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The Actuary The magazine of the Institute & Faculty of Actuaries

On reflection

It isn’t often that one is asked to write one’s own obituary, but when The Actuary asked me to write an article about my own experiences I thought times must be hard and I must discharge my duty to the profession. This is not a ‘ramble through the actuarial countryside’, to quote the late Frank Redington, but rather a walk through the garden of remembrance.
I was born in Calicut and educated in Madras, where I graduated in mathematics and statistics in 1953. I considered postgraduate studies, decided that an actuarial career would be more exciting, sat the entrance exam, and launched myself into an actuarial career.

My first job
I came to London in 1954 and set about finding a job, applying to insurance companies in alphabetical order, starting with the Alliance. The National Mutual won. Conditions then were rather different from what they are now. My starting salary was £408pa, I had no study time or help with tuition and examination fees initially (these came later), three weeks’ holiday, and free lunches. Life was good. The National Mutual published a bonus reserve valuation in conjunction with assets taken at market values one of the few offices to do so and was one of the early offices to invest in equities.
Examinations in the 1950s and early 1960s were held annually failure meant waiting another year for retakes. Slide rules were out, log tables were in. The drop-out rate was high. Work experience consisted largely of calculating surrender values; more advanced students did policy conversions. Product development was almost unknown and few actuaries, let alone students, had any involvement with the sales and marketing areas. Mergers, quite common these days, were rare in the life assurance sector although, judging from company names, they had clearly taken place in the past.

New environment
I was stagnating and sought wider fields. I joined Noble Lowndes in 1960 and entered a totally new working environment. It was about that time that the government introduced the graduated pension scheme. Contracting out of this early version of SERPS gave an enormous boost to the pensions industry. Much of the business involved converting money purchase schemes to final salary schemes, a trend which has now been reversed. Although the work did not involve much by way of actuarial technology, it gave me an insight into the wider field of marketing and sales and an opportunity to accompany sales staff on occasions and deal with or explain some of the mysteries of controlled funding and other technical concepts in terms a lay person would understand. This was a most rewarding experience and one which all students and actuaries should try as part of their training.
I qualified in 1962. While I found the ‘wider field’ interesting, I decided that my future career lay in more traditional areas and I joined the Sun Alliance in 1964.

The 1960s and the decades that followed saw considerable changes in the financial services industry. The entry of new unit-linked offices with direct sales forces, a distribution method previously the preserve of industrial business, raised the tempo of the game. The public now had easy access to the booming equity markets of the time, with the added benefit of tax relief. This era also saw the establishment of building society-linked policies, again on the back of LAPR.
The performance and volatility of the equity market, coupled with competition from the linked companies, led to the emergence of terminal bonuses. In most cases these bonuses were declared annually and, despite cautionary warnings about their volatility, most offices were reluctant to reduce them. The Sun Alliance was probably unique in that it reviewed its terminal bonuses monthly and changed them by relatively small amounts both upwards and downwards. I was too junior at the time to have any part in developing this approach, but fully agreed with it and continued it many years later as the appointed actuary.
The growth of with-profits business was largely a result of the widely held view that bonuses would never decrease. Warnings in benefit illustrations that bonus rates were not guaranteed were generally ignored both by intermediaries and sales staff. Business was sold on the basis of future projections of current reversionary bonuses and on past performance. Endowment mortgages were an important source of business to many companies, and pressure to maintain a competitive position depended very much on high bonus projections for 25-year policies. The regular savings market focused on ten-year policies, for which the rate of terminal bonus was a significant factor.

Institute paper
The high equity backing of with-profits life funds led me to question the suitability of the prevailing pattern of bonus declarations, resulting in a paper to the Institute in 1985. The paper attempted to recognise the incidence of investment income in determining the rates of reversionary bonus, and reflected the overall return based on asset shares in the form of terminal bonuses.
Much has been said and written on the subject of policyholders’ reasonable expectations, a great deal of which may have escaped me since I retired in 1991. At the risk of repeating the obvious, I feel that the life assurance industry has an overall responsibility to educate the public on the nature of with-profits policies and within that framework individual offices should explain, at the point of sale, the general principles of their bonus philosophy. Bonus notices provide an excellent opportunity for explaining the application of those principles and advising policyholders of any significant changes.

The wrong message
There were periods in the late 1980s and early 1990s when many offices increased their payouts following a fall in the equity market. No doubt they were well able to afford the higher rates, but such action sends out the wrong message to policyholders and creates the wrong expectations. I felt sufficiently strongly about this to contribute an article to The Actuary entitled ‘Living off the hump’. It seemed to me that the purpose of ‘smoothing’ investment returns was to iron out the peaks and troughs and not to invert them.
It has always seemed odd to me that, whereas members of the public are prepared to pay lawyers, surveyors, and other professionals for their services, they are not prepared to pay for investment advice, so that those giving it have to rely on commission from sales. Many of the problems of pensions mis-selling were undoubtedly a result of the hard sell.

My service with the Sun Alliance covered a wide spectrum of activities at various levels of responsibility: actuarial, pensions, unit trust operations, underwriting, valuation, and financial management. I was closely involved in rationalising the structure of the many life funds that existed following the merger with the Phoenix and Property Growth. After some 27 years with the Sun Alliance I decided in 1991 to retire. I was then the chief actuary and deputy general manager of its UK life operations and the actuary of its pension fund. I had no firm plans for the future, apart from giving a boost to the travel industry and endeavouring to achieve a level of mediocrity in my favourite sport. Neither of these ambitions was realised.

I joined the University of Kent at Canterbury (UKC) as the Black Horse professor of actuarial science (my chair was funded by Lloyds Bank) in 1992. It was a completely different environment from the ones I had been used to, and I worked very hard getting up to speed. UKC had offered a degree course in actuarial science for many years but it lacked the resources to move to a higher gear. New modules were introduced covering most of the fellowship subjects, and additional resources brought in to deliver them. I received a great deal of support and assistance from my colleagues in implementing the changes I had proposed. I got the greatest satisfaction from my lecturing and tutorial activities and the help I was able to give my students, many of whom still keep in touch.
Some students taking an actuarial science degree decide not to pursue an actuarial career; others embark upon but do not complete the exams. It seems to me therefore that universities offering such degrees should, in addition to covering the core actuarial subjects, include courses in management skills which will give those wishing to follow an alternative career a good start, and those qualifying as actuaries the skill they will need later in their careers. Such a degree would have to be a four-year course.

Working parties
Since retiring, I have chaired two working parties, one dealing with the ownership of the inherited estate, which was discussed at sessional meetings at the Faculty and the Institute, and another on reserving for expenses. As with most undertakings in which I have been involved, I gained more than I contributed.

What is an actuary?
From time to time professions seek to redefine their roles in the light of changes in the business environment in which their members operate. The traditional areas of life assurance and pensions which have been the principal areas of actuarial input have, over the years, been extended to cover the wider fields of general insurance, investment, and, more recently, financial instruments. The common feature of all these components is risk. So what is an actuary? My suggestion is that an actuary is one who is involved in the evaluation and management of, and the provision for financial, demographic, and allied risks.
That’s it. I’ve been very fortunate; I’ve enjoyed the work I did, the company of colleagues I worked with, and the students I taught.
PS Is the RPI a good measure for pension increases? Lower interest rates mean cheaper mortgages. Pensioners generally don’t have mortgages they have savings. A double whammy!