1989
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| 18/01/1989 | GAD write to Equitable’s Appointed Actuary in reply to his letter of 21/09/1988. GAD head the letter ‘Returns as at 31 December 1987’. GAD explain: ‘I understand from your letter that there are sufficient margins between your published valuation basis and a corresponding net premium valuation basis to make overall provision for future additional mortality on Projection F of AIDS Bulletin No 2’. GAD continue by saying: ‘We would be interested to learn what mortality basis your experience corresponds to?’ GAD also refer to the considerable sums assured in certain categories – Level Term Assurance and Miscellaneous (mainly Income Benefits and Temporary Assurances) – and state: In view of the large sums assured at risk we suggest that these categories of contract are significant for the purpose of Section 2.1.1 of Guidance Note GN8. In keeping with the Government Actuary’s recent letter to all appointed actuaries [see 14/11/1988], we will be looking for you to set up reserves for these categories in the 1988 returns which would include specific provision for future AIDS mortality … GAD ask Equitable to provide further details of their new approach to temporary assurance business. |
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| 14/03/1989 | DTI provide briefing for the visit of a Minister to Equitable on 22 March 1989. This follows the format that was used for the visit by the Permanent Secretary of the Treasury on 19/10/1987 (see 13/10/1987). DTI set out some updated statistics for 31/12/1987 (being free assets of £390m, long term business fund of £2,862m and net premium income of £500m) and state that: The Society appears to be sound and has expanded steadily with the underlying trend of expenses being satisfactory. Its strong solvency position makes it low priority in the companies supervised by Insurance Division. Consequently contact with the Society is infrequent and there appear to be no important current issues. |
| 20/03/1989 | Equitable’s Appointed Actuary and another of the Society’s actuaries (who later becomes Appointed Actuary) present ‘With Profits Without Mystery’ to the Institute of Actuaries. The abstract to the paper is as follows: The paper describes the philosophy of withprofits business which has been developed in the authors’ office, as a practical illustration of the running of such business in modern conditions. A description is given of how the philosophy is implemented in the main areas of actuarial management, including valuation methods, bonus distribution, product design and expense control. The discussion is extended to address a number of topics which are the subject of current debate including the financial strength of offices, future bonus prospects and disclosure of expenses. The paper is published on the website of the actuarial profession at http://www.actuaries.org.uk/files/pdf/library/JIA116/03010345.pdf (Note: in his witness statement to the Penrose Inquiry (provided in May 2003), Directing Actuary A stated: I read “With Profits Without Mystery” and attended the debate at the Institute of Actuaries just before being promoted to Directing Actuary [in April 1989]. (By way of background, I should explain that Institute papers were distributed to members about two to three weeks before they were presented for discussion. After an initial brief introduction by the President, a previously appointed “opener” would give his views on the paper, and this would be followed by other members of the profession who wished to speak. There would also be an official “closer” of the discussion. GAD did not hold a formal discussion of Institute papers amongst themselves, but papers like that on the Equitable would be discussed by those members of staff with a direct interest in the company.) The Equitable was generally seen as being a special company due to its historical significance as the first life insurance company, and the fact that actuarial thinking basically started with William Morgan, its first actuary. Nevertheless, I concluded that the culture of the Equitable, as expressed in the Paper, did not fit easily with the new solvency margin regime introduced in 1984, and it would need careful monitoring. While I sympathised with the philosophy that the current generation of policyholders owned the company (being a mutual), nevertheless the fact that the Equitable’s culture also meant that policyholders would receive a reasonable approximation to the value they had built up in the company on the maturity of their policies, thereby inhibiting the building up of an estate, meant that the solvency margin (or at least the explicit component of the solvency margin) would need to be met largely from the investment reserve held back to fund terminal bonuses. He continued: With other mutuals, an estate had normally been built up by past underdistributions of bonuses to policyholders, whether deliberately or otherwise – for example, in the latter case through perhaps not having some kind of asset share technique – while in a proprietary company the solvency margin could also be covered by shareholders’ funds, and in extremis through calls for increased levels of shareholder capital, although raising this has its own difficulties. The irony was that those companies which had underdistributed to policyholders and shareholders in the past were most able to meet the new solvency margin requirements. I did not participate in the debate as I felt, as a regulator, it would not be appropriate to discuss the affairs of an individual company in public. I could envisage that, in the event of a deep, sustained fall in the stock market, the “With Profits Without Mystery” culture, in relation to bonus declarations, might need to change, much more quickly than for other companies with an estate, if the company were to maintain its required solvency margin. In the event of closure to new business, other issues would have to be confronted, including the need to adjust the investment mix so that the assets closely matched the likely incidence of outgo. The Equitable would be no different in this regard from any other company. The Appointed Actuary of a company transacting long term business has to set up reserves which enable the company to be run off satisfactorily in the event of closure to new business, including any cost overruns in the first few months of closure due to redundancies and the costs of the closure of branches. Most of the Equitable’s business was recurrent single premium business. By the nature of single premium business, no future premiums can be deemed to be collected under the contract, and the Institute paper indicates that the Equitable wrote off all their new business expenses in the year of inception, thus causing no strains of that nature in future.) |
| 03/04/1989 | Equitable’s Appointed Actuary writes to GAD in reply to their letter of 18/01/1989. The Appointed Actuary explains that he has some difficulty in saying with precision what the Society’s AIDS mortality experience is, due to the limited sample size, but over recent years it has been considerably lighter than the valuation basis. The Appointed Actuary provides information about the Society’s approach to temporary assurance and says that he notes ‘your comments about the Government Actuary’s recent memorandum and will take appropriate action in respect of the 1988 returns’. |
| 13/04/1989 | GAD acknowledge Equitable’s letter of 03/04/1989. GAD thank the Appointed Actuary for the helpful and interesting information on the Society’s actual mortality experience and note ‘that you will be making some changes on the reserving basis for term assurances in the 1988 returns’. There appears to be no other correspondence on the 1987 returns. |
