provided to members. general insurance and life insurance. Netherlands, on 21 November. Keynote The guidance is, according to the Members who require assistance in the speakers include Ieke van den Burg MEP, regulator: “For use by trustees, managers interpretation of guidance can now submit Jaap Maassen, vice chairman of EFRP and and employers and contains principles a query using the query input form on Karel Van Hulle of Internal Market DG. and guidelines on following good practice the Profession’s website. The query will Mick McAteer, independent consumer in written communications to members. be allocated to the relevant panel and a advocate, will present the consumer’s Our focus is on the schemes that appear response forwarded to the enquirer via perspective. The conference, for which to be in most need of support. Smaller e-mail and, if relevant, to a wider audience five hours of CPD can be claimed, will schemes may have less to spend on — extracts may be published anonymously conclude with an interactive debate communications experts and advice, on the website. facilitated by Gijs Weenink, director of though schemes of all sizes can benefit Queries might relate to: the Dutch Debate Academy. For more from the guidance. n The interpretation of the Professional details, visit www.gcactuaries.org/ “We chose to focus on written Conduct Standards or, in time, its documents/21st_colloquium.pdf communications because these are the successor, The Actuaries’ Code most widely used.” n The interpretation of Actuarial Chairman of BAS to stand down Making pension fund choices — think Profession Standards Paul Seymour, chairman of the Board for before you choose, is a separate investment n The interpretation of BAS Standards Actuarial Standards since December 2005, guide which trustees and employers can n The interpretation of BAS amended and a director of the Financial Reporting issue to help members understand the DC standards. Council, has decided to stand down. Mr fund choices available to them. To access the service, or to find out Seymour is leaving to ‘devote more time To view this guidance, visit: www. more, visit the website at www.actuaries. to personal interests’. He will continue thepensionsregulator.gov.uk/guidance/ org.uk/regulation/standards_compliance/ working until a successor is appointed, dcScheme/index.aspx interpretation_service which is likely to be in the first half of 2009.

14 November 2008 www.the-actuary.org.uk

010-014_Actuary_1108_Prof.indd 14 21/10/08 17:10:26 News Profession

Faculty welcomes new fellows Ronnie Bowie, president John Cranston, Stephen of the Faculty of Cunningham, Lisa Actuaries, welcomed Dilley, Steven Hood, new fellows to the Vikki Larkin, Catherine Faculty at a ceremony McFadyen, Patrick on 1 September at Ndururi, Rene van Merchants’ Hall, Heerden Prinsloo, David Edinburgh. The Reeves, Emma Roberts, president was especially Rosalind Rossouw, Lindy pleased to welcome five Schmaman, Gemma new fellows who had Sefton, Emma Smith, travelled from South Leong Soon Tan, Susan Africa to be present. Thomas, Willem van With Ronnie Bowie are der Merwe and Gower Diane Bell, Neil Christie, John Wisdom. Epidemics and climate part of new mortality modelling Researchers have developed a method impact on mortality, killing an estimated 20 The work is summarised in a paper of forecasting mortality rates that to 50 million people worldwide. entitled Smooth models of mortality incorporates unusual events such as a Dr Currie said the new method could with period shocks, which can be viewed bird flu epidemic or extreme weather. be used to measure volatility in mortality at www.ma.hw.ac.uk/~iain/research/ In the latest research, Dr Iain Currie forecasts, and the researchers hope it Currie_Shocks.pdf and James Kirkby have introduced events will prove valuable to pension scheme Dr Currie’s research was supported by that can alter mortality rates in particular actuaries in modelling and forecasting a grant from the Profession and carried periods, such as disease epidemics — an mortality rates. out at Heriot-Watt University. The work example of a ‘period shock’ — into Dr Currie said: “Flu epidemics, of James Kirkby was supported by an mortality models. hot summers or cold winters can Engineering and Physical Sciences In the past, ‘period shocks’ have not been disproportionately affect the mortality Research Council Studentship and a used in modelling, although events such as of certain age groups in particular years. grant from the Continuous Mortality the Spanish Flu in 1918 made a huge one-off We call such an effect a ‘period shock’.” Investigation (CMI). Call for speakers Stochastic reserving and Current issues in Would you like to speak at next year’s modelling seminar pensions seminars pensions conference? The main topics The requirements anticipated under Dates have been set for the latest seminars include: fallout from current economic Solvency II, and International Accounting on current issues in pensions. These seminars conditions, risk management in changing Standards, place greater emphasis on are designed to provide a topical view of times, the future of financial modelling, and quantifying reserving uncertainty. developments in pensions, aimed at qualified the future of pensions. Your presentation at Practice and standards are still evolving, actuaries working in the pensions field. the conference, 3-5 June 2009 at the Queen’s although many actuaries may not have had The dates are: 3 and 25 November at the Hotel in Leeds, could lie within any of these sufficient practical experience with these Hilton Paddington, London, 6 November areas. If you are interested in preparing and stochastic methods. at the Hilton Deansgate, Manchester, and delivering a presentation visit www.actuaries. This event, at Staple Inn in London, on 18 November at the Radisson SAS, Glasgow. org.uk/pensions/speakers2009.doc, complete the 2-3 December, will introduce and explore Topics will include updates from the Pensions ‘Call for speakers form’ and return it to claire. these methods through a series of lectures Regulator, the Pension Protection Fund and [email protected] by 7 November. and hands-on working examples, with BAS, and presentations on the legal aspects of tutors available to help. funding and major pensions reform. The seminar is aimed at actuaries who For more details, visit www.actuaries. 16th general insurance wish to gain practical experience org.uk/conf_flyer/cip_autumn20081103 in applying stochastic reserving methods To book a place, please visit www.actuaries. seminar: thriving on change to estimate reserve uncertainty. It will org.uk/members/transactions/conference_booking Sunday 9 to Wednesday 12 November, Hyatt also be of interest to more senior Regency Coolum, Queensland actuaries who need to understand ASTIN in Manchester In addition to 36 sessions, the seminar will results from these methods. Leading general insurance actuaries feature a number of leading Australian and For more details, visit www.actuaries.org. of the world met for the 38th ASTIN international speakers. uk/conf_flyer/StochasticReserving200812. colloquium in Manchester in July. For the latest information on the To book a place, please visit www. Colin Czapiewski reports back on this programme and the Seminar Brochure go to actuaries.org.uk/members/transactions/ popular event. For the full article, visit: www.actuaries.asn.au conference_booking www.the-actuary.org.uk/822032

16 November 2008 www.the-actuary.org.uk

016-017_Actuary_1108_Education.i16 16 22/10/08 12:47:45 Education News

New opportunities for actuaries at Heriot-Watt Professional actuaries with an interest in the reader level, with the first wave expected academic development of actuarial science to be made in late 2008 and early 2009. All and quantitative risk management will appointments are expected to have been have the opportunity to apply for one of made within the next two to three years. eight vacancies at Heriot-Watt University’s Department of Actuarial Mathematics new Centre for Financial Risk and Actuarial and Statistics Professor Alex McNeil said Modelling, Edinburgh (FRAME). the new focus at the university, which The five new, and three existing positions was the first in the UK to offer a specialist are part of the university’s focus on risk and degree course in actuarial science, was modelling, as one of its five priority areas recognition of the growing importance of nominated in its strategic plan. enterprise risk management. The FRAME centre, within the Department “In his Presidential Address, Ronnie of Actuarial Mathematics and Statistics, will Bowie called for actuaries to play a greater be unveiled on 5 November in an event that role in enterprise risk management, and we Julian Leigh presents will feature a keynote address by Scottish first also believe that this is important and offers Greg Taylor with the minister Alex Salmond. It will have three aims: many opportunities for actuaries,” Professor to expand actuarial teaching at the university; McNeil said. “That is why we are expanding Finlaison Medal at GIRO to enable the university to offer more CPD our activities in that area. It will have huge Julian Leigh, chairman of the General and knowledge transfer opportunities; and to benefits for students, professional actuaries, Insurance Practice Executive Committee, facilitate more applied research. and the profession as a whole.” presented Greg Taylor with his Finlaison Medal The FRAME appointments will include The university will consider applications at the GIRO convention in Sorrento on 26 a professorial level position, and seven from academics or professional actuaries September. Julian kindly stood in for Institute appointments at lecturer, senior lecturer and who are interested in academia. president Nigel Masters who had flight delays.

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www.the-actuary.org.uk November 2008 17

016-017_Actuary_1108_Education.i17 17 22/10/08 12:48:24 News Industry

Too big to fail: AIG receives $85bn bail-out American International Group, until facilitate a process under which AIG will recently the world’s largest insurer by sell certain of its businesses in an orderly market cap, has obtained an $85bn manner, with the least possible disruption to liquidity facility from the US Federal the overall economy”. Reserve. Earlier in September, AIG was The term of the facility is two years reported to have been approaching various and interest is accrued at LIBOR + 850bps. counterparties to obtain a $40bn cash loan The loan is expected to be repaid from the to help strengthen its balance sheet in the proceeds of the sale of the firm’s assets, face of a credit rating downgrade. The Federal Reserve was moved to act by which include interests in City Airport, AIG, which operates in 130 countries and the impact the collapse of AIG could have an aircraft leasing business and its various has more than $1tn of assets worldwide, had on millions of American policyholders insurance operations around the world. had reported record losses throughout and the already fragile financial markets. The US government receives a 79.9% 2008 mostly related to write downs in The Fed said that the purpose of the equity interest in AIG and has the right to investments linked to US sub-prime facility was to “assist AIG in meeting its veto the payment of dividends to common mortgage assets. obligations as they come due. This loan will and preferred shareholders.

P-Solve calls for Lehman’s goes bankrupt more active use of Lehman Brothers, the US investment bank consolidated assets totaling $639bn and that traced its history back to the 1840s has total liabilities of $613bn. The largest derivatives positions filed for bankruptcy. The $639bn filing, the creditor to Lehman Brothers is Citigroup, Martin Johnson, investment director at largest in US corporate history, surpasses which has $139bn in bond debt, followed P-Solve, has warned against trustees shying Enron and Worldcom combined. Lehman’s by The Bank of New York Mellon, which away from derivatives positions as part of the broker-dealer subsidiary, however, did not had a combined $17bn in bond debts risk management of their pension schemes. form part of the filing. with Lehman. In an open letter in response to the According to the details of the Lehman Brothers employed more than collapse of Lehman’s, he said: “Trustees need bankruptcy filing, Lehman held 25 000 people including 5000 in the UK. to expect more from the investment advice they receive. Investment strategy must be Turmoil impacts UK reviewed more frequently, and long-term New regulations strategic decisions need to be supplemented proposed to clean up life insurance sector with tactical adjustments to take advantage credit derivatives markets The new trend for scrip dividends and of changing market conditions. continued market turmoil has slashed “Trustees should seek a more The impact of credit derivatives on the the value of stocks and bonds held by life comprehensive service provision, from insurance, banking and hedge fund sectors is insurance companies. Concerns over the derivatives training, hedge design and the catalyst behind a new push to improve impact on insurer solvency have led to the assistance with legal documentation, market regulation. In September, the US Financial Services Authority (FSA) issuing through to trade implementation, active Insurance Department gained the authority to a questionnaire to life assurers focusing on collateral management, position monitoring regulate part of the stock market’s $62tn of their investments in corporate bonds. and reporting.” credit default swaps. The department reversed Details sought by the FSA include credit Johnson calls on investment an eight-year-old ruling that credit default ratings of all bonds in their portfolios and consultants to up their game saying: swaps are not a form of insurance. concentrations in exposure to particular “In these uncertain times, trustees and Until now, writers of credit default companies. According to the Financial corporate managers are seeking more than swaps, contracts that offer protection Times, the FSA has said it is keeping the just the most appropriate advice. They are against counterparty default, have not situation “under close review” given the looking for an independent and objective been subjected to the capital requirements “unprecedented nature of the current market participant that understands their meted out for conventional insurance market volatility”. strategic goals, to whom they can delegate contracts. Eric Dinallo, the New York Life insurers are the single largest the implementation of that strategy, and insurance superintendent, is now working investor in the £237bn sterling corporate who has the experience and standing in with New York governor David Paterson to bond market. Almost 63% of the bonds the market to ensure best execution, even implement the new regime from January currently outstanding are issued by in the most challenging of conditions. 2009. “This is primarily a credit crisis, not financial sector companies whose He suggests that even those funds that an equity crisis, and that is where the focus financial positions are thought to have had Lehman Brothers as a counterparty and should be now,” said Dinallo. “The severity weakened considerably in recent months. have been able to replace their positions of this crisis was substantially increased by The FSA has also outlined proposals to swiftly are in a better shape than funds that what the government chose not to regulate increase disclosure in supervisory returns have not hedged their interest rate and — principally, credit default swaps.” by insurers holding derivatives positions. inflation exposure at all.

18 November 2008 www.the-actuary.org.uk

018-019_Actuary_1108_Industry.in18 18 22/10/08 15:44:14 Industry News

BAS launches consultation on data issues FRC review panel says The Board for Actuarial Standards (BAS) has published a firms need to recognise consultation paper setting out proposals for a generic standard on data, as part of its project to develop new actuarial standards. more remote risks The consultation paper sets out the principles that BAS thinks The Financial should apply to the use of data in actuarial work. These include: Reporting Council n User needs (FRC) review panel has n Scope of actuarial work published its activity n Materiality report and comments n Proportionality on the challenges n Application and judgment. Paul Seymour to corporate reporting The paper also suggests standards for best practice: arising from current n A set of data checks should be constructed and performed in order to conditions in Bill Knight determine whether or not, taken overall, the data is sufficiently accurate and financial markets. complete to meet the needs of the user In total, 300 sets of accounts were n Margins should not be incorporated into actuarial information to compensate reviewed, along with directors’ reports, for inaccuracy or incompleteness of the data unless specifically required. If and 138 companies were approached by margins are incorporated, their effect should be separately identified. the panel for further information. Commenting on the publication, Paul Seymour, chairman of BAS, said: “The Issues raised most frequently with significance of data issues has grown in recent years with the information revolution. companies related to the disclosure of Poor data is an obvious and ever-present threat to the quality of actuarial output the principal risks and uncertainties that — ‘garbage in, garbage out’. Our aim is to ensure that information provided by they face. According to the FRC: “Given actuaries to users is of high quality.” the speed and pervasiveness of Copies of the consultation paper can be downloaded from the BAS website at www.frc. the financial crisis and other market org.uk/bas/publications. changes, including rising prices and pressures on supply, directors may need to contemplate risks and uncertainties Welfare Reform Act signals change in GIP market previously thought to be too remote to The design of Group Income Protection (GIP) to address not only those areas of the design have warranted serious consideration.” products could change significantly under the that are directly affected by the Act but also Commenting on the findings, Bill new Welfare Reform Act. The Act is predicted to consider other design approaches that Knight, chairman of the panel, said: “UK to impose stricter criteria for access to state have developed in recent years.” company directors generally work hard benefits. This means that the assumed level A number of design options have been to comply with accounting standards. of deductions for state benefits in current GIP agreed with the major insurance providers This report aims to help them in the next products may be too high. This is likely to lead and can now be offered. “For example, it is reporting season by highlighting those to challenges from group scheme members. now possible to ignore state benefit values areas where directors’ judgment is vital Jamie Winter, head of healthcare for entirely within the GIP design, thereby and where the assumptions on which it Watson Wyatt, said: “We know from recent achieving far greater simplicity,” said must be based are sensitive to change. feedback from employers that they are Winter. “Another option is to deduct the “The panel is less likely to question generally unhappy with their existing GIP actual amount of state benefit received by directors whose business model is clear, designs, which have often been in place each individual claimant.” Other options who avoid boiler-plate descriptions and for many years and have not really altered available include reducing the term of who are open and direct about the specific in all that time. The Welfare Reform Act, the policy or applying more restrictive risks and uncertainties that may challenge therefore, offers employers an opportunity definitions of disability over time. their business in the foreseeable future”.

group-wide supervision ABI promotes risk-based supervision n Supervisory authorities should strengthen The Association of British Insurers risk-based supervision. their ability to cooperate in identifying (ABI) has joined other global insurance After meeting with the International emerging problems and in using their existing supervisors to launch new principles Association of Insurance Supervisors the powers in an efficient and appropriate way, to to protect policyholders and ensure ABI reports that the global insurance safeguard policyholders and beneficiaries. enhanced risk-based supervision. They industry believes that insurance n The insurance industry encourages the agreed that, overall, the insurance regulation should continue to be based on continuing trend towards risk-sensitive industry entered the crisis in a strong key principles: regulation. The level of prudential position and had shown resilience to the n The insurance industry shares the requirements should reflect the level of risk continuing shocks to the financial system. regulators’ objective of protecting and diversification. According to the ABI the resilience seen policyholders n The insurance industry believes that to date reflects the strength of the insurance n International insurance companies regulation should encourage competition. business model and the increasing attention should be regulated with enhanced Further information can be found at paid by insurance regulators to fostering co-operation among supervisors and www.abi.org.uk

www.the-actuary.org.uk November 2008 19

018-019_Actuary_1108_Industry.in19 19 22/10/08 15:44:02 News Industry

From the world of general insurance

The Lloyd’s franchise performance director, Rolf Tolle, has announced that he will be retiring at the end of 2009. Mr Tolle, who has already deferred his retirement once, has been credited with a major role in the turnaround in Lloyd’s reputation and profitability. The announcement was made now to allow time for a successor to be sought and appointed. The market’s results for the first half of 2008 show a fall in pre-tax profit from £1.8bn to £949m, a level that is generally reckoned to be good in the current soft market environment. A cut was also announced in Climate change the Central Fund contribution for 2009, from Catlin, the Lloyd’s insurer and reinsurer is the current 1% to 0.5%, the lowest level since sponsoring a major scientific expedition in before the reconstruction and renewal exercise 2009 to the Arctic ice-cap to measure the in the early 1990s. thickness of the permanent ice and study the impact of global warming. Marine and aviation business The UK Met Office has revised its Willis has reported that marine business estimates of the maximum likely water remains in a generally soft market, with levels in the Thames estuary this century. rating reductions still widespread. However, The revised estimates show a reduction on it identifies the protection and indemnity account of the reduced uncertainty in the (P&I) sector and Scandinavian hull business impact of climate change. The new figures as exceptions, with some double-digit suggest a rise in maximum water levels percentage increases being obtained. In Solvency II reducing from the previous 4.2 metres to 2.7 relation to P&I, Willis contends that similar French insurers could face a bill of almost metres. Nevertheless, their report concedes increases are expected next February when E1.2bn to implement Solvency II according that there remains considerable uncertainty. the 2009 renewals are produced. to a report by Paris-based consultancy Sia- Piracy in the Gulf of Aden has become a Conseil France. The majority of this cost is Asbestos development major problem, with more than 50 vessels estimated to arise from the implementation The Association of British Insurers has urged being attacked in the last 12 months. As of of mechanisms for risks, capital and risk members of the Scottish parliament to vote mid-September, no less than 15 ships were management reporting under the provisions against plans to allow people with pleural being held hostage. There is some confusion of Pillar 3. The report suggests that the issue plaques to claim compensation on the regarding the insurance coverage of such will cause some consolidation among the grounds that no symptoms are attached to the risks, with some hull policies providing approximately 4000 players involved in the benign scarring of the lungs that constitutes coverage, whereas other vessels are covered French insurance market. pleural plaques. This argument was put under their war risks policy. The preliminary findings of the Fourth forward in evidence to the justice committee Meanwhile, Aon has reported the first Quantitative Impact Study (QIS4) who are considering the possibility of signs of hardening in airline premiums after were published in the second half of legislation to overturn the effect of the House several years of reducing rates. The airlines September, and indicated there had of Lords ruling on the matter last year. themselves are unlikely to be prepared for been a 40% increase in the number of rate increases at a time when there are so European insurers participating, compared Lloyd’s many other economic pressures on them. with QIS3. The initial feedback suggests The Canadian company, Fairfax Financial Space insurance rates have also hardened the framework of the proposed Solvency Holdings has completed the acquisition recently, by as much as 15%, following a II regime is workable, although a few of 58.5% of the shares of Advent Capital spate of in-orbit losses. outstanding issues remain. The full Holdings, the Lloyd’s managing agency. findings will be published in November. Lloyd’s chairman, Lord Peter Levene, has Aon/Benfield called on the UK government to amend the The boards of directors of both Aon and More GI news tax treatment of Lloyd’s underwriters to Benfield have approved the former’s take-over allow the market to compete with insurers of the latter. Aon will pay £3.50 cash for each The following items can be found on based in other centres where tax rules are Benfield share and assume £91m of Benfield the website: very attractive. net debt, in a deal that values the company n Other regulatory developments In early September, the High Court in at £935m. The take-over significantly n Court cases London granted Lloyd’s civil restraint orders extends the lead of Aon as the world’s largest n Large losses against approximately 50 names. These orders reinsurance broker, as Benfield was previously will make it more difficult for names to issue third in this list. The merged company will Visit www.the-actuary.org.uk/ fresh claims against the Lloyd’s market. trade as Aon Benfield Re. category/news/industry

20 November 2008 www.the-actuary.org.uk

020_Actuary_1108_General.indd 20 21/10/08 16:18:21 News People/Society

Births Julian Ellacot takes on the Great Wall n Cathy Carroll (Darwin Rhodes) and her I don’t know which was more intimidating husband Marty are proud to announce the — setting out on a trek along the Great birth of daughter Orla Katy on 16 August. Wall of China with a group of unfamiliar faces, or trying to raise more than £3000 n Kenneth Lo (UBS, Hong Kong) and wife for three charities! With a fair wind and Deborah are please to announce the birth of help from friends, colleagues and SIAS, I daughter Sophie Sau-Ching on 26 August. have achieved both. Having never done a challenge in aid of Deaths charity before, I was asked if I would consider n Desmond John Le Grys, died on 11 joining the Westminster Challenge for October, aged 71. He became a fellow of the their trek to China this year. This challenge Institute in 1962. encourages those involved in politics (outside Julian shows impeccable taste in reading matter of the actuarial world I am a local councillor) n James Ronald Gibson, died on 15 July, to get involved in charitable work, and Paralympics were going on. aged 70. He became a fellow of the Faculty fosters relations between the charitable Accommodation during our walk in 1968. and political spheres. All funds raised are consisted of basic hotels or local split equally between Crimestoppers, The farmhouses — luxury was not an option. n William Mitchell, died on 4 July, aged 66. Childrens’ Society and Cancer Research UK. Food was traditional, wholesome and He became an associate of the Institute in 1993. In Beijing, after a short night’s sleep, we plentiful, although the abundance of Spam were whisked off to spend the following was a concern (except for the one person n Alan Bertram Mott, died on 24 week walking several different sections of the who actually liked it, naturally!) September, aged 88. He became a fellow of wall, accompanied by a local guide. These We typically covered around 10 miles the Institute in 1953. varied enormously, from the picture postcard a day, although this did not take into scenes of restored wall, complete with stone account the steep gradients and number n Douglas Sawyer Rose, died on 22 parapets and towers, to sections where there of steps involved. However, the reward for September, aged 91. He became a fellow of was either no wall at all, or a large pile of climbing each section was tremendous, the Institute in 1947. stones, covered by shrubby undergrowth. with breathtaking views. What better way Needless to say, some parts of the wall to relax when reaching the top than a bit n Clifford Douglas Sharp, died on 17 endure much heavier traffic than others. of light reading! September, aged 98. He became a fellow On more than one day we rambled on All in all, the trip was a great success, of the Institute in 1940. An obituary will without seeing any other walkers, apart and £3000 was raised for the charities follow in the next issue. from local villagers or guides. At one point (having paid for the cost of the trip myself). we attempted to walk along a section Of this, £500 was kindly donated by SIAS, Marriages running adjacent to a military area — to through its Charity Sponsorship Initiative, n Stephan Vogel married Stefanie Kuhnert be sternly told to turn back. At another, and I would like to acknowledge the on 30 August in Niedernberg, Germany. a section of the wall had been closed generosity of this scheme. as a result of a pro-Tibet protest event Further details of the charities benefiting Please send details of births, deaths and marriages to last year, the Chinese authorities clearly can be found at www.bmycharity.com/ [email protected] taking no chances while the Olympics and greatwallchina And the winner is... New chaplain for Paralympic success More than 60 people responded to the reader offer in the September Grantham and Stamford Dean Bergeron, an actuary with Desjardins issue of The Actuary to be in with Peter Weeks, an Australian-born actuary, has Financial Security (Canada) took the gold a chance to win a pair of tickets to been appointed to take on the newly created medal in the men’s 200 metres at the see A Disappearing Number at the role as chaplain for Grantham and Stamford Beijing Paralympic Games, which took Barbican in London. Ramesh Balaji, colleges, Lincolnshire. place in September. of Zurich Financial Services, was the Peter’s role is anticipated to help build Dean adds the medal to his bounty of lucky winner. a fruitful partnership between Grantham Paralympic medals, which includes one gold, After seeing the production and Stamford colleges. In a quote to the three silver, and four bronze medals. This is Ramesh said: “I was glad I won the Grantham Journal, Peter said: “I am looking Dean’s final appearance on the Paralympic competition as I’ve never been to forward to building strong links between stage, having competed in four games to date. the theatre before. I thought the both colleges, local faith leaders and In addition to the Paralympics, Dean has also production was well executed to respective wider communities in Grantham participated in a range of international and show the imaginative/creative side and Stamford.” national championships, leaving behind a of mathematics, as GH Hardy said: “A Peter has degrees in economics and trail of successes. mathematician, like a poet or painter, psychology, and was an actuary for a For more information on Dean’s is a maker of patterns.” I enjoyed the multi-national insurance company, before athletic career and ambitions, visit www. experience so much that I’m thinking achieving his Certificate in Theology. deanbergeron.ca of going to the theatre more often.’

22 November 2008 www.the-actuary.org.uk

022+023_Actuary_1108_People.indd22 22 22/10/08 12:24:39 People/Society News

SIAS Event particularly impressed by SIAS 5-a-side football tournament the skilful Report by James Williamson performance of Cyprian This year’s SIAS 5-a-side football competition Njamma of took place on a balmy Sunday afternoon at Catford’s Powerleague the Brokeback stadium on 30 August. Mountaineers. A total of 12 teams entered, including last year’s winners Pearl In the second Group, and were split into four groups with the top two from semi-fi nal, the each going through to the knock-out stage. The group stages were much-fancied fast-paced and full of goals. Hymans Robertson topped group A, Hymans team with Hays following in second. Prudential were winners of group secured a The winning team show off their trophies B followed by RBS. In Group C, Oliver Wyman won, with Punter comfortable 3-1 Southall taking the runner-up spot. The Brokeback Mountaineers win over Pearl Group. (ex-Aon) topped group D, with Pearl Group behind them. After another quick break it was time for the fi nal: the Brokeback After a short break, the quarter-fi nals began. Hymans Robertson Mountaineers versus Hymans Robertson. This proved to be an exciting versus RBS was the pick of the ties — a closely fought, tense game contest with lots of attacking play resulting in plenty of goals in the fi nishing 2–1 to Hymans after extra time. Special mention goes fi rst half — the Brokeback Mountaineers coming from behind to lead to RBS’s Mark Watterson who put in an admirable performance. 3-2 at half time. Play was slightly cagier in the second half, and the Hays beat Prudential 2–1 and Pearl Group beat Oliver Wyman by Brokeback Mountaineers managed to hold their nerve to win 4-3. the same score in their closely contested quarter-fi nals, while the Pearl Group beat Hays in the 3rd place play off. Brokeback Mountaineers cruised to an easy 4-0 victory in their A special mention goes to the Brokeback Mountaineers’ star match against Punter Southall. player, Cyprian Njamma, who earned the Player of the Tournament The semi-fi nals saw the Brokeback Mountaineers pitted trophy, as voted for by the referees, for his fi rst-rate performance against Hays, and Pearl Group against Hymans. The Brokeback throughout the competition. Mountaineers continued to show impressive form, progressing An excellent afternoon was had, and we look forward to next with ease to the fi nal after a 4-1 victory. The referees were year’s competition. Worshipful Company carol 20 years of The Other Half Club service and family supper To celebrate the 20th anniversary of was held in November 1988. Last year’s carol service proved so popular that the founding of The Other Half Club, an As a fi nal celebration of our special it will be held again this year. It is open to all enthusiastic group of members met recently year, we are inviting our ‘other halves’ to members of the profession and their families. in London. Among the group were seven join us on Monday 24 November for our The carol service will be held in St Lawrence founder members, and six past chairmen of fi rst dinner of the winter at the Café du Jewry Church on 15 December, beside the the club in addition to the present incumbent. Marché in Charterhouse Square. Guildhall, Gresham Street, London, beginning We began our special day with a tour on If you would like more information on at 6.15pm. There will be a service of carols the London Duck — one of the World War The Other Half Club, please contact Jean and readings, followed by a walk to Barbers’ II amphibious vehicles. We then enjoyed Grenville-Jones, chairman, by telephone Hall, in Monkwell Square, where there will be lunch and a special cake at the Skylon on +44 (0)1386 841163 or e-mail jean@ a buffet supper with communal carol singing Restaurant in the Royal Festival Hall. Diana grenville-jones.com or Margaret Ross, after. There will be a brass sextet at the supper Brimblecombe, the fi rst chairman, read out secretary/treasurer, on +44 (0)1296 630098 to accompany the singing. the list of founder members and the letter or [email protected] St Lawrence Jewry is the offi cial church of invitation to the very fi rst dinner which Margaret Ross of the City of London Corporation. It has a spacious hall-type interior with a striking white and gilt ceiling. Barbers’ Hall is Neo- Below: the Georgian in style. The Banqueting Hall is seven founder a large double height room with a giant members of The rounded bow window. The Barbers have been Other Half Club on this site since the 1440s. The cost of the evening is £60 per head (£30 for children of 12 and under). If you would like to attend please write to David Johnson, Clerk, The Worshipful Company of Actuaries, 3rd Floor, Cheapside House, Above: cake Above: all 138, Cheapside, London EC2V 6BW, by at the Skylon aboard for a 1 December, with details of who will be Restaurant Duck Tour attending, with a cheque made payable to ‘The Worshipful Company of Actuaries’.

www.the-actuary.org.uk November 2008 23

022+023_Actuary_1108_People.indd23 23 22/10/08 12:25:09 Trailblazer Lindsay Tomlinson Trailblazer This month’s trailblazer, Lindsay Tomlinson, comments on how the actuarial profession has changed and the vast array of choices and opportunities young actuaries face today

What motivated you to pursue an BGI has a reputation for a technology- actuarial career and what contributed to driven approach to managing risk, cost your decision to become an actuary? and return. Where do you feel actuaries I was a mathematics graduate, when there can make their mark within this process? were far fewer choices available than there As an actuary, you will have spent the early are now. The actuarial training offered an part of your career working on liabilities. opportunity to use mathematical skills in a In the investment world this places you at finance environment. a disadvantage to those who have spent the comparable early stages of their careers Has the profession changed much since learning about specialist investment areas. It you first came on board? would be difficult for an actuary to ever catch Like everything else it has changed up. But when it comes to the things that really immensely. My only concern would be that matter, such as asset allocation, or risk control, it has not changed enough. actuaries have a major competitive advantage. They understand the liabilities. Their skills Are you proud of the actuarial profession? play particularly well in a company like BGI. Pride is one of the seven deadly sins, so I try to They are also very valuable in more traditional avoid it. But yes, I am pleased to be a member Lindsay Tomlinson OBE is vice-chairman of financial market businesses. of the profession. Our reputation has taken a Barclays Global Investors Europe. He is a member real battering over the past few years but being of the Financial Reporting Council and the NAPF’s Of your career accomplishments, what do an actuary still commands respect. Investment Council, and is chair of the Code you consider the most satisfying? Committee of the Takeover Panel Still being employed after 35 years. Do you feel your background as an Seriously, by far the most satisfying thing actuary has positively affected your career actuaries today? has been taking a concept like indexation in finance? We are living in a soundbite world where virtually straight from the academic Immensely. Being an actuary gives access everything has to be transparent and failure world and seeing it become a mainstream to a very powerful global network of people is not an option. Professional mystique is not investment tool worldwide. with real insight into long-term institutions. valued. We have to find a way of presenting Understanding the liability side is highly complex material to non-experts so that What is the most important lesson you’ve advantageous when you are trying to they can take responsibility for the end learned in business? manage the assets result. This is an Do something you enjoy. You spend so of a long-term Our reputation has taken extraordinarily much of your life in your job, that you have institution. » difficult to make sure you don’t waste it on purely Having the a real battering over the past environment money-making activities. qualification few years but being an actuary for long-term Aside from that, you need to take enabled me to still commands respect financial responsibility and ownership for what you switch career « planners. We do. And I have learned that it’s easier to say tracks in a way have to cope sorry than to ask permission. that would have been impossible otherwise. with this, and we need to broaden our remit beyond insurance and pensions. What do you do to relax? You studied maths at university. What do I have five children and six Labradors so you think inspires young mathematicians What excites or intrigues you about the there is not a lot of relaxation. Aside from today, and how can the profession ensure fund management world and how can that I love all ball games except golf and we recruit the most talented ones? actuaries make their mark outside the have season tickets at Arsenal, Northampton There is now a massive array of choices traditional fields? Saints (rugby) and at the Royal Ballet. available to young mathematicians. I worry The fund management world is that for entirely understandable reasons extraordinarily interesting. It sits at the What advice would you give to someone (student debt and housing costs) they heart of the financial market system and starting out in the actuarial profession? will be unduly influenced by money. To deals with both the providers and users of Be prepared to change. Don’t get attract the best we need to offer a variety of capital. It’s global in scope, you meet an pigeonholed as a life or pensions person. attractive global career opportunities. amazing variety of people, and actuaries are Talk to people outside the profession quite well qualified to operate in it. I love it (particularly doctors and accountants) about What do you see as the key issues facing and I recommend it to everyone. the role of professions in modern society.

24 November 2008 www.the-actuary.org.uk

024_Actuary_1108_Trailblazer.ind24 24 20/10/08 15:31:55 Tuesday 18 November AGM Friday 14 November

AGM, Staple Inn Hall, London, 5:45pm SIAS Social Event The Annual General Meeting of the Society will be held in Staple Inn Hall on Tuesday 18 November 2008 and ‘Carnivale de Mystique’, The Brewery, will be immediately followed by a general meeting. The members of the committee are: Chiswell Street, London EC1, 6.30pm Name Status Fellow/Student Company Lady Luck has spoken and fame, fortune and mystery Robert Hails Chairman F Watson Wyatt await ticket-holders at the colourful ‘Carnivale de Amanda Prest Hon secretary F Hymans Robertson LLP Mystique’. You will enter a by-gone era of character Simon Jeffery Hon treasurer F SynSeer and excitement as performers entertain throughout the night to celebrate the passing of another William Bennett* S Barnett Waddingham LLP successful year. The truly hedonistic will enjoy the Lisa Mahtani F Legal and General Assurance Society complimentary bar, scrumptious three course meal James Williamson* S Barnett Waddingham LLP and partying late into the night. The event is black tie Gerard Francis F Towers Perrin or fancy dress with a prize for the best costume! Clara Hughes* S Fitch Ratings Alvin Kissoon* S PricewaterhouseCoopers Joanne Meusz* S Lane Clark & Peacock Mark Dainty* S High Finance Actuarial Nilantheny Christie* S AIG Life Richard Purcell* S Watson Wyatt Taha Ahmad S Studying at University of Kent *A ‘younger member’ as defined in the Society’s rules Tuesday 18 November Robert Hails, Simon Jeffery, Lisa Mahtani and James the committee. One vacancy will be reserved for a Programme event Williamson are retiring at the annual general meeting. ‘younger member’, being a member who has not James Williamson and Taha Ahmed (who was co- yet completed the examinations of the Institute of Dynamic Policyholder Behaviour, opted onto the committee during the last year) are Actuaries, Faculty of Actuaries or any other body of Staple Inn Hall, London standing for immediate re-election. actuaries or who has not done so since 1 May 2007 Dynamic Policyholder Behaviour (DPB) is one of the Amanda Prest will continue to serve as honorary and who has not already served on the committee for key issues faced by life actuaries when carrying out secretary for the 2008/2009 session. Gerard Francis at least three years. stochastic modelling. The paper gives background has been nominated to take over the position of Nominations should be sent in writing to the on types of situations in which DPB is important, honorary treasurer on Simon Jeffery’s retirement. The honorary secretary, giving the name, status, and case examples and explanation of the impacts committee’s nominated chairman is to be confirmed. employer of the candidate, together with the of DPB, and an explanation of factors that can The main business of the meeting will be to names of proposer and seconder, who must be influence DPB and the extent to which they can be accept the reports and accounts, to confirm the SIAS members. Each candidate should supply a analysed. It also proposes techniques which can nominations for chairman and honorary treasurer, personal profile no longer than 50 words, including be used to analyse DPB experience and suggests and to confirm the appointment of the successful a brief biographical history, which will be included a range of possible DPB modelling approaches and candidates in the election to fill the vacancies for in the ballot paper should an election be required. formulae that can be used in calculations. ordinary members of the committee. Nominations should be received no later than There is no need to register for this event in advance. The Rules of the society state that there can be Tuesday 4 November. Notice is also needed in between eight and 12 ordinary committee members, writing before 4 November of any resolutions that meetings (10 per year, Tuesday evenings), attend the so there are a maximum of five vacancies to be filled, members may wish to move at the meeting. Jubilee Lecture, attend the annual supper, and attend with two nominations already received from the If anyone has any questions about the role and some of the social events (approximately one per current members who are standing for re-election. responsibilities of committee members, please month, usually Thursday evenings). The vacancies for ordinary members are open to contact Amanda Prest. We expect all committee Amanda Prest any member of the Society, other than one who members to attend committee meetings (up to eight One London Wall, London, EC2Y 5EA has already served six years as an ordinary member per year at Staple Inn on a Tuesday evening), attend Tel: +44 (0)20 7082 6266 Fax: +44 (0)20 7082 6082 of the committee or who will be older than 35 on sub-committee meetings (about four per year, venue E-mail: [email protected] 1 November 2008 and has not already served on decided by convenor), to attend most SIAS sessional Website: www.sias.org.uk

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

26 November 2008 www.the-actuary.org.uk

026_Actuary_1108_SIAS.indd 26 22/10/08 16:03:43 Events Calendar

Events Wednesday 5 to Thursday Tuesday 18 November Association of Tuesday 18 to Thursday Cutlers Gardens, 6 November One-day seminar: Consulting Actuaries 20 November London Actuarial Profession Two-day fellowship course Current issues in pensions, Thursday 13 November Training course: Monday 3 November in professionalism, Radisson SAS, Glasgow Sessional Meeting/Dinner Trusteeship for Tuesday 18 November Sessional meeting: Edinburgh Jolly Hotel St Ermin’s, today’s trustee, London evening meeting Stochastic modelling Monday 24 November London SW1, Westminster, KPMG, Puddle Dock Staple Inn Hall, Sunday 9 to Tuesday 11 Institute sessional Meeting: 5.30pm. London London London November meeting: Management Dinner: 7pm for 7.30pm Life Convention 2008 actions in a with- Wednesday 26 November Worshipful Company Monday 3 November Amsterdam, profits fund, Thursday 27 November NAPF Trustee conference of Actuaries One-day seminar: Holland Staple Inn Hall, London Annual Dinner 2008: Understanding and Friday 7 November Current issues Drapers’ Hall, controlling risk, Silent Ceremony, in pensions, Thursday 13 to Friday 14 Tuesday 25 November London One George Street, London Guildhall Hilton Paddington, November One-day seminar: 6.45pm for 7.15pm Gresham Street, London Two-day fellowship course The end of the pension Pensions Management London in professionalism, Bristol scheme: how to manage National Association Institute Tuesday 4 November schemes in wind-up and of Pension Funds Tuesday 11 November Saturday 8 November One-day seminar: Monday 17 November the PPF Tuesday 4 November Seminar: Lord Mayor’s show/late Pensions and Faculty sessional meeting: Staple Inn Hall, Seminar: Corporate Trustees — decisive lunch and fireworks, corporate finance, Solvency II London governance, action required, Doggett’s Coat and Badge, Staple Inn Hall, Merchant’s Hall, Westminster, Mayfair Conference Centre South Bank,Blackfriars London Glasgow Tuesday 25 November London London Bridge, London One-day seminar: Event listings Current issues Thursday 13 November Society of Pension Tuesday 18 November in pensions Training course: Consultants Charity dinner, To list your events in The Actuary, please Hilton Paddington, What is trusteeship? Thursday 13 November Lord’s Cricket Ground, e-mail [email protected] London Westminster, London London evening meeting St John’s Wood, London

Contacts Association of Channel Islands Contact Andrew James T +44 (0)20 7808 1300 Society of Pension Consulting Actuaries Actuarial Society T +44 (0)1227 827703 E [email protected] Consultants Actuarial Profession Meetings held at Jolly Meetings held at BWCI, E [email protected] Unless otherwise stated, all Actuarial Profession Hotel St Ermin’s, St Peter Port, Guernsey, North West London meetings take place events Caxton Street, 5.15pm for 5.30pm, unless London Market Actuarial Society at City Conference Centre, See event listing for London SW1 otherwise stated. Sessional Actuaries Group Hone Sec Sarah Darby Coleman Street, London location details. See also unless otherwise stated, meeting monthly. All meetings are 12.30pm T +44 (0)161 833 7296 EC2 at 5pm or 6.30pm, and www.actuaries.org.uk 5.30pm, dinner at 7pm Hon sec David Peel at the Old Library, Lloyd’s. E sarah.darby@ all Yorkshire meetings at for 7.30pm. T +44 (0)1481 728432 Chairman Armoghan watsonwyatt.com Hammond Suddards’ Leeds Faculty of Actuaries Secretariat E [email protected] Mohammed office at 5.45pm. Meetings held at 4.30pm T +44 (0)20 7382 4594 T +44 (0)20 7213 5906 Norwich Actuarial Contact - London for 5pm, unless otherwise E [email protected] Faculty of Actuaries E armoghan.mohammed@ Society John Mortimer stated. Students’ Society uk.pwc.com Meetings usually held at T +44 (0)20 7353 1688 T +44 (0)131 240 1300 Birmingham Actuarial Sessional meetings the offices of Norwich E john.mortimer@ E [email protected] Society held at Standard Life London Market Union, Surrey Street, spc.uk.com Meetings held at 5pm House, Edinburgh, 5pm Students’ Group Norwich, NR1 3NG. Yorkshire Institute of Actuaries for 5.30pm, followed for 5.30pm. Chairman Emma Hon sec Gemma Thompson Richard Sweetman Sessional meetings held at by drinks locally. Non- Contact Donald Budge Blackhurst T +44 (0)1603 684 460 T +44 (0)113 243 6671 Staple Inn, 4.30pm for 5pm, members welcome. T +44 (0)131 245 3988 T +44 (0)1372 751 060 E gemma.thompson@ North West Steve Robinson unless otherwise stated. Hon sec Thomas Alden E donald_budge@ E emma.blackhurst@ norwich-union.co.uk T +44 (0)161 236 9191 T +44 (0)1865 268200 T +44 (0)121 633 6786 standardlife.com emb.co.uk Scotland Brian Dingsdale E [email protected] E thomas.alden@ Pensions Management T +44 (0)141 333 1066 landg.com Glasgow Actuarial LSE Actuarial Society Institute Staple Inn Students’ Society (London School of PMI House, Worshipful Company Actuarial Society Bournemouth Meetings held at Economics) 4-10 Artillery Lane, of Actuaries Meetings held at Staple Actuarial Society Resolution, 287 St Vincent President Yici Zhou London, E1 7LS 3rd Floor, Cheapside House, Inn, 5.30pm for 6pm Meetings held at 6.30pm. Street, Glasgow, G2 5NB T +44 (0)7818 262232 Contact Vince Linnane 138 Cheapside, London unless otherwise stated, Non-members welcome; Sec Ross Fleming E [email protected] T +44 (0)20 7247 1452 EC2V 6BW followed by a buffet contact hon sec. E [email protected] E pmiservices@pensions- Contact David Johnson supper at a nearby tavern. Hon sec Jacky Cheung Manx Actuarial Society pmi.org.uk T +44 (0)20 7776 3880 Hon sec Amanda Prest T +44 (0)1202 292333 Groupe Consultatif Meetings held at 5.30pm E clerk@ T +44 (0)20 7847 6266 x2149 Actuariel Européen for 6pm. Society of Actuaries actuariescompany.co.uk E amanda.prest@hymans. E jacky.cheung@liverpool- Sec Michael Lucas Hon sec Joanne Hadfield in Ireland W www.actuariescompany. co.uk victoria.co.uk T +44 (0)1865 268218 T +44 (0)1624 821212 102 Pembroke Road, co.uk Programme contact E [email protected] E joanne.hadfield@ Dublin 4. Lisa Mahtani Bristol Actuarial fpiom.com Details of all forthcoming Yorkshire Actuarial T +44 (0)1737 375107 Society Invicta Actuarial meetings can be found on Society E [email protected] Meetings held at 5.30pm, Society National Association the Society’s website. Contact Malcolm Slee Social contact with tea from 5pm. Meetings held at Grimond of Pension Funds T +353 1 660 3064 T +44 (0)1904 452792 Clara Hughes Hon sec Paul Bowden Lecture Theatre 1, University NIOC House, 4 Victoria E [email protected] E malcolm.slee@norwich- E [email protected] E [email protected] of Kent, Canterbury, 6pm. Street, London, SW1H 0NX W www.actuaries.ie union.co.uk

www.the-actuary.org.uk November 2008 27

027_Actuary_1108_Calendar.indd 27 22/10/08 15:54:31 Pensions Risk sharing Intelligent design Derek Benstead considers a pension scheme sharing risk between sponsoring employer and employee

aced with the task of designing a new pension scheme, there are two fundamental principles that any new scheme should incorporate. I F realise that the idea an employer might want to start a new trust-based pension scheme nowadays is tragi-comic but please bear with me. The first is the preservation principle: early leavers from the scheme should receive a Derek Benstead is short-service benefit that is a fair proportion an actuary who has of the benefit they would have received been discussing had they remained in service until normal risk-sharing schemes retirement age. It is to the industry’s shame for years. In 1998, he that fair preservation had to be legislated into proposed a collective existence, and to the government’s shame DC scheme to the that the next Pensions Act will undermine stakeholder pensions fair preservation of final salary benefits by consultation. He has reducing statutory revaluation from Retail been scheme actuary Price Index (RPI) up to 5% per annum, to RPI to a risk-sharing DB up to 2.5% per annum. The primary purpose scheme since 2003 of revaluation is not indexation for its own sake but to offer a fair exchange for the loss of the link to final salary upon leaving service. on risk-sharing schemes this summer. It is a proxy for salary growth, and RPI up to A natural design of risk-sharing DB 2.5% per annum is not enough. schemes is a career average earnings The second principle is that a defined scheme, in which the rate of revaluation benefit (DB) scheme should be fully funded of benefits before retirement and the rate on a wind-up basis most of the time. of escalation of benefits after retirement Granted, this is not remotely the reality for is discretionary. most DB schemes. However, my purpose To protect members, a minimum rate is not to explore the history of how we of employer contributions can be written got to where we are but to outline design into the rules, and no refunds to the principles for a new scheme. I assert that it employer allowed. The minimum employer would be good to design a scheme such that, contribution rate can then be communicated if it is fully funded on a reasonable ongoing to members, so that it is understood that basis, it is also likely to be fully funded on a whatever the discretionary increase outcome wind-up basis. or indeed the wind-up benefit outcome, the benefits being paid out are worth the Guaranteed benefit contributions that were paid in. Of course, paying to have benefits guaranteed Members in deferment are already by an insurance company is the most protected by preservation law, which under expensive way of providing pensions. It is the option for career average schemes, requires more efficient to offer pensions through a the same rate of revaluation to be applied trust-based scheme. For my second principle to deferred benefits as is applied to active to be met, the benefit guaranteed on a wind- members’ benefits, so my first principle is up must be smaller than the benefit provided met. Of course, trustees have a general duty of while ongoing. The additional benefit fairness in the exercise of their discretion. provided while ongoing is not necessarily A very similar but very different scheme guaranteed but discretionary. can be created by just two alterations to this This line of thought leads directly to risk- design. Firstly, the discretionary indexation sharing scheme designs, which is timely, as is not ‘upwards only’ but can be negative. the government conducted a consultation Secondly, the employer’s contribution rate is

28 November 2008 www.the-actuary.org.uk

028+029_Actuary_1108_Benstead.in28 28 22/10/08 15:59:55 Risk sharing Pensions

requirement, in order that post-retirement management are for employers, trustees and increases can be discretionary, not guaranteed. their actuaries to work out collectively, with Otherwise, it is already possible to run this some oversight from the Pensions Regulator design within existing DB pensions law. in the DB arena. Narrow vision legislated To facilitate collective DC schemes out of existence the concept of collective DC requires more extensive legislation. The schemes, and if the government does decide presumption in pensions law that a scheme to legislate to facilitate risk-sharing schemes, that is not DC is DB needs to be removed, it would be foolish to simultaneously legislate and the term ‘money purchase’ should be out of existence, possible scheme designs and used to describe DC schemes operating by management strategies that do not fit the individual member accounts. narrow constraints of its consultation paper. The government’s role should be to prescribe Risk-sharing schemes a few key principles, of which preservation is The actuarial planning of discretionary one, which it should not undermine. benefits can be done by use of the aggregate To conclude, good scheme design funding method and best estimate principles of fair preservation and only assumptions in a valuation of guaranteed guaranteeing what you expect to afford to and discretionary benefits. On one side of buy out, lead naturally to a risk-sharing the balance sheet, we have the assets and scheme design. I am delighted that the the value of future contributions. On the government has considered risk-sharing other side of the balance sheet, we have schemes to a depth of detail that displays the value of accrued and future accrual of a serious-minded attempt to understand guaranteed and discretionary benefits, with the issues. I hope that the government fixed. Now we have a scheme that is defined the rate of discretionary increases being used proceeds to facilitate the existence but contribution (DC) but does not operate by as the balancing item to equate the two. not prescribe the detail of risk-sharing means of individual member accounts. Such By using best estimate assumptions, schemes. If so, my differences of opinion a scheme was proposed in the government’s the discretionary increases can be planned with the consultation paper about the consultation, the term ‘collective defined evenly over the period of membership detail of the actuarial management of such contribution’ scheme being coined to of all the members. Explicitly funding schemes will not matter. describe it. discretionary increases provides prudent Within the area of risk-sharing schemes, Being DC, it is very different to a DB funding of the guaranteed benefits there is scope for a DC scheme that scheme, as the employer’s contribution is required in DB schemes. The government’s avoids the vicious volatility of outcomes fixed. Yet these two designs of scheme could consultation paper envisages the prudent of individual money purchase accounts, produce very similar benefit outcomes in funding of guaranteed and discretionary although we need the government to most circumstances. On the DB side, there is benefits. I believe this to be misguided, facilitate them. Even without government a guaranteed benefit that may rarely require because it will reduce the rate of legislation, there is already much that can additional employer contributions to fund. discretionary increase awarded to the first be achieved within the DB sector to make On the DC side, there is not. generation of members to the benefit of a risk-sharing scheme that thoughtful To facilitate the existence of a DB risk- later generations. employers may be pleased to sponsor. sharing scheme on these lines needs only We need the government to facilitate risk- one legislative change, the abolition of the sharing schemes and not to prescribe their Search for more articles on this topic post-retirement limited price indexation design and actuarial management. Design and at www.the-actuary.org.uk

Outline risk-sharing schemes

Defined benefit Collective defined contribution Benefit framework Career-average earnings Career-average earnings Revaluation and escalation Discretionary, upwards only Discretionary, can be negative Employer’s contribution Minimum rate specified in the rules Fixed rate specified in the rules Short-service benefit Receives discretionary increases Receives discretionary increases Refund to employer Not allowed Not allowed

www.the-actuary.org.uk November 2008 29

028+029_Actuary_1108_Benstead.in29 29 21/10/08 10:02:23 Life Securitisation An option for capital efficiency Jeff Wood illustrates the mechanics of securitisations as a capital management tool

Figure 1 – Gracechurch Life Finance

Financial Noteholders guarantor Guarantee of interest and ultimate principal Liquidity and swap Interest and Note guarantee principal proceeds

Barclays Bank Issuer Liquidity, swap and expense loan provider Jeff Wood is a member of the Interest and Reinsurer insurance capital principal loan markets team at Barclays Capital Reinsurer K life insurers are increasingly considering value of in-force (VIF) Surplus Reinsurance business securitisation as part of agreement their capital, financing and risk U management toolkit. As the market for these transactions develops, simpler structures, Barclays Life together with a more sophisticated investor Source: Barclays Capital base, are improving the efficiency of the execution process while at the same time VIF securitisations are particularly useful the regulatory and legal frameworks and the incorporating features, such as the ability in managing capital for insurers, where risk proposition, the costs of a transaction to to add new business, which maximise the the regulatory capital requirements exceed an insurer both in terms of expenditure and benefits for issuers. the management’s view of the economic resources have fallen. Transactions to date have been executed capital requirements. There are compelling The emergence of simpler structures, like primarily to create Core Tier 1 (equity-like) economic arguments as to why an insurer the recent AEGON transaction (see Figure capital at a cost below that of equity. If should fund any excess of the regulatory 2), has been key to this development. These correctly structured, VIF securitisations can capital above the economic requirements simple structures have additional benefits, also provide unencumbered cash that does with non-equity capital, namely to maximise such as allowing issuers to receive the cash not contribute to the financial leverage the return on equity and minimise the cost without restriction. The early transactions ratios used by rating agencies. The cash and of capital. This type of capital management gave capital benefits to the issuer but placed capital raised can be used for a wide range of has been widely used by banks to optimise restrictions on the use of proceeds by business uses, for example, reinvestment in their capital positions. Transactions can be effectively trapping the cash in the structure. higher margin business, used to finance new tranched comprising varying degrees of risk. A simple structure also increases speed of business, or returned to shareholders. On an economic capital basis, this can provide execution and reduces third-party costs. The basics of the transactions are very significant benefits, but the costs increase. Recent transactions have given issuers simple — investors provide cash to the insurer, the option to add new business to the which is repaid out of future surpluses as they Market developments transaction on an ongoing basis as surplus emerge on specified blocks of business, or the Early transactions, such as Gracechurch Life emerges on the initial pool of policies. This entire business. If surplus does not emerge, Finance, used relatively complex structures allows the insurer to maintain the quantum investors do not receive interest payments, (see Figure 1). This structural complexity, of financing outstanding at the initial level and principal is not repaid. The size of the together with the associated costs of onerous for several years, thereby providing cash and loan is determined by stressing the future due diligence required by the regulator, capital benefits for longer and effectively cash flows — for example, an increase in lapse monolines, rating agencies and investors, reducing the all-in financing costs. For rates and mortality rates — to the targeted risk are key reasons why the market for VIF investors, this additional feature also has level. The greater the stress, the greater the securitisation has not grown at the rate benefits. The bespoke nature of the risks security to investors and the lower the price, predicted following the inaugural NPI Mutual in each transaction means that investors but the smaller the amount of financing raised VIF securitisation in 1998. However, as key dedicate significant resources to analyse and risk transferred from the insurer. parties have become more comfortable with the risk and the longer duration also allows

30 November 2008 www.the-actuary.org.uk

030+031_Actuary_1108_Wood.indd 30 21/10/08 10:12:37 Securitisation Life An option for capital efficiency

them to reduce this cost. investment grade tranche. The reason for to the relatively simple products and the Another important development this is that most of the earlier transactions relatively stable, or at least predictable, cash- recently has been to show that portfolios included a monoline to guarantee the timely flow profile. Annuities are more difficult within an open book can be securitised, payment of interest and ultimate repayment because of the significant judgment required rather than a whole fund, without the principal. This enhanced ratings to AAA in setting the reserves which can materially need to transfer the business, through and allowed the transactions to be widely reduce surpluses, but it is possible to include reinsurance, out of the fund. Although distributed beyond those investors with them in a transaction and there are several this is usual in traditional reinsurance specific insurance expertise. examples of this. agreements, capital market investors In the absence of a monoline that Determining appropriate stresses for the have been hesitant to rely on an would centralise the due diligence, today’s risk level is the most important element issuer’s administrative systems unless the VIF investors need to be much more in sizing a transaction. For risks, such robustness of these systems can sophisticated with in-depth knowledge as market risk, where there are liquid be demonstrated. of the life insurance sector. In particular, markets, it is usually straightforward to The market is still developing, and the investors need to get comfortable with the determine the appropriate stress for the holy grail of a transaction blueprint that can risks of such transactions and are making risk level. The non-hedgeable risks are be followed by all issuers is some way away. their investment decision based on their more subjective. For risks where there is While it is certainly feasible, and expected, own analysis. The investor analysis is plenty of historic data such as lapse risk, that the legal structures will standardise, focused not only on the robustness of it is possible to determine appropriate it remains unlikely that a pre-defined set the underlying cash flows, but also the stresses. However, for risks such as of stresses will be used to determine the overall structure of the transaction. mortality improvements, which are financing amount relative to the VIF for a As a result, there is also growing highly subjective, agreeing a stress level certain policy type. Investors, like insurers, demand for sub-investment grade or acceptable to both issuers and investors also analyse the risks in different ways, unrated VIF securitisations from can be very challenging. focusing on different elements of the risk, investors who seek the higher returns, which also makes harmonisation of the but with a clear understanding of the Solvency II and VIF securitisation transactions more difficult. This should come risks which this entails. The eventual implementation of Solvency as no surprise given the variety in product II could provide both a significant boost to design, the level of subjectivity in the analysis Selecting policies and the number of insurers actively using VIF of experience, and the differing experience sizing a transaction securitisation as a capital tool, and potentially between insurers. Any policy type can be securitised, although increase the size of the investor base. for some types the process is much more Solvency II is expected to give regulatory The investor base straightforward. With-profits business, in capital credit for VIF securitisations by The insurance-linked securities (ILS) particular, is challenging because of the European insurers, and this is likely to market has grown rapidly over the past few asymmetry in the shareholder profits, to involve greater sub-investment grade years. On the life side, VIF securitisations date no transactions have included any issuance than has been seen previously. have generally been targeted at the with-profits business. Non-profits business Through using VIF securitisation, insurers investment grade debt market, although is comparatively straightforward, with unit- could also significantly reduce their cost of some transactions have included a sub- linked policies ideally suited, primarily due capital post-Solvency II by exploiting the apparent discontent between the proposed Figure 2 – AEGON Scottish Equitable stresses used to calculate the solvency capital requirement, and those stresses used Future surplus Future surplus in the capital markets to size transactions, AEGON + Fixed + Floating Scottish Barclays Investors particularly for unit-linked business. Solvency II also represents a move towards Equitable £250m Contingent loan via a more economic capital-based view of the Contingent sub-participation regulatory capital requirements for insurers. loan note This is likely to increase the comfort that Fixed Floating investors take over the appropriateness of the liabilities of the insurers, particularly as the Solvency II methodology should mirror that Swap which other stakeholders, including rating counterparty agencies and investors, take in analysing the Source: Barclays Capital underlying risks.

www.the-actuary.org.uk November 2008 31

030+031_Actuary_1108_Wood.indd 31 21/10/08 10:12:54 Investment Credit crunch A blow-by-blow account Shaun Krom shares his views on the cause of recent market turbulence

he past 12 months have been a time limited to the availability of deposits in of extreme turmoil for financial the banking system and the monetary institutions worldwide, resulting policy of the central banks. However, the in questions being raised about the advent of securitisation in the 1980s and T very bedrock on which our global financial the boom of credit derivatives in early markets are based. With colossal financial 2000 allowed for the dissemination of failures such as Washington Mutual, the largest bankruptcy in history, Lehman As the market matured, Brothers, and the rescue of Bear Sterns » Shaun Krom is a and AIG, world markets are left to banks began to invest in capital markets credit wonder what is next. their own deals as they were structurer The seeds of the current crisis seduced by the equity upside were sown during the period of 2000 to 2007, where the originate- they were creating « and-distribute model of banking dominated, allowing loans to be originated huge swathes of credit, resulting in an that would arguably not have been made expansionary boom. if the banks had to keep them on balance Essentially, banks would make loans, sheet. Primary securitisation and second or buy loans from other banks, that were and third-order repackaging leveraged warehoused off balance sheet using conduits these assets and spread them throughout and structured investment vehicles (SIVs). the financial system thus facilitating the These loans covered all asset classes such systematic risk we see today. as commercial/residential property, credit card debt, small business loans and leverage Birth of a marketplace loans used for private equity take-outs. The traditional role of banks was to make The rest of this article concentrates on the loans to individuals and corporations, securitisation of only residential property which were funded primarily by deposits. given its current prominence. However, the Therefore, the extension of credit was arguments are applicable for all asset classes.

Libor — OIS

+ (#. 3m Libor USD (#+ OIS (#( * Spread ( '#, ) '#) '#& (

&#- Spread This graph shows the spread of USD Libor, three month Overnight Index Swap (OIS) spread — OIS Rates &#* ' is the three month compounded overnight Fed &#' rate. This spread is a classic measure of banks’ %#. willingness to lend to each other. With a historical & average spread of 11bps over the past 10 years and %#+ a low of 6.85 in June 2007, it reached 106bps in %#(

December 2007 and is at an unprecedented all time 12/6/2007 12/8/2007 12/10/2007 12/12/2007 12/2/2008 12/4/2008 12/6/2008 12/8/2008 % % high at the time of writing. In fact, the current spike is more than a 7 sigma event, based on historical

observations of the Libor/OIS from 2001. Source: Bloomberg

32 November 2008 www.the-actuary.org.uk

032-034_Actuary_1108_Krom.indd 32 22/10/08 12:11:26 Credit crunch Investment A blow-by-blow account Shaun Krom shares his views on the cause of recent market turbulence

Boom! Goodbye Northern Rock, Lehman Brothers, AIG... However, you can have too much of a good thing. Since banks only held the loans for a short period until a CDO was structured, and large fees were earned in originating CDOs, loans were made on easier and easier terms, for example, self-certified loans in the UK. This was fine as long as property prices kept going up and, with credit so readily and cheaply available this seemed a near certainty. The sub-prime market moved from a legitimate enterprise financing the disenfranchised who could afford property to an aggressive push of debt into the hands of anyone who would take it. Investors meanwhile continued to pile into structured credit investments as the wash of money drove yields down for all rating classes. This rosy picture for the banking market began to cool in late 2006 with the turn of the property cycle.

First KO — mismatch funding Unease grew among investors as known losses were coming. However, it was difficult to know where the losses were going to hit exactly, due to the syndication process and the opaqueness of structures used. Securitisations could not be called and re-issued as investors were When these warehouses reached a argued that this made the system more on strike. Banks refused retail customers’ suitable size they were securitised using robust and thus allowed for leverage to be requests to refinance their sub-prime collateralised debt obligation (CDO) extended beyond historic norms. properties and customers couldn’t afford technology and distributed throughout the Liquidity flooded into the market, the new higher payments. financial system. Banks also participated with trillions of dollars of risk passing to The result was the first round of defaults in the secondary market, buying these investors in a leveraged format and banks seen in Northern Rock in the UK and where first securitisations and wrapping them earning large origination fees. As the market long-term ‘toxic’ assets were funded with into second and third order products. matured, banks began to invest in their own a small layer of equity and short-term For example, a bank makes a residential deals as they were seduced by the equity rolling funding, and eventually a CDO property loan and once a large enough upside they were creating — they could get take-out. The CP market began to freeze up portfolio has developed, say $1bn, the more deals done and earn more fees. as investors worried over the quality of the loans are securitised into a residential Rating agencies played a crucial role as assets to be funded and the CDO market was mortgage-backed security (RMBS) that 75% or more of CDOs of sub-investment effectively closed. is sold to investors. The bank is also an grade loans were rated AAA due to the Liquidity facilities were called, money active participant in the secondary market, assumed granularity of the portfolio. This poured away from banks to support this where it is buying asset-backed securities allowed banks to invest in this part of the and SIVs and conduits were forced back (ABSs) — RMBS being but one example — capital structure and finance the position onto balance sheets. This caused LIBOR to with the aim of selling a newly structured cheaply off balance sheet via conduits and increase dramatically and the inter-bank product, a CDO of ABSs (second order SIVs in the commercial paper (CP) market. market was in panic. Central banks stepped securitisation), into the market. These This short-term rolling finance provided in, broadening the asset classes allowable for events spread risk even more diversely additional gearing for long-term highly repurchasing with the criteria being lowered throughout the financial system and it was leveraged assets. progressively as the crisis deepened. »

www.the-actuary.org.uk November 2008 33

032-034_Actuary_1108_Krom.indd 33 21/10/08 13:59:51 Investment Credit crunch

A blow-by-blow account (continued) Glossary CDX indices CDO -*% A collateralised debt obligation (CDO) -%% DJ CDX.NA.IG Main On the run (5Yr) Swap JPMorgan CDS Spread Mid is a structure where a portfolio of debt ,*% DJ CDX.NA.XO On the run (5Yr) Swap JPMorgan CDS securities is held in a bankruptcy remote ,%% Spread Mid special purpose vehicle (SPV). The SPV +*% DJ CDX.NA.HY 100 On the run (5Yr) Swap JPMorgan CDS Spread Mid issues rated notes — senior, mezzanine +%% and equity — backed by the cash flow of **% the portfolio. *%% )*% SIV A structured investment vehicle (SIV) )%% is an evergreen credit arbitrage fund. (*% It has a thin layer of equity and is (%% financed by commercial paper (CP) '*% issuance. SIVs do not have to be backed '%% up by a full liquidity facility. &*% &%% Conduit *% Similar to an SIV but set up by a % sponsoring bank that provides a liquidity 1/06/2007 1/06/2007 1/06/2008 facility that is drawn when the conduit Source: Bloomberg fails to find funds in the CP market. The graph above shows the spike in US corporate credit spreads. CDX IG consists of the most actively traded 125 CDS names in the past six months; the cross-over index, CDX XO, consists of 35 high yield To date, a reactive, ad hoc, decision to liquid CDS investment grade names; CDX HY are the 100 liquid highest spread names. bail out institution by institution has been chosen. If the government is to intervene, » Second KO — liquidity drain products. Finally understanding the a clear systematic approach is needed. The Today’s crisis is more correctly a liquidity situation, rating agencies took action Resolution Trust Corp of the 1980s appears crisis. As banks found funding harder to and downgraded whole swathes of assets, to have been reborn with the Troubled Asset access, they began to sell assets, even at Relief Program recently large discounts to expected losses. The Today’s crisis is more correctly having been voted for in huge amount of structured debt being sold » the US, the objective being quickly overwhelmed the demand in the a liquidity crisis. As banks found to create price transparency troubled market, so that highly rated debt funding harder to access they while securing funding for that was selling at par a few months back, financials. There has been was now available at 30 cents or less to began to sell assets, even at large no co-ordinated European the dollar. Banks that were in a strong net discounts to expected losses « response at the time of asset position when debt was considered writing; each state is taking to be held to maturity were in a very weak including those of AIG. AIG had to its own extraordinary measures to shore up its position when marked to market. It became rush for funding that was unavailable system while confronting others to make good increasingly difficult to roll funding for as credit default swap buyers demanded on their obligations. A more co-ordinated these assets as they came up for renewal, they put up capital. This, together with approach will be needed if the Euro is to resulting in further forced sales into an their net asset position, put them into remain a strong viable currency. already overwhelmed market. Thus went technical insolvency. It is clear that the boom years of easy Lehman Brothers and Washington Mutual credit and high leverage are gone. The not so silently into the night, as they were Correcting imbalances future of the originate-and-distribute model major players in the securitisation market The current wave of thinking is that is being questioned and funding will be far failing because of solvency (liquidity) risk. governments need to act to prevent a more conservative. Finally, there will be AIG was affected in a similar way. It collapse in our financial institutions and far fewer players alive — both banks and had written protection (sold unfunded to avert the third-round effect, that being bankers — when the dust finally settles. insurance) on the super senior AAA (most the cut-off of credit to consumers and highly rated) tranches of structured companies resulting in business failures, If you would like to comment on this article, please products, and owned many of these individual bankruptcies and recession. e-mail [email protected]

34 November 2008 www.the-actuary.org.uk

032-034_Actuary_1108_Krom.indd 34 21/10/08 14:00:21 TheActuary Spoilt for choice

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035_Actuary_1108.indd 35 22/10/08 16:21:03 Life Solvency II Life after QIS4 Roger Austin, Simon Parrack and Anne Baxter of the Faculty’s Solvency and Capital Management Research Group provide an update on QIS4 for life insurers

he draft European Union (EU) We refer to our article in The Actuary differences such as: Framework Directive proposed by (Solvency II — QIS3 issues, November 2007) n The use of the swap curve for discount the European Commission (EC) for readers who require more detailed rates in QIS4 rather than gilts plus a is currently being debated by the information on the principles underlying liquidity margin for annuities in ICA T European Parliament and the EU Council n the proposed Solvency II standards. As a brief The risk margin addition for non- of Ministers, and is expected to be fully recap, the Solvency II proposals include: hedgeable risks in the QIS4 calculation of implemented by October 2012. n A best-estimate, market-consistent approach technical provisions The Solvency II initiative is aiming to to valuing technical provisions with an n The allowance for capital relating to any introduce a more principles-based approach additional risk margin for non-hedgeable risks staff pension scheme under ICA to the assessment and supervision of the n A capital buffer (the Solvency Capital n Differences in correlations and thus solvency of insurers (and reinsurers) across the Requirement (SCR)) calibrated to be diversification benefits EU. Under Solvency II, the proposed capital sufficient at a 99.5% level of confidence, n Non-linearity adjustments in ICA. requirements for companies are much more which is calculated by aggregating capital Initial results suggest that for many closely aligned with their underlying risk charges for individual risk modules via companies, QIS4 technical provisions exceed profiles than under the current Solvency I correlation matrices their ICA base liability. regime, and companies must ensure that good n A ladder of regulatory intervention for risk management is embedded in their day-to- breach of the SCR with companies going QIS4 issues day decision-making processes. into run-off if they breach a lower buffer There were several common issues raised Although 2012 seems a long way off, the (the Minimum Capital Requirement (MCR)). by companies when completing QIS4. We changes are significant and the timescale is The diagram below illustrates the summarise some of the main issues below. likely to present considerable challenges for interaction between these various elements. companies to ensure they are fully prepared. In many ways, the closest comparison Annuity business to the Solvency II technical provision A number of annuity writers expressed QIS4 background calculations is the current Pillar 2 Individual concerns regarding the calibration of the To assist with the development of Solvency Capital Assessment (ICA) base liability and, capital requirements for this business under II regulations, the EC has commissioned a generally, companies appear to be using the QIS4. The concerns arise as a combination series of Quantitative Impact Studies (QISs). same best-estimate assumptions for both. of various factors including the lack The latest study, QIS4, was completed by Although similar, there are a number of of a liquidity risk premium within the companies between April and July this year. It aims to assess the quantitative and Proposed framework for Pillar I qualitative impact of the proposals, as well as checking that the calibration meets the standards set out in the draft Framework Directive. It also aims to encourage companies to start preparing for Solvency II and help to identify areas where their Available preparations are currently inadequate. The capital results of QIS4 are due in November, and Solvency Capital will be used to inform the debate in the EU Requirement (SCR) Parliament and Council of Ministers. There has been greater industry MCR involvement in QIS4 than for last year’s } Risk margin for QIS3, and companies are generally better { non-hedgeable risks prepared. Most are regarding the QIS4 exercise as an important part of their overall Best estimate for Solvency II strategy, and have committed Assets at non-hedgeable risks an increased level of resources than under Assets market value QIS3. Early indications suggest that despite covering Technical provisions some improvements to the calculation technical methodology following industry feedback provisions Market-consistent valuation from QIS3, a number of issues remain. We for hedgeable risks highlight the more significant issues later in this article. { }

36 November 2008 www.the-actuary.org.uk

036+037_Actuary_1108_Austin.indd36 36 21/10/08 10:15:18 Solvency II Life Life after QIS4

calculation of the discount rate. Another capital charges. that the level of charge is significantly is the view that the 6% above risk-free rate Under QIS3, the ‘KC Factor’ approach different between the two approaches. used to calculate the risk margin is too was proposed for allowing the reduction in high compared to the market rates which capital charges in relation to management Minimum Capital Requirement certain companies are prepared to pay when actions (the risk-absorbing effect of future A new method of calculating the MCR is purchasing portfolios of annuity business. profit-sharing). This approach came under being tested in QIS4 and now includes a It has also been commented that the capital significant criticism, and has been replaced cap (50%) and a floor (20%) related to the charge for interest rate risk can be minimised with an improved approach under QIS4. SCR. Some companies have been affected by by mismatching assets and liabilities, which Although it is an improvement, it still creates the cap, whereas others have been affected does not appear to be consistent with a practical difficulties for UK companies as by the floor. So while most regard this solvency standard encouraging good risk their existing models do not generally make methodology as an improvement, many feel management. If the current calibration is it straightforward to ‘turn off’ management that a straight proportion of the SCR would implemented, a possible consequence may be be preferable. companies wishing to pass on an increased » If the current calibration amount of risk to policyholders through is implemented, a possible Spread risk with-profits or unit-linked annuities, and Some companies have commented perhaps ultimately the withdrawal of certain consequence may be that the credit risk charge seemed companies from the market. companies wishing to pass high in relation to the quality of on an increased amount of underlying bonds, and expressed Risk margin concerns that this could distort bond The risk margin forms a significant risk to policyholders « purchases. They also stated that the component of the QIS4 balance sheet. It stresses are relatively static and do allows for a number of simplifications in actions. A number have said they would not adequately take into account current the calculation of the risk margin, and prefer the capital charge to be calculated net market conditions such as the present credit most companies have made use of these, of management actions. For many, the future crunch. although some have found it difficult to profit-sharing adjustment forms a significant calculate the “modified duration” which is component of their SCR; arising mainly from Counterparty default stress used in some of the simplifications. It is also market risks. Many companies feel that the calculation suggested there should be an allowance for of the counterparty default stress is much diversification across business lines in the Lapse stress too granular in relation to the likely size of risk margin calculation. Under QIS3, the capital charge for lapse risk the capital charge, and have suggested that was split into a charge for general lapse risk this calculation should be simplified. There With-profits and management actions and an additional charge for catastrophic was also concern that while the credit rating With-profits business within the UK is lapse risk on unit-linked policies, calibrated approach may work well for reinsurance, significantly different and generally more assuming a 75% lapse rate. Under QIS4, the it may not be so appropriate for structured complex than in most other EU countries. catastrophic lapse risk has been included credit assets, as credit ratings are falling out UK companies often have a range of within the standard lapse risk module and of favour with banks. management actions which they can use the level has been decreased to 30% across to manage with-profits business such as all contracts. While the reduction has been Research group adjusting bonus rates, changing asset mix welcomed, many companies believe this is still The Solvency and Capital and applying market value adjustments. beyond a 99.5% percentile event, particularly Management Research Group of the They must produce and adhere to their for unit-linked pensions business which must Faculty of Actuaries is chaired by Principles and Practices of Financial transfer rather than lapse. Roger Austin. The group is currently Management (PPFM) and also meet the considering various aspects of Financial Services Authority’s Treating Operational risk Solvency II and would welcome Customers Fairly requirements. Given these Many companies regard the calculation suggestions from members of the differences, certain aspects relating to the of the capital charge for operational risk profession on any related topics they allowance for management actions under to be too simplistic. The lack of allowance feel would benefit from research. QIS4 are not fully framed with the UK in for diversification with other risks was Please contact Roger Austin (roger. mind, with QIS4 generally referring to also cited as an issue by some. For those austin@austinprofessionalresourcing. changes in bonus rates but not mentioning companies that have used an internal model com), Simon Parrack (sparrack@ the wider management actions available as well as the standard formula to calculate uk.ey.com) or Anne Baxter (anne. when calculating the associated reduction in operational risk, initial indications suggest [email protected]).

www.the-actuary.org.uk November 2008 37

036+037_Actuary_1108_Austin.indd37 37 21/10/08 10:15:32 Life Derivatives Crunch time Scott Eason explores the effect of the credit crunch on derivatives and structured assets and highlights related issues for life insurers

Figure 2 — CDO Issuance 2005-2008

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&%%%%%

Scott Eason is a *%%%% member of the Derivatives Working % '%%* '%%* '%%* '%%* '%%+ '%%+ '%%+ '%%+ '%%, '%%, '%%, '%%, '%%- '%%- Party F& F' F( F) F& F' F( F) F& F' F( F) F& F'

year on, the credit crunch has lending by packaging up their existing performance particularly misleading. As had far-reaching implications mortgage books and selling these loans it became clear that losses on mortgages on many markets and shows to other investors (securitisation). These could reach levels causing losses on the no signs of abating. Following mortgage securitisations were structured securitisation tranches being held, banks on A from its highly commended paper on into tranches (first loss, second loss) with were forced to increase capital and to write credit derivatives, the Derivatives Working varying risk characteristics to appeal to down the value of the assets held. Partly Party has been looking at the impact the different investors. Securitisation gave because they needed the capital, and credit crunch has had on credit derivatives lenders the ability to greatly expand their partly because they were concerned about and structured assets. This article reports mortgage books and, due to this freedom, the difficulty of quantifying the impact on its findings and highlights some of underwriting standards were sometimes their peers, banks stopped lending to each the issues identified that impact life allowed to weaken. other and increased the cost of borrowing insurance companies. Banks had been major buyers of to other institutions. Consequently, the the lowest risk tranches of mortgage first part of the credit crunch was actually What is the credit crunch securitisations. Typically, in excess of 20% a liquidity crunch. and how did it occur? of the value of the mortgages would have to The liquidity crunch developed into a The credit crunch is a substantial reduction be lost before they bore any losses, which at true credit crunch as the lack of liquidity in the general availability of borrowing that time was a level of defaults perceived started to impact other industries. facilities. The catalyst was a period of rising to be virtually impossible. Banks had, Lenders continued to demand a greater interest rates and worsening economic therefore, not been holding much — if any premium for cash, and this affected many conditions in the US, following a period of — capital against these holdings. companies who rely on flow of money, aggressive mortgage lending in the sub- As economic conditions worsened, such as banks, house-builders and retailers. prime market. mortgage defaults increased, especially Therefore, the likelihood of companies Prior to the credit crunch, mortgage in the sub-prime sector, where weaker going bust increased, reducing the number companies had been able to fund increased underwriting standards had rendered past of lenders willing to take on credit risk and hence pushing up credit risk premiums. Figure 1 — Spread movements This can be seen in Figure 1, where Spread Source: UBS both the spreads on credit default swaps 200 (CDSs) and corporate bonds increased CDS Index significantly from Q3 2007. Bond Index 150 What happened to structured assets and derivative markets? 100 Many of the securitised mortgages placed into the market were structured 50 as collateralised debt obligations (CDOs). Due to the need to hold increased capital 0 for these CDOs, a number of companies, 20-Mar-2006 21-Jul-2008 notably the North American monolines,

38 November 2008 www.the-actuary.org.uk

038+039_Actuary_1108_Eason.indd 38 21/10/08 10:26:19 Derivatives Life

became forced sellers and found there were Figure 3 — Changes in spreads for a CDO very few buyers. Source: UBS This ‘buyers strike’ drove the mark-to- HegZVYWeh )%% market prices lower and lower, although BVgX]'%%, deals were still occurring rarely. Therefore, ?jan'%%- holders of mortgage CDOs were forced into (%% significant asset write-downs. Contagion also led to CDOs based on more standard '%% credit instruments and other structured assets being written down significantly, &%% even though default levels remained at historically low levels. The lack of demand can be seen in Figure 2, which shows total % IgVcX]Z ("+ +". ."&' &'"'' ''"&%% CDO issuance by quarter. While a number of credit markets n Valuation interest rates — spreads to generate LIBOR (the London inter- effectively closed down due to lack of on corporate bonds are exceptionally bank offer rate) to pay the floating leg of a buyers, interest rate derivatives and wide. Does this reflect greater default derivative, are they adequately allowing for credit derivative markets remained expectation or greater liquidity the possibility of not being able to achieve liquid throughout the credit crunch. The premium? What allowance for default the required return? outstanding amount of interest rate and should be made? n Collateral agreements — the increased credit default swaps has in fact risen over n ICA stresses — spread-widening has volatility in derivative values has led to the period. probably been greater than previously used greater levels of counterparty risk. Any As discussed above, credit spreads as a one-in-200-year stress. To what extent collateral agreements should be reviewed widened on both CDSs and corporate is it reasonable to assume a further spread- to understand the inherent levels of bonds. However, Figure 1 shows that CDS widening from the current position? Can counterparty risk. spreads were more volatile than those for it be justifiable to have an ICA stress less On the positive side, there are still many corporate bonds. This was mainly because severe than has been experienced in the past willing sellers of CDOs and other structured the derivative market stayed liquid and 12 months? products in the market. These are often had lower bid-offer spreads so institutions n Ratings — is it safe to rely on credit priced at ‘doomsday’ scenario prices and can wishing to adjust their exposure to credit ratings for reporting purposes and to treat be bought at a discount to expected value. were most likely to use the derivative all assets (vanilla and structured) with a This can be seen in Figure 3, which shows market. The relative stability of the particular credit rating the same? Credit the spreads available for different five-year corporate bond market was often due to ratings are generally based on long-term iTraxx tranches in March 2007, before the the lack of trading leading to the true default risk but the credit crunch has credit crunch, and in July 2008. All spreads market price not being actively tested. The shown that historic default rates may be have increased significantly but the spreads CDS market remained liquid as investors a poor guide and, in addition to actual for both the 12% to 22% and 22% to 100% still wanted to take positions on the default experience, different assets can tranches have increased by a factor of credit market, and using CDSs was the have markedly different mark-to-market approximately 50. way this could be achieved for minimal movements. QIS4 attempts to tackle this by Most UK insurance companies have had asset transfer. imposing greater capital on structured credit little or no exposure to the asset classes to reflect the higher expected volatility in directly affected and are in a position to take New challenges market values. advantage of forced sellers if they have the The credit crunch has revealed a number n Mark-to-market — market values need expertise to assess these assets. We believe of challenges to insurers in respect of independent verification for UK regulatory some companies have already entered into their financial reporting and general reporting. If a market price is not available, such trades. risk management. We have deliberately then a prudent value should be assigned. Clearly these companies will have to stopped short of suggesting answers as, in When is it reasonable to regard trading as live with mark-to-market volatility of such many cases, there is no obvious correct too thin to validate a market price? assets but as insurance companies, especially one and the questions have vexed many n Hedging — if companies are using CDSs those with illiquid annuity liabilities, will leading academic minds over the past year. to hedge credit risk in corporate bonds, are generally hold these assets to maturity, these Instead, our aim is to provide a checklist of they allowing for an appropriate level of assets are expected to produce significant credit crunch-related issues for insurance basis risk? gains over risk-free rates as liquidity companies to consider: n Floating legs — if companies are required premiums are released.

www.the-actuary.org.uk November 2008 39

038+039_Actuary_1108_Eason.indd 39 21/10/08 10:26:49 General interest Valuation The price is right? Angus Sibley debates the notion of subjective valuation and its effect in a world dominated by free markets

n the mid-nineteenth century, Austrian academics initiated a revolution in economic thought: the development of a new concept of value. Earlier, it I had generally been held that the value of any object, or any service, was basically the cost of producing or providing it. This value, adjusted for transaction costs and profits, denoted the price at which anything should Angus Sibley, a normally change hands. So we were told by retired actuary and those pioneers of economics, Adam Smith former member of and David Ricardo. the London Stock The Austrians overturned all that, Exchange, now and today, their doctrines are generally lives in Paris. He accepted, yet their notion of value writes regularly on was not entirely new. In 1831, Richard www.equilibrium- Whately, Anglican archbishop of Dublin, economicum.net anticipated the Austrians by stating that: “Pearls are not highly valued because men dive for them; on the contrary, men dive actually buy, from the least affluent district for them because they are highly valued.” is willing (can afford) to pay. Hence we have (Richard Whately, Introductory Lectures on Menger’s principle: “The value of any article Political Economy, 1831) in commerce is the price conceded by the He did not elaborate this theory, however, buyer whose ‘best price’ is the lowest.” This the basic idea being that things are worth buyer is called the marginal buyer and we what buyers are willing to pay for them, say that the price is formed at the margin. rather than what they cost to produce. Carl Menger (1840–1921), professor Free competition of political economy in Vienna, was the While this principle applies to markets first to systematise this doctrine. It is more where quantities of identical items are complex than it appears at first sight, since traded, the theory of ‘subjective’ value various potential buyers may value the is also relevant to unique items such same thing differently. He used the example as antiques or works of art. It explains of horse-copers selling horses to farmers why objects can change hands at prices but for us it is perhaps simpler to consider that bear no relation whatever to their the Dutch flower-market, an auction with cost of production. Damien Hirst’s latest decreasing prices. The auctioneer starts a masterpiece The Golden Calf — a bullock ‘clock’ that shows prices; starting at a high with gold horns and hooves, preserved, level, it descends until the price is low as usual, in formaldehyde — was sold at enough to attract bids from the florists (or Sotheby’s for £10.35m. In 2006, Christie’s wholesalers who sell on to them). Florists, sold three bottles of Romani-Conti 1978 with shops in widely varying locations, sell for $211 500. at somewhat differing prices, depending on Menger also explained how free the purchasing power of their customers. competition between traders removes any Thus, the florist from the most chic district incentive for them to try to boost prices by of Amsterdam can offer the best price for a restraining sales volumes and, therefore, given quantity of tulips. encourages maximum consumption. He A big lot, comprising hundreds or called any such restraint verderblich, that is, thousands of flowers of the same grade, pernicious, corrupt or perverse. However, in will often be divided among several buyers today’s world, which tends to over-consume and, normally, all the sub-lots sell at very its resources, we may well have doubts similar prices. These will be close to the about the validity of this judgment. Menger price that the florist, among those who was writing around 1870, when the world

40 November 2008 www.the-actuary.org.uk

040+041_Actuary_1108_Sibley.indd40 40 22/10/08 16:27:20 Valuation General interest The price is right?

stable than market prices, the change to have no value unless they command a price FRS17 was misguided, and has seriously on some human market. This is clearly not destabilised the world of pensions. Jewish, or Christian, or Islamic — indeed, it Pay is another topic affected by Austrian sounds much like blasphemy. thought. Classical economists held that One does not have to be devoutly the natural and normal remuneration religious to see that there are grave of unskilled labour was just enough for practical objections to ascribing no value survival. Turgot, finance minister to Louis to anything that does not have a market XVI and friend of Adam Smith, wrote: price. Things that are not readily sellable, “In all kinds of labour it must, and does, such as gas flared from oil wells, materials happen that the worker’s wage is limited that cannot be reused at a viable cost or to what he needs for his subsistence.” machinery that is ‘not worth repairing’, (Anne-Robert-Jacques Turgot, Réflexions sur we discard as worthless. la Formation et le Distribution des Richesses, My wife, in a photographic shop in 1769). That was a harsh view but at least London, once asked to have a camera there was a basic minimum, the amount repaired. The puzzled salesman replied with needed to keep the workers alive and a memorable question: “Repair, madam, fit to work, in other words the ‘cost of what does that mean?” How many millions production’ of labour. of tons of materials are junked yearly as a With Menger, however, this floor result of this attitude? All this in a world population was in the region of 1.3 billion, a collapses under the poor fellows: “Neither that is consuming many natural resources at fifth of today’s level. the means of subsistence, nor the minimum unsustainable rates. A seemingly academic change in the subsistence level can be the direct cause In the world of nature, plant and animal theory of value has had far-reaching or the principal determinant of the price species that have no commercial value tend effects on the way we think about of labour.” (Carl Menger, Grundsätze der to be crowded out by the activities of us economic matters and, ultimately, on our Volkswirtschaftslehre, 1871). The idea that turnover-obsessed humans. These problems actions. It is a shift from an objective to wages are whatever employers are willing to can be tackled. Many rare species are protected a subjective valuation basis. For the cost pay, rather than the cost of supporting the by law. In France, a small tax is levied on of making an article is an objective fact workers, seems to be endorsed by Menger, new electrical goods to finance the obligatory — the price that a buyer is willing to pay who observes on the very same page that: recycling of old equipment. The Russian and for it is a subjective opinion. “A seamstress in Berlin, even if she works Nigerian governments — whose countries Although Austrian theory has won the fifteen hours a day, cannot earn enough for are the biggest gas-flarers — are trying to approval of economists, it has been slow her subsistence.” stamp out this wasteful atmosphere-polluting to spread into business practice. Even practice. However, such solutions entail state today, German life offices generally value Further implications interference in the economy, which is — in their investments at acquisition cost, a At the other end of the pay scale, the general — abhorrent to rigorous followers of relic of the old idea that value should be Austrian theory may be seen to support the the Austrian school. practice of paying extraordinary It would be absurd to blame all our amounts to certain ‘star’ employees. profligate habits on a group of deceased » A seemingly academic After all, if the value of a person’s Viennese academics. Yet it is fair to say change in the theory of work is purely subjective, and if that the doctrine of subjective valuation value has had far-reaching an employer can be persuaded to has encouraged our current tendency to subjectively value it at $50m a year, allow our lives to be ever more dominated effects on the way we think then why not? There are further by markets, these being the places where about economic matters and, implications. The subjective theory subjective valuation rules. Austrian was strikingly described by Ludwig theory is, in general terms, a realistic ultimately, on our actions « von Mises (1881–1973), one of the description of how untrammelled, free leading economists of the Austrian markets work. However, the practical and based on historical cost of production (or school: “The value is not intrinsic; it is not ethical difficulties linked to this theory acquisition), rather than on the current in things, it is in us.” (Ludwig von Mises, demonstrate the limitations of the free- market. Until very recently, UK pension Human Action, 1949) market philosophy. funds valued assets on a non-market- Von Mises was a non-religious Jew but, price basis, by discounting future income seen from a religious standpoint, his words If you would like to comment on this article, please flows. Since these flows are much more seem to tell us that things created by God e-mail [email protected]

www.the-actuary.org.uk November 2008 41

040+041_Actuary_1108_Sibley.indd41 41 21/10/08 16:42:22 Healthcare Shared costs Paying the bill? Charlie MacEwan assesses the arguments for sharing the costs of healthcare provision

age where genome projects, robotics, hospital makes you a more responsible nanotechnology, new imaging methods and purchaser and keeps control of overall costs. gene therapy are all leading to new drugs and Bringing it closer to the back yard, it is procedures to improve our quality and length a weakness of traditional (non-deductible) of life. Medicine is becoming personalised. insurance models where, once you have Stem cells from different organs will be used paid your premium, you don’t care how to create tissue banks to replace defective body much you claim. The insurance is based on parts. Brain implants will repair the defects the premise that the ‘premiums of the many that lead to dementia and disorders such as pay for the claims of a few’ — turn that rule Parkinson’s. All at what price? inside out and we can begin to understand Charlie MacEwan why health insurance premium increases is the corporate Bureaucratic burden exceed the retail price index by several communications There is much to be learnt from The Economic times. Co-payments, paying a proportion director of medical Journal paper on bill sharing (Volume 114, of your individual consumption, are good insurer WPA, a not- Issue 495, 2004) and it is telling, given today’s for the community of insured. The insurer for-profit association UK healthcare conundrum. ceases to be the enemy and becomes a If it wasn’t for the bureaucratic partner, while the customer benefits from burden of breaking down the bill or the lower — by up to 90% premiums — and embarrassment of appearing ‘tight’ or premium increases on a par with inflation. unfriendly, 80% of diners would prefer This analogy works for the NHS too — the hy don’t we split the bill 10 to pay their individual costs, yet in the minute something is perceived as free, you ways? We’ve all been irked at majority of cases, the bill is split evenly get uncontrollable medical inflation. What the end of a restaurant meal amongst diners. The cost of splitting a bill business does not know the cost of what it where you had the pasta and evenly amongst diners is potentially a 30% sells to its customers? Why can the NHS not W abstained from the wine, while others had increase for some, with other individuals produce a cumulative cost of treatment so that thermidore and paid Bacchus excessive gaining advantage from sharing. Paying a the patient can know the cost and appreciate reverence. Why should you subsidise proportion of the value they are getting? The topping-up your more profligate friends? The same your costs debate rages and, by the time that you read analogy works within the current NHS whether this, Professor Richards, national clinical cancer debate, which questions whether it is in a director for cancer, will have submitted a thousands of pounds should be spent restaurant report to the Minister of State for Health on on one patient extending life by a few or whether topping-up should be allowed. My months or restoring the sight of several guess is that it will get a thumbs-up with patients — the price of life. provisions — a victory for common sense. Put yourself in the shoes of your local Like so many things, the shared NHS bureaucrat. A 40-year-old mother of two restaurant bill creates economic young children with kidney cancer wants a inefficiencies and selfish motives. It seems new drug — it’s her only hope. The emergency that by human instinct — when we room wants another triage nurse to reduce play to a less preferred set of waiting times from four to two hours. And rules — we minimise our the ophthalmologists want to give two individual losses by patients a new drug to prevent age- taking advantage related blindness. Each intervention of others. For an will cost £30 000. You only have NHS born 60 years £30 000 left — it’s your call. ago on the principles Rationing healthcare is never easy. of equality and The proportion of earning universality, which now taxpayers to retirees will be lives in an information age, worryingly out of kilter and the only answer is to expand rationing appears irrational the current top-up system to to the ipod generation (insecure, a broader NHS so that we can pressurised, overtaxed and debt-ridden) make the most of an NHS fit for who have matured in today’s information the 21st century.

42 November 2008 www.the-actuary.org.uk

042_Actuary_1108_Macewan.indd 42 22/10/08 16:36:46 Trustee boards Pensions Conflicts of interest David Johnson exposes the conflicts of interest faced by pensions fund trustees in the current economic environment

recorded since the introduction of new commissioned an independent review accounting standards in 2002. when the sponsor’s market value fell below Rising inflation has already added at least £500m. Undoubtedly, we will see even £56bn to company pension liabilities in the greater use of independent covenant reviews last year, according to figures by Redington in the future. Partners, and is projected to reach the 5% As the financial strength of UK companies barrier before the end of this year. This weakens, the temptation to cut funding means that the liability of schemes is likely for pension schemes as part of wider cost- to rise by additional billions. cutting measures will increase. The existence David Johnson is As the pressure on funding levels of surpluses built up over the last few years consulting director mounts, there is growing agitation among in some schemes, will make that temptation at Trustee GAAPS trustees over the deteriorating financial even harder to resist. Trustees will have to position of sponsoring companies and the be extra vigilant and guard against directors ust like a seismic wave from an possibility that payments into schemes taking a short-term view and cutting earthquake can expand the tiniest might not be met. funding levels. crack in a building or a road, in the same A clear principle of good governance way, financial shockwaves have is that trustees should evaluate the Tougher task J the power to aggravate latent conflicts affordability of the sponsoring companies’ Trustees fulfilling dual roles as directors of interest on trustee boards. The credit debts to ensure that future payments into have an even tougher task. Trustees in this crunch in particular has had a devastating schemes are not endangered. Trustees position must struggle to secure the long- impact, leading to mounting funding deficits are increasingly turning to independent term funding of schemes with one hand, for pension schemes, and destabilising the covenant reviews to allay their concerns. while ensuring short-term financial returns financial position of sponsoring companies. According to research by Mercer, the for shareholders with the other. Maintaining With the economic situation becoming more number of schemes undertaking such Chinese walls of the mind are difficult precarious, dormant conflicts of interest are reviews has jumped by 55% in the past enough in clement times but when stormy being awakened, making the role of trustees year alone to 28% of all trustees. Trustees weather arrives, conflicts of interest are much more problematic and difficult to of the Trinity Mirror pension fund recently substantially magnified. execute than ever before. Such volatile market conditions represent Over the past 12 months the FTSE-All the sternest test for trustees and exert Share index has fallen by more than 36%, increasing pressure on their professionalism. taking pension funds from surplus to deficit Sponsoring companies will no doubt come and causing business plans of sponsoring to trustees with persuasive arguments about companies to unravel. As corporate earnings why funding levels should be scaled back but shrink, companies have less space to with stock markets capable of turning healthy manoeuvre and board rooms can quickly surpluses into deficits in less than a single become a pressurised environment. financial quarter even with funding levels untouched, trustees need to be very careful. Doubling deficits It has been more than a year now since Pension schemes have seen their assets fall the onset of the credit crunch. Still, it may by 11.4% over the last year to £767.6bn be too early to know whether the worst of (Pension Protection Fund (PPF) October the financial turmoil is behind us. Further index of the 7800 largest schemes). shocks could simultaneously deplete scheme Meanwhile, the PPF, the safety net for surpluses and undermine the financial pension schemes of insolvent employers, is position of sponsoring companies, heaping now facing a shortfall of £113.5bn — three even more pressure on trustees who have times the deficit in October 2007. to balance dual roles. With recognition More recent figures add to the bleak growing that the role of a director is not picture. A recent study by actuaries Lane always compatible with being a trustee, Clark & Peacock revealed that FTSE-100 and the financial position of schemes and companies had an aggregate deficit of £41bn sponsoring companies a serious concern, in mid-July against a £12bn surplus last now would be a good time for trustee boards year. Worryingly, the swing from surplus to to resolve some of those conflicts as the deficit was the single largest one-year move fissures become more prominent.

www.the-actuary.org.uk November 2008 43

043_Actuary_1108_Johnson.indd 43 20/10/08 18:01:15 Matt & Finn Arts

That’s entertainment While Matt and Finn raise their glasses, Frosty returns to raise the highbrow bar with a cultural exploration of regietheater

As Alan Frost returns to The Actuary Arts After a while, one can become inured to and the coups de théâtre breathtaking. page to spread a little culture, we take the regietheater style. Lucia di Lammermoor This is opera for the masses and it works the other half of the page lowbrow. is based on an incident that took place in so well. Next year it’s Aida and I can’t wait Having just returned from a triumphant 1669 around the Lammermuir Hills area to book. weekend at Munich’s Oktoberfest, of Scotland. In the charming Opernhaus As chairman of Dorset Opera there is celebrating one of the most fun times in Zurich, there was an impression of scope for me to practice risk management you can have in a tent with 5000 a castle interior but the bewildering and devise KPIs; the legacy bequest scheme people, some lederhosen and a lot scenery mattered not a jot. A last minute offers insight into local demographic of steins of beer, we embrace what substitution meant that Lucia was sung trends. This is literally the actuarial wider German culture has to offer. by a young British artiste, Jessica Pratt. fi eld, in this case a parkland setting. Matt and Finn Thrilling in the mad scene, she should Artistically, The Pearl Fishers did not quite have a good future as a coloratura soprano. match last year’s Turandot but fi nancially Regietheater In August, we returned to Bregenz we achieved our objectives and have means literally to see Tosca on the lakeside stage. The doubled our weekend audience base in ‘director’s theatre’ production style is sheer spectacle. three years. Our director, William Relton, and is what Thousands sat for two hours enthralled spared us the full force of regietheater. we experience by the cleverest opera production I Think Bollywood, think pink, and you’ll when a familiar have ever seen. The lake backdrop was have an idea of how it looked. opera opens to magnifi cent, the stage structure enormous Alan Frost a minimalist traditional costumes, and what better to stage with Recommended band line your stomach than a meat-centric scuba divers Kraftwerk menu of spicy sausages and pork representing, 99 Luftballons knuckle? With a live Oompah band on say, water apart, German Saturdays, what more could you ask nymphs in a popular music for? Das ist gut, ja? forest glade. is pretty grim It contrasts listening. starkly with Art by an actuary Where it stands Matthew Fewster the realistic settings of operas in alone is in This month we attempt to capture the vogue since the middle of the last century. electronica. emotions at Munich’s Oktoberfest. Wagner’s Die Meistersinger von Nürnberg Much of Even wearing lederhosen can’t stop is a favourite. The setting is Nuremberg, this can be this performer seeking adulation from so one can see why a new approach was attributed to his adoring (or is that drunk?) crowd. required after World War II. Given the Kraftwerk, the forefathers of modern Now we call on you actuaries to get title, the director can hardly change the dance music. The Model is perhaps their creative and give us more to showcase. location but he can alter the historical best known work but scratch the surface Upcoming art may include an actuarial setting. The 16th century was replaced and you will fi nd such timeless classics as dance hit and interpretations of religious by the 1990s and traditional houses Trans Europe Express, Radioactivity and texts. If you can match this — either low became a monstrous block of fl ats. During Tour de France to name but a few. Having or highbrow — let us know! odd moments of tedium one searches seen Kraftwerk live, I witnessed perhaps for ways in which the director avoids my favourite encore of all time — the If you would like your work featured in this space, anachronisms. What should a medieval band replaced by ‘the robots’, four lifesize please e-mail [email protected] lantern-bearing night watchman become? mannequins who leave you with their The answer is the local wino pushing a eponymous track. Simply brilliant. supermarket trolley full of his accumulated scraps of comfort. Client entertaining Tosca is set in Rome in 1800. My après- The Fest, London ski in March, after a delightful day on the For those not fortunate enough to Patscherkofel in Innsbruck, was a visit to the experience Oktoberfest proper, the Fest Tiroler Landestheater. Scarpia’s offi ce was in a restaurant and bar in Fulham offers a modern tower setting and the torture scene of great local approximation. At the bar you Cavaradossi was relayed via a TV monitor for are served huge steins of beer by a bevy Tosca, and us, to see. A less graphic approach of beautiful maidens dressed in would have been preferred.

www.the-actuary.org.uk November 2008 45

045_Actuary_1108_Arts.indd 45 22/10/08 16:43:29 Student page Jen & Jean

With the credit crunch in full swing and prices on the rise, Jean Eu fi nds herself watching the pennies a little bit more The saving grace of students

Thankfully, the Profession has once again While I take the point that actuarial them that much negotiated a deal with the National Union students are generally wealthier than their ■ Once you qualify, you have no choice but of Students (NUS) that entitles all student school/university counterparts, I am not to pay full price — so the bargain hunter members of the profession to the NUS entirely convinced how not taking out in me screams: “Make the most of the Extra card. This year’s NUS Extra card a student card makes any difference. My discounts while you can!” entitles the holder to even more deals and thinking is as follows: I took a look at the list of professional discounts than the NUS Associate card ■ Whether or not I own a student card, I am organisations on the NUS website to see who from previous years. not depriving a university/school student of else gets these discounts. The list includes Before I get down to details, I would like their opportunity to own a student card accountants, administrators, business to explore the idea of discounts for students ■ High street prices are ridiculously executives, auditors, motor industry members of professional organisations. Although I expensive, particularly in London, where and tax people. It’s clear from this list that tend to take up any special offers I can lay a lot of things aren’t worth the price we, the actuaries, belong there too — so well my hands on with a vengeance, bargain being charged done to the Profession for not letting the hunting being my speciality, I have met ■ Having worked in retail in my university accountants outsmart us. other actuarial students who have refused days, I know that retailers price their We are genuinely interested in your to own a student card as they felt it unfair products at roughly twice as much as they views though, so please feel free to e-mail that actuarial students could get the same actually cost. So a 10% student discount at us at [email protected] with discounts as needier, ‘real’ students. a high street store isn’t really going to affect your comments.

DOWN TO THE NITTY GRITTY… iwantoneofthose.com, boysstuff. co.uk, just-eat.co.uk What discounts can I get with my ■ Theme parks/attractions NUS card? — Thorpe Park, Alton Towers, In the past year, I’ve used my NUS Madame Tussaud, The Dungeons card to get discounts at the cinema, (York/London/Edinburgh), Sealife bookshops, sports shops, high street Centre, Warwick Castle, Chester Zoo, stores, HMV and even to claim half- Nationwide Paintball. price tickets to a show at the Royal For more details, have a look at the Festival Hall. Discounts are usually NUS website www.nus.org.uk/en/ around the 10%-15% mark at NUS-Extra/Discounts/ most places. There will also be places offering For the discount divas and bargain student discounts which may not How do I get my student card? beaus out there, here are some of the be listed on the NUS website. Print out a Professional Organisations places mentioned on the NUS website Remember, all you have to do the Application Form from the NUS offering student discounts this year: next time you go shopping is to ask website at www.nus.org.uk/en/NUS- ■ High street stores – Warehouse, — as the saying goes, if you don’t ask Extra/Professional-Organisation/ Oasis, Principles, House of Fraser, you don’t get. Although the website doesn’t make La Senza, JJB Sports, Matalan, Ben it clear, the evidence you need is the Sherman, Moss (suit specialists) How much will it cost? same as previous years. Login to the and Halfords Just £10 this year. Actuarial Profession website and print ■ Boots Opticians and Superdrug out the page that shows your contact ■ Food and drink — McDonald’s, BBs How long is it valid for? details (Login – Transactions and

and restaurants at The O2 Arena It’s valid for a year, up to 31 August personal information – Your contact ■ Online — Virgin Experience Days, 2009, so the sooner you get your details). Then get your employer to Amazon.co.uk, drinkstuff.com, card, the more time you have to reap sign it, confi rming that you are a empiredirect.co.uk, AJ Electronics, the benefi ts. student of the Actuarial Profession.

46 November 2008 www.the-actuary.org.uk

046_Actuary_1108_Student.indd 46 22/10/08 12:08:51 AOTF People

Actuary of the future Daniel Wiltshire on socks, spreadsheets and escaping from tricky situations Daniel Wiltshire What’s your best attribute? How do you relax away from I have a pretty good work ethic and fi nd it the offi ce? Employer and area of work easy to get on with people. Despite my complete lack of natural aptitude, RGA, actuarial pricing department I have recently discovered that cooking in And your worst habit? the evenings helps me to relax. Date entered Profession I secretly enjoy sleeping with my socks on, December 2007 which is disgusting, apparently. Tell us something unusual about yourself Describe yourself in three words: What is most likely to irritate you I grew up on an alpaca farm. (They’re a bit Assiduous, exuberant, sesquipedalian about others? like big sheep with long necks, or camels Complacency. with fl eeces.) What’s the best thing about your job? The people, the variety of tasks involved, and Alternative career? Who would you most like to be stuck in study days, obviously. A food critic or a journalist. a lift with? David Blaine — he has a lot of experience in And the worst? Favourite book/fi lm/CD/gadget? tight situations and could entertain me with Spreadsheets. Endless spreadsheets. If I had to choose then it would be: The magic tricks. Catcher in the Rye, The Godfather Part 1, Oasis Tell us your formula for success — Defi nitely Maybe. I have recently discovered If you would like to nominate someone for Actuary of Set yourself high goals and try your best. the replay application on my TV… brilliant! the Future, please e-mail [email protected] Super Crunchers book review

Martin Lunnon is captivated and whether society is happy with all the data- simultaneously repelled by some of the mining and data-mashing that companies new uses for statistical tools are doing on individual data. The book is One thing I thought I knew was that, US-biased, and recognition that the rules are 99 times out of 100, the explanation for different in the EU, as I understand it, would something odd is cock-up, not conspiracy. have been useful both for European readers In general, people just aren’t that clever. and US readers needing an international After reading Super Crunchers, I may have perspective. The fi nal chapter, ‘The future of to revise that opinion. Some people are intuition (and expertise)’, suggests everyone clever, and that cleverness can be turned should familiarise themselves with normal into technology and sold to any company distributions, standard deviations and Bayes that wants to market direct to us, with theorem. Again, actuaries should know the aim of extracting profi t from us. They these, however, do we all apply them in our even get us to do the data entry for them everyday lives to gain the advantages that — hell, that is smart. Ian Ayres seems to think we can? Most of the techniques described in the Apart from the lack of recognition of book is well worthwhile. book, regression analysis and randomised non-US approaches to data control, Super Super Crunchers: How Anything Can Be testing, are well known to actuaries. Crunchers’ other weakness is perhaps not Predicted, Ian Ayres, published by John Indeed, many will apply them, especially addressing fi nancial markets, where huge Murray, £7.99. in general insurance pricing. amounts of data can be mined to great The last three chapters are probably the profi t. However, problems of non-normality To order your copy of Super Crunchers at most interesting. ‘Why now?’ addresses arise here, and the area is already well the special price of £6.79 including p&p (RRP how developments in technology have covered by other texts. As a standalone £7.99), please call 0870 755 2122 and quote allowed statistical techniques to be applied read to refresh an actuary’s basic applied BSH665, or order online at www.pressoffers. on a massive scale. ‘Are we having fun yet?’ statistics, or as an introduction for someone co.uk/bsh665. Please allow 28 days for delivery. addresses fundamental questions about without a statistical background, this Offer is subject to availability.

www.the-actuary.org.uk November 2008 47

047_Actuary_1108_AOTF.indd 47 20/10/08 18:14:37 Puzzles Coffee break

Puzzle 409 Get knotted Ties are taken seriously in the fi ctional country of Caulataria and this month the Worshipful Company of Tiemakers celebrates its 800th anniversary after the Institute and Faculty of Tailoring merged in 1208. New members of the Company (all of whom must demonstrate and discuss a selection of the 85 ways to tie a tie during an asphyxiating six hour practical exam) are given a unique ‘fellowship year’ tie to mark their June enrolment and so denote the length of their society membership. The strict fashion rules governing the design of these annual ties as laid down in the society’s royal charter are as follows: ■ Each tie consists of seven consecutive horizontal stripes, in a fi xed pattern, on a navy background ■ Stripes can be gold, silver, red or green Puzzle■ No two406 adjacentKiller stripes 60 can Sudoku be of the same colour ■ No three consecutive stripes can be either all noble (silver or gold) or all base (red or green).

When is the last year before calamity strikes — and the members are forced to redesign their new ties?

Puzzle 410 Missing links

Find the connection between the following items — this could be a word, a number, a phrase or a common association. Beware puns and other traps for the cultured. Example: a fl atiron, a boot, a ship, a top hat — all playing pieces in Monopoly. ■ Specifi cally — Leonardo, Michelangelo, Donatello and Raphael? ■ Europe, Rome, Stalingrad, George V, Franklin D Roosevelt? ■ Charlemagne and William I, Isaac Newton and Annie Lennox, Charlie Chaplin and Nicolae Ceausescu, Bob the Builder? ■ Lolita, gorillas, Catch-22, Bobby Kennedy, Three Men in a Boat? ■ The sun, roses, Tantalus and his child, a village in the Stockholm islands (four times)? ■ Light sensitive membranes, keeps, Greek wine, solid fat, more evil? ■ Sparrows and young ladies, Red Savina, a doctor played by two bakers, Philadelphian sportsmen, Messrs Bianchi and Buono? ■ David Beckham, Jim Carrey, Michael Jordan, human sperm? ■ Departure, employment, monarchs (twice), anaesthetics, wise sayings? ■ Elizabeth Gaskell, constituents of nucleons, the Hokey Cokey, Rudyard Kipling, Sergeant Pepper, contract plus an overtrick?

Puzzle 411 Fruit smoothies

Below are some fruits which have been blended together, two or three at a time, to make “smoothies”. Can you unscramble their names to get the fruits? Disclaimer: The Actuary does not necessarily recommend the consumption of any of these combinations and is not regulated to provide individual gastronomic advice. ■ Planet numeric ■ Factory ship insurer ■ Gram more pension ■ Quantum towel maker ■ Harp accrued rent ■ A permeating fog ■ Numerable yacht ■ Compliance route ■ Muddier fi g, banana tour ■ Dropped actuarial pet cats

NOTES

48 November 2008 www.the-actuary.org.uk

048_049_Actuary_Puzzles_1108.ind48 48 20/10/08 15:19:10 Coffee break Puzzles

Solutions for October 2008 Puzzle 412 Stack ‘em up Puzzle 406 Killer 60 Sudoku solution n Eight standard dice are stacked together Killer Sudoku, with a twist. Place one of nine natural numbers at random to form a larger cube. Each die (1, 2, 3 etc.) in each blank cell. Within the grid every column, is aligned independently of the others and every row and every 3x3 box should contain the same nine all possible configurations of the dice are numbers. The numbers within each coloured shape add up to equally likely. Find the mean and variance the printed top left-hand figure. Within each shape, a number of the total number of spots showing on cannot be repeated. all six faces of the larger cube. n I have one red die and some blue dice, 16 23 15 16 11 all of the same size. I stack them into 11 6 1 10 5 13 3 2 9 a cuboid. Given the dimensions of the 18 11 38 cuboid, and the fact that the cubes are 5 13 3 1 2 9 6 11 10 stacked completely randomly, then the probability that the red cube is on the 29 18 23 19 inside of the cuboid is exactly one half. 10 2 9 3 11 6 5 13 1 At least how many blue cubes do I have? 21 And at most how many? 9 11 2 6 10 3 1 5 13 n Show that a regular octahedron has 37 30 27 precisely four times the volume of a regular tetrahedron if the two have edges 6 5 13 9 1 11 2 10 3 of the same length. (This can be done 23 without using complicated trigonometry 3 1 10 5 13 2 11 9 6 or algebra.) 16 52 13 NOTES 13 3 5 2 6 10 9 1 11 24 1 911 13 3 5 10 6 2 12 27 21 2 10 6 11 9 1 13 3 5

Puzzle 407 Hidden capital solution The same simple encryption has been applied to several world capital cities listed below (also two of the capitals have had spaces removed). Reverse the encryption to give the original names.

The cypher is a simple alphabetic substitution as follows: A=T B=W C=H D=Z E=F F=U G=J H=N I=A J=K K=S L=X M=P N=R O=Q P=Y Q=D R=C S=I T=E U=M V=B W=V X=L Y=O Z=G

CFOSKTBAS becomes REYKJAVIK XTYTG becomes LA PAZ HTCTHTI becomes CARACAS YQCEQUIYTAR becomes PORT-OF-SPAIN VARZNQFS becomes WINDHOEK HQRTSCO becomes CONAKRY BTXXFEET becomes VALLETTA RTIITM becomes NASSAU More puzzles online PARIS becomes MINSK WFAKARJ becomes BEIJING To access the puzzles archive or to play daily interactive sudoku, visit Puzzle 408 Keep dividing solution www.the-actuary.org.uk/puzzles (In this problem, a number written as a,bcd means (a*1000) + (b*100) + (c*10) +d, etc.) The puzzles editor is pleased to receive Find a nine digit number abc,def,ghi made up of the digits 1 to 9, so that ideas for new puzzles from readers at the first n digits of the number make a smaller number divisible by n. (For [email protected] example, a,bcd,efg is divisible by 7.) The solution is 381 654 729.

www.the-actuary.org.uk 2008 November 49

048_049_Actuary_Puzzles_1108.ind49 49 20/10/08 15:19:30 Appointments People moves

Reinsurance’s US Synesis Life. He David Lang life business. also previously has joined worked as a life Ernst & Young MGM Advantage, actuarial consultant as a director the retirement at Watson Wyatt. in the London income special- and Bermuda ist has appointed Dale Lee has joined insurance team. Mark Joannes as GB Actuaries and Mr Lang joins commercial actuary Consultants, the from insurance in its designs for recently formed David Lang Trevor Jones Ash Ruparelia group QBE, where retirement team. business and non- he was managing director for the Lloyd’s Mr Joannes will life actuarial con- KPMG has announced that Trevor Jones division, in addition to being operations be responsible for sultants. Mr Lee has been appointed a partner in its director for European operations. product pricing and has more than 25 life insurance actuarial practice and supporting product years’ experience Ash Ruparelia a director in its non-life Graham Fulcher agement team as a development. He in non-life actuarial actuarial practice from 1 October. has joined Watson senior vice presi- was previously at work, underwriting Wyatt’s non-life dent in its inter- Watson Wyatt, and new business worked for Mercer the past three actuarial team. national division. and prior to that ventures. He and HMRC. years, he has Prior to his ap- Mr O’Brien will was strategic mar- was previously served as head of pointment, Mr focus on growth keting manager at group actuary at White Mountains central reserving Fulcher held the in international GE Capital. Thomas Miller Insurance Group with Munich Re. role of chief markets. He was and Company. has appointed Jeff actuary for Ace previously a senior Partnership Assur- Davis as senior vice Jean Drouffe has European Group. vice president at ance has appointed Axa has appointed president and chief been appointed Lehman Brothers in Robin Houghton Mark Versey as actuary of White finance director at Transamerica its insurance prod- as chief actuary and chief investment Mountains. In addi- Axa Insurance fol- Reinsurance, a unit ucts group, and a board member. Mr officer of its UK in- tion, Mr Davis will lowing a reorganisa- of Transamerica director of Ber- Houghton contin- surance operations. take on the roles tion of the business. Life Insurance muda-based Leham ues to specialise in Mr Versey started of executive vice Ms Drouffe joined Company, has an- Re. Prior to that he the annuity market his career as a con- president and chief Axa UK in 2004 as nounced the return served as the chief having spent two sulting actuary at actuary of White head of financial of David O’Brien pricing actuary for years at pension Tillinghast, prior to Mountains Re. For risk management. to its senior man- Transamerica buyout start-up working in invest- ment banking. He Mark Airey has was previously at been appointed Morgan Stanley. as director of insurance for The Financial Tesco Personal Reporting Council Finance, based has announced that in Edinburgh. Robert Inglis has Mr Airey will be joined as project responsible for director at the Board Mark Airey developing TPF’s for Actuarial Stand- existing general ards (BAS), where insurance business. He was previously he will be working a senior consultant at Tillinghast Towers on the programme Perrin, and has also held positions at of transition from KPMG and Saga. the guidance notes adopted in 2006, to Have you moved? the new technical Please send news of moves, actuarial standards promotions, retirements and John Feely, Maurice Whyms and Tara Flynn have established Attain issued by BAS. Mr appointments to peoplemoves@ Consulting, a Dublin-based pensions and actuarial consulting firm. Inglis has previously the-actuary.org.uk

London ● UK Wide ● France ● Europe ● South Africa ● Asia Pacifi c ● Australia Your World With GAAPS www.gaaps.com +44 (0)20 7397 6200

50 November 2008 www.the-actuary.org.uk

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