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The Actuary The magazine of the Institute & Faculty of Actuaries

BAJ Volume 9 part II

This part of the British Actuarial Journal starts with a guest editorial by Sam Gutterman, a past president of the Society of Actuaries, entitled, ‘The danger of best practice or don’t be satisfied with what most people do now’. Mr Gutterman makes two major points:

  • determining best practice can be a negative, as well as a positive, move for any profession;
  • the tendency to keep innovations proprietary is rarely in anyone’s long-term interest.

These are controversial ideas and Mr Gutterman’s editorial is well worth reading.

The most substantial item in this part of the BAJ is a paper by David Wilkie, Howard Waters, and Sheauwen Yang entitled ‘Reserving, pricing and hedging for policies with guaranteed annuity options’. This paper was presented to the Faculty in January 2003 and the transcript of the discussion at the Faculty is included. The paper was presented to the Institute in October 2003. The authors consider single-premium unit-linked policies where the rolled-up investment must be converted to an annuity at age 65; this conversion is at the current market rate or a guaranteed rate, whichever gives the greater amount. The authors use the Wilkie investment model to calculate quartile reserves for these policies using, as starting points, market conditions each year from 1984 to 2001. As is well known, such policies have been of considerable interest in recent years since, owing to falling interest rates and improving mortality, the options are now ‘in the money’. One of the interesting points to emerge from this paper is that the improvement in mortality rates has had, arguably, a greater financial impact on guaranteed annuity options than the fall in interest rates. The authors also consider a financial economics approach to the hedging of these options. They derive a theoretical solution but argue that there are practical reasons why this solution could not be implemented in current conditions.

This part also contains a contributed paper by Timothy Jenkins entitled, ‘Operation of the capital market under entity-specific pricing’. The author models an economy where each business, eg an insurer, builds a planned profit margin into its pricing. Using the expected utility criterion and mean-variance analysis, the author shows that the entity-specific pricing model he derives is ‘a special case of the CAPM’.

John Brumwell’s very useful ‘Notes on the FTSE Actuaries Share Indices (United Kingdom Series) in 2002’ appears in this part of the BAJ.

This part concludes with abstracts of papers published recently in the Geneva Papers on Risk and Insurance (Vol 28 (1)), Insurance Mathematics and Economics (Vols 31 (3) and 32 (1)), the Journal of Risk and Insurance (Vol 70 (1)) and the North American Actuarial Journal (Vol 7 (1)). All these journals were published in 2003.