The paper is in the nature of a summary of the authors' book “Surplus in British Life Assurance—Actuarial Control over its Emergence and Distribution during 200 Years”. Copies may be purchased direct from the Institute of Actuaries (price 17s. 6d.). Members and Students of the Faculty may obtain a copy for personal use at the reduced price of 11s. post free. It begins with a survey of the principal factors that have influenced the development of theory and practice in regard to surplus throughout the years. It describes the manner in which surplus first arose in scientific life assurance, and traces how this and other historical developments have had an important effect both in the early days and later as a valid standard of equity was gradually evolved. At the same time the influence of long-dated contracts and of the expectations of the public has been a stabilising factor in spite of rapid changes in the economic and social scene.

The characteristics of the nineteenth-century image of equity are described, and the history of the twentieth century in regard to surplus is seen as one of attempts to preserve that image through sharp and contrasting vicissitudes. This idea is explored in some detail for both ordinary and industrial life business.

The problems of the present day are reviewed one by one and the paper touches on such matters as economic inflation, the public demand for pension schemes, the introduction of computers and data-processing devices and the prospect of Britain joining the Common Market. Against this background, various modern concepts of equity are contrasted and brief reference is made to matching, immunisation and gearing. Equity in with-profit pension schemes and systems of variable policies are also considered.

This general survey leads the authors in the end to ask some critical questions about the performance of the profession throughout its history. These questions relate to the success or otherwise of actuaries in foreseeing the future, in attaining equity and in progressing with the times. The authors attempt to answer them and are able to end on a cheerful note as regards past achievements and to express great hopes for the future, which may well bring a new era for the profession.

The paper is divided into five sections. The first deals with the historical aspect of mortgage lending and the reasons which, over some 200 years, have modified the percentage of life funds applied in this way.

The second section considers the place of this type of investment in the modern portfolio—particularly in the light of changing ideas on the relation of assets to liabilities.

In the third section, the importance of the selection of suitable loans is stressed, and the general principles which should govern this discussed.

The fourth section details certain classes of security and the factors affecting transactions in each class.

In the concluding part, the author deals with the essentials of the mortgage contract.

May I first say how eager I was to accept this invitation ? Secondly I should like to say that I followed my father into this trade and, in those days—the 1930's—there were, to my knowledge, only three roads open to mathematicians. When I discussed this matter with my father he said, “You could go into the Civil Service, but you will find it very difficult because you have to write what you say and you say far too much.” “The second thing you can do,” he said, “is to be an actuary, but you will have to be good.” I am very happy to be a schoolmaster. I may say at this stage that I think there is a terrible waste in this room. Looking round, I see enormous headmaster possibilities in you all. You have the tremendously exciting look !

Two centuries ago, a distinguished son of Scotland made his “Inquiry into the Nature and Cause of the Wealth of Nations”, there bringing together important business interests of actuaries and economists, and so providing justification for addressing you this evening. “The only trades”, wrote Adam Smith, “which it seems possible for a joint stock company to carry on successfully, without an exclusive privilege, are those of which all operations are capable of being reduced to … a routine. … Of this kind is, first, the banking trade; secondly, the trade of insurance.” As we all know, actuaries are a mainstay of insurance undertakings and economists are to be found in the employ of the banks; both, that is, are engaged with companies that are closely involved in movements in the level of interest rates, an involvement where, despite the views of Scotland's revered father of economists, few operations can be “reduced to a routine”!

The paper is largely concerned with discussing what is a suitable valuation basis for deciding the rate of bonus an office should declare if it wishes to maintain this rate of bonus in the future as long as conditions remain reasonably stable.

Because of recent developments, such as the substantial proportion of the assets now held in ordinary shares, the reverse yield gap, the present historically high rate of interest and the growth of immediate annuity and other single premium business, a net premium valuation in conjunction with assets at balance sheet values gives an inadequate view of the position of an office. With the advent of electronic computers a more realistic and comprehensive view is now possible, and the paper advocates a valuation of the liabilities on a modified bonus reserve basis with rates of interest and bonus the same as those implicit in the current premium rates, and a valuation of the assets at a notional rate of interest equal to the rate used in the valuation of the liabilities. The various problems arising in the valuation of assets, and especially of ordinary shares, at a notional rate of interest are discussed, and also the adjustments necessary if the assets and liabilities are not fully matched.

The final decision on the rate of bonus to be declared must in the end be a matter of judgment, as it depends on many factors which cannot be accurately forecast, such as the future course of the rate of interest, the amount of new business and the rates of premium charged. Nevertheless, it is now possible to make this decision in the light of a very much fuller analysis of the position than has probably been made in the past.

The paper is concerned mainly with the incidence of estate duty on life assurances and annuities under sub-sections 2 (1) (c) and 2 (1) (d) of the Finance Act 1894. The effect of changes in the law introduced by section 34 of the Finance Act 1959 are examined by reference to two trust policies effected under the Married Women's Property Acts, one a policy for the absolute benefit of the wife of the life assured and the other a policy also for the benefit of the wife but with the trust falling should she predecease her husband. Where the assessment falls under sub-section 2 (1) (c) the treatment of life policies now follows the same lines as gifts of other types of property and the requirements to obtain limitation or exemption from duty are considered in detail.

The paper goes on to review the incidence of estate duty on joint life and last survivor annuities according to the manner in which the contract is written.

Finally some examples are given of the effect on estate duty of dealings with policies by beneficiaries in terms of section 34 of the Finance Act 1959.