Consolidation of the FTSE Actuaries Share Indices Series and of the FTSE Global Industry Classification System. Introduction of ‘free float’ weightings (in six bands) introduced in 2001.

In this paper we consider a discrete time insurance risk model with interest income. Using the recursive calculation method of De Vylder & Goovaerts (1988), recursive equations for the finite time ruin probabilities and the distribution of the time of ruin are derived. Fredholm type integral equations for the ultimate ruin probability, the distribution of the severity of ruin, the joint distribution of surplus before and after ruin, and the probability of absolute ruin are obtained. Numerical results are included.

This paper has been written to provoke discussion and will be used as background to the debate on 18 November 2002. An earlier version was produced by the Faculty of Actuaries Pension Research Group and presented as a paper to the Faculty of Actuaries Students' Society.

The text of this paper, together with the abstract of the discussion held by the Faculty of Actuaries on 17 February 2003, are printed in British Actuarial Journal, 9, IV, 725-786.

Dynamic financial analysis (DFA) is a technique which uses Monte Carlo simulation to investigate the evolution over time of financial models of funds, complex liabilities and entire firms. Although of increasing popularity, the drawback of DFA is the dearth of systematic methods for optimising model parameters for strategic financial planning. This paper introduces strategic DFA which employs the only recently mature technology of dynamic stochastic optimisation to fill this gap. The new approach is described in terms of an illustrative case study of a joint university/industry project to create a decision support system for strategic asset liability management involving global asset classes and defined contribution pension plans. Although the application of the system described in the paper is to fund design and risk management, the approach and techniques described here are much more broadly applicable to strategic financial planning problems; for example, to insurance and reinsurance firms, to risk capital allocation in financial institutions and trading firms and to corporate investment and business development involving real options. As well as describing the mathematical and statistical models used in the case study, the paper treats econometric estimation, asset return and liability scenario generation, model specification and optimisation, system evaluation and historical backtesting. Throughout the system visualisation plays an important role.

This paper addresses the use of expected utility theory for the recommendation of an apportionment between investment channels of a member's interest in a defined contribution retirement fund. Such usage is defended against arguments that have been levelled against expected utility theory and empirical evidence is discussed.

The lecturer discusses the subject of professional integrity, and considers the themes of: the particular space within which the professional operates; the independence and integrity of the professional, including regulation and competition; and how integrity is measured. The two professions on which he concentrates are the actuarial profession and the legal profession, particularly barristers.

For estimates of critical illness (CI) insurance premiums in the presence of a known mutation leading to a genetic disorder, the key quantity is the penetrance, that is the probability q(x) that the disease has developed by age x. This function is often estimated in the genetics literature, though typically with large confidence intervals. In this paper we suggest that the main features of real penetrance functions can be represented reasonably well by simple one-parameter families of functions, which can be scaled to fit the age range and lifetime penetrance. This gives a simple, direct, pragmatic way to obtain quick estimates of CI premium rates from published penetrance estimates, and also some indicative bounds for such premium rates, which are useful since confidence intervals usually cannot be estimated. To aid this process, as a short-cut to the solution of Thiele's equations in a multiple-state model, we give extensive tables in another report (Macdonald & Yang, 2003).

During 2002, which was the sixteenth year of publication of the FTSE All-World Index series — previously successively known as the Financial Times-Actuaries World Index, and the FT/S&P Actuaries World Index — there were no changes in the methodology of the construction of the series, and the main development in 2002 was probably the consolidation of the long promised adjustments to reflect the available free floats of each constituent company's shares on 18 June 2001.

The Human Genetics Commission intends to study the use of family history in underwriting, regarding it as genetic information in a broad sense. We survey the developments in genetics and insurance that led up to this decision. We propose a model for studying the possible costs of adverse selection in the mortgage-related life insurance market (which is important in the United Kingdom) with and without moratoria on the use of family history. We consider both level and decreasing term assurances, finding that the cost of adverse selection is slightly higher for the latter. Several assumptions about mutation penetrance, incidence of additional mortality, prevalence of genetic testing and insurance-buying behaviour are considered. Overall we conclude that: (a) a moratorium on genetic test results alone will lead to negligible adverse selection costs; while (b) a moratorium extended to family history will lead to premium increases just by redefining underwriting classes, with adverse selection being possible as well, but only in extreme circumstances would all premium increases be likely to exceed about 10%. However, we give examples in a model of a smaller life insurance market that show that our benign conclusions might not apply more generally.

In this paper a system for recommending investment channel choices to members of defined contribution retirement funds is proposed. The system is interactive, using a member's answers to a series of questions to derive a utility function. The observed values are interpolated by means of appropriate formulae to produce a smooth utility function over the whole positive range of benefits at retirement. The resulting function, together with stochastic models of the returns on the available channels and of the annuity factor at exit, is then used to recommend an optimum apportionment of the member's investment. The proposed system is applied to the observed values of utility functions of post-retirement income elicited from members of retirement funds. Difficulties in the application are discussed and the results are analysed. The sensitivity of the recommendations to the parameters of the stochastic model is discussed.

We discuss classes of risk measures in terms both of their axiomatic definitions and of the economic theories of choice that they can be derived from. More specifically, expected utility theory gives rise to the exponential premium principle, proposed by Gerber (1974), Dhaene et al. (2003), whereas Yaari's (1987) dual theory of choice under risk can be viewed as the source of the distortion premium principle (Denneberg, 1990; Wang, 1996). We argue that the properties of the exponential and distortion premium principles are complementary, without either of the two performing completely satisfactorily as a risk measure. Using generalised expected utility theory (Quiggin, 1993), we derive a new risk measure, which we call the distortion-exponential principle. This risk measure satisfies the axioms of convex measures of risk, proposed by Föllmer & Shied (2002a,b), and its properties lie between those of the exponential and distortion principles, which can be obtained as special cases.