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The Actuary The magazine of the Institute & Faculty of Actuaries

Decline and fall

When the ‘scientific’ actuarial approach to life assurance started at the Equitable the mathematicians involved were solely concerned with the problem of dying too soon, ie the mortality risk. Their assumptions were based on out-of-date mortality data and improving mortality was heavily on their side. The resulting margins led to the introduction of the with-profits concept.

Gradually endowment contracts – usually with profits – were introduced. These provided a useful savings alternative which, for many years, was helped by tax concessions. The most popular term was 20 years, while the average real term was substantially less (because the majority of contracts did not run the full term).

When I joined the profession at the beginning of 1928 endowments represented the far greater proportion of our business. There was a small annuity portfolio and virtually no call for insured pension schemes. Separately there were the large industrial life companies, the Prudential, the Pearl, etc, whose business was largely whole life. Here again improving mortality provided a safety margin for any errors on the other actuarial assumptions.

The actuary was held in respect because it was he who determined the premiums and, in particular, recommended the bonus rate. Investments were very largely in government securities and conservative assumptions the general rule.

As time went on the basic problem changed and our potential market changed because people became more concerned with living too long rather than dying too soon. But we failed to recognise the full implications of this in our assumptions. Our first major error was to ignore inflation which was rampant in the 1970s. This led to contracts where savings were directly linked to the performance of the stock exchange and the actuary ceased to have his critical authority to declare the bonus rate.

Gradually the weight of business changed. The tax concession was withdrawn and competition from other forms of saving became intense. With the stockmarket boom actuaries were encouraged to declare ever increasing rates of bonus until the crash came. On the insured pension side they were encouraged to offer guaranteed annuity options at rates far beyond that ever considered ‘safe’ before and they recommended contribution holidays based on what soon proved to be unreal assumptions.

The fallout has been dramatic and the long-term general trust in the savings industry, particularly the pensions aspect, has largely been destroyed. At the back of that is our undoubted inability to be able to guess the future.

What evidence is there that the emphasis in our examinations on higher mathematics has in reality made us any better to guess the rate of mortality or the rate of interest likely to exist in 20, 30, or more years time, which the long-term pension contracts require? The favourable niche conditions which have given me such an enjoyable and satisfying life have disappeared – good luck to those still battling.