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The Actuary The magazine of the Institute & Faculty of Actuaries

BAJ Volume 9 part III

Part III of British Actuarial Journal Volume 9, soon to be distributed to members, opens with a guest editorial by Professor Hans Bühlman, ‘On teaching actuarial science’. The author’s thesis is that the list of skills needed to fulfil tasks performed by actuaries is too long for any one person to master, and that teaching actuarial science must mean taking the approach of asking ‘what are the fundamental concepts and basic ideas underlying our science?’ He illustrates his thesis with an elegant example of the valuation of a life insurance contract.

Haberman and eight co-authors present the Institute sessional paper ‘A stochastic approach to risk management and decision-making in defined benefit pension schemes’. The paper describes a stochastic valuation process aimed at producing two key risk measures, solvency risk and contribution rate risk, and the presentation of these in the form of a set of indifference curves. The discussion tended to focus more on the question ‘Is the underlying model the right one?’ rather than ‘Are stochastic models better than deterministic ones?’, though as one speaker remarked, the answer to the former question is likely to evolve only after much testing.

Adams, Booth, and McGregor, in ‘Lease terms, options pricing and the financial characteristics of property’, the first of the submitted papers, discuss how traditional and discounted cashflow valuation techniques are unable to deal with a variety of options contained in lease contracts. The paper discusses financial techniques by which leases incorporating upwards only rent reviews can be valued as embedded options.

The paper ‘Ruin theory in a discrete time risk model with interest income’ by Sun and Yang considers a discrete time insurance risk model with interest income. The paper develops recursive equations for time of ruin, the probability of ultimate ruin, the severity of ruin, and the probability of absolute ruin. Numerical results are included.Thompson in ‘The use of utility functions for investment channel choice in defined contribution retirement funds i: defence’ defends the use of expected utility theory in framing recommendations for the apportionment between investment channels of a member’s interest in a defined contribution retirement fund against arguments levelled against it.

Finally, a report on abstracts of papers in recent issues of Insurance Mathematics and Economics (Vol 32(2), 32(3), 2003), Journal of Risk and Insurance (Vol 70(2), 2003) and North American Actuarial Journal (Vol 7(2) 2003) is included.