It is, indeed, an honour and pleasure to write a guest editorial for British Actuarial Journal. The guidelines stated that my topic could be ‘education’, so, as a lifelong educator (whether any students became educated is another matter), I have chosen that topic as my focus.

This house believes that there should be a statutory minimum to cash equivalent transfer values payable from defined benefit pension schemes.

The corporate landscape of United Kingdom financial services has changed considerably in the last fifteen years with virtually all the main players now shareholder-owned. The dominance of shareholder ownership may not last for ever and the pendulum could swing back to alternate structures. Should the actuarial profession look ahead and consider what, if anything, could be done to encourage diversity? This paper considers some of the issues involved and raises some questions for the profession to discuss.

A project to develop an Accounting Standard for Insurance, with the aim of enhancing understandability, relevance, reliability and comparability of general purpose financial reporting for insurance worldwide, is being progressed by the International Accounting Standards Board. The basis of the proposals is that assets and liabilities be shown at fair values (market values for quoted instruments). This paper, prepared by a Working Party established by the Life Board of the United Kingdom actuarial profession, summarises and comments upon a number of the principal features of the proposals, as they have emerged up to September 2001. The paper goes on to consider how a system of reporting for prudential regulatory purposes might be built upon a fair value general reporting base, summarising the thinking of a number of other bodies, proposing certain principles and suggesting lines of development. The appendices to the paper discuss a number of issues in further depth and present some illustrative results of some investigations into applying fair value methods in practice. The emphasis of the paper is on reporting for life assurance business, although many of the principles apply equally to general insurance.

This paper considers a wide range of stochastic reserving models for use in general insurance, beginning with stochastic models which reproduce the traditional chain-ladder reserve estimates. The models are extended to consider parametric curves and smoothing models for the shape of the development run-off, which allow extrapolation for the estimation of tail factors. The Bornhuetter-Ferguson technique is also considered, within a Bayesian framework, which allows expert opinion to be used to provide prior estimates of ultimate claims. The primary advantage of stochastic reserving models is the availability of measures of precision of reserve estimates, and in this respect, attention is focused on the root mean squared error of prediction (prediction error). Of greater interest is a full predictive distribution of possible reserve outcomes, and different methods of obtaining that distribution are described. The techniques are illustrated with examples throughout, and the wider issues discussed, in particular, the concept of a ‘best estimate’; reporting the variability of claims reserves; and use in dynamic financial analysis models.

This paper is divided into three parts. Taken together, the three parts intend to provide the reader with an overview of the first 101 years of financial economics, with particular attention on those developments that are of special interest to actuaries. In Section 1, S.F. Whelan attempts to capture the flavour of the subject and, in particular, to give an overview or road map of this discipline, highlighting actuarial input. In Section 2, D.C. Bowie gives a concise and self-contained overview of the Modigliani and Miller insights (or MM Theorems, as they are often known). In Section 3, A.J. Hibbert considers the novel option pricing method proposed by Black, Merton, and Scholes. These two insights are highlights of this newscience, and, in both cases, contradict our intuition.

T.S. Elliot, the mathematically trained poet, described the darkness that intercedes between the idea and the action as the ‘shadow’. There is a shadow to be considered between these insights and their application. The demonstration of the results requires, of course, some idealised circumstances, and therefore the extent and degree of their applicability to the non- idealised problems encountered by actuaries requires some delicate considerations. An attempt is made to outline these further considerations.

In the light of recent judgments by the courts, there are areas where the interpretation of Policyholders' Reasonable Expectations (PRE) by actuaries may need to be reassessed. Furthermore, the discussion paper on the exercise of discretion expected from the Financial Services Authority (FSA), as part of its review of with-profits business, is likely to raise wider issues.

The time is therefore right for actuaries to have the opportunity to debate how PRE should be interpreted in the future. This paper is presented as a catalyst to enable that debate to happen, and the authors have set out their own views on some of the key issues.

The paper discusses certain areas where the interpretation of PRE adopted by Appointed Actuaries in the past may no longer be consistent with recent court judgments. Following that discussion, the actuarial profession should attempt to establish a revised interpretation of PRE, in order to provide greater assistance to Appointed Actuaries currently advising on with-profits business.

The paper ‘A Primer in Financial Economics’, which is printed immediately before this discussion, on pages 27-65, was written by Mr S. F. Whelan, Dr D. C. Bowie and Mr A. J. Hibbert after the discussion took place. It incorporates what they said at the beginning of the discussion, after the introduction by the President of the Faculty of Actuaries, and replaces those remarks.