This paper focusses on some practical issues that can arise when developing methodologies for calculating benchmark figures for extreme market events, particularly in the context of the Financial Services Authority's ICAS regime. The paper limits discussion to equity and interest rate risks. Whilst not intended to constitute formal guidance, it is hoped that the material contained within the paper will be useful to practitioners. The paper acknowledges the role of prior beliefs in the choice of data to be used for modelling and its influence upon the ensuing results.

This paper shows how the powerful and flexible tool of stochastic modelling can be applied to a range of business decisions extending far beyond the asset allocation solutions that are common to many asset/liability modelling studies. The example used to demonstrate these techniques is a general insurance case study, but similar principles can be extended to many different business situations. At each stage of the analysis we consider the implications of modern financial theory on the management decision process together with a practical perspective on observed behaviour in the real world. Opportunities are taken to suggest directions in which further research may be of benefit to the actuarial profession.

In the following discussion, whenever reference is made to ‘the paper’, this is the paper Anderson et al. (2007), which is the full paper produced by the General Insurance Premium Rating Working Party (GRIP), and which is being discussed here. The full reference on how to access the paper is given at the end of the Summary Paper, which appears immediately before this discussion.

The Nested Binomial Model presented in this paper is a new approach to modelling mortality and survival in humans and other species that seeks to reconcile individual life course risk trajectories and those population mortality patterns that arise from inter-individual heterogeneity. In describing individual trajectories it partitions mortality risk into two main elements: ‘redundancy’ and ‘interactive risk'. Interactive risk is volatile, increasing or decreasing with time and circumstance, while redundancy is a quantity which declines in a linear and largely invariable fashion throughout life. Although a biological correlate for redundancy is not identified, this assumption allows strikingly realistic modelling of mortality and survival curves, late-life mortality deceleration, Strehler-Mildvan correlation, mortality plateaux and slowing of mortality. Simple assumptions with regard to heterogeneity of parameters within the model allow close approximation to the entire human mortality curve, and provide a rationale for observed and otherwise paradoxical population mortality phenomena. As such, it fulfils biodemographic criteria for a comprehensive theory of ageing. Future challenges are to reconcile its theoretical structure with empirical findings in the biology of ageing and to render it in a form that can become a usable actuarial tool.

The Presidential Address gives a broad overview of the development of the actuarial profession's role in its principle areas of activity. Actuaries play important roles in life insurance and pensions, but there are some major new challenges facing the profession in these areas. General insurance has been slow to develop, but is now likely to be the fastest growing part of the profession with a steadily expanding role. Finance and investment also offer major fields where actuaries could be more influential. With continuing growth expected in the number of qualified actuaries, it will also be important to move into wider fields. The new President challenges the profession to give proper priority to the public interest and to ensure that actuaries are worthy of the trust which is placed in them.

This paper addresses the process of estimating loss reserves for a company or syndicate writing in the London Market. Particular emphasis is placed on insurers maximising the value of the process, and ensuring that the process is not simply a series of mathematical calculations. The use of sophisticated mathematical techniques should not distract from the importance of understanding the business and ensuring that data are correct. Sophisticated mathematical techniques can give rise to misleading impressions of confidence and accuracy to estimates, which are often subject to considerable uncertainty. The principles (rather than the detailed techniques) are illustrated by a case study based on a hypothetical London Market writer. Many of these principles are relevant to other markets.

The modelling of extreme events is becoming of increased importance to actuaries. This paper outlines the various theories. It outlines the consistent theory underlying many of the differing approaches and gives examples of the analysis of models. A review of non-standard extreme events is given, and issues of public policy are outlined.