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The Actuary The magazine of the Institute & Faculty of Actuaries

Twin Peaks

The paper by Messrs Martin Muir and Richard Waller to the Staple Inn Actuarial Society (‘Twin peaks’) is full of interest, even for actuaries outside the UK. The UK is respected as a source of sound practice. The appointed actuary system invented in your country has been adopted in many other places, including Pakistan.

But, considering the short timeframe and the tight deadlines given by the FSA, and the fact that models ‘are still being developed’, how sure can one be that the new UK approach is sound? Or will the UK life insurance industry become a guinea pig for yet another experiment? Is the chance of success of the new approach a stochastic variable itself, with probabilities all over the place?Perhaps Occam’s Razor should be applied!

One specific point: it seems that the new tests will be ‘lapse supported’. If a policy lapses, there is indeed a release of reserve in most cases. But good persistency is almost always in the interest of policyholders, and in the long-term interest of the office itself. It is in the public interest. Any system which rewards poor persistency and punishes good persistency is flawed. Immersion in the FSA-related abracadabra seems to have obscured this basic point. It was jarring to read that under the stress test, an increase in persistency would be an adverse change. And that ‘the persistency risk scenario is a 50% reduction in voluntary termination rates’.

At the very least, there should be stringent lower limits to the persistency assumptions.

PS In 1999, a British visitor to Pakistan remarked that ‘the UK life insurance business has not yet recovered from the Financial Services Act, 1986’. At about the same time, a British actuary corresponding with me described the FSA 1986 as ‘a mess’. That is why I have said ‘yet another experiment’.