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Interview:
John Kay
The mild-mannered
prophet of doom
Underwritten
annuities
A compilation of
articles on planning
for retirement
Pensions
Long-term
end game or living
in the moment?
Arts
Alan Turing: beyond
the enigma
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Planning a prosperous future for retirement
p01_apr_cover_SEMIFINALCT.indd 1 22/03/2013 10:53
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We look below the surface to spot trends early and show you what
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www.theactuary.com
APRIL 2013
MORE CONTENT ONLINE
Additional content can be
found at www.theactuary.com
26
WRITER OF THE MONTH
Nick Silver wins a 50 book token for his
interview with John Kay, courtesy of the Staple
Inn Actuarial Society
AT THE BACK
40 Arts
Sharon Maguire explores the life and
work of Alan Turing
43 Puzzles
Win a 50 Amazon voucher
44 Actuary of the future
Alex White of Redington
45 Student
Jessica Elkin prepares for the end of the
world or of her exams, at least
ONLINE
Underwritten annuities:
Back to the future
Stephen Lowe on the history and growth
of annuities, and potential opportunities
for the market
Staple Inn sundial
marks centenary
Sharon Maguire reports on the ceremony to
celebrate the 100-year anniversary of SIAS
MORE CONTENT ONLINE
Additional content can be found at
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FEATURES
19 Interview: John Kay
Nick Silver discovers why the author of
the Kay Review of UK equity markets
believes the current system is fated
24 Pensions: Living in the moment
Celene Lee and William Zimmern ask
if pension schemes get better results by
focusing on the present
Underwritten annuities
26 Healthy choice?
Billy Burrows oers an advisers
perspective on enhanced annuities
28 Of wealth and health
Dr Gordon Woo on human resilience
30 Outsmarting mortality
Daniel Ryan welcomes the integration of
medical and demographic knowledge
33 The gender angle
Jules Charrington looks at the eect of
the Test-Achats gender ruling on rating
34 Steering through the rapids
Peter Banthorpe discusses pricing
challenges for actuaries and underwriters
38 The forum
Five leading practitioners debate the
underwritten annuity market
UP FRONT
10 Profession news
14 Industry news
16 People/society news
18 SIAS events
OPINION
5 Editorial
Deepak Jobanputra sees a glimmer of
hope amid ongoing nancial volatility
6 Letters
History lessons and the perils of less-
than-critical critiques
7 Presidents comment
Philip Scott reviews the cross-practice
initiatives put forward by the enterprise
risk management committee
8 Soapbox
Michaela Koller reviews the measures
that insurers across Europe are taking in
tackling insurance fraud
42 Book review
Managing Fraud Risk: A Practical
GuideFor Directors And Managers
bySteve Giles
15
19 Our assessment of
mortality could
include positive factors
that sustain life and
make individuals
resilient. Depending on
these, the lifespan of two
similar individuals may
varysignicantly.
28
3 April 2013 THE ACTUARY
Contents
CHRIS DUNN
p03_apr_contents_SEMIFINALCT.indd 3 22/03/2013 11:26
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ACT.04.13.004.indd 4 22/03/2013 08:54
Editorial
Recent years have proved a rollercoaster ride for global markets. The
initial phase encompassed shock, headlines and punditry, and society
took an active interest in following the views of what was to come
next. More recently, however, we have become desensitised to new
developments. It seems we almost expect shock events to be the norm
and just shrug our shoulders. Is this a good or bad thing?
At the time of writing, the news of a tax on savings in Cyprus has the
potential to send jitters across the globe, yet equity markets in some
regions have been soaring. Clearly, a vast range of factors is at play and
there is good reason for this to be the case. Consumers will, however,
wish to seek out more stable outcomes and overall certainty for their
nancial planning. The current volatility makes this di cult, although
it is balanced to some degree by government and regulatory attempts
to ensure stability. These changes will hopefully bring about greater
condence among consumers, allowing insurers to provide valuable
nancial solutions to drive social good across the world.
An interesting insight from our interview with John
Kay was that actuaries should challenge their complex
nancial models and provide more narrative solutions,
using their skills to express subjective opinions. This, Im
sure, will drive positive debate as it raises a number of
complex questions.
Coming back to consumer solutions, we have a
range of features this month looking at the developing
underwritten annuity market, where growth has been strong. Although
the market is still in its infancy, there is tremendous opportunity for
insurers to innovate and provide customers with eective solutions,
reaching into areas such as long-term care, which is a key issue facing
ageing populations.
I do believe we are yet to see the full eects of the demographic shift.
This is denitely an area where actuaries have a leading role to play in
shaping future outcomes.
Deepak Jobanputra
editor@theactuary.com
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Deepak Jobanputra believes the ongoing nancial
volatility we are seeing holds its own opportunities
A glimmer
ofhope
DEEPAK JOBANPUTRA
Although the
underwritten annuity
market is in its infancy,
there is tremendous
opportunity to innovate.
April 2013 THE ACTUARY 5
Li ke The Actuary on Facebook Joi n The Actuarys Li nkedI n group Fol l ow @TheActuaryMag on Twi tter
www.theactuary.com
p05_apr_editorial_SEMIFINALCT.indd 5 22/03/2013 08:19
MORE LETTERS ONLINE
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THE ACTUARY April 2013
Opinion
Letters
The editorial team welcomes readers letters but reserves
the right to edit them for publication. Please email
letters@theactuary.com. The deadline for receiving letters for
the May issue is 16 April 2013.
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6
Earth is Room Enough
Earth is Room Enough is the title of a book by Isaac Asimov, a
collection of short science ction stories published in 1960. It
also seems an appropriate title for a response to the shallow
logic of the Malthusian article The World is Not Enough
(p28,January/February).
The article asks us to believe that it is reasonable to estimate
that, without heavy government intervention, the number of
years the worlds supply of minerals will last can be calculated
by dividing current reserves by the annual level of
consumption. This ignores many market factors that inuence
consumption: market price, further discovery, substitution
and particularly the ingenuity of humans for developing
greater e ciencies in the use of resources, and their capacity
for research and invention to improve quality of life.
In forecasting doom and gloom, the article also ignores the
ready ability of humans to adapt to changing conditions.
However, it is not the purpose of this letter to critique the
article or the paper on which it is based. My concern is with the
failure of the Resource and Environment Group (REG) to do so.
The actuarial profession has traditionally been proud of its
aim to base projections of outcomes on sound analysis of all
relevant and available data and statistics, producing logical
assumptions clearly stated and accompanied by comment
regarding their limitations. The REGs input to the paper,
which has been written largely by non-actuaries, appears to be
little more than some generalised comments on factors
inuencing actuarial assumptions. While I would expect that
they were involved in the choices made under the dierent
scenarios presented, the assumptions are not stated and not
qualied in the normal actuarial way. Projections for up to 100
years must be subject to major uncertainties, even without the
inevitable need to make subjective assumptions regarding the
consequences of government interventions.
I have always been enthusiastic about the profession
moving into wider elds, with actuaries using their skills to
assist the current participants in those elds. However, in this
case, the underlying paper appears to reect more a group of
actuaries simply climbing on the back of experts in another
eld, accepting their philosophies and methods without
question. Indeed, the whole tenor of the paper is that of a
political polemic rather than a realistic analysis of the limits to
economic growth. Certainly, the suggestion that the only way
world order, such as it is, can be preserved over the next
century is by the development of a global consensus
government process for distribution of resources appears to
represent the narrow desire of the authors rather than the
result of an objective assessment of possible outcomes.
I would challenge the REG to provide a proper actuarial
critique of the paper, analysing assumptions and reasons for
their adoption, and focusing on the uncertainties in arriving at
the model outcomes particularly in relation to the
questionable success of governments in market manipulation.
Geo Dunsford 15 March
Look back before you look forward
This year is the 400th anniversary of a landmark book, Richard Witts
Arithmeticall Questions, published in 1613. It provided a pioneering
and very practical insight into one of the foundations of actuarial
science compound interest. The subject is clearly explained and the
author takes great care to ensure accuracy, probably thinking in much
the same way as modern actuaries. The book contains interest tables
and 124 worked examples on the valuation of leases and annuities.
One of the simpler examples describes calculation of annual
payments on a debt due in two years time, which is now to be paid o
in instalments over the next ve years.
Richard Witt was a 44-year-old mathematical practitioner from
London, who was consulted on a variety of commercial and property
matters. The profession is fortunate to own a copy of his important
book, which is on display in the library at Staple Inn this year.
The librarys holdings of historical material have been considerably
strengthened in recent years. I hope that all members will take pride
in this unique resource and that some may even use it occasionally
as a source of inspiration when dealing with todays issues. We can
often benet by looking back before looking forward.
Chris Lewin 3 March
Power of long memory was
along time in the making
Faisal Zais article (The Power of Long Memory, p23, January/February) was
excellent. It was, however, slightly marred by his crediting Mandelbrot with being
the man who persuaded people that stock returns are not normally distributed
and that stock markets and most asset return processes are not memoryless.
Ifhe did it took a long time. Almost all nancial economists either ignored or
derided Mandelbrots work throughout the 1960s, 1970s, 1980s and 1990s.
Similarly, nearly all younger (now late middle-aged) actuaries derided or
ignored the work of Plymen, Clarkson, Fitzherbert, Arthur and those of us with
real investment experience, who had been expounding similar doubts about
higgledy-piggledy growth, as it was then called, even before Mandelbrot.
A study of Clarksons contributions to sessional papers will note that he was
referring to the Hurst component, at least by the 1970s. But when some 20 years
later, as a member of the professions nance and CPD working party, I tried to
introduce two of Hursts original papers as additional reading none of my much
younger colleagues on that committee could see their relevance to investment.
I hope that a newer generation of actuaries will be encouraged by your choice
of Faisal Zais article to read beyond the professions present inadequate courses
on nance and investment in an attempt to gain real understanding of how stock
markets work.
S. J. Green 1 March
p06_apr_letters_SEMIFINALCT.indd 6 22/03/2013 08:37
Opinion
Presidents comment
This month, I am reporting on the Enterprise
Risk Management Practice Executive
Committee (PEC) and its aims for the coming
year. Risk management, in its myriad forms,
is becoming more important in all our daily
lives. The Prudential Regulation Authority
(PRA) is taking shape with the appointment
of Andrew Bailey, and the proposals for new
supervision under the Financial Conduct
Authority are being published.
This twin peaks regulatory structure
should greatly enhance the regulators
approach to tackling systemic risk and will
consider supervision from a macro-prudential
perspective. However, there will still be
great reliance on internal risk management
strategies, and the profession can do much to
inuence the discussions on such risks.
For those who work in the enterprise risk
management (ERM) arena, the PEC is aiming
to develop more thought-leadership events
that will provide opportunities for debate of
current issues and enable those interested to
gain continuing professional development
(CPD) accreditation.
A number of excellent speakers have already
been booked for the Risk and Investment
Conference, being held in Brighton in June.
These include Julian Adams, director of
insurance, PRA; Tim Harford, economist,
author and the columnist behind the FTs
Undercover Economist; and professor Karel
Van Hulle, former head of insurance and
pensions at the European Commission. One
area that is being looked at closely is the greater
understanding of drivers from regulation and
rating agencies that might aect future risk
management practice for actuaries.
As risk management extends into all aspects
of nancial work, and following the Institute
and Faculty of Actuaries desired strategy in
this area, the ERM PEC is intending to set up
a number of cross-practice initiatives, which
will assist actuaries who predominantly
work in more traditional areas. Each of these
initiatives will be tailored to the needs of each
of the dierent collaborating PECs.
Jules Constantinou believes success will
be measured by the extent to which links
are established between the ERM group and
the other PECs and the integration of risk
management resources and material in the
other PECs research and CPD programmes.
The ERM research and thought leadership
committee intends to develop and deliver
key member-led research that inuences not
only the profession but other risk groups. Its
priorities are to develop:
research topics for actuaries working in ERM;
risk management topics as part of the cross-
practice initiatives; and
broader research topics that enhance the
actuarial professions reputation in this area.
Also important is developing links with
other like-minded UK and international
societies. It is hoped in the near future to
planjoint events and undertake research
with the Institute of Risk Management
and the Professional Risk Managers
InternationalAssociation.
By forging links with overseas actuarial
associations, such as
the Society of Actuaries
and the Casualty
Actuarial Society, as
well as other groups
in the international
risk management
community, we can
identify any special
needs of overseas
members in the areas
of risk management.
This will also enable us to identify areas that
could be useful in the work undertaken in the
UK. The more we can do this, the greater our
chance of exposing actuaries to disciplines and
thinking from other risk professionals, while at
the same time broadening our inuence.
The Chartered Enterprise Risk Actuary
(CERA) qualication continues to expand, and
over 1,400 students have completed the exams.
One aspect of feedback that particularly stands
out is that the course teaches people to speak
the language of the board. Only by being able
to do this can we hope to have more inuence
and authority in the future.
Following the award last year of the CERA
designation to 10 actuaries who are considered
thought leaders in the eld, applications
are being accepted for very experienced
practitioner designation. Senior risk
professionals are invited to apply for CERA
status by virtue of their work and experience
in the eld instead of taking the exam.
The PEC also aims to work with other
practice areas to help members transfer into
chief risk o cer (CRO)
and other senior risk-
related roles. We have
established an actuarial
CRO group to provide
a forum for the most
senior risk actuaries
in each rm to share
their understanding
and knowledge of ERM
for the benet of the
profession as a whole.
The year ahead will be challenging for the
ERM PEC as it drives forward its strategy, but I
am convinced that it will make much progress
with its thoughtful initiatives and that we can
rely on it to deliver solutions to meet the future
challenges of risk management. a
PHILIP SCOTT
Stand and
deliver
Philip Scott reviews the cross-practice
initiatives put forward by the enterprise risk
management committee
April 2013 THE ACTUARY 7
www.theactuary.com
An actuarial CRO
group provides a forum
for the most senior risk
actuaries to share their
understanding and
knowledge of ERM.
Philip Scott is the
president of the
Institute and
Faculty of Actuaries
p07_apr_pres_comment_SEMIFINALCT.indd Sec1:7 22/03/2013 08:37
www.theactuary.com
THE ACTUARY April 2013 8
Opinion
Soapbox
A study of 1,000 adults conducted by the
Federation of Finnish Financial Services in
2012 found that 27% of respondents knew a
person who had deceived his/her insurance
company. This only begins to highlight the
scale of insurance fraud across Europe.
Insurance fraud undermines the principle of
mutual benet on which insurance is based,
since the vast majority of honest customers
end up paying for the dishonesty of the few. It
aects every type of insurance and ranges
from opportunistic claims to highly organised
crime rings. It has an impact on society as a
whole, as research shows that insurance fraud
can be used to fund criminal activity.
Across Europe, it has been estimated that
detected and undetected fraud represents up
to 10% of insurers total claims expenditure.
National insurance associations collect data
on fraud levels in their countries. The
Association of British Insurers, for example,
estimates that around 1.9bn of fraud goes
undetected each year in the UK. This is despite
insurers detecting more fraudulent claims
every year up 7% year-on-year in 2011 to
983m. Across the Channel, gures from the
French Federation of Insurance Companies,
the FFSA, reveal that over 35 000 fraudulent
claims were detected in 2011, leading to
savings of 168m.
Pan-European statistics are, unfortunately
di cult to compile, as countries collect
dierent data and measure fraud in dierent
ways. Nevertheless, national statistics
demonstrate what a major issue fraud is. This
is why insurers invest signicant resources in
their ght against fraud and why Insurance
Europe recently published a booklet entitled
The Impact of Insurance Fraud to raise
awareness of the issue.
Insurers use a variety of methods to tackle
fraud. Initiatives vary between countries and
are constantly evolving to keep pace with
changes in fraudulent behaviour.
Information is exchanged across Europe,
within the limits of data protection and
privacy requirements. In the Nordic countries,
regular meetings are held to discuss
developments, since fraud trends in one
country have been seen to spread.
Formalised groups to investigate fraud also
exist in many states. The UKs Insurance Fraud
Bureau (IFB) was set up in July 2006 to detect
and prevent organised
and cross-industry
fraud, working closely
with law enforcement
agencies. The impact of
the IFB has been hugely
positive, leading to
numerous arrests and
savings of tens of
millions of pounds for
insurers and their
customers. In France, a
national body, the
Agence Pour la Lutte Contre La Fraude
lAssurance, ALFA, was set up in 1989 to
investigate suspicious claims and promote
counter-fraud activities. It trains and certies
fraud investigators, advises on cases targeting
multiple insurers and on managing relations
with law enforcement agencies.
Cooperation with law enforcement agencies
is, of course, vital. In Denmark, the insurance
association F&P organises exercises at the
Danish Police Academy on how to combat
insurance fraud. Former police o cers are also
often employed by the industry.
Cheat-lines have proved successful in a
number of countries, including Ireland,
Sweden and the UK. These allow members of
the public to report suspected or known fraud.
Technology can also be harnessed to ght
fraud. Methods include electronic devices to
detect document authenticity and the use of
publicly available
information from social
media. One claim in the
UK for back injuries was
rejected when Facebook
images showed the
claimant doing
gymnastics and training
for a charity run.
Insurance fraud is not
a victimless or
insignicant crime.
Serious consequences,
including custodial sentences, await those
found guilty of it. The industry is constantly
strengthening its systems to ensure that all
types of fraud are detected and prevented, but
it also needs the support of governments, law
enforcement agencies and the general public.
Michaela Koller is director-general of Insurance
Europe, the European insurance and reinsurance
federation. She also chairs the insurance and
reinsurance stakeholder group of the European
Insurance and Occupational Pensions Authority
and testies regularly at EU hearings.
The Impact of Insurance Fraud is free to
download at www.insuranceeurope.eu
MICHAELA KOLLER
Cooperation
is the key to
cracking fraud
Michaela Koller takes a look at the
measures insurers are taking across
Europe to tackle the spiralling rate of
insurance fraud
The impact of the
UKs Insurance Fraud
Bureau has been hugely
positive, savings of
tens of millions of
pounds for insurers and
theircustomers
p08_apr_soapbox_SEMIFINALCT.indd 8 22/03/2013 08:37
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ACT.04.13.009.indd 9 22/03/2013 08:54
THE ACTUARY April 2013 10
www.theactuary.com
Gordon Sharp, chairman, CMI
In November, we announced changes to the
funding structure and publications of the
Continuous Mortality Investigation (CMI);
these changes are now in eect. Registration
and subscription details may be found at
bit.ly/Zvq70M
All our existing publications, including
the recently released CMI 2012 mortality
projections model, remain on the open-access
area of www.actuaries.org.uk
However, new publications will be for
registered users only. Watch out for S2
pensions mortality tables from the self-
administered pension schemes (SAPS)
investigation and the latest results from the
life o ce mortality investigation, both of
which are coming soon.
The CMI has been incorporated into a
limited company of the same name, wholly
owned by the profession. This is to provide
clarity from the previously unincorporated
structure. It does not aect the day-to-day
operation of the CMI or its not-for-prot status.
Join the mergers and
acquisitions group
We are looking to reinvigorate the mergers and
acquisitions (M&A) member interest group
and would like all interested members to be
involved. This group would be useful for
actuaries working on corporate and private
equity mergers and acquisitions, either full
time or as part of their work. The group will:
share ideas and engage in discussions on
issues surrounding corporate transactions;
promote the value actuaries can add to the
M&A process; raise the bar in terms of quality
of advice given by the profession in M&A
situations; and, where appropriate, act as an
informal representative body for members.
We plan to organise a kick-o meeting for
April/May to discuss future activity/priority
issues etc, and would love to see you there.
If you are interested in joining and/or would
like to attend the meeting, please notify Craig
Ajimuda at craig.ajimuda@actuaries.org.uk
For general information about member
interest groups, visit bit.ly/YYYxcf
News
Profession
Upfront
NEWS UPDATES FROM THE ACTUARIAL PROFESSION
I was recently discussing strategy implementation
with a past president of the Institute and Faculty of
Actuaries. He asked me how we would know if we
had successfully delivered on our strategy what
would success would look like? Id like to share with
you the answer I gave him.
In my opinion, success goes hand in hand with quality, and I strongly
believe in the quality of our qualication above all else. We can only
deliver the professional body the membership deserves if we maintain
our high standards, which is the hallmark of our exams, continuing
professional development and regulation. This gives us the reputation
required to attract the best possible students.
On reputation, you may have seen the Institute and Faculty of
Actuaries quoted in the media more often than previously in the past
few months. As part of our public aairs strategy, we are increasingly
looking to give the profession a strong voice, which speaks out in the
public interest in areas where we can add value. However, there is no
point in having a strong voice without the reputation to back it up
which brings me back to quality.
Its a virtuous circle: quality breeds quality. Having a strong
reputation creates demand from employers for FFAs and FIAs, meaning
that we are able to attract the best prospective students, whose skills
further cement the reputation of the Institute and Faculty of Actuaries.
An inevitable consequence of this will be an increase in both inuence
and membership numbers across the globe, which will help us to serve
our public interest role.
By delivering our services to the highest standard, we will ensure that
our members are fully supported throughout their careers. Therefore,
when it comes to measuring how successful we are in implementing our
strategy, it all comes back to delivering a quality service. Ultimately, if
we have a strong reputation based on the high quality of our
activities, we will attract the best members, who will gain
the best jobs across the world. I truly believe that this is
within our grasp, providing we place the quality
agenda at the heart of everything we do. This is our
promise to you as your professional body a
A virtuous
circle
Opinion
CEOs comment
Derek Cribb explains why the quality agenda
should be at the heart of everything we do
DEREK CRIBB
Derek Cribb is the
chief executive of
the Institute and
Faculty of Actuaries
Mortality update:
astronger CMI
ACCESS THE PROFESSIONS ANNUAL REPORT
p10_13_apr_prof_news_SEMIFINALCT.indd 10 22/03/2013 08:38
April 2013 THE ACTUARY 11
www.theactuary.com
Regions leader Beth Montgomery takes us
on a whistle-stop tour of the professions
regional actuarial societies in the UK
Q. As regions leader, how do you engage
and support members?
Members are supported in a number of ways.
This year we have created a regional actuarial
activity area (bit.ly/XpmCqa) on the members
section of our website. This provides
information and contact details for each
regional society, plus a programme of events. If
members are moving or travelling to dierent
regions for business, this gives them access to
an instant networking point with colleagues.
Through regular contact with these societies
and by working closely with colleagues
internally, I am able to develop opportunities for
joint working and future events. This means all
members can access excellent opportunities for
continuing professional development (CPD) and
networking, regardless of location.
Q. Are there many actuaries based outside
Edinburgh and London?
There are currently over 12,000 members
across the UK, including actuarial students. Of
these, around 45% are based outside London
and Edinburgh and many of them also belong
to their local regional actuarial society.
Q. Where are the regional societies and
what do they do?
In addition to the activities in Edinburgh and
London and the burgeoning student network,
there are currently 10 regional societies
operating around the UK. They cover the
regions of: Birmingham; the north-west of
England; Bristol; Northern Ireland; the
Channel Islands; Norwich; Kent; Wessex; the
Isle of Man; and Yorkshire.
All of these societies are run by committees of
volunteers, who create and facilitate a series of
professional and social events for members in
their local area throughout the year.
Q. Can you highlight examples of key
developments for members in the regions?
The success of the recent regional roadshow,
DWP calls for evidence, which visited seven
UK locations to gather member feedback for
the Institute and Faculty of Actuaries
consultation response, as well as the ongoing
Conicts of interest sessions, which are
being delivered in over 10 dierent locations,
have given us a great template for the future.
Support from the regional societies in hosting
these sessions has been invaluable, and
member feedback has shown that there is
certainly a demand for future topics to be
delivered in this way.
Working with the Scottish Board, we have
launched a new event format called Knowledge
Sharing Scotland. The rst event will be held in
April 2013 and will allow volunteer members to
create and host small, debate-style sessions in
local o ces. The group will focus on generating
activity for members based in Glasgow and
Stirling as well as Edinburgh and we are hopeful
that this will provide a platform for networking
and information sharing among the actuarial
community in an informal environment.
Further information on Knowledge Sharing
Scotland can be found at bit.ly/YYF6wR
If you have any ideas that you would like
to share with Beth, please contact her on
+44(0)131 240 1323 or email her at
beth.montgomery@actuaries.org.uk
First port of call for
networking and more
Sloan Prize winner praises inclusive debate
The Sloan Prize for the best
contribution from the oor at the
sessional meeting Unintended
Consequences of Basel III and
Solvency II has been awarded to
Dr Garry Smith.
A pensions-turned-banking
actuary, on secondment from
Hymans Robertson to RBS,
Smith is currently applying
actuarial techniques to
bankingproblems.
He said of his award: I was
delighted to hear that I had been
selected to receive the Sloan
Prize following the January
sessional meeting. The
establishment of the Sloan Prize
showed great insight into the
sort of practical measures that
really do make a great
contribution to what the
profession ought to be about in
terms of open and inclusive
debate and discussion.
This award continues to be
supported by founder Ronnie
Sloan, who said: I was glad to
hear how pleased Garry was at
the recognition bestowed by his
award, which he hoped would
encourage others to participate
at meetings.
The sessional meeting
took place on 21January
inEdinburgh.
Beth Montgomery:
all members can
access excellent
opportunities for
CPD and networking,
regardless of location
p10_13_apr_prof_news_SEMIFINALCT.indd 11 22/03/2013 08:38
THE ACTUARY April 2013 12
www.theactuary.com
News
Profession
NEWS UPDATES FROM THE ACTUARIAL PROFESSION
Solvency II transition:
focus on what is clear
Changes to Actuaries Code : your opinion counts
As the mist of delay and the fog of uncertainty
obscures the view of eventual Solvency II
implementation for a UK actuary, it is easy to
forget that much of the legislative landscape
is clear. The provisions of the Solvency II
regime may take a variety of forms, but we are
far closer to understanding whose rulebook
will be the main regulatory driver, aecting
the future work of an actuary. The Prudential
Regulation Authority (PRA) and Financial
Conduct Authority (FCA) handbooks,
Financial Reporting Council (FRC) guidelines,
European-level technical and implementing
standards, and the Groupe Consultatif
Actuariel Europen or International Actuarial
Association (IAA) standards are all relevant.
The Life Practice Executive Committee of
the profession set up a working party to
understand better the coverage and gaps
in the legislation and standards that will
apply to actuaries working on UK regulatory
reporting. The working party is in the process
of nalising its conclusions, which will be
published on the professions website. In this
article, we touch on who will be writing the
rules, how they will be interpreted and the
potential for disagreements and gaps.
The main source of future Solvency II
legislation is the raft of provisions coming
through the EU procedures as what are
termed level 2 and level 3 texts. These are on
subjects as diverse as acceptable
documentation of management actions for a
with-prots fund, when contracts should be
unbundled and valued separately, and, of
course, the discount rate that should be used
in assessing liabilities.
Rules deriving from this source are
expected to include the level 2 texts, but also
parts of level 3. Consultation on these texts
has hitherto been private, and directed at
certain key industry groupings. In the future,
the EU protocols talk of extensive
consultation at the EU level.
The interpretation of rules is another
source of change. The ECJ interprets
legislation in the context of its structure and
purpose, whereas the UK courts have looked
not to purpose but to a literal interpretation of
the words of the legislation. However,
although our background and court system
still favours literal interpretation, the FSA
handbook calls for a purposive interpretation
in GEN 2.2.1 and 2.2.2. In future, the ECJ and
UK courts will have to consider purpose.
The sources of guidance are set to expand.
The UK technical actuarial standards (TASs)
will continue to apply to a UK actuary in a UK
company. For a UK actuary working for a
French or German rm there will be a set of
rules overarching local requirements. The EU
will issue guidance through the European
Insurance and Occupational Pensions
Authority (EIOPA), based heavily on the level
3 texts. And the Groupe Consultatif is
currently consulting on some of its proposals,
hopeful for widespread EU adoption.
Back in the UK, the PRA/FCA will have their
own guidance that may impinge. One area of
concern is the potential for disagreements or
gaps between UK and EU texts. For example,
the bulk of the current INSPRU texts will
disappear under Solvency II, to be replaced in
the main by direct EU standards (old level 2
and some level 3). However, in a recent
consultation paper, the FSA deliberately
imported some of the current realistic balance
sheet terminology into the conduct of
business handbook (COBS) texts, which may
be misaligned with the nal Solvency II
requirements for with-prots liabilities.
Conversely, UK specic issues are unlikely to
be covered well, yet the scope for more local
interpretive guidance may be limited.
Members have received an email to let them
know about a consultation we issued on
5March in relation to proposed changes to the
Actuaries Code.
The code has now been in existence for over
three years and we want to make sure that it is
achieving what it set out to do to provide a
set of high-level ethical principles that
members are expected to observe in the public
interest in order to build and promote
condence in the work of actuaries and in the
actuarial profession.
Given the importance of the code in our
regulatory framework, we encourage you to
read the proposals and give us your views if
you havent already done so.
We would be pleased to receive any general
comments on the recommendations, in
addition to the completed questionnaire.
Please note that the deadline for responses is
30 April 2013.
A link to an online version of the proposals,
Exposure Draft 29 The Actuaries Code, and
the questionnaire can be found on the
Institute and Faculty of Actuaries website at
http://bit.ly/Yqqsyq or by going directly to
http://svy.mk/10CMn97
NEWS I N BRI EF
Sir Joseph Burn prize presentation
Philip Scott, president of the Institute and Faculty of
Actuaries, presented Katie Watkin (pictured above
left) with the Sir Joseph Burn prize for her overall
performance in the examination process.
Member opportunity: chairman
of management board
The management board has oversight responsibility
for the operational management of the Institute and
Faculty of Actuaries. The board chairman receives
a fee of 24,700 pa for this role, which has arisen as
part of the normal governance cycle. Members who
feel they may have the appropriate skills can nd out
more at bit.ly/Zd2iYh
Towers Watson prize presentation
Professor Paul Sweeting, Fellow of the Institute
and Faculty of Actuaries, presented James Keates
(below right) with the Towers Watson Prize for
Financial Economics for his performance in the CT8
examination.
p10_13_apr_prof_news_SEMIFINALCT.indd 12 22/03/2013 08:38
April 2013 THE ACTUARY 13
www.theactuary.com
13
LOOKI NG FORWARD TO 201 3
15-17 May
Celtic Manor, Newport
Book your place by 15 April to
receive the early bird booking fee.
Speakers include:
Tim Harford, behavioural
economist and award-winning
Financial Times columnist;
Roy Chappell, SCOR UK
and Darren Spriggs, Ageas;
Jamil Qureshi, performance-
enhancing psychologist;
Guy Shone, head of customer
and market insight,
Money Advice Service.
For further information visit
http://bit.ly/10ztfgb
Join the Health and Care LinkedIn
group at http://linkd.in/YTNzDQ
Sponsorship opportunities are
available at http://bit.ly/WGS1UP
or contact hannah.watson@
actuaries.org.uk
Conicts of Interest
Interactive Session
(Pensions)
Wednesday 10 April
Mercer, Belfast
http://bit.ly/14pdggQ
Conicts of Interest
Interactive Session
(Pensions)
Tuesday 16 April
Maclaurin House, Edinburgh
http://bit.ly/10admw3
Highlights of the
Life Conference 2012
17 April
Hilton Metropole, Birmingham
http://bit.ly/XQOcje
CILA
1 May
Royal College of Physicians,
London
http://bit.ly/VAvQ6l
CIGI
2 May
Royal College of Physicians,
London
http://bit.ly/WsUWpk
Health and care conference Events 2013
Year of change: the story of
pensions reform continues
The rst quarter of 2013 has been a period of signicant activity in pension reform, with changes
suggested for both the state and occupational pensions systems. This follows the commencement
of automatic enrolment towards the end of 2012.
On 14 January, the government launched its long-awaited white paper, The Single-Tier Pension:
A Simple Foundation For Saving. This aims to ...provide the right foundation to allow people to
plan and save for their retirement with condence. It proposes an extension of the state
retirement age to 67 by 2028 and a single-tier state pension of 144 per week, subject to qualifying.
The introduction of a single tier would mean the abolition of the State Second Pension.
Consequently, the White Paper also proposes the cessation of contracting-out. Employers that
operate contracted-out schemes will experience an increase in national insurance (NI)
contributions, as will employees who are members of those schemes. Some commentators have
suggested this will kill o remaining unprotected dened benet schemes in the private sector.
The Department for Work and Pensions has issued a call for evidence to address pensions and
growth. This posed two questions: 1. Whether to introduce a new statutory objective for the
Pensions Regulator and; 2. Whether to smooth assets and liabilities in scheme funding
valuations. The Institute and Faculty of Actuaries held a series of meetings with regional
actuarial societies to discuss the call for evidence. Its responses are online at bit.ly/LCkwSr.
Pensions minister Steve Webb opened public debate about pension provision in the UK with
the publication of the strategy document Reinvigorating Workplace Pensions in December. As
debate continues, there will be many opportunities for pensions actuaries to inuence the future.
Pensions minister Steve Webb: provoking
debate about future UK pension provision
PA
p10_13_apr_prof_news_SEMIFINALCT.indd 13 22/03/2013 11:27
14
www.theactuary.com
THE ACTUARY April 2013
News
Industry
MORE BREAKING NEWS ONLINE
Visit www.theactuary.com for breaking news
and to register for weekly news alerts
Scottish independence would rock
pension industry across the UK
Actuarial consultancy warns of increased costs for
employers and need for state support
If the 2014 referendum on Scottish independence results in a yes vote,
it will require the establishment of a new institutional framework to
supervise and deliver pensions, according to consultancy Xanity.
It will also involve the development of dierent tax and national
insurance regimes, which will lead to an increase in costs initially at
least for payroll systems and treasury functions. A revised tax regime
will create still more costs, Xanity said.
Donald Campbell, the companys principal consultant, said: A yes
to Scottish independence would make huge waves across the pension
industry, both in Scotland and the remainder of the UK.
Corporate advisers would be the obvious winners in the short term,
but additional costs would arise for many employers, who would almost
certainly be pressing for the new government to provide support in one
form or another.
Further issues would also be created by the need to either replicate
or complement The Pensions Regulator and possibly the Pension
Protection Fund, Xanity said. There could also be a requirement for
separate professional advisers and dierent exam regimes.
For more on this story, visit bit.ly/16b36Ex
Plans to smooth gilt yields detrimental
for most pension schemes, warns NAPF
Answer is to ensure full exibility of the existing
discount rate regime, says director of policy
Government plans to allow pension schemes to smooth the value of
their assets and liabilities over a number of years could do more harm
than good the National Association of Pension Funds has claimed.
Responding to a call from the Department for Work and Pensions
for evidence on whether smoothing should be applied, the NAPF said
smoothing gilt yields over a two- to three-year period would have a
detrimental impact on the funding position for the majority of schemes.
This is because it would lock schemes undergoing a valuation in 2013
into last years very low gilt yields, weakening their overall funding
positions so that the companies running them could face even bigger
decits. Government should drop any plans to introduce smoothing in
the near future and instead ensure that the full exibility of the existing
discount rate regime is used, the NAPF said.
Darren Philp, director of policy at the NAPF, said: Smoothing is not
the right answer. If it goes ahead, not only will it be too little, too late
but it might do more harm than good. It risks making matters worse
for pension funds once interest rates start picking up, and could cause
greater confusion for trustees, actuaries and employers when agreeing a
discount rate.
Instead, he concluded, pension funds need greater reassurance from
the government and The Pensions Regulator that they can adjust the
discount rates they use where they have been pegged to gilt yields.
For more on this story, visit bit.ly/10fVFYe
DC systems must be rened
to produce good outcomes
The UK is making good progress towards
developing a sustainable dened contribution
(DC) pension system, but it must focus on
providing adequate outcomes for savers, the
Organisation for Economic Co-operation and
Development (OECD) has said.
DC pension schemes are expected to
provide a major source of retirement funds
in many of the 34 countries that are members
of the OECD. However, a number of factors
mean these systems might not produce
adequate incomes, it explained in a report
entitled DCDesign and Delivery.
However, the OECDs research also found
that, where workers save for 30-40 years, it is
possible for DC systems to produce attractive
returns within a low volatility environment, in
turn delivering adequate retirement incomes.
It detailed 10 optimal design and delivery
features for a DC pension system.
For more on this story, visit bit.ly/XpS3UH
EIOPA urges co-ordinated
action on interest rates
The European Unions insurance regulator
has called on member states to take a co-
ordinated approach to address the damage
that persistently low interest rates are causing
to the insurance industry.
The European Insurance and Occupational
Pensions Authority (EIOPA) also committed to
taking steps itself to alleviate the impact of low
rates, which it said were already aecting the
industry in several member states.
In an opinion note, EIOPA explained that
both the life and non-life insurance sectors
were aected by the issue, which hits asset
and liability values. In terms of liabilities,
persistent low rates mean life insurers
long-term obligations to their policyholders
become more expensive in todays terms. On
the assets side, they have a negative eect on
insurers investment results and increase the
re-investment risk of assets.
EIOPA noted that low rates and resulting
lower investment returns also reduce the
margin for short-term insurers that use returns
to compensate for weak underwriting results.
Gabriel Bernardino, chair of EIOPA, said:
The economic environment shows us that
joint actions against long-lasting low interest
rates environment are crucial. By co-ordinating
these actions, EIOPA is committed to ensure a
consistent supervisory approach and a fair and
equitable treatment to policyholders.
For more on this story, visit bit.ly/108yXVI
news@theactuary.com
Variable annuity
sales set record
Sales of annuities that
oer variable levels of
payout depending on
how they are invested
reached a record 1.42bn
in the UK last year, Towers
Watson has revealed.
The consultancys gures
show that, in 2012, the
value of variable annuity
sales increased by 30% on
the 1.09bn recorded in
2011. The nal quarter of
2012 saw quarterly sales
of the products exceed
400m for the rst time.
bit.ly/16oBADF
Annuity code to
simplify choice
The Association of British
Insurers has formally
launched a new code of
conduct to make it easier
for retirees to make the
right choices when they
use their pension pot
to buy an annuity. The
mandatory code, which
came into eect on
1March, requires the ABIs
members to provide clear
and timely information to
help people approaching
retirement to understand
what their options are.
bit.ly/13ehFaB
Surplus a rarity
for DB schemes
The number of leading UK
companies whose dened
benet (DB) pension
scheme is in surplus is
continuing to fall, JLT
Pension Capital Strategies
has said. According to
the rms latest quarterly
research, only 13 of the
FTSE 100 companies
would have disclosed a
surplus if theyd had a
year-end of 31 December
2012, compared with 16
that reported a surplus in
their most recent annual
report and accounts.
bit.ly/YW6TxV
p14_apr_ind_news_SEMIFINALCT.indd 14 22/03/2013 08:39
15
www.theactuary.com
April 2013 THE ACTUARY
MORE GI NEWS ONLINE
For further GI news,
visit www.theactuary.com/news/
Esure sets share issue pricing
Esure, the UK personal lines insurer, has announced the price range for
a planned initial public oering (IPO) in 2013. The company owns the
Esure brand, made famous by the late Michael Winners Calm down,
dear television adverts, as well as Sheilas Wheels, the insurance group
designed with women in mind. The company was founded in 1999 by
its chairman Peter Wood, the insurance pioneer who also founded Direct
Line in 1985. Lloyds Banking Group sold its 70% stake for 200m in 2010
to a consortium led by Wood.
Esure insures around 5% of the UKs motorists. At the end of 2012,
it had 1.25 million in-force motor policies and 500,000 home policies,
helping the Surrey-based company to more than double pre-tax
prots to 115m last year. The companys conservative approach to
underwriting means 87 per cent of its motor policy holders are over 30
years of age, while 98 per cent of in-force home policies are located in
areas considered to have a low risk of ooding.
Stock in the IPO will be oered at between 240p and 310p, giving a
mid-point valuation of 1.15bn, indicating a place in the FTSE 250.
Insurers announce dividend cuts
Several insurers have recently announced changes to their dividend
policies. On 20 February, UK-based insurer RSA announced that it
would be cutting its nal dividend for 2012 from 5.82p per share to 3.9p
per share. CEO Simon Lee said that the dividend was being cut to a level
appropriate to the business today. RSAs shares fell 16% following the
announcement. Lee said: We were clearly over-distributing prots. You
need to retain some earnings to grow the business and thats what were
doing. He also blamed prolonged low bond yields.
QBEs nal dividend was reduced from AUD0.25 per share in 2011 to
AUD0.1 per share in 2012. QBE said that it had reconsidered its dividend
policy. For 2013, it has adopted a payout ratio of 50% of cash prot.
Following a transitional year, Aviva announced a reduction in its
nal dividend from 16p per share to 9p per share, with the full year
dividend falling from 26p to 19p. Aviva said that it expected the 2013
dividend to be rebased in line with the cut in the nal dividend. Aviva
CEO Mark Wilson said that, although Aviva had enough liquidity to pay
the dividend in the short term, cash ows from the business are too
tight to sustain the historic level.
Call to make Flood Re compulsory
The Association of British Insurers (ABI) suggested that all insurers who
write property insurance in the UK should be compelled to participate
in the new Flood Re scheme. Otto Thoresen, director-general of the ABI,
told a parliamentary committee that one of the failings of the current
ve-year statement of principles was that, due to its voluntary nature,
some insurers were able to operate only in low-risk areas. The ABI is
proposing a levy on the insurance industry to give Flood Re enough
start-up capital. Flood Re would be not-for-prot and would be overseen
by the government.
Driving down cost of car insurance
At the start of March, the Association of British Insurers (ABI) issued
a new report, Lifting The Bonnet On Car Insurance, What Are The Real
Costs?. The association estimates the following breakdown of motor
insurance premiums:
29% paid out in repair and replacement costs;
20% paid out in whiplash claims;
14% paid out for non-whiplash personal injury claims less than 0.5m;
9% paid out for personal injury claims greater than 0.5m.
Nick Starling, ABIs director of general insurance, said despite rising
costs linked to excessive legal fees, and whiplash, insurers are determined
S
A
V
E
T
H
E
D
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18
p18_apr_sias_events_SEMIFINALCT.indd 18 22/03/2013 08:41
19
www.theactuary.com
April 2013 THE ACTUARY
Nick Silver nds out why
John Kay, author of the
2012 review on equity
markets, believes that,
although the current system
is fated, everything will be
alright in the end
SAM KESTEVEN
THE
MI LD- MANNERED
PROPHET OF
DOOM
On my agenda
features@theactuary.com
p19_22_apr_Q&A_silver_SEMIFINALCT.indd 19 22/03/2013 08:41
20
www.theactuary.com
THE ACTUARY April 2013
A small terraced house in the hinterland
between Londons Marble Arch and the
Edgware Road does not seem like the sort of
place where you might expect to nd a leading
economist. But professor John Kay is not a
typical economist: he has been a fellow of St
Johns College, Oxford, since he was 22; a
director of the Institute for Fiscal Studies; he
was the rst director of Oxford Universitys
Sad Business School; and he has also set up a
successful economic consultancy rm.
Alongside that, he has written weekly
columns for the Financial Times for 17 years.
More recently, he has been in the public eye
having been commissioned by the
government to carry out an independent
review of the eects of UK equity markets on
the competitiveness of the economy,
published as the Kay Review in July 2012.
If I didnt know that the slight, genial
gentleman settled down opposite me was a
professor of economics, I would imagine him
as a specialist physician, detailing why a
patient had only six months to live with
comforting assuredness. During our
conversation, he gently and politely dissects
the state of the equity markets and nancial
services, the UK economy and the economics
profession in his soft Scottish accent and
oers his thoughts on actuaries.
Kay on Kay
When asked what had rst attracted him to
economics, Kay explains that he started out
studying for a maths degree at Edinburgh
University. Having worked for a summer in
the school holidays at Scottish Widows,
calculating surrender values, his assumption
was that he would become an actuary.
However, on taking a subsidiary course in
economics, he decided he was more interested
in practical aairs and ended up studying
economics at Oxford. Asked why he had opted
for such a varied career, rather than sticking to
being an academic economist, his response is
simple. The idea of doing the same thing all
of my life was a bit daunting, he says.
His particular skill, he continues, is the
popular exposition of complicated ideas.
Throughout the conversation, I form the view
that is a two-way street rather than being
stuck in a hermetically sealed world of
academia, Kay has much practical exposure to
the real world. This feeds back into his
academic work, potentially changing his
views on how the economy works.
Although he professes to not having any
other major passions in life besides my work
and walking, where I do my best thinking,
Ihave the impression that Kays work is so
wide-ranging that this encompasses
multipleinterests.
Kay on banking
My opening salvo is to ask him about his most
recent FT column, in which he wrote that the
reputation of nance has been degraded by the
actions of a few. But the few have been running
the show, and have imposed inappropriate
values on once respected institutions.
He explains that, during the big bang, retail
banks took over rms engaged in wholesale
nancial activities. But the retail banks
couldnt control the investment bankers, who
were richer and smarter, and so they ended up
running the show, he says. The only way to
stop this, he continues, would be to have a
politically driven restructuring of the nancial
service sector a surprising answer, as the
Kay Review was pretty limited on government
intervention. Instead, we are seeing the
proliferation of a style of regulation that has
plainly failed.
Although he has seen change in the past
year among politicians and with public
realisation that what went wrong resulted
from the ethos and structure of the industry
he says there is an endemic culture in
nancial services that makes it incapable of
learning from other disciplines.
Sciences that study systems for example,
engineering or biological systems have
developed a sophisticated understanding of
how systems actually work. In an ecosystem,
monocultures are the most vulnerable and
this is exactly what we have in banking, made
worse by the current style of regulation, which
freezes the evolution of the system,
preserving the dinosaurs.
p19_22_apr_Q&A_silver_SEMIFINALCT.indd 20 22/03/2013 08:41
21
www.theactuary.com
April 2013 THE ACTUARY
The current style of regulation
freezes the evolution of the system,
preserving the dinosaurs
who understood a bit about it on people who
understood less, he says. This typied much
of the nancial services sector.
So when he observed the credit instruments
between 2003 and 2007, it was with a sense of
dj vu, knowing how this would end. His
conclusion was that most nancial market
trading was the product of information
asymmetry rather than dierent risk
preference and risk attitudes as assumed by
the capital asset pricing model and the
e cient market hypothesis. Financial
markets are currently explained using models
that cannot conceivably account for the
volume of trading that takes place in them.
The other experience that led to his change
of mind was carrying out some research on
London casinos. He found that the typical
gambler was a successful, entrepreneurial
businessman. Far from being there for the
thrill of winning, or losing, money, these
people actually believed that they could win.
He realised he was observing the upper tail
of a distribution of people who were
aggressive risk takers, yet nave about the risks
they were taking the businessmen one sees
in the casinos are the ones successful enough
to have enough money to lose.
These same people provide the underlying
dynamics of capitalism. They are not rational,
they do not understand risk and are therefore
prepared to take risks that a rational agent
would not take. And it is these people who
drive the growth of the economy. Again, this
entirely contradicts economic theory in which
agents are assumed to be rational; it is the
irrational agents that drive the markets.
Kay is not the only critic of mainstream
economists, and it would seem patently
obvious that economics has failed as a
predictive and explanatory tool. Was the
profession changing? Could there be an
Einstein moment approaching, where the
mainstream realises that the cranks were
right? No, says Kay. Unlike subjects such as
physics, you cannot denitively prove
economics wrong. The rewards structure of
the economics profession is basically a
common value system, he says. Small
marginal improvements are rewarded, critics
are considered cranks and ignored.
But surely economists would become
increasingly irrelevant as there would be
decreasing demand for models that just do
notwork? Once again, Kay thinks not.
People are continuing the use of value at risk
models, he says, although these plainly
failed, because extreme observations come
from o-model events, not from improbable
events within models.
He cites the Goldman Sachs executive who
said they were seeing things that were
25-deviation events, several days in a row.
This was obviously not the case, says Kay.
They were seeing events that were not in
Goldman Sachs model. What interests Kay as
a result is exploring the limits of probabilistic
reasoning something that has been
discussed since the 1920s but has still not
been taken on board.
Kay on equity markets
The subject of the Kay Review was how equity
markets aected the economy as a whole. One
of the ndings was that companies rarely raise
money in the stock market. But part of the
purpose of savings, according to economic
theory, is also to provide investment capital,
which allows the economy to grow. Kay
thought that this was no longer the case, as
companies no longer needed to raise large
amounts of capital.
Companies such as Facebook or Google are
capital-light and generate their own cash,
which they can invest themselves, he says.
The main capital allocation decision in the
economy is therefore taken within companies
by company management, not by the capital
markets. Most of the large-scale investment of
the modern economy is required by
government, for areas such as health,
education and infrastructure.
The main economic function of the equity
markets is not, therefore, to allocate capital
e ciently, but to ensure that company
management makes the correct capital
allocation decisions.
Kay champions the concept of
stewardshipasset owners that have a close
relationship with the management of
companies they own, overseeing the
allocation of capital in a manner that will
On my agenda
features@theactuary.com
It turns out that Kays optimism is
predicated on the inevitability of another
crisis, as the current banking business model
is a proven failure, which will basically wipe
out the nancial system so we can start again.
Kay on economics
I read another column by Kay a while ago in
which he wrote that he used to teach modern
portfolio theory, but that he no longer
believed in it. Asked what changed his mind,
he takes us back to the early 1990s, when he
was involved with the restructuring of the
Lloyds Insurance market, following the
London market excess of loss (LMX) spiral.
What had been going on was not the
spreading of risk to reduce the cost of risk
bearing, but the dumping of risk by people
SAM KESTEVEN
p19_22_apr_Q&A_silver_SEMIFINALCT.indd 21 22/03/2013 08:41
22
www.theactuary.com
THE ACTUARY April 2013
result in the long-term growth of the
company. This is the only way in which
theinvestment management industry can
addvalue.
Competing with each other on relative
short-term performance is a zero-sum game,
says Kay, which is of no social value or value to
their clients as a whole. At present, asset
managers either do not focus on long-term
growth or, worse, they actively encourage
companies to behave in a more short-term
fashion, undermining long-term value. By and
large, therefore, the asset management
industry has not been doing its job.
Doesnt that make the Kay Review an
indictment of modern capitalism, I ask? After
all, economics teaches us that peoples
earnings are based on how much they are
worth to society, yet the head teacher of my
daughters school earns a small fraction of
what most people working in the equity
markets earn, despite her obviously socially
important job. The Kay Review argues that
what people working in the equity markets do
is mostly useless, sometimes positively
harmful, with most workers either not doing
their jobs properly or not doing them at all.
Kays answer is that capitalism is working,
but not necessarily perfectly; the most
successful economies are obviously based, to
a large extent, on free markets. But the UKs
nancial services system is currently not
serving the rest of the UK economy very well.
As a result, the UK has become a global centre
that is quite good at manufacturing a
particular set of products, which are of
doubtful value, but which are mostly bought
by foreigners. This is the modern moral
dilemma of our society.
Kay on actuaries
Before this interview, I searched the Kay
Review and found no mention of the word
actuary and only one of actuarial. From our
subsequent discussion, I can conclude that he
lets us o lightly.
When Kay had his rst interaction with the
profession over 20 years ago, he felt that
actuaries were blissfully unaware of
nancial economics. But, since then, he says,
we have adopted them wholesale in a
particularly naive and uncritical way.
He believes that people best deal with
uncertainty, as opposed to risk, through
narratives rather than probability
distributions. For instance, the legal
profession uses terms such as balance of
probability and beyond reasonable doubt.
We might surmise, says Kay, that these
could be translated into probabilities the
former greater than 50%, the latter greater
than, say, 99%. But this is not the case at all,
he continues. Legal reasoning places the onus
on the ability to tell a consistent and
convincing story, and the judgment is based
on what degree of condence the judge or jury
has in the story. On balance of probability
means which story is the most convincing.
Beyond reasonable doubt means the story is
a clear and convincing narrative of events.
What Kay would like to see from actuaries is
for them to exercise judgment and frame
these in convincing narratives.
Another example he uses is taken from
Malcolm Gladwells book Blink: The Power Of
Thinking Without Thinking. A Greek statue in
Californias J. Paul Getty Museum was easily
recognised by experts as a fake, but it was very
di cult for them to explain why they thought
this they just knew. Because of uncertainty,
there cannot be an objective truth; expertise is
exercising a subjective judgment based on
experience, not the ability to run a model.
Kay on the way forward
For investment consultants and asset
managers, the Kay Review is little short of
devastating. So what does he suggest?
To start with, he says, the methods for
picking asset managers and the mandates that
they are set are a long way from perfect. First,
the theoretical underpinning of current
practice for example, investing against a
benchmark and dening risk as deviation
from that benchmark follows the e cient
market hypothesis and the capital asset
pricing model, both of which Kay thinks are
nonsense. Second, mandates should be based
on styles and strategies that look compelling.
In Kays view, pension funds should invest
in a smaller selection of companies, with
whom they should be in close contact, either
directly or indirectly via the asset managers,
the key concept being stewardship.
He believes that asset managers should be
selected for their convincing narrative. They
should not be reporting or judged upon
quarterly returns against other managers, as
this is not in beneciaries interests, Kay says.
Instead, he continues, they should be judged
over, say, three years on whether they are
investing in line with their stated narrative
and how this is evolving through time.
The investment consultant should exercise
professional judgment on which narrative is
the most convincing.
Asked whether this was something
actuaries could do, Kay suggests we do not, at
present, have the right skills set. Instead, the
work should be undertaken by asset managers
who understand the competitive advantages
and evolution of companies.
Kays message for actuaries is that we
should distrust our models what is not in
our models is often more important than what
is. And we should develop narratives of what
might happen rather than relying on
spuriously accurate mathematical projections
based on past experience. Equally, we should
not blindly follow methodologies implied by
nancial economics.
In conclusion, the Kay Review has been
described as good on diagnosing problems but
not on solutions. This impression is
strengthened by our conversation, as Kays
ultimate solution seems to be based on little
more than the inevitability of another crisis,
after which everything will be ne. Not a very
comforting message, perhaps, but I think we
should listen carefully to the diagnosis of this
most mild-mannered of Cassandras. a
On my agenda
features@theactuary.com
Develop
narratives of what
might happen
rather than relying
on spuriously
accurate
mathematical
projections
p19_22_apr_Q&A_silver_SEMIFINALCT.indd 22 22/03/2013 08:42
As Solvency II faces further delay to 2016 or even later, rms are
looking to reap the benets from their signicant investments
in capital modelling.
This trend is changing the game for capital modeling actuaries:
before, it was like a 200m steeplechase with companies investing
to meet a series of deadlines; now, it is more similar to a 5,000m
distance run. Capital modellers still need to cover the distance
but must become leaner and more efcient as management
expects more reporting on a continuous basis with less resource.
A few years ago companies produced results four times a year.
Now companies are running up to 500 capital calculations a year.
This increase in throughput has, up until now, been achievable
with the extra resource made available from Solvency II
programme streams. Today, one of the key challenges facing
capital modellers is how to maintain the same level of analysis
throughput when operating as business as usual.
Introducing TeamCentre
This is driving a need for industrialisation of much of the
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Business Critical
As a self-respecting actuarial professional, youll no
doubt want to keep up with the latest industry
developments, people and society updates and
professional news.
But youre also busy being an actuarial professional.
Right?
Thats why The Actuarys weekly email alert brings
you a handy round-up of only the most relevant
news stories and comment, straight to your inbox,
every Thursday.
ACT.04.13.023.indd 23 22/03/2013 08:56
Pensions
Long-term strategy
features@theactuary.com
In the past decade, many dened benet
pension schemes have been pondering
journey planning and de-risking ight paths
as they plan for a long-term end game, often
based on a buy-out or self-su ciency. The
time frame could stretch out to 20 years-plus.
However, while people may well be living
longer, we are most certainly not staying in
our jobs for as long as our parents. The
average tenure of a FTSE 100 chief nancial
o cer (CFO) in the UK is around ve years [1]
and for a chief executive is 4.9 years [2]. Even
member-nominated pension scheme trustees
often have a dened term of o ce of not
more than ve years without re-election.
Given that the key decision-makers in
pension schemes have a term of o ce of
around ve years, why do we insist on talking
about a strategy stretching over 20 years?
Is there a dierent angle from which we can
look at this to better align the interests of
these decision-makers with a successful
outcome for the pension scheme?
If you were taking charge of a company as a
CFO, the rst things you might consider are
likely to hinge on the macro-economic
environment you might face in the next ve
GETTY
THE ACTUARY April 2013 24
www.theactuary.com
Anyone approaching
retirement age should
be planning their future.
But can pension
schemes get better
results by focusing on
the present, ask
Celene Lee and
William Zimmern
moment?
Living in the
p24-25_apr_pensions_SEMIFINALCT.indd 24 22/03/2013 08:42
CELENE LEE is a pension
risk and investment actuary
in PwCs pensions team.
WILLIAM ZIMMERN is a
macro-economist in PwCs
economics team
years and how you can make the most of your
tenure against this economic backdrop.
Right now, one of the key factors that will
aect dened benet pension schemes is the
aftermath of quantitative easing (QE). As a
country, we have not been here before, so we
have little idea how QE will unfold in practice.
As we can see from Figure 1, gilt yields have
fallen signicantly while QE has been in
place. Although the equity market has picked
up over the same period, this has not been
enough to compensate for the impact that
declining gilt yields have had in increasing
the values placed on pension liabilities. As a
result, a sample scheme invested in a 60%
equity/40% bond allocation is still almost
20% below its pre-crisis funding level.
The rst tranche of QE was implemented in
early 2009, with the second phase between
2011 and 2012. In total, the programme has
injected 375bn into the UK economy, with
the Bank of England (BoE) now holding about
a third of the total UK gilts in issuance,
leading to a distortion in the gilt curve. Many
organisations such as the National
Association of Pension Funds (NAPF)
continue to lobby that QE has resulted in an
unprecedented increase in the value of
pension liabilities in the region of 270bn [3].
Many people are expecting some level of
reversal to the gilt curve, as, according to the
law of common sense, what goes down must
come up. But the unwinding of QE may not be
as straightforward as a reversal of the gilt
curve. To begin with, we could look at three
key considerations as to how QE might
unfold: the macroeconomic environment in
which QE might be reversed; the actions the
BoE will take to implement the reversal; and
at what speed might the reversal take place.
A number of scenarios would support the
case for withdrawing monetary stimulus,
including the return of sustainable growth in
the economy with some acceptable level of
inationary threats, given that the BoEs
primary aim is to control ination.
However, there are potential stumbling
blocks. First, signs of the beginning of a triple
dip can be disguised by early green shoots.
Any misinterpretation of the early signals
could lead to the Bank raising interest rates
too soon. If there is a genuine triple dip and
we are in a prolonged recession, the Bank
may be forced to react once again. But how?
With interest rates close to rock bottom and
rounds of QE already implemented, the Bank
may have no choice but to attempt to
implement further rounds of QE. However,
the extent of the existing programme means
that the Bank would risk losing its credibility,
if it has not done so already. Some might
question the eectiveness of QE and the
damage it will continue to cause to the
underlying long-term health of the economy.
Second, how will the Bank unwind QE? One
possibility is that the government could simply
cancel the bonds held by the Bank and there has
already been some speculation appearing in the
nancial press and blogs [4]. The government
would then not need to pay interest on those
gilts, but the Bank would be left with a 375bn
hole with no assets to back it. The consequence
could be vast, not least because there will be a
no-condence vote in the system as the Bank
would be seen to have nanced the
governments debt by creating money.
And, third, what about timing? If the risk of
triple dip subsides, the sudden reversal of
interest rates to pre-crisis levels could cause
serious issues for the private sector or
households with variable mortgage rates,
pushing the economy back into recession.
Weexperienced this to some extent in the UK
when interest rates were raised from 8% to
15% between 1988 and 1990, which was
followed by GDP growth falling from 5% to
-1.4% in 1991.
An unclear strategy from the Bank as to
how monetary stimulus will be withdrawn
will hinder both pension schemes and
businesses in planning for the next few years.
While the lack of action will mean that the
short end of the curve will run its course, the
long-end gilt curve may continue to stay low
for some years while the Bank ponders the
right action. As Andrew Sentance, senior
economic adviser at PwC and a former
member of the BoEs Monetary Policy
Committee, has suggested, an announcement
by the BoE of an orderly intention to raise
rates would go a long way to help the country
adjust to this new normal, but the Bank may
be reluctant to do this.
Further, for pension schemes it could be a
double whammy. Low interest rates have
already led to the pound weakening, which
could lead to high ination for the UK rather
than increasing exports, due to the
inelasticity of UK exports. A combination of
continued low gilt yields and high ination
could be very damaging.
Combining macroeconomic insights with
traditional asset-liability modelling oers a
powerful way to carry out a reality check
between what might be achievable in the
medium term against our long-term target.
Ittakes us away from the unquestioning
mindset of long-term returns without having
a view about the shorter-term and sometimes
brutal reality we try so hard to ignore. a
REFERENCES
[1] According to the Curzon Partnerships
analysis in 2012
[2] According to data from Manchester Square
Partners between 2002 and 2007
[3] Exceptional Times, Exceptional Measures?,
NAPF, March 2012
[4] See debate at bit.ly/cancelgilts
Figure 1: Gilt yields and UK equity performance since the nancial crisis and a sample schemes funding level assuming
a 60:40 asset allocation of equities and bonds
01/05/2007 01/05/2008 01/05/2009 01/05/2010 01/05/2011 01/05/2012
0%
1.00%
2.00%
3.00%
4.00%
5.00%
50%
60%
70%
80%
90%
100%
110%
FTSE all share (LH scale)
Funding level (LH scale)
Over 15 yr gilt (RH scale)
April 2013 THE ACTUARY 25
www.theactuary.com
p24-25_apr_pensions_SEMIFINALCT.indd 25 22/03/2013 08:50
Underwritten annuities
Enhanced annuities
features@theactuary.com
An enhanced annuity pays a higher income
to individuals who have a medical condition
that might reduce their life expectancy.
Generally, individuals will qualify for an
enhanced annuity if they can answer yes to
one of the following questions:
Do they smoke cigarettes?
Do they take prescription medication?
Have they been to hospital recently
for a medical condition?
There are three categories of enhanced
annuities: lifestyle, enhanced and impaired
life. Table 1 explains these dierences and
notes the common medical conditions for
each type. As the market for enhanced
annuities increases, a number of key issues
and trends can be identied that will
inuence its future.
Increased market share
About 14bn of pension funds are invested in
annuities every year, with an average fund
size less than 30,000. In 2012, sales of
enhanced annuities represented about 40%
of the total market, with sales totalling 5.5bn
a signicant increase from a 10% market
share in 2004, arising from increased supply
and marketing activity.
However, the increase in sales has aected
the pricing of standard or good health
annuities. While di cult to quantify, as
enhanced annuities have attracted unhealthy
lives, the mortality cross-subsidy element of a
standard healthy annuity has fallen. This has
had a dual impact on the market.
First, it can be viewed that value is being
transferred away from people in good health
to those in poorer health. In time, this may
aect individual behaviour and the advice
they receive. People with above-average
funds and in good health may be advised to
consider annuitising funds at an older age or
to invest in drawdown products when they
rst retire. The move towards later
annuitisation is also being inuenced by the
current low levels of bond yields, resulting in
the lowest annuity incomes in living memory.
Second, we are fast reaching a point when
the majority of annuities will be underwritten
in some way. Insurance companies are clear
that they cannot use medical underwriting to
overcome the ban on gender-specic pricing,
but they will be looking at more ways to
dierentiate between future annuitants on
the basis of health, accelerating the amount
of underwritten annuities.
As the enhanced market grows, the
distinction between lifestyle and standard
THE ACTUARY April 2013 26
www.theactuary.com
Billy Burrows oers an advisers perspective on
the value of enhanced annuities for customers
and examines what the future holds
HEALTHY
CHOI CE?
p26-27_apr_burrowsSEMIFINALCT.indd 26 22/03/2013 08:43
BILLY BURROWS is
a director of the Better
Retirement Group and
the Retirement Academy
GETTY
annuities will become more blurred. Most
60-year-olds have some type of medical
complaint that will meet the ever-widening
range of qualifying medical conditions for an
enhanced annuity.
Better use of technology
As the number of annuities arranged using the
open market option increases, a number of
dierent annuity broking models are emerging,
including scheme-specic broking services,
web-based annuity supermarkets and
direct-to-customer propositions. All of these
models have used technology to cut transaction
costs and improve client communications.
The most obvious use of technology is in
customer-facing annuity quotation systems,
often referred to as annuity supermarkets, that
allow clients to enter their own medical data.
However, many clients do not understand
annuity options su ciently well to have the
condence to purchase online. Therefore these
systems work better as an education tool than a
business tool.
In addition, current annuity quotation
systems take account of only a limited number
of medical conditions and cannot be relied on to
produce the highest annuity income for a
particular range of medical conditions. Those
that capture more in-depth medical information
often do not have systems sophisticated enough
to produce competitive quotations.
This second point is being addressed by the
next generation of annuity quotation systems.
These will capture comprehensive medical
information and transmit it directly to the
insurance companies to underwrite.
Another challenge to these supermarkets is
to widen the limited range of products on their
virtual shelves to include products such as
investment-linked and xed-term annuities.
Collection of medical data
Traditionally, medical information has been
obtained from individuals by completion of a
quotation request form. But paper forms take a
good deal of the applicants time and eort and
act as a barrier to the growth of enhanced
annuities. In order to make the process easier,
applicants have been oered the opportunity of
a telephone interview.
There are three types of telephone interview:
1. Those provided by insurance companies,
where a qualied underwriter will interview
the individual applicant.
2. Those oered by specialist companies, which
use nurses to interview applicants.
3. Those oered by advisory rms, which use
medically trained interviewers or train their
own sta to conduct the interviews.
As well as the obvious advantage of avoiding
completion of a paper form, telephone
all-time low, more commentators are asking if
annuities are the most appropriate policy for
converting pensions into income.
Annuities will probably remain the product
of choice for most people at retirement, but
people with above-average pension pots may
be better o considering other options.
The advantages of the extra income from
an enhanced annuity will quickly disappear if
the annuity was the wrong policy in the rst
place. While it is very important to shop
around and to get the highest income, it is
also important to make sure that people know
what they are shopping for. a
interviewing should improve the quality and
consistency of medical information. For
example, a nurse will be able to help
applicants explain their medical conditions
and will be familiar with their medication.
And many applicants may be able to explain
the state of their health more accurately with
the help of a nurse compared with what they
would write on a paper application.
Future of enhanced annuities
It is tempting to see the future as being linked
to the development of more sophisticated
online solutions. Although technology has an
important role to play, many people will not
buy an annuity without rst speaking to an
adviser. If this is the case, the earlier they
speak to an adviser, the better the chances of
the most favourable outcome. Technology
will have more impact in the back o ce.
Enhanced annuities will continue to
increase in market share until almost all
annuities will have an element of medical
underwriting. But with annuity income at an
Graph 1: Single life level annuity purchased with 100,000 for 65-year-old man. Annuity income for a range of medical conditions
3,000 4,000 5,000 6,000 7,000 8,000 9,000 SOURCE WWW.BRGL.CO.UK FEBRUARY 2013
5,688 Best good health annuity
High blood pressure (180/100)
Cancer (lymph nodes)
Angina only
Type 2 diabetes
Smoker (20 a day)
Angina and smoking
Chronic pulmonary disease
5,688
5,688 676
368
0
5,688 783
5,688 1,035
5,688 1,072
5,688 1,448
5,688 2,357
Healthy annuity
Medical enhancement
April 2013 THE ACTUARY 27
www.theactuary.com
Most 60-year-olds have some type of medical
complaint that will meet the ever-widening
range of qualifying medical conditions
TABLE 1 Lifestyle annuity Enhanced annuity Impaired life annuity
Description Takes into account certain
behavioural and environmental
factors that may reduce life
expectancy
For those with medical
conditions that may reduce
life expectancy and where the
information can be obtained
directly from the client
Similar to enhanced, but where
the medical conditions are
more serious and a doctors
report has to be obtained
Medical conditions Smoking higher frequency and
longer history
Overweight / heavy drinking
High blood pressure
High cholesterol
History of heart attacks, angina
or heart surgery
Chronic asthma
Digestive or bowel complaint
Bladder or liver complaint
Life-threatening cancers
Major organ diseases, eg liver
or kidney
Other life threatening
illnesses such as Parkinson's,
multiple sclerosis and strokes
p26-27_apr_burrowsSEMIFINALCT.indd 27 22/03/2013 08:43
Underwritten annuities
Positive health
features@theactuary.com
THE ACTUARY April 2013 28
www.theactuary.com
Gordon Woo looks at
annuity pricing of
human resilience
OF WE ALTH
Actuarial assessment of impaired or
enhanced annuities focuses on specic
medical conditions or lifestyle factors that
reduce life expectancy. The assessment of
negative health conditions that hasten death
oers an important but still rather narrow
perspective on mortality. This assessment
could be broadened to include positive
human factors that sustain and extend life,
and help to make individuals resilient.
Depending on these positive human factors,
the lifespan of two relatively similar
individuals may vary signicantly.
With engineering systems, safety analysis
traditionally focuses on the risk of things
going wrong. But a modern supplementary
approach focuses instead on what keeps
systems functional. This is resilience
engineering [1]. A tenet of resilience
engineering is that a system is safe if it can
adjust its functioning prior to, during, or
following changes and disturbances, so that
the required operations are sustained under
both expected and unexpected conditions.
Air safety is not just about what can cause a
plane to crash; it is also about the capability
of the pilot to keep a plane airborne.
Similarly, human longevity is not just about
pathology and frailty, but is driven also by
cognitive, psychological and social factors
that keep people advancing purposefully
through life. These basic human resilience
factors supplement the physical health
factors that have been elucidated over the
past half-century, starting with the classic
longitudinal Framingham heart study in the
US. Yet health-related information from
prospective underwritten annuitants rarely
extends to gauging their state of cognitive and
social functioning or positive well-being.
p28-29_apr_woo_SEMIFINALCT.indd 28 22/03/2013 08:44
DR GORDON WOO
is a catastrophist at
RMS LifeRisks.
CHRIS DUNN
April 2013 THE ACTUARY 29
www.theactuary.com
AND HE ALTH
Fortunately, a number of longitudinal
studies of cognitive, psychological and social
factors have recently been published. For
example, in 2011, a University of St Andrews
paper quantied the widowhood eect on
mortality risk. Using mortality statistics from
the Scottish Longitudinal Study of 58,000
married couples, the paper found that the risk
is highest shortly after widowhood, but
remains raised for at least 10 years.
Mental health or no health
Preservation of cognitive functioning is
critical to successful ageing. Rapid loss of
cognitive faculties often signies medical
decline and heightened mortality risk. Many
activities that inuence longevity are very
cognitively demanding. New medical
treatments may require self-monitoring and
complicated self-medication. Chronic disease
patients must make many choices daily that
have major implications for their health.
Mental stimulation, such as reading and
conversation, is important for maintaining
cognitive function. Brain training studies
show that the cognitive biological age of an
individual can be lowered in relation to
chronological age. Keeping psychologically t
through mental activities leads to improved
cognitive health in old age. Brain plasticity
research by Californian neuroscientist
Michael Merzenich has demonstrated that
cognitive age reduction is achievable even for
older people with mild cognitive impairment.
It pays to stay positive
Positive psychology is the study of human
ourishing, and focuses on personal traits
such as well-being and happiness, rather than
on problems, which is what people tend to
think psychology is all about. Like a resilience
engineer, a positive psychologist concentrates
more on what is going right than wrong.
Positive psychology was founded by Martin
Seligman just 15 years ago. Researchers of
positive psychology have demonstrated that
positive characteristics or feelings, and
purpose in life, help people to live longer.
Positive feelings are especially benecial for
the longevity of pensioners, and it is hardly
surprising that the will to live is a strong
predictor of survival among older people.
While it is clear that happiness is a good
predictor of longevity, research to explain the
causal biological connection that links
well-being with longevity is still ongoing.
Signicant cardiovascular protection seems
to be achieved by satisfaction with life.
Evidence connects major stressful events to
physiological changes: stress induces cellular
resistance to cortisol, reducing the bodys
ability to regulate inammation. Laboratory
studies by Elizabeth Blackburn, the 2009
Nobel laureate, have advanced the hypothesis
that stress aects health by modulating the
rate of cellular ageing.
Social networking for survival
Isolation is a powerful risk factor for poor
health. In the US, a MacArthur Foundation
study of successful ageing showed that
friendship is a key factor in keeping older
people active and emotionally secure, even in
advanced old age. The mortality of any older
individual is contingent to some extent on the
survival of at least one peer. This implies that
a single life annuity has some characteristics
of a joint life annuity. Members of
communities that are noted for their
longevity both work and socialise together in
a close-knit fashion that helps to reinforce
good habits and behaviour. Sustained
engagement in social and productive
activities is central to healthy ageing, and is
ingrained in the most long-lived Blue Zone
communities around the world, which are
celebrated for their number of centenarians.
Social support can buer some health-
related eects of ageing. There are two main
kinds: emotional social support and hands-on
care. The latter can be essential for basic
survival. Emotional support encourages a
sense of being cared for, esteemed and valued
by others. It is especially needed to get
through serious illness and di cult
treatments, just as a nancial reserve may be.
Measuring resilience
Using methods developed in insurance risk
modelling for property and casualty insurers,
a grade index scale can be dened for each of
the three resilience variables: cognitive, social
functioning and well-being. From a meta-
analysis of the published longitudinal
studies, index values can be associated with
hazard ratios. Collectively, the three
resilience variables dene a vector resilience
metric that can elucidate key aspects of
mortality for annuity underwriting.
Mortality convergence, for example, is
partially attributable to compositional eects:
time selects out a resilient sub-population,
with a levelling in the observed mortality at
higher ages. Surviving resilient annuitants
will tend to be functioning well cognitively
and socially, have a purpose in life and a
positive sense of well-being.
Accordingly, the mortality rate observed
among surviving annuitants at advanced age
should exhibit signicantly greater degrees of
convergence. The older people become, the
more their survival depends on resilience.
Demographer James Vaupel rst
introduced the concept of a population frailty
distribution to represent the tendency of
frailer people to die younger. There is a strong
correlation of frailty between generations,
reecting its core genetic basis. Focusing on
survival rather than death, and data-mining
the domain of social psychology, we can now
dene a resilience distribution to reect the
marked population variability in cognitive
and social functioning and well-being.
Annuity underwriters may have intuitively
appreciated the signicance of these human
factors. However, lack of evidence would have
inhibited eorts to incorporate them into
pricing algorithms. Now, in conjunction with
available experience data, these factors can
be taken into practical consideration to rene
the pricing of underwritten annuities. a
[1] Hollnagel E, Woods DD, Leveson N (2006) Resilience
Engineering: Concepts And Precepts. Ashgate Publishing,
Farnham, Surrey
p28-29_apr_woo_SEMIFINALCT.indd 29 22/03/2013 08:44
Underwritten annuities have revolutionised
the insurance industry in the UK by
extracting the most out of available
information by combining existing life
underwriting manuals and the underlying
experience, disease-specic cohort studies,
patient medical records and the expert
knowledge of our chief medical o cers.
Wehave even been able to splice together
experience in a common calendar year from
diagnoses that occurred in dierent years in
the past to produce the most up-to-date
assessment of the additional mortality
associated with dierent conditions.
However, the journey is not yet complete.
Our expectations for underwritten annuities
are still based on assumptions of aggregate
mortality improvement, such as those
developed from the CMI Mortality Projection
Tool. Perhaps this could be viewed as a
reasonable approximation, particularly as the
proportion of people receiving underwritten
annuities increases, but it is not making the
best use of the information available to us.
For example, patient medical databases,
such as the General Practice Research
Database, can give us an insight into specic
conditions. In the case of heart conditions, we
can know the percentage of individuals with a
prior history of heart attack who are currently
being prescribed ACE inhibitors and statins to
manage their blood pressure and lipid balance
and how this changes over time from
diagnosis. At the same time, we have guidance
from the National Institute of Health and
Clinical Excellence (NICE) and other bodies
on what patients should receive.
We have insights through global clinical
trials as to the progress of new treatments
that could further enhance our ability to treat
cardiovascular and other diseases. We also
can learn from those treatments that have
fallen by the wayside, either because they
proved less eective than existing treatments
or because of unexpected side eects.
Global ageing challenge
We all know that the future is uncertain. The
temptation is to step back and to take refuge
in aggregate projections of the future. I would
argue that we should do exactly the opposite.
In 2012 the World Economic Forum
produced a treatise into the challenges and
opportunities that we are faced with because
of global ageing populations [1]. One of the
chapters on medical education that I
co-authored with John Wilden, CEO of Global
Health Futures, highlighted that the focus on
elderly populations and particularly on
clinical management of those with multiple
co-morbidities was insu cient and even
neglected in many countries. New strategies
are needed to train the doctors of tomorrow.
The future will be dierent to the past.
Those of us who are interested in
predictions of life expectancy need to
understand the many dierent possibilities
where further enhancements in healthy life
expectancy could occur. This is going to take
an enormous collective eort. However, there
are eorts under way. Dr Cathy Prescott, chief
scientic o cer at the Till Group and director
of Biolatris, is a strong advocate of the
potential for regenerative medicine to extend
healthy life expectancy, and brought together
a group of interested individuals from
Cambridge Econometrics, Club Vita, Munich
Re, SCOR and Swiss Re to better understand
the interest of the insurance industry and to
model the potential impact on future
mortality experience. This has now led to a
working party at the Institute and Faculty of
Actuaries with a primary focus on developing
a predictive multi-state model of diabetes and
resulting complications that can quantify the
potential benets of regenerative medicine.
Diabetes is also a key condition for
underwritten annuities. In a series of
presentations to actuarial groups in 2012 and
2013, John Wilden and I used diabetes to
exemplify how future innovations should
enable us to move from a remedial state of
medicine, where we manage the disease and
its complications, to the possibility of
curative medicine, where we treat before
symptoms are apparent. This is precisely the
information that we need to understand if we
are going to develop appropriate predictions
as to how future mortality will change.
Diabetes is a rapidly developing global
problem with huge implications for
healthcare costs. The number of people with
diabetes across China, India and the US alone
is expected to increase from 70 million to
150million between 2000 and 2030.
Type 1 diabetes is characterised by a lack of
insulin production and is an autoimmune
disease that is rst seen in children or young
adults. Treatment might be possible if this
immune response could be suppressed.
However, widespread suppression can lead to
THE ACTUARY April 2013 30
www.theactuary.com
Daniel Ryan attributes the success
of underwritten annuities to the
integration of medical and
demographic knowledge within the
actuarial profession
Outsmarting
mortality
Underwritten annuities
Medical research
features@theactuary.com
Underwritten annuiiitie
p30-31_apr_longevitySEMIFINALCT.indd 30 22/03/2013 08:44
DANIEL RYAN is head
of life and health research
and development at
Swiss Re and a member
of the World Economic
Forum Global Agenda
Council on Ageing
GETTY
infection and other complications. A study [2]
that is expected to be completed in September
2014, is investigating whether the particular T
cells that are responsible for the immune
response in type 1 diabetes could be removed
using a stem cell educator. This targeted
modulation of the immune response could
have applications for other autoimmune
diseases, such as preventing the demyelination
of nerve bres that is seen in multiple sclerosis.
There are two types of cells in the pancreas
that are relevant to treating diabetes. The
beta-islet cells produce insulin that promotes
the uptake of glucose. With type 1 diabetes,
these islet cells are destroyed by the immune
system. The other type, the alpha-islet cell,
produces glucagon that promotes the release of
glucose from cells, and particularly from the
liver. Our modern eating patterns as compared
to those that shaped our evolutionary biology
mean that we eectively have an
oversu ciency of alpha islet cells.
Regenerative medicine
There is therefore an interesting possibility for
the replacement of beta-islet cells that have
been destroyed by the immune system. In a
mouse where all the beta-islet cells had been
destroyed [3], alpha-islet cells showed an
unexpected increase in replication and also
conversion to beta-islet cells. We now have an
increased understanding of the variety of
methods by which one adult cell can be
converted into another, and these could
include viruses and the eects of
inammation. The precise signals that lead to
conversion from alpha-islet to beta-islet cells
The above is by no means an exhaustive list
of diabetes research. I have not delved into
the world of nucleic or mitochondrial DNA
manipulation and expression. The key point
is that we should move away from aggregate
mortality improvements to those that focus
on developments that will apply to a group of
policyholders with a particular disease.
Such an approach will leave us with two
questions. First, to what extent will
policyholders embrace new recommendations
from doctors regarding healthy living and
treatment that moves away from the classical
pharmaceutical model? Second, what are the
drivers to improvements in mortality
experience in the healthy population?
I would suggest that the answers to all
these questions can only be resolved through
research collaboration within and outside the
insurance industry, and even then it will be a
long road. For those actuaries that join, be
prepared for a thrilling rollercoaster ride. a
REFERENCES
Full references for this article can be found online at
www.theactuary.com
are not known, nor whether these would have
an identical impact in humans. But this could
represent a valuable method for restoring
insulin production.
Another treatment possibility would be to
produce an articial pancreas that could
boost insulin production but was somehow
protected from the immune response. Viacyte
has developed a capsule that develops its own
blood supply after being implanted. This
creates a safe environment for cells to
dierentiate and produce an additional
source of beta-islet cells that will produce
insulin in response to changes in blood
glucose. This technology, Enceptra, will be
evaluated in a phase 1 trial in the near future.
So far, the strategies that we have focused
on to treat diabetes restore insulin
production. Many individuals with type 2
diabetes successfully manage their condition
through dietary control. Two separate
research streams from Harvard Medical
School have suggested that there may also be
ways to increase our metabolic rate and to
burn o excess calories [4] [5]. The rst
stream is concerned with the discovery that a
signicant proportion of adult humans do not
lose their brown fat, and that these cells are
activated by small drops in temperature and
use fat as a fuel to maintain body
temperature. The second stream builds on
the recent discovery of the hormone irisin,
which is produced by muscles in response to
exercise, and demonstrates the link between
bursts of activity in young athletes,
concentrations of irisin in the blood and the
production of ATP to fuel further activity.
April 2013 THE ACTUARY 31
www.theactuary.com
p30-31_apr_longevitySEMIFINALCT.indd 31 22/03/2013 08:44
4
2
8
0
1
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4
0
22887
22887
228
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2
5
5
3
TAPPING OPPORTUNITIES
IN ILLIQUID CREDIT
In todays low-growth, income-starved
world, the search for yield across
investment markets is likely to remain a
signicant driver of investor behaviour.
With nominal government bond yields
at such low levels, the additional pick-up
offered by the spread on credit is likely
to continue to attract investors. Credit
markets are likely to remain a signicant beneciary of this
hunt for yield, especially given the greater certainty of return
that they offer relative to equity markets.
However, we believe total returns from conventional corporate
bond markets over 2013 are unlikely to be as high as those
seen last year. Credit spreads were signicantly wider at the
end of 2011 than they are today (see Chart) so the scope for
further price increases is more limited. Investors looking to
maintain relatively high returns are faced with a choice. They
can reduce credit quality and increase the risk of default, or
explore more niche areas of credit markets where they can
expect to be paid for accepting lower levels of liquidity. In our
view, going down the route of accepting lower liquidity
currently offers a better balance of risk and reward.
Accessing illiquid credit opportunities requires specialist asset
management skills. Often these instruments do not have public
ratings. Managers have to make an in-depth credit assessment
themselves and understand their structure and documentation.
Two areas of illiquid credit we currently believe are worth
considering are secured corporate loans and commercial real
estate loans. The rst area is a well-established part of the
credit market and a good example of an asset where investors
are well rewarded for giving up some liquidity.
The absolute yields of secured corporate loans are now more
attractive than those from high yield corporate bonds. Loans
are also senior in the capital structure, which means investors
are given a higher priority claim on a borrowers assets than
a bondholder. Because of the secured nature of the asset
class, recoveries are generally higher in the event of a default.
Another interesting characteristic of loans is that they typically
pay a oating rate coupon that is reset in line with market
interest rates. This provides a natural interest rate hedge.
We also believe lending to commercial real estate projects is
particularly attractive on a risk/reward basis. It is an area of the
market that has opened to institutional investors partly as a
result of the nancial crisis. Many banks are being forced
by regulation to shore up their capital ratios and shrink
their balance sheets, including the size of their loan books.
Our research suggests 2013 offers a window of opportunity
to enter this part of the loan market on very attractive terms.
The value of investments and any income from them will
uctuate and is not guaranteed (this may be partly due to
exchange rate uctuations). Investors may not get back the
full amount invested.
For further information, please contact:
Institutional Business Development
businessdevelopment@insightinvestment.com
020 7321 1547
www.insightinvestment.com
CREDIT MARKETS PROVIDED INVESTORS WITH REMARKABLE PERFORMANCE LAST YEAR. ONLY 2003 AND
2009, YEARS MARKED BY ECONOMIC RECOVERY, DELIVERED STRONGER RETURNS. BUT WITH CREDIT MARKETS
TESTING THEIR HIGHS, NOW IS THE RIGHT TIME FOR INVESTORS TO CONSIDER WHAT THEMES SHOULD SHAPE
THEIR PORTFOLIOS IN THE YEAR AHEAD.
MARCH 2013
This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person
to whom it is unlawful to make such offer or solicitation. Issued by Insight Investment Management (Global) Limited. Registered in England and Wales. Registered ofce
160 Queen Victoria Street, London EC4V 4LA; registered number 00827982. Authorised and regulated by the Financial Services Authority. 09186-03-13
By Alex Veroude
Head of Credit,
Insight Investment
ADVERTISEMENT FEATURE
FOR PROFESSIONAL CLIENTS ONLY.
NOT TO BE DISTRIBUTED TO RETAIL CLIENTS.
Chart : European corporate bond spreads over government bonds
Source: Bloomberg.
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500
Feb 13 Feb 12 Feb 11 Feb 10 Feb 09 Feb 08
b
p
s
ACT.04.13.032.indd 32 22/03/2013 08:57
Underwritten annuities
Rating factors
features@theactuary.com
On 21 December 2012, the Test-Achats ruling
came into eect meaning that pricing of
insurance products is now bound by the
Equality Act. It has long been understood
that male and female life expectancies dier
and this has been a major factor in pricing
annuities. Medically underwritten annuities
look at the whole person, their lifestyle and
medical conditions included, pricing each
client individually without relying on the
cross-mortality subsidy used in standard-rate
annuities. This would suggest that pricing
could be dierent if gender was an actual
marker in the progression of a disease.
To accommodate that, a change would be
required in traditional pricing structures,
where medical risk factors are added to
average life expectancy tables. The question
is whether this is really necessary. Current
statistics are pointing to the imminent
merging of male and female life expectancies,
probably as a result of recent cultural shifts,
such as the increase in smoking and drinking
among women.
It may be more productive to look at
potential new rating factors as there are
many. For example, although we may
consider medical advances to lead to
increases in life expectancy without
detriment, there are treatments that hold
their own risks. Methotrexate, a drug widely
prescribed for rheumatoid arthritis, is one.
We need to consider the combination of the
mortality risks, and this is di cult and
complex, especially as it would not be ethical
to withhold treatment from one group in
order to calculate the dierent death rates for
treated and untreated patients. First, though,
there is a denite opportunity to add rating
factors by medicines, as the data is easy to
obtain, being a question in each condition
area on the common quotation form.
Interestingly, it would appear that
treatments will also have dierent eects
depending on gender. Sometimes the risks
may present in the opposite direction to the
disease progression, and research into the
potential longevity risk calculation factors
allowable with gender-specic pricing
resulting is showing where this would
potentially be appropriate.
In fact, the rates oered for women should
be better than for men, as there are
conditions that progress more rapidly
towards death in women.
Another area that has been extensively
studied is the eect of poverty on mortality.
Dr Sheryl Gabram of Emory University School
of Medicine and Grady Memorial Hospital in
Atlanta, Georgia, conducted a study in 2008.
Using men and women from diering
socioeconomic groups with breast, prostate
JULES CHARRINGTON
is chief underwriter at
MGM Advantage
and colorectal cancers, she showed a
meaningful dierence in survival by status.
We already look at wealth as a factor in the
pricing of annuity rates, but low
socioeconomic status has many other factors
that could be used and the data is often
available to underwriters and actuaries.
Ideas being considered include the use of
the plethora of personal data related to our
everyday lives that is out there. Predictive
underwriting is already being debated by
protection product underwriters, and much
of this information could also be useful to
annuity underwriters. Potential factors
include gym membership, food shopping
trends and online computer gaming hours.
We need to keep reviewing the statistics
used, as society is no longer the stable,
unmoving thing it once was. People move
house and change job more often than ever
before, rendering the traditional postcode
and occupation factors as determinants for
socioeconomic status less and less relevant.
Recreational drug use is becoming more
widespread across all classes and may
overtake smoking as a relevant lifestyle risk
factor. Gathering information on this,
however, is going to be di cult.
Medical advances are continuing apace. No
longer are stem cell treatments and bionic
body parts the stu of science ction. It is an
unassailable fact that the world is changing
faster than the insurance industry. If we are to
maintain acceptable risks on our books, we
must adapt in order to survive. a
THE
GENDER
ANGLE
April 2013 THE ACTUARY 33
www.theactuary.com
Jules Charrington looks at the eect of the
Test-Achats gender ruling on rating factors
Table 1: Low socioeconomic status linked to five-year
all-cause mortality
Age-adjusted
mortality risk
Hazard
ratio
95% condence
interval
Breast cancer 1.59 1.35 1.87
Prostate cancer 1.33 1.13 1.57
60
65
70
75
80
85
90
Rising male life expectancy
Life expectancy at 30*
1950 60 70 80 90 2000 10 20 30
Source: Les Mayhew * England and Wales
Women
Men
Projected convergence in 2030
p33_apr_genderSEMIFINALCT.indd 33 22/03/2013 08:45
Todays underwritten annuity market is
highly competitive: each life is individually
underwritten, and up to 10 companies are
likely to be competing for each risk. As a
result, we have the paradox of a product that
is bespoke but is also now commoditised.
This means good-quality pricing and risk
management practices are essential and that
underwriters and actuaries must work very
closely together.
As the volume of sales has grown, so has
the volume of data. Although thats good
news, the number of deaths for holders of
these products is still relatively small and,
aswith all lines of actuarial work, the skill is
interpreting that data in the context of the
evolving marketplace.
The rapid growth in sales of underwritten
annuities, especially in recent years, is well
documented. From 2005 to 2010, UK sales of
underwritten annuities more than
quadrupled, and growth since then has been
around 30% per annum [1]. Although it is
unlikely to continue to grow at 30% per
annum indenitely, we believe it will
continue to grow and quickly in the
foreseeable future. This is because the whole
at-retirement marketplace will continue to
grow, and because market developments will
mean a larger proportion of retirees will apply
for an underwritten annuity product.
The markets rapid expansion has attracted
many insurers and reinsurers. Each will most
likely have dierent pricing and underwriting
structures, which will select against current
players that do not rene their rating
structures to the same degree of granularity.
We have seen this in the market already, with
many companies adopting an approach to
underwriting these annuities that is
reminiscent of how life insurance is rated:
relatively detailed mortality loadings,
customised for individual conditions and
severities. This approach in theory, at least
will attract more severely impaired lives
than the traditional approach in the market of
using a relatively small number of mortality
tables, each reecting a group of diseases
from which an annuitant might suer.
Granular rating
As you might expect, companies are also
seeking to oer enhancements to impairments
not currently covered, especially for applicants
with minor risk factors.
Taken in total, this suggests that to create
risk pools by condition, which are stable over
time and suitable for analysis, requires
considerable insight and adjustment to
successive cohorts of business.
A granular rating basis for this product will
consist of several hundred impairment codes.
Commonly, a life will have a number of
impairments, and so will also be assigned
multiple impairment codes. It would not be
unreasonable to expect well over a thousand
dierent combinations of impairments in a
live portfolio. Clearly, analysing such a varied
risk pool in detail has its challenges. Even
with a huge number of deaths, statistical
credibility will exist for only a small number
of the very common combinations of
impairments. As a result, the market will
always need to rely on interpretations of
medical studies and data by medics and
underwriters to provide rating information.
Relating the results of that work accurately to
the base mortality cost derived by actuaries is
a complex problem.
Unlike other life and health insurance
marketplaces, the underwritten annuity
market has had a standardised application
form for all participants for many years [2].
Itenables advisers to e ciently obtain
multiple illustrations and quotes from
providers, speeding product recommendation.
The quality of the standardised
applications approach has been much
improved by the recently implemented
ORIGO 3.7 project. This is the new data
exchange protocol for the pension annuity
marketplace. It has increased the number of
questions being asked, as well as the
underwriting details the questions elicit,
resulting in higher acceptance rates and a
better understanding of each individual risk.
That better comprehension of risk should
THE ACTUARY April 2013 34
www.theactuary.com
The UK underwritten annuity market is growing
rapidly, challenging actuaries and underwriters to
constantly review their pricing decisions.
Peter Banthorpe discusses how the underlying
drivers will shape the markets future
Better comprehension of risk should allow
sharper pricing. However, how to adjust past
data for those changes is a key challenge
Steering through
the rapids
Underwritten annuities
Pricing products
features@theactuary.com
p34-35_apr_pricing_SEMIFINALCT.indd 34 22/03/2013 08:45
PETER BANTHORPE
is head of mortality
research at RGA UK
GETTY
allow sharper pricing than previously.
However, understanding how to adjust past
data for those changes is a key challenge.
One product or two?
We believe that underwritten and non-
underwritten annuities will increasingly be
seen not as two products but as one, just as
there is no such distinction in the life
assurance market. Every applicant will
undergo the same underwriting process and
receive the same product. The only dierence
will be the size of the mortality loading
applied to the price for a healthy life.
A single process to access the full range of
oerings is e cient for the consumer and the
insurer and will be encouraged by a number
of factors. For instance, the Association of
British Insurers code of conduct on
retirement choices, issued in March 2012,
encourages shopping around by customers at
retirement by ensuring that pre-retirees use
the open market option (OMO). And, more
recently, the Financial Services Authority
announced that it was undertaking a
thematic review [3] of the underwritten
annuity market to determine whether older
individuals were losing out by not shopping
around for the best annuity solution to their
retirement income needs.
These initiatives will lead to more retirees
being exposed to the underwritten annuity
market and will undoubtedly reveal more
impaired lives. Another factor is anticipated
growth in annuities being sold directly
through insurers websites, aggregators, or
direct sites sponsored by independent
nancial advisers. This will be a consequence
of the UK Retail Distribution Review (RDR),
which became eective on 1 January 2013, for
many annuity customers may choose to buy
directly rather than pay the explicit fee for
advice. With over 40% of pension funds being
less than 20,000 [4] at retirement, the cost of
advice will appear prohibitive in many cases.
One market element that might change is
the risk of over-disclosure by applicants.
Asthe benets of impairment-driven
enhancements to annuity payouts become
better known, potential buyers might
exaggerate ailments to obtain the highest
possible payouts. Most applicants are
remarkably honest when applying for
annuities, and insurers have good monitoring
processes in place. But this could change and,
if it does, it will have to be managed.
Future pricing improvements
Mortality trends are driven by a wide range of
factors. Thinking specically about
individual diseases, we can look at medical
improvements to prevent onset of the disease,
earlier detection, improvements in treatment
and also better post-treatment care.
Of course, those buying an underwritten
annuity have already developed a medical
problem, so primary prevention, detection
and initial treatment of that disease are no
longer going to benet our cohort of lives.
And since the lives are older, they will
frequently have multiple conditions.
Also, people with medical condition X
maylater also develop medical condition Y.
We need to look at mortality improvements
by medical condition, as drivers of mortality
improvement that have only a small impact
on a population as a whole may have a
signicant impact on specic conditions.
Forexample, consider a cure for a rare form of
cancer: over the whole population, the impact
on mortality is tiny, but for the cancer
patients the impact is signicant. When
analysing past data, we need to be aware of
factors that may have had a signicant eect.
The underwritten annuity market is a
sizeable and growing portion of the annuity
market. Accurate pricing of these products will
be critical to its long-term success, and requires
a blend of input from actuaries, underwriters
and medical practitioners. Analysing past data
can provide insights into the impact of disease
and the behaviour of consumers, but the ability
to interpret these insights in the context of the
evolving market is the key challenge for
actuaries in this eld. a
REFERENCES
[1] ABI market size statistics
[2] www.commonquotation.co.uk/
[3] www.bbc.co.uk/news/business-21273593
[4] ABI market statistics
April 2013 THE ACTUARY 35
www.theactuary.com
p34-35_apr_pricing_SEMIFINALCT.indd 35 22/03/2013 08:45
www.rgare.com
The security of experience. The power of innovation.
Its not about us.
lt's about always putting our clients and their customers hrst.
RGA celebrates 40 years of using underwriting and mortality pricing excellence
as the foundation to build commercially focused, innovate products and services.
From idea to product to success, we are with you every step of the way.
ACT.04.13.036_37.indd 36 22/03/2013 08:58
How long has RGA been involved in the
underwritten annuity market?
We made the strategic decision to enter the market
in summer 2006. We spent the next year working
on essentially two parallel projects: one researching
mortality and underwriting, the other building a
consumer-friendly sales and application process. Our
hrst client went live during the summer ol 200?.
Why did RGA enter this market?
The product had been in existence for more than 10
years, but we could see potential lor growth. Dehned
beneht plans had been contracting and dehned
contribution plans expanding. There were more people
coming to retirement and Treating Customers Fairly
(TCF) considerations, meaning more people should be
offered the underwritten route.
In addition, the product plays directly to RGAs strengths,
in terms of mortality and underwriting research, using
technology to improve the customer journey, and
developing processes that work lor our clients and
their customers. We could also see value in hedging
the in-force term life and critical illness portfolios.
Have you been successful to date?
Yes, and we expect this to continue into the future.
What has driven this success?
ln a nutshell, we provide the services our clients need to
successfully grow their underwritten annuity business.
These services directly complement the clients' skills. lt
sounds a bit glib, but this is a product line where there is
genuine synergy between insurer and reinsurer.
To be more specihc, our underwriting manual contains
detailed medical information and customised calculators,
and our AURA e-underwriting solution enables a
high percentage of applications to be automatically
underwritten. In addition, our knowledge of this product
and the market-place allows us to provide clients with
expert advice on a broad range ol related issues, lrom
pricing and underwriting to selling, the applications,
disclosure-checking, and capital management. Finally, we
take a portion ol the risk with typically a more aggressive
view than insurers, which allows them to ultimately write
more business, or increase their prohtability.
:KDWULVNVPLJKWGDPDJHWKHSURWDELOLW\RI
the portfolio?
lgnoring investment risk, which is clearly material, within
the mortality element there are three key factors: base
mortality, underwriting loadings, and future mortality
improvements. With thorough, detailed research,
mortality and underwriting can be assessed accurately.
The big unknown is luture improvements in longevity.
These risks can be mitigated by the use of reinsurance
and by hedging across other mortality lines.
Where do you see the market going from here?
The market has been growing at approximately 30%
per annum, and while this rate will inevitably slow in the
long term, we foresee continued growth in the short
term. Drivers ol this growth include baby boomers who
are now moving quickly into retirement, the Association
of British Insurers (ABI) and other regulatory codes
pushing open-market options, and the continued growth
in dehned contribution schemes. The challenge lor us,
as insurers and reinsurers, is the large number of small
pension pots. While it is absolutely right to encourage
customers to shop around, it is also dilhcult when the
amount ol money is small. l believe very strongly that
insurers and reinsurers should be designing processes
to make life as easy as possible for customers and
advisers. l also believe that the technology is there to
allow this without increased risk to the insurers.
The product is a genuine win-win-win for customers,
advisers and insurers. Long may this continue!
Jason Hurley FIA
Head of Sales and Marketing
RGA UK and Ireland
RGA Supports Underwritten Annuities
We provide the services our
clients need to successfully
grow their underwritten
annuity business.
Advertisement Feature
ACT.04.13.036_37.indd 37 22/03/2013 08:59
To kick o with a simple
question, what exactly does a
personal underwritten annuity mean?
CB: This is literally as simple as it sounds; we scrutinise each
persons lifestyle and medical history and oer those individuals with
reduced life expectancy better annuity terms. At Aviva, we believe that
all annuities should be fully underwritten to ensure that customers
receive the correct level of benets in retirement.
Looking at the growth in sales, are enhanced
underwritten annuities becoming the standard?
TG: A personal underwritten annuity means taking into account
factors such as health and lifestyle to determine life expectancy and
we believe that, at some point, disclosing this information will become
the norm. However, the fact you can be better o through being in
poor health is a di cult concept for consumers to understand.
Customers need and deserve a conversation to explain the benets.
VO: In the UK, according to the ABIs quarterly statistics Q3 2012, 80%
of retirees annuitise and, in the 12 months to September 2012, over
30% of the funds annuitised were underwritten.
TG: Last year, of the 200,000 annuity contacts sold externally, where
consumers shop around and buy their annuity from another provider,
around 46% were enhanced annuities. On the other hand, of the
220,000 contacts sold internally, where customers buy their annuity
straight from their pension provider, less than 5% were enhanced
annuities. Estimates are that 50% to 60% of consumers could qualify
for an enhanced rate and so there are still a lot of people potentially
missing out on extra income.
Why is take-up in the internal market slower?
TG: Externally, many consumers get nancial advice and it seems that
checking for qualication for an enhanced rate is fast becoming part
of many advisers routine process. As well as severe illnesses,
enhanced annuities now cover lifestyle-type health risks, including
blood pressure, cholesterol and body mass, which means qualication
for extra income is much wider than it used to be. Many nancial
advisers therefore ask all their customers to complete a lifestyle/
medical questionnaire just to be sure they dont miss out. Poor market
conditions and falling annuity rates have also focused minds on
squeezing out as much retirement income as
possible, making enhanced annuities worth
consideration. When it comes to internal sales,
some companies simply dont oer an enhanced annuity
product to their maturing pension customers. Also, low awareness of
annuity options, smaller pot sizes and a lack of advice makes it easy
for many in this group to end up with a poor outcome, including
missing out on enhanced terms.
How can we encourage consumers to shop around?
TG: From 1 March, the new ABI code of conduct on retirement choices
will bring about consistency in the communications that pensions
companies have with their customers in the run-up to retirement.
Theobjective is to get consumers to make more informed choices
about their retirement income and that includes the decision to
shoparound.
CB: The adoption of common quote forms and the recommendations
made in the ABI code of conduct on retirement choices are already
helping. In addition, although the internet is undoubtedly a useful
resource, we believe that all retirees should make sure they have a
face-to-face conversation about their retirement needs.
VO: Online aggregators are driving awareness, with research tools such
as online calculators providing the opportunity for annuitants to shop
around and compare incomes instantly. Inertia is also a challenge its
still easier to accept an oer from an existing provider than to shop
around for what may seem a modest dierence to many with smaller
pots. This has led to calls for all annuities to be underwritten.
Could customers lose out by shopping around?
CB: Providing additional information around personal health and
lifestyle choices doesnt ever decrease a standard annuity rate if the
conditions are very mild, they may have no eect on the rate; however,
if more severe, they can and do increase annuity rates.
What role should nancial advisers play?
SL: New rules on nancial advice that came into force this year put
more pressure on intermediaries to justify their costs, and taking a
more detailed interest in clients who may be about to commit many
tens of thousands of pounds is one way of doing this.
SHUTTERSTOCK
THE ACTUARY April 2013 38
www.theactuary.com
T
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Welcome to The Actuary
magazines rst
underwritten annuities
forum with leading industry
providers, facilitated by
Sarah Bennett
p38-39_apr_Forum_FINALnewCT.indd 38 22/03/2013 10:23
TIMOTHY GOSDEN (TG),
head of annuity product
development and marketing, L&G
STEPHEN LOWE (SL), group
external aairs and customer
insight director, Just Retirement
ANDREW TULLY (AT),
pensions technical director,
MGM Advantage
CLIVE BOLTON (CB),
managing director of Avivas
At Retirement business
VANESSA OWEN (VO),
head of annuities and
equity release, LV=
CB: Financial advisers play a key role in getting the right annuity for
customers. This may increase the cost of service for advisers, but we
believe that they need to be able to charge an appropriate amount for
the service and anticipate that the cost will reect this.
VO: Independent nancial advisers (IFAs) are best placed to guide the
customer through the decision process. But, for most IFAs, it may only
be nancially viable to oer advice on larger pots, where the choice
isnt whether to select an underwritten annuity but whether to buy an
annuity at all. The success of aggregators oering non-advised
comparison services was well established pre-Retail Distribution
Review (RDR) and is expected to continue. This may mean, post-RDR,
we could see a steady shift of consumers choosing non-advised routes.
Is portalisation a good or bad thing?
AT: Portalisation is a bit of a double-edged sword. It will open up
underwritten annuities to a wider audience as portals move towards
direct-to-client oers, and annuity providers move their propositions
onto various consumer comparison websites. However, automating
quotes will always restrict the underwriting philosophies to the same
data set. There are moves to develop more sophisticated messaging to
ag condition areas and/or combinations of risk that would be better
reviewed by a human underwriter, but these involve quite signicant
system development and industry will. Underwriters would welcome
these referrals, especially as the most accurate disclosures come from
the clients rather than from their advisers.
TG: Portalisation is a good thing as it facilitates a speedy and e cient
service for intermediaries and enables consumers to complete an
online medical form if they want. The person best placed to complete
the medical form is the consumer or a medical professional on their
behalf, and so all portals should facilitate this and ensure the question
set is comparable with the industry common quote request. For more
complex medical conditions, a paper form is probably the best option.
How will distribution of underwritten annuities
evolve in future?
VO: The evolution of online non-advised channels has been rapid.
Now we are seeing increasing discounting between non-advised
services as competition increases. Of equal importance, we see
workplace distribution as critical to overcoming inertia at the point of
retirement. This is where, over the long term, we see the value from
auto-enrolment driving up the size of retirees pension pots, thereby
increasing the potential for market growth.
Will we see a trend towards streamlined or
detailed underwriting going forward?
SL: About six years ago, key players in the industry worked together to
replace medical questionnaires with the more detailed industry-
standard common quotation form. Eectively, shallow underwriting
was considered obsolete and all of us who knew its limitations were
keen to replace it with something better. Its re-emergence is on the
basis that streamlining the process by basing decisions on a few broad
factors rather than many detailed ones could cut costs. But thats not
great for customers, who may miss out on income.
Will additional layers of underwriting further
complicate the purchase of an annuity?
CB: We dont believe that asking customers to provide a full set of
information, which could increase their income in retirement but
never decrease it, can be bad for customers in any way.
What is wrong with the existing system?
CB: The existing system can be confusing. All customers deserve a
conversation about their retirement needs, regardless of the size of their
pension pot. Such conversations can lead to retirees considering options
they would not have thought about. For example, some may assume an
enhanced annuity from one provider will always pay a higher income
than a standard annuity from another. This isnt always the case. Some
competitive standard annuities may oer a higher rate than an
enhanced personally underwritten quote from a less competitive
provider. But some enhanced annuities may include a narrower range
of underwriting factors than another standard annuity, which may be
priced to include factors such as postcode or smoking.
What would be your idea of Utopia in this market?
TG: For everyone to understand the benets of enhanced annuities
and to be willing to complete a lifestyle/medical questionnaire. Also
for companies to be forced to oer an enhanced annuity to internal
customers, either themselves or through another provider.
What does the future hold?
SL: Technology is allowing us to gather more information, more
cheaply than ever before and to understand what those numbers
mean in ner and ner detail. That will dene the marketplace as
insurers ght to create the intellectual property that gives them a
sustainable competitive advantage. a
April 2013 THE ACTUARY 39
www.theactuary.com
Underwritten annuities
Industry forum
features@theactuary.com
p38-39_apr_Forum_FINALnewCT.indd 39 22/03/2013 10:23
THE ACTUARY April 2013 40
www.theactuary.com
At the back
Arts
Arts
arts@theactuary.com
Sharon Maguire explores the life
and work of one of Britains greatest
20th-century thinkers
Aside from the lm Enigma (2001) and the
Robert Harris book of the same name, Id paid
scant attention to codebreakers and Bletchley
Park. Even though both book and
aforementioned lm are highly ctionalised
accounts of a young mathematician trying to
break the Germans Enigma ciphers during the
second world war, there is little reference to a
man called Alan Turing.
Ironically, his story is one that is equally
compelling, mysterious and, above all, sad.
With that in mind, I set o for the Science
Museum in London to see Codebreaker: Alan
Turings Life and Legacy a special exhibition
to mark the centenary of his birth.
Alan Mathison Turing was born in London
on 23 June 1912. His formative years were spent
in Dorset at Sherborne School, where he
became friends with fellow pupil Christopher
Morcom the rst in a line of male companions
that Turing would become involved with. Their
friendship would inspire Turings lifelong
endeavours. However, it was cut short by
Morcoms sudden death in February 1930, aged
18, from tuberculosis.
Turing went on to win an open scholarship in
mathematics to Kings College, Cambridge,
matriculating in 1931. He graduated in 1934
with distinction, and was awarded a fellowship
in 1935. In 1936, Turing went to Princeton
University in the United States, before
returning to Kings in 1938.
At school, Turing was described as being
popular with the boys, but never quite one of
them. He was considered an eccentric
character, a very reserved sort, although he
generally got on well with everybody.
Cryptology comes of age
When war broke out, he joined the Government
Code and Cypher School at Bletchley Park.
Along with another Cambridge mathematician,
Gordon Welchman, he designed a new
machine, the Bombe; used to decipher
Enigma-enciphered messages. It was the work
done by Turing and his colleagues during this
time that brought cryptology into the modern
world. In 1946, he was awarded an OBE for his
work there.
Set amid the spectacle of astronauts, rockets,
and all things scientic, analytic and
mechanically artistic, the exhibition is
unassuming. A haunting, melancholy face at
A L A N T U R I N G :
B E YO N D T H E
E N I G MA
p40_41_apr_arts_SEMIFINALCT.indd 40 22/03/2013 08:46
April 2013 THE ACTUARY 41
www.theactuary.com
During an intense
period of grieving,
Turing began to
contemplate a
spiritual existence
beyond the body,
and he turned his
attention to whether
machines could learn
to think like humans
the bottom of the staircase beckons you
upstairs to a large balcony set aside for this
pioneering British gure.
Despite being best-known as a genius
mathematician and codebreaker, the exhibition
covers many other facets of Turings life. The
area is arranged into six themes: Computing
before computers; Turings war, and his work at
Bletchley Park; Pilot ACE the automatic
computing engine; Can machines think?;
Amatter of life and death; and Programming
computers today.
According to David Rooney, curator of the
exhibition, the star of the show is the Pilot ACE
computer, which, in its day, was the worlds
fastest computer. It is the most signicant
Turing artefact in existence and Rooney says it
wouldnt be too fanciful to suggest that Pilot
ACE was Alan Turings mind made into metal
and glass valves.
Showcased alongside this is a moving set of
archives made available by the family of
Christopher Morcom. During their time at
Sherborne, it was clear that Turing was besotted
with Morcom, and the intensity of the
relationship was such that Turing would
eulogise his feelings of love and loss in a series
of heartfelt letters sent to Morcoms mother in
1930, following her sons untimely death. It
seemed their great bond stemmed from the fact
that Morcom was someone who took scientic
ideas seriously he may well also have been the
rst person to take Turing seriously.
During this intense period of grieving, Turing
began to contemplate a spiritual existence
beyond the body, and he turned his attention to
whether machines could learn to think like
humans. This idea would stay with him for the
rest of his life.
On show at the exhibition is a charming short
lm, charting the creation by Turings
contemporary, Dr William Grey Walter, of Toby,
a mechanical tortoise with an electronic brain
that functions like the human mind. His
magic-eye head is a photo-electric cell that
revolves to nd the strongest source of light, to
which it is then drawn, negotiating obstacles
along the way. Turing knew Grey Walter well,
and would later visit the Science Museum to see
a demonstration of a pair of Grey Walters
tortoises that reportedly captivated him.
In 1948, Turing began working on a ground-
breaking new project, developing mathematical
theories of morphogenesis the development
of form and structure in an organism. But only
four years later, following a relationship with a
local man, Turing was arrested under anti-
homosexuality legislation and convicted of
gross indecency. Doctors then were
experimenting with ways to treat
homosexuality, and Turing was given the
option of either imprisonment or chemical
castration. He opted for the latter.
During this time, he had continued with his
research on morphogenesis, as well as advising
the government on secret codebreaking
projects. However, his security clearance was
suddenly revoked and he was put under
surveillance. In 1954, aged just 41, he was found
dead as a result of cyanide poisoning. The
o cial verdict was suicide, with the coroner
adding his mind had become unbalanced.
Alan Turing is most widely known for his
critical work at Bletchley Park during the
Second World War. But he was also a
philosopher and computing pioneer who
questioned and contemplated the fundamental
problems of life itself.
His ideas have touched so many aspects of
science and technology, including the early
days of computer programming, and planted
the seeds of articial intelligence. A great many
things we use in our daily life exist as a result of
such pioneering work.
It is perhaps ironic then that the Science
Museum, with all its celebration of the
advances of human endeavour, and its gizmos
and gadgets laid out for purchase in the
museum shop, owes much to the quiet,
unassuming man whose mournful image gazes
down from a quiet corner of the balcony.
In a letter to the Telegraph, Stephen Hawking and other
scientic luminaries have called on prime minister
David Cameron to formally pardon Alan Turing.
Despite a posthumous apology in 2009 by then
prime minister Gordon Brown, no o cial pardon was
given. A later appeal was turned down by the coalition
government. With a private members bill drafting new
legislation later this year, it may well be that one of the
most brilliant mathematicians of the modern era can
at last be celebrated without reserve.
Codebreaker Alan Turings life and legacy
runs until Sunday 30 June at the Science Museum,
Exhibition Road, London SW7 2DD. Admission is free.
Unrivalled: Pilot
ACE was, in its
day, the worlds
fastest computer
Early articial
intelligence: the light in
Toby the Tortoises hutch
never fails to bring
him home
GETTY / SCIENCE & SOCIETY PICTURE LIBRARY
zes
er
as
oon nn
eew w
he he
an
y
ee.
Early articial
intelligence: the light in
Toby the Tortoises hutch
never fails to bring
him home
p40_41_apr_arts_SEMIFINALCT.indd 41 22/03/2013 11:27
THE ACTUARY April 2013 42
www.theactuary.com
GETTY
Managing Fraud Risk A Practical Guide For
Directors And Managers by Steve Giles
PUBLISHER John Wiley & Sons
ISBN-10: 0470979453
RRP 34.99
BOOK REVIEW
There are two important things you would not guess
from the title of this book. First, it is a very good read: not
quite The Girl With The Dragon Tattoo, but it ows well
and keeps the reader involved. Second, while its core
subject is fraud risk, it could easily be used as a more
general introduction to risk management. Perhaps
because fraud itself can produce some fascinating
stories, and certainly because the author is able to draw
on examples from a career built on consultancy and
teaching, this book provides a very practical
perspective on its subject matter.
The book comprises 10 chapters, each covering a
discrete aspect of fraud from softer elements, such as
behaviour and responsibility, to elements of a risk
management framework: controls, prevention and
detection. The 10 chapters are linked without too much
contrivance to 10 questions in a fraud awareness quiz
that the author uses when teaching. Actively stopping to
consider each question before reading the content of
the associated chapter prepares the reader to
challenge their own views. It also helps to embed the ve
key messages at the end of the chapter.
The book does deliver some very useful textbook
content. There is factual content largely built around
introductions to relevant frameworks that have
developed over the years: legislation such as
Sarbanes-Oxley and anti-bribery laws, risk
management frameworks such as the Committee of
Sponsoring Organizations (COSO) ERM model, control
frameworks and corporate governance approaches.
The treatment of these frameworks in the book is
supercial enough to bring out the essence of their
purpose, but leaving the reader to investigate further by
following references. This content is complemented by
the authors personal insights as a practitioner, so the
whole book suggests a theoretical framework that
underpins the practical advice it contains.
The author uses two further teaching aids. The rst
involves case studies drawn either from personal
experience (the author was a key player in the team
investigating the Polly Peck collapse) or from the study
of other highly public cases. The second quotes insights
drawn from a select group of other practitioners whose
approach to fraud risk management has quite clearly
impressed the author. Rather than using these
illustrations to reinforce his own position, the author
appears to want to give the reader a broader palette
of viewpoints.
Considering this books usefulness to actuaries,
I would point to three things.
First, this is as good a risk management primer as
any other text. As more actuaries like to consider
themselves risk management professionals and as the
demand for these skills increases, students and
experienced actuaries alike would benet from
reading it.
Second, for actuaries who are directors or senior
managers of organisations, the book is a useful
reminder of the threat of fraud risk, directors and
o cers accountability for protecting stakeholders from
fraud and the resources available to them to discharge
that accountability.
Lastly although it is only a small section the
discussion of statistical techniques used in the
detection of fraud will be familiar territory for actuaries
whose core role involves the analysis of large volumes
of data.
A nal thought, inspired by the subject matter, relates
to the role that actuaries should continue to play in
comparing long-term benets with short-term costs.
Fraud prevention is only one example of the conict
between businesses increasing exposure to risk and
the pressure to reduce the cost of controls, taking
resilience out of individual businesses and therefore the
economy and society.
While practitioners such as Steve Giles continue to
improve the eectiveness and e ciency of controls,
actuaries do have a role to play in highlighting the
nancial benets of maintaining those controls.
Tony Brooke-Taylor is an audit director, general
insurance, at Aviva
As more actuaries consider themselves risk
management professionals and as demand
for these skills increases, both students and
qualied actuaries will benet from reading it
MORE ONLINE
Latest reviews at
www.theactuary.com/
opinion
p42_apr_reviewsSEMIFINALCT.indd 42 22/03/2013 08:47
April 2013 THE ACTUARY 43
www.theactuary.com
43
www.theactuary.com
At the back
Coee break
HAVE YOU GOT WHAT IT TAKES?
Membership of Mensa is open to anyone who can
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For information on IQ testing in your area, visit
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Mighty mileometer
Mensa puzzle 540
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Indianapolis 66
Dallas 42
Philadelphia 75
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Spadework Bridge puzzle 31
How many miles
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Move from square to touching square to nd
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What is it?
T I N
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Justiably unwilling to defend, you punt 4 hearts.
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West leads K. You ru with 7 and draw 2 rounds of
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Bridge puzzle provided by David Lampert
A bank cashier transposed the pounds for
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customer far too much money. After the
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three times the amount of the original cheque.
What was the amount of the
original cheque?
SHUTTERSTOCK
6534
10
432
AK1096
KQJ1098 A72
Q653 42
A 8765
J7 Q832
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Pick up the pace
Mensa puzzle 539
A cyclist is on a ve-day expedition. On the rst
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The next day she covers a third of what is left.
The following day she covers a quarter of the
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left. How many miles has she travelled?
For a chance to win a 50 Amazon voucher, please email
your solution to puzzle 539 to: puzzles@theactuary.com
by Tuesday 16 April
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Puzzles
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IZE
PU
ZZLE