African Journals Online
South African Actuarial Journal

VOLUME 2, 2002
ABSRACTS

RISK-POSITION REPORTING IN
THE SOUTH AFRICAN LIFE-INSURANCE INDUSTRY
By A Dardis

ABSTRACT
Risk management is central to the running of a successful insurance operation. This means that insurers must be able to measure and monitor their risks using risk-management tools that will effectively help them manage and exploit these risks. This paper considers risk-reporting techniques in the life-insurance industry in South Africa, reporting on the results of a survey of current practice. Liability risk, asset risk, asset-liability risk, and operational risk are each viewed separately. The current state of reporting is considered and a view is taken as to the future outlook, identifying areas for potential improvements in risk reporting. Additionally, comparisons are made with current practices outside South Africa, particularly in North America.

KEYWORDS
Risk reporting; asset-liability management; South Africa

MANAGING ACTUARIES' PROFESSIONAL RISK
By MW Lowther and JWT Mort

ABSTRACT
This paper describes a new concept, of vital importance to actuaries, which the authors have named 'managing actuaries' professional risk'. Much has been written on the constituent elements of legal causation, risk management, indemnity insurance and professional conduct standards. This paper envisages an integration of these elements using the profession's own guidelines for risk analysis and management for projects (RAMP). Actuaries are experts in risk applications for clients-in an increasingly litigious society, they need to apply their expertise in their own back yard.

KEYWORDS
Professionalism; professional risk; risk management; professional indemnity insurance


WHAT ACTUARIES MIGHT LEARN ABOUT LIFE
By A Asher

ABSTRACT
This paper presents the author's view that the professional life assurance courses for subjects 302 and 402 fail to consider a number of important technical and ethical elements of management and economic theory. These include the marketing concept, the financial life cycle, macro-pricing and public relations, which are important in the management of a life office. They also fail to engage the debates that surround questions of profit, market prices and modelling, especially that between actuarial practice and financial economics. Their failure leads to some incoherence in the courses, and could mean that students are inadequately prepared for professional practice.

KEYWORDS
Education; life assurance; marketing; profit; modelling; financial economics


DEFICIENCIES IN THE THEORY OF FREE-KNOT AND VARIABLE-KNOT SPLINE GRADUATION METHODS WITH SPECIFIC REFERENCE TO THE ELT 14 MALES GRADUATION
By GJ Farmar

ABSTRACT
This paper revisits the theory and practical implementation of graduation of mortality rates using spline functions, and in particular, variable-knot cubic spline graduation. The paper contrasts the actuarial literature on free-knot splines with the mathematical literature. It finds that the practical difficulties of implementing free-knot spline graduation are not recognised in the actuarial literature reviewed. The paper also revisits the results of the graduation of the English Life Tables no. 14 (ELT 14) experience for male lives using a 'multistart' optimisation approach for the free-knot graduation. Application of this technique results in the finding that the chi-squared values reported in the ELT 14 graduation for male lives for 10, 11 and 12 knots were not optimal values. The multistart optimisation results appear to show that McCutcheon's t-statistic, which is used in variable-knot spline graduation to select the optimal number of knots, may not in fact result in an optimal choice. Free-knot spline graduation should be used with caution and variable-knot spline graduation, in the form that employs McCutcheon's t-statistic, should not be used.

KEYWORDS
Mortality; graduation; splines; free-knot spline; variable-knot spline


THE MANAGEMENT OF RISK
BY BURIAL SOCIETIES IN SOUTH AFRICA
By RJ Thomson & DB Posel

ABSTRACT
This paper explores the ways in which burial societies mitigate the risks associated with funerals that would otherwise devolve on the members of those societies, and on their families. It considers members' perceptions of the risks faced by the burial societies themselves. It explores the ways in which burial societies develop community and establish trust. It investigates the procedures that have been developed by burial societies, on the basis of the trust so established, for the management of their risks. Finally, it considers problems relating to the insurance of mortality risks in the burial society movement.

KEYWORDS
Burial societies; mutual assistance schemes; funeral insurance; assistance business; social capital;
risk management


INTERPOLATING THE SOUTH AFRICAN YIELD CURVE USING PRINCIPAL-COMPONENTS ANALYSIS: A DESCRIPTIVE APPROACH
By AJ Maitland

ABSTRACT
A principal-components analysis of the South African yield curve suggests that two factors explain most of the variability in both yields and changes in yields. This result is used to select which two interest rates to model and, given a model for these rates, how to use them to reproduce the entire curve. The objective of this paper is a methodology for interpolating the South African yield curve given a restricted number of yields on that curve, while at the same time minimising the number of yields from which to estimate the remainder of the curve. The interpolated curve can then be used for the purposes of discounting nominal future cash flows. Given values for the selected yields, this methodology provides the best fit to the remainder of the curve in the sense that it minimises the expected root-mean-squared error of the residuals. The paper does not provide a model for the evolution of the yield curve.

KEYWORDS
Principal components; par yield curve; descriptive yield-curve models; interpolation; South Africa