One of the most interesting developments of the last decade has been the advance in micro-computer technology, and the actuary has taken full advantage. The advent of the mainframe computer heralded the use of a whole range of techniques which had previously been impractical because of the lengthy calculations involved; it is, however, the convenience and flexibility of the micro-computer that has brought some of these techniques to life. As a result the micro-computer has become an indispensable tool for a wide variety of actuarial work. In no area of actuarial practice has the impact of the micro been more noticeable than in that of profit testing. It is profit tests and their applications that are the subject of this paper.

In the discussion on Smart's paper (J.I.A., 104, 125) it was suggested that, for all its general excellence, it did not make the subject of profit testing readily accessible to the student. One of my aims in writing this paper has been to present the subject in a more practical form. In an attempt to make the paper readily comprehensible many aspects have been simplified, which I consider to be necessary if the principles are to be expounded clearly and are not to be clouded by unnecessary detail.

It is a great honour for an accountant to be invited to deliver the Students' Society 1984 Jubilee Lecture. When the Financial Times defined an actuary as “someone who found accountancy too exciting”, I realized that accountancy might be a suitable subject for this Jubilee Lecture.

I note that the Institute of Accountants and Actuaries in Glasgow played a pioneering role in the evolution of the accountancy profession in Scotland during the latter half of the last century.

So the paths of the actuarial and accountancy professions have met, and indeed crossed, on a number of issues, and we have a great deal in common, most of all perhaps a belief in the power of presenting an argument through numbers. Like you, we have members in practice and in commercial employment, we form professional opinions which we express in reports and we are concerned with problems of measurement; also we each have our own procedures, assumptions, jargon and rules, all of which are confusing to the uninitiated.

In the last four years, the number of small self-administered pension schemes has increased from a few dozen to a figure that, if it has not already done so, must shortly pass the 10,000 mark and few major Life Offices, Consulting Actuaries or Pensions Consultants are now without such a weapon in their armoury.

Considerable practical experience in the administration of these arrangements has been gained, often somewhat traumatically, over this period by actuaries and other practitioners and, with many schemes having recently had, or just coming up to, their first triennial actuarial report, it seemed a sensible time to consolidate this experience and to highlight some of the more contentious areas for discussion.

Certain statements in the paper are based on my understanding of current Inland Revenue practice which is not necessarily consistent either with time or between different examiners.

Finally, although the subject matter of the paper applies equally to fully self-administered schemes and to Life Office 'hybrid' schemes, I wish to apologize for any unintentional bias towards the latter that may have crept in. Better the devil you know, I suppose!

The intention of this paper is to describe, by way of example, how profit testing is carried on in practice and how by making it central to the company's operation the company may be controlled. The mechanism of control is to test the company's results against the results of profit tests built into a model of the company. We shall also describe how the results of these tests of the company's results are fed back into the profit tests to establish the basis for future tests of the company's results.

The motivation for this paper arose from the need to communicate to shareholders the links between profit testing and the company's actual results. It is all very well to say to shareholders that the products satisfy a certain profitability standard but how does that show itself and how real is that profitability paticularly for a new or expanding company which displays nothing but statutory losses or, at best, break even? This communication also led to the need to explain variations from the original projections and finally to answer the question: what happens to profitability if these variances continue?

Much discussion is taking place currently in the United Kingdom on the subject of pensions. Conferences and symposia have been conducted at various times on many aspects of pensions by such diverse bodies as the Policy Studies Institute (1), the Institute of Fiscal Studies (2), the Trades Union Congress (3), the Pensions Management Institute, the Confederation of British Industry, the National Association of Pension Funds and even our own Institute (4) (in the case of our Institute, on the whole field).

The Government announced an all-embracing enquiry on 16 December 1983. This has been divided into separate parts. Evidence for the first part concerned with ‘portable pensions’ was required by 31 January 1984. Despite the very tight deadline, written evidence was obtained from over 1,500 different sources. This serves to show just how much interest was currently being aroused. The final results of the full Government enquiry are not yet available (September 1984). The unprecedented speed with which the Government has proceeded demonstrates the importance that it attaches to the issues raised, and suggests that any prompted legislation will be given a degree of priority.

Most of the published actuarial literature in the U.K. on immunization has been applied to the valuation of a life office. The authors have shown how the immunization techniques first introduced by Redington (3) in 1952 can be used to match the liability outgo of the office, to a greater or lesser extent.

The purpose of this paper is to introduce the student to the underlying concept of immunization and to show how it can be utilized to produce a guaranteed rate of return with a high degree of probability, irrespective of the future course of interest rate levels.

The term to maturity and duration (mean term) of a bond are discussed in §2. The maturity is only of limited help in characterizing a specific bond. The duration—a measure of the average time until the bond payments are received—is an easily determined figure which is more informative about a bond than maturity. The price sensitivity of a bond (i.e. volatility) is linearly related to the duration.

In order to portray the changing role of life reinsurance it is necessary to describe many of the traditional areas of activity for the industry, so that an understanding can be gained of how current developments have usually emerged in a natural way from previous undertakings. Therefore, this paper, particularly in its early sections, summarizes techniques and procedures which have been covered in greater detail in previous papers related to the subject of life reinsurance. Current developments, which are naturally associated with some existing activity, are described under the appropriate heading. In this way we hope that those who have little experience of reinsurance will quickly grasp the main principles, whilst anyone fortunate enough to have been involved in the fascinating world of reinsurance will still find items of interest scattered throughout the paper.

This paper describes the basic principles, methods and techniques of direct marketing, particularly as they relate to the Insurance Industry. It concentrates on those areas that are peculiar to this art and which would not necessarily be familiar to the Actuarial Profession in the normal course of events. The paper therefore has a marketing rather than a technical bias.

Legislation relating to this business is set out briefly and a review of the types of insurance product marketed by this method is included.

The paper concludes with some of the problems direct marketing presents to the Actuary and with some thoughts for the future.

The paper explains how Personal Financial Planning (PFP) covers all aspects of financial advice for individuals, with emphasis on pensions, life assurance, tax and investment. Advice may be confined to one of these subjects, but in its widest sense PFP extends to the process whereby an individual's financial affairs are looked at as a whole before comprehensive planning recommendations are made in accordance with his or her objectives.

The training of actuaries specifically covers the subjects of pensions, life assurance and investment. It also provides a working knowledge of trust law and tax. A familiarity with financial projections, an understanding of the effects of inflation and the ability to use computers provide actuaries with a further strong base for giving PFP advice.

Despite a plea for no more legislation, the author admits to having been overtaken by events. To this extent, the paper should be seen as a review of the current position in 1984. Whilst the trust fund might not be an ideal vehicle it did seem to be the best available and probably better than an alternative, totally new instrument. This view is held by the TUC, Gower, the Wilson Committee, and the Occupational Pensions Board (OPB). The principal deficiency at present is that the three relationships: Employee-Employer, Employer-Trustee and Trustee-Employee need to be better defined. Is membership of a scheme enforceable by an employee under contract law—or, indeed, by the employer? If so, are the benefits enforceable by the employee against the employer if the trustees have inadequate resources? Certain more immediate suggestions were (i) a pension fund should be protected against claims by a liquidator, (ii) the trustees on wind-up should be a creditor ranking with unpaid salaries, (iii) separate bank accounts for trustees and employer (this has now come to pass).

The paper is based on a Report produced by a working party of the General Insurance Study Group for the General Insurance Seminar held at Bristol in November, 1983. The terms of reference of the working party were:

(i) To review and summarize the published papers on the valuation of outstanding claims.

(ii) To classify the methods described, and comment on the assumptions implied by each method.

(iii) To discuss the problem of estimating the degree of uncertainty associated with the valuation of outstanding claims, disregarding the uncertainty resulting from the effects of inflation and (insofar as this may be taken into account in the valuation) investment income.

The first part of the paper is concerned with terms of reference (i) and (ii), explaining how the paper could be used as part of the loss reserving process and describing the format and presentation of the summaries which are shown in three Appendices.