1.1 The background to the production of this paper is somewhat involved, but is necessary for an understanding of why it contains what it does. Readers who are familiar with recent developments in the valuation field may proceed straight to Section 2.

1.2 Statutory valuations of long-term insurance business under the Insurance Companies Act 1982 (‘the Act’, which superseded the 1974 and 1981 Acts) and the Insurance Companies Regulations 1981 (‘the current Regulations’) have now been prepared by actuaries for some years. Similarly the guidance issued by the profession to Appointed Actuaries, specifically GN1 and GN8, has also remained substantially unchanged over that period. The time was opportune for valuation practice to be reviewed in the light of recent experience.

This paper has the strictly practical objective of devising procedures for managing Equity portfolios to the best advantage.

First, Modern Portfolio Theory, (MPT) which has been developed over the last 35 years with just this objective, is critically examined; from a study of the history of MPT and of its philosophy, principles and practices, the authors conclude that this discipline makes no contribution whatever to improving the performance.

The Index Fund step-up is a sterile concept. Surely a professional investment manager, using modern techniques of data banks, investment analysis, etc. should improve on the Index performance. This objective is in conflict with the Perfect Market Principle. For the less erudite investors, who are, of course, in the majority, the Perfect Market Principle may well apply, at any rate, to the well researched leading shares. However, the Perfect Market Principle should not apply to the erudite, professional investor, well equipped and well advised, who should be able to find many opportunities for situations with undervalued and overvalued shares, both among the leading issues and particularly within the smaller companies that get less research attention.

In 1953 together with a colleague (Benjamin and Logan) the author called attention to a paper by Haenzel (1950) describing a new index of mortality years of life lost.

The argument was that many people were living for more than the three score and ten years and that every earlier death represented a loss of potential further years of life; that adding up the total years of life lost might be a significant measure of the toll of largely preventable disease; that changes in this total year by year would maximize the improvement gained by curative and especially preventative medicine.

1.1 The publication last year of the English Life Table No. 14 enables my earlier paper (Daw, 1982) to be extended to include the latest table. This paper applied Redington and Michaelson's rx test to E.L.T. Nos. 8 to 13 and the corresponding figures for E.L.T. No. 14 have now been calculated. The Government Actuary's Department kindly supplied me with the unpublished exposed to risk figures which were used.

1.1 In March 1987 the Futures Committee of the Institute considered a preliminary report (Daykin, 1987) on the possible impact of AIDS in the United Kingdom and the consequences for life insurance. The Committee recommended the setting up of a Working Party to study the problem. The Working Party on AIDS was accordingly established, under the auspices of the Research Committee. The authors of this paper formed the membership of the Working Party, under the chairmanship of C. D. Daykin.

1. In this note I describe the mathematical formulation of a model for representing the spread of AIDS in a population, which is designed for actuarial use in dealing with life insurance companies and pension funds. A major requirement of actuaries is that the model should be age-specific, and should take into account normal age-specific mortality as well as the extra sickness and mortality from AIDS.

In the report of the Presentation of an Institute Finlaison Medal to Mr Gordon Terry Pepper it is regretted that two names were incorrectly reported.

On page 153, line 10, the stockbroker referred to was Charles Frappell.

On page 154, six lines from the foot of the page, the former President referred to was Fred Menzler.