Equitable wins right to sue directors

It would be a very hard case to make. To prove negligence you have to show that people failed to do something they could reasonably have been expected to do. If essentially everyone in that position has failed to do it the starting point is going to be that it wasn't reasonable to expect it. (It would also be even more vindictive than suing the directors, given that the actuaries' assets are probably negligible.)

You could also consider a somewhat similar question. Actuaries make assumptions about life expectancies. It's possible that there could be a medical discovery which would allow essentially everyone to live to be 130, and that would blow a hole in all insurers (and all final salary pensions) in a similar way. Are actuaries being negligent in not taking account of that possibility?

Lack of clarity in my post. Originally I suggested that a non-execs might be culpable if they had known that no legal advice had been taken on this important point and not acted (e.g., requesting/instructing the chief-exec to take legal advice).

It is a technical device to get round the guarantee (which failed). I'm sure it wasn't a loophole with respect to non-guaranteed policies.

I thought it was more general - if you promise something to a consumer then no amount of small print/technical detail can get you out of honouring that promise. I may have misunderstood.

Thom

"Stephen Burke" wrote

That's not the same thing at all.

You said that Equitable did not allow for the value of the *known* guarantees until too late. Your example above is of *unkown* future factors.

I was suggesting that, as the Equitable had written their policies with the guarantees, and therefore knew that the guarantees existed, then they should have allowed for these whenever performing an (annual) valuation.

Of course, the "medical breakthrough" you suggested would actually mean that life assurance policies generally paid out much later, therefore would

*help* insurers. So the effect on the insurer of this type of thing would depend on the proportions of "assurance-type" policies on the books of the insurer, compared to "annuity-type" policies on their books.

"Stephen Burke" wrote

OK, let's see. Firstly, an Appointed Actuary needs to apply Guidance Note

1, and even needs to certify that GN1 has been complied with (see section 4.1 below) whenever an "annual valuation" is performed & reported on.

Secondly, GN1 states (section 4.2) that "The Appointed Actuary must have regard to all aspects likely to affect the financial position", and goes on to list a number of points which should be considered, including "GUARANTEES"!!

So, I would say that allowing for the guarantees within the valuation *is* "something they could reasonably have been expected to do."

"Stephen Burke" wrote

I do not agree - every Appointed Actuary *should* be complying with GN1, so it is inherently "reasonable" to expect this. The mere fact that other actuaries have not, cannot be an excuse!

Sorry, forgot to add references first time:

"Tim" wrote

Selected snippets from GN1 applicable at end 1998 / from 1999:

GN1 V5.1

4 The Duties of the Appointed Actuary

4.1 The statutory responsibility of the Appointed Actuary as required under Section 18 of the Insurance Companies Act 1982 is to carry out, from time to time, and to report on an investigation into the financial condition of the company, including a valuation of its long-term liabilities. The Appointed Actuary must certify that, inter alia, GN1 and GN8 have been complied with. ...

4.2 The Appointed Actuary must have regard to all aspects likely to affect the financial position of the company in respect of its long-term business including the possible effect of any contingent liabilities should they crystallise. Although the following list is not exhaustive the financial position is particularly affected by: (a) ... (b) the nature of the contracts in force and currently being sold, with particular reference to all options and guarantees; (c) ...

The guarantee was a promise about the annuity rate you could get, there was never any guarantee about the amount of money you would get to buy the annuity, other than that it would be at least at the level of the accrued annual bonuses. The terminal bonus is always at the discretion of the insurer. People with GARs have not necessarily come out of this much better off, because the company was just forced to cut bonuses for everyone which in turn made it impossible to keep writing new business, where the premiums might otherwise have been being invested now with the market (probably) at a low point. Instead the fund is pretty much in cash, no new money is coming in and it has no chance of recovery; even people with GARs may well be better off transferring unless they are pretty close to maturity.

I have heard that the terminal bonus was annularised and added to the guarenteed amount every year and that this is one of the reasons that they couldn't meet their liabilities.

I'd really like to know if this is correct.

tim

Almost certainly not. How was the terminal bonus made into a doughnut?

No, it's not. Equitable have an annual guaranteed bonus (some policies had a guaranteed annual 3.5% bonus. others have whatever they're paying any particular year). They also have a terminal bonus which isn't guaranteed.

But not necessarily the end point.

(uk.legal added)

very funny, when are you going to correct the misspelling of your name?

tim

>

ta.

out of interest, what sort of figures have they been paying for the last

20 years?

tim

What's wrong with it?

I think you know.......

tim

>

Too much, apparently :-)

To be serious, I don't know. Perhaps a look at their website might help?

No, actually. To my knowledge there's nothing wrong with the spelling. It's not my real name, of course, nor is it that of a certain well known celebrity, but it's a perfectly good name.

Would you rather I signed myself Laura Norder?

The reason the guarantees cost so much now is that annuity rates fell sharply in the 90s, and people didn't forsee that; at the rates available when the policies were written the guarantees were worth pretty much nothing. Part of the reason for that fall *is* an increase in lifespans, and there is no way to hedge that (unlike the fall in interest rates which is the other part). All actuaries can do is guess how life expectancies will change, but what do you do if the guess turns out to be substantially wrong?

With hindsight they should, but to show negligence you have to show that they should have realised it at the time. They were left out originally because the value was negligible, but that meant that no-one noticed when it started to become non-negligible.

In some ways it reminds me of this:

which is well worth reading for students of human error.

I'm pretty sure that that would come nowhere near balancing the loss, and it certainly wouldn't help pension funds.

I suspect you're thinking of unitised with-profits policies, I don't think it has much to do with the general problems.

"Stephen Burke" wrote

Fair enough. So, the reserve in the first valuation for guarantees would have been negligible. However, then - year on year - the reserve set in the annual valuation should have been increased higher and higher, as the experience unfolded and different valuation assumptions were introduced to value the guarantees that had been sold. In turn, the bonuses declared would also have reduced to compensate - in a more realistic fashion than ignoring guarantees from the annual valuations.

If this had been done properly, with a small step each year, then a huge leap would not have been required later!

"Stephen Burke" wrote

Simple - adjust your valuation assumptions each year. No excuse.

"Stephen Burke" wrote

Why do you insist on not reading my earlier posts? (1) Appointed Actuaries *have to* comply with GN1. (2) GN1 states that guarantees *should be* considered when performing the annual valuation. (3) Appointed Actuaries need to confirm that they have complied with GN1 when they write the annual valuation report.

What more is necessary to "show that they should have realised it"??