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WHAT ACTUARIES DO NOT LEARN ABOUT LIFE by ps94506

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									           WHAT ACTUARIES MIGHT LEARN ABOUT LIFE
                                                                                        Anthony Asher
                                                                       University of the Witwatersrand
                                                                                    September 3, 2001

Abstract

The paper outlines the main issues that the author believes are inadequately covered in the current
life assurance courses 302 and 402. Some are covered in the Product Development course taught
as part of the honours year at the University of the Witwatersrand. This course covers aspects of
management and economic theory that could be added to the existing actuarial curriculum. These
are, in particular, the marketing concept, the financial life cycle, macro pricing and public
relations. It is also suggested that the actuarial courses fail in their treatment of the nature of
modelling and profit, and in their use of market prices. Their failure here leads to incoherent
assertions, that make it difficult for our best students to respect the examinations, and is
undermining the reputation of the profession.



Introduction

Subjects 302 and 402 are the final elements of an actuarial education intended to provide the theory
to function as a professional in the life assurance industry. It is suggested that the courses fail to
integrate a number of insights from economics and management that are of particular importance to
the actuarial management of life offices, and of general usefulness in life.

The postgraduate product development course has been taught for the last 6 years at the University
of the Witwatersrand. The first two sections of this paper describe elements of the course and the
intention behind their inclusion in the actuarial curriculum. The first appendix describes the course
program; the second a report of a survey of graduates who had taken the course as to which
elements they have found useful.

The life assurance core reading is also frequently criticised for failing to reconcile actuarial practice
with modern financial economics. This criticism is often accompanied with considerable agitation,
either by students who find the core reading impenetrable, or by actuaries who believe that their
qualification is significantly devalued by the archaic finals. The third section looks at the core
reading’s failure in this area, making suggestions as to what changes could be made.

The fourth section discusses how the core reading might treat mathematical modelling in a more
helpful manner.

The theoretical framework behind these comments and suggestions is being applied to the
reworking of the core reading for a South African 402 examination. It is also hoped that this paper
will provide some explanation for the changes that are being suggested.




                                                    1
This paper is a fuller version of one given at the Actuarial Teachers’ Conference at LSE in July
2001.

1      MARKETING THEORY

1.1    The Marketing Concept
The "marketing concept" insists that the business of a firm is to provide for the needs of its clients
(at a profit to itself). It can be contrasted with a sales or product orientation, which is said to
confuse means and ends. In the classic and popular exposition of the concept, Levitt (1975) shows
the dangers of failing to appreciate this contrast. He suggests that the American railroads lost their
dominant position in the transport industry by failing to see that their business was “transport”, and
not “the running of railways”. Adopting the marketing concept makes it more likely that existing
product and sales methods will be abandoned, and innovations introduced, as customer needs
change.

Drucker, (1977), emphasises that discovering one's "business" requires protracted intellectual
effort. This is true of firms, is true of professions and their representative organisations, and of
individuals. For the latter, he suggests, in Drucker (1990), that asking the question: "what do I want
to be remembered for?" is the beginning of adulthood.

The process of management includes the three functions of planning, organizing and controlling.
Planning requires the setting of objectives. The marketing concept, or Drucker's question: "what is
our business?" is an essential part of doing so in a rational manner.

1.2    What is our Business?
The marketing concept therefore requires three fundamental questions to be asked, continually:
   What is the business of the life assurance industry?
   What is the business of the actuarial profession?
   What is my business, or for what do I want to be remembered?
The answers must include how we meet the needs of others. We need to work at developing an
understanding of the real and perceived needs of these “customers”, and to examine our own
capacity to meet them.

1.3    The Financial Life Cycle
The core reading includes some consideration of the needs of policyholders by reference to utility
theory in subject 107 particularly, and to particular needs - in the second unit of both subjects 302
and 402.

If the marketing concept is valid, then understanding the needs of consumers is a fundamental
question that requires a more coherent framework. The framework can be provided by the concept
of the "financial life cycle". The idea is spelt out in Modigliani's (1986) Nobel Prize lecture,



                                                   2
although may not appear particularly novel. The elements of the cycle are not all obvious, but have
been intensively investigated in academic economics literature.

      The financial life cycle can be said to start on leaving full-time education.

      Income, for educated men, rises with age until the late forties (later in organizations with
       promotions based on seniority), and then declines slowly until retirement. Non-skilled men
       peak at around 30. Single women's salaries largely follow men's salary patterns.

      Married women's income drops significantly while their children are young, and they
       seldom catch up.

      The process has been explained by "human capital theory", of which Gary Becker is the
       originator, and for which he received a Nobel Prize.

      Expenses have a different trajectory. Setting up house - and buying cars for some - is
       expensive. This is aggravated if children arrive early. The cost of children generally rises
       with age and drops when they leave home. Medical costs are currently more or less
       proportional to the number of people in the household until retirement, after which they rise
       rapidly. Other expenses reduce after retirement, more so as health deteriorates.

Savings - in which life assurers play a key role - depend on the interaction of the two.

      There is evidence that many people are "liquidity constrained" when they start work. This
       means that their consumption is constrained by their inability to borrow enough to live at a
       level that is likely to be justified by their future earning power. Fears of moral hazards and
       lack of insurance of other risks contribute to the reluctance of lenders.

      Paying off this early debt is usually prudent. Saving for retirement can then begin.
       Modelling of the process can show that it might be reasonable to start this at 40 or even
       later.

      Retirement means living off investment income and capital. The failure of most people to
       buy annuities is a puzzle often debated. One possibility is that the "bequest motive" is
       widespread.

      The determinants of saving constitute a major debate in economics. Considerable research
       has been published on the effects of increases to income, self-employment, tax incentives,
       income volatility etc.

      The volatility of income, expenses and savings is a critical element for life assurers. Much
       intriguing data has come from the Panel Study on Income Dynamics started in 1970 by the
       University of Michigan. Duncan (1988) reports on some of the findings. Changes to family
       composition (particularly leaving home and divorce) prove to be the major contributors to
       financial instability. Also of interest is the spread and volatility of income progression
       especially in the light of changes to inflation and other economic variables. (The author is
       raising funds for a South African study equivalent.)


                                                  3
One of the principal failings of the actuarial education system is that it does not create any
awareness of the massive academic literature on subjects closely related to actuarial work. The life
cycle and income dynamics literature are important elements of the gaps.

1.4    Distribution
Another insight of marketing theory not included in the core reading is the importance of
distribution. This subject is given prominence in marketing textbooks. It also forms the major part
of Gupta and Westall (1993), which is included in the recommended reading for subject 402. Iqbal
(1988) suggests that successful companies will regard the marketing channels as a separate market
with its own needs. The designing of systems of remuneration and their incorporation into premium
rates certainly forms part of the work of the actuary.

1.5    Marketing in subjects 302 and 402
Unit 8 of subject 302 discusses the factors that must be considered in product design.

"Marketability" is mentioned as one such factor, but in terms that are bound to create cynicism.

"The benefits offered need to be attractive to the market in which the contracts will be sold.
Innovative design features may make a contract more attractive as may the additions of options and
guarantees. The charging structure under a unitized contract needs to be attractive to the potential
market and consideration needs to be given to whether the charges should be guaranteed. More
generally it needs to be considered what guarantees should be given with regard to premium rates."

The refrain of "need to be attractive" suggests superficiality. The mention of options and guarantees
that most actuaries would regard as of little value, and of unitised charging structures that are
widely regarded as deceptive, suggest the same. Section 3.1 of unit 6 refers to the need to
differentiate the product of those of competing companies, which again is superficial.

The effects of this are ameliorated in unit 9 of subject 402, which lists a number of real "marketing"
objectives such as simplicity and flexibility. No framework is available to address the questions.

Pressures to design contracts to appear (deceptively) innovative and inexpensive do form part of the
day-to-day life of an actuary. Given the deceptive nature of the demands, it would not be surprising
to find the facts given to support them were similarly misleading. The real demands of potential
policyholders can however be quite different. The Product Development course attempts to offer
alternatives. It is hoped that courses 302 and 402 can be amended to do so.

http://www.usspeedpost.com/financial

1.6    Public Relations
One element of Product Development that might be considered in the Communications paper is that
of public relations. An explicit aim of subject 201 is that it is intended to test the ability to
communicate with lay people familiar with the financial sections of the press. Implicit, it would
appear, is that such a communication could be placed in such sections.

                                                  4
The basics of the theory of communication are that it includes sender, message and recipient, and
that there are translation problems at each interface. A number of elements could fruitfully be
added to the core reading.

       The sender. The sender's position and interests form part of the message. No one is
        particularly persuasive when defending their own interests; they should at least be disclosed.

       The message. This depends partly on the medium. It would be helpful to include some
        information as to how newspapers choose and edit material.

       The recipient. Subject 201 appears to be focused on answer to technical questions. There is
        another type of communication, such as press releases or product presentations, where more
        effort is required to get the attention of the recipient.



2       PRICING FOR PROFIT

2.1     The Nature of Profit
Profit is a controversial subject. Asher (1998) suggests that it can helpfully be divided into four
elements:

       An interest portion allows for the deferment of the use of the money. This would be the risk
        free rate.

       A risk premium consists of one part to allow for expected losses and another to reimburse
        providers for uncertainty. Under modern financial theory, the additional amount tends to be
        proportional to the correlation of the risk with the “market" return on all potential
        investments.

       Entrepreneurial (in the sense of the creative and not risk taking) activity will be rewarded if
        customers are prepared to pay more for quality or innovation.

       A monopoly rent can be extracted from customers if they are somehow prevented from
        obtaining better value elsewhere. Rents can be regarded as ethically unacceptable, and
        become the target of government intervention.

Firms in competitive markets are expected to attempt to maximise profit. This is achieved by
investing in all possible projects where the expected return on capital exceeds the cost of capital.

The maximisation of profit is achieved when marginal revenue is equal to marginal cost (including
the risk adjusted cost of capital).




                                                   5
2.2    Profit in 302 and 402
The courses have a different view of profit. In many cases, there appears to be a fear of criticising
common practice that might prove embarrassing to some members of the profession. This however
creates confusion and cynicism in students.

Return on capital is described in the first units of 302 and 402 as depending on “other uses of the
company's capital” rather than on the cost of capital (in the market). This is only true if the
company does not want to raise capital. In practice, this is frequently the case because the costs are
too high, or because managers do not want to dilute their control. These are important practical
considerations, which need to be mentioned if students are to be able to reconcile theory and
practice.

While it is conceded in unit 5 of 302, that a company will want to maximise profits, the position
spelt out in units 6 and 9 of 302 is that a company sets a required return or criterion. In unit 8 of
302, profitability is described in terms of the need to cover benefits and expenses.

This approach is criticised by Chalke (1991). A required return somewhat in excess of the cost of
capital can be justified as a rule of thumb, but (again) this should be spelt out.

Setting a profit target can also be regarded as placing a ceiling on entrepreneurial profits, or
monopoly rents, at a level acceptable to the market and to regulators. It might be argued that there
is significant competition, and therefore no monopoly rents, in the life assurance industry in either
the UK or SA. The recent Cruikshank's (2000) review of UK banks found that significant
competition problems in all the markets investigated. The Myners (2001) report on the institutional
investment market found similar problems. Both are sufficiently close in structure to the insurance
markets to suggest the same might apply there. In particular, actuaries have a monopoly on pricing.
To be provocative, the current, actuarially recommended, approach to price determination (which
suggests that profit targets should significantly exceed the cost of capital) might be found to be an
illegal (if unconscious) price fixing cartel.

If the market is competitive, then setting a profit target that is too high means turning down
profitable business opportunities.

The impression that might be given from the core reading is that profit should not be discussed, and
that making it is ethically questionable. This is likely to create confusion about the nature of both
profits and of ethics. Drucker's (1977) view is that the social function of business is to "create a
customer" (by meeting a need) and that profits are a means to that end. This seems to be an
expression of the golden rule: "do to others what you would want them to do to you." In the long
run, ceteris parabis, ethical business is good business. In the short run, various forms of deceit may
be lucrative. It is contended that a critical part of passing on professional ethics is that students do
need training in the concepts and behaviour that allow them to resist short-term temptations.

2.3    The product life cycle
The product life cycle can give a deeper understanding of the nature of, ethically acceptable,
entrepreneurial profit.


                                                   6
The cycle can be show in two diagrams. The first represents the market penetration and profitability
of new products.

                             THE PRODUCT LIFE CYCLE


                                TURNOVER       PROFIT




                                      TIME




The second is more colourful and is used to indicate which products need to be culled and which
will repay investment.




                         Question
          G                                                 Stars
                         Marks
          R
          O
          W
          T
          H


                         Dogs                           Cash cows




                                   PROFITABILITY

                                                        7
The two are reconciled in that the product life cycle shows the progression of successful "question
marks" through "stars" to "cash cows".

The product life cycle illustrates that in the context of dynamic and competitive markets, it is
entirely acceptable (and indeed incumbent on companies) to maximise profits.

3      MARKET VALUES
The debate between market and alternative valuation of assets and liabilities has a long history
considerably enlivened recently by debates between traditional actuarial methodologies and
financial economics. Exley, Mehta and Smith can be relied on to attack on the older ways - as for
instance, in their 1997 paper on defined benefit funds. Hare et al (2000) are the most recent to
apply the questions to life assurance as they show how the notional use of put options can be used
to determine a market price of the guarantees in with-profit contracts.

Probably the major failure of the core reading as it stands is that it largely fails to acknowledge the
debate, let alone offer any of insights that financial economics can offer. Hare et al are included in
the recommended reading for subject 402, but as examinations are based on the core reading,
students are not being asked to integrate the insights of financial economics into their thinking
about life insurance. Little wonder students who have studied financial economics find them
frustrating and irrelevant.

3.1    Surrender values
Unit 10 of 402, which deals with policy alterations and surrenders, fails to refer to the market value
of surrendered contract, or to the implicit put options that may be present. The environment
envisaged is again a monopolistic one in which profit can be determined by the company.

Unit 10 of 302 does refer to the auction value of a surrendered policy, but only on terms that
suggest that the market value it represents may not be reasonable. While limited markets may be far
from perfect, they do provide a useful theoretical framework that cannot merely be dismissed as
impractical.

If monopoly profits are indeed unethical, the fair surrender value is that determined in a fair
auction.

3.2    Profit reporting
Profit reporting is discussed in units 4 and 12 of subject 402. It is also linked to the question of the
risk discount rate used in pricing. There is again no mention in these units of the widespread view,
now required by many international accounting standards, that liabilities should be shown at a
“fair” or market value. Fair value can perhaps be equated with the realistic or “best estimates”
discussed in the core reading, but this would fail to make provision for the value that the market is

                                                    8
generally thought to place on risk. The most coherent view on the risk premium is that it is related
to the correlation of the particular return with that of the overall investment universe. While the
nature of the relationship, and of the universe, is debatable, this view is difficult to refute.

The theoretical risk discount rate is therefore related to the “beta” of the profits generated by the
life business and the market universe. This may well be greater than one in which case the discount
rate should be greater than that on equities in general. It is however difficult to justify high beta’s
for profits that depend on mortality or lapse rates.

3.3    Surplus Distribution
The idea options could be used to develop a unit-linked analogy to with-profit contracts dates back
to Wilkie (1987). He suggests that the office implicitly purchases put options to provide with-profit
guarantees.

Smoothing can take place without guarantees, and can be regarded as analogous to rolling forward
contracts between premium paying and maturing policyholders. The smoothed price, where the
forwards were spread over n periods, is then be give by the equation below:
                              0
Smoothed price             1/ n P (1  r )
                         t   ( n 1)
                                         t    t
                                                  t




Where Pt is the market price at time t and rt the risk free interest rate. (Some sensible adjustment
would have to be made for dividends.)

This formula would allow for the pricing of surrender values and the adjustments that should
theoretically be made to new business premiums.

Unit 13 of 402, in dealing with surplus distribution, again fails to mention that the market related
approach – although, to be fair, this author has not come across this approach to smoothing in the
literature.

3.4    Mismatching
The idea that life offices should mismatch their liabilities in order to increase profits is particularly
aggravating to those who have adopted the capital irrelevance proposition from financial
economics. This points out that shareholders are able to adjust their exposure to the market risk by
including more, or less, interest bearing stock in their portfolios – and may borrow if they want
gearing. Company managements therefore cannot add value by mismatching and investing more in
equities.

The following paragraph from unit 12 of subject 302 is a red rag to the financial economics bull:

   The existence of free assets in a life assurance company means that it can depart from the matching
   strategies outlined above so as to improve the overall return on its assets and thereby benefit its
   policyholders, through higher bonuses or lower premium rates, and its shareholders (if any), through
   higher dividends.

                                                      9
In practice, both policyholders and shareholders may want a life company to increase their
exposure to the equity market because its cost of borrowing is lower, or because they are liquidity
constrained. This point can be made legitimately, but is not, even though mismatching is mentioned
in units 1, 4, 11, 13 of subject 402.



4       MATHEMATICAL MODELLING
A good deal, if not the essence, of actuarial work requires mathematical modelling. A look through
a small selection from our library shows, however, that this can mean different things to
statisticians, applied mathematicians, engineers and economists. Pemberton (1999) and discussants
show how controversial the philosophical underpinnings can be.

The core reading reflects some of this diversity of opinion, but without much apparent appreciation
of the debate. Unit 6 of 302, for instance, discusses models in life assurance but seems to only have
a model life office in mind.

This subject is critically important to actuarial work, as actuaries have models of different
mathematical complexity in mind whether we are pricing, valuing or otherwise investigating the
finances of a life company. They cover each of:

-   Mortality, disability and other risk rates,
-   Expense allocations,
-   Lapse and surrender rates, and
-   Investment returns.

Of particular concern is that course 302 requires that models “must be valid”, which may feed
actuarial egos but is otherwise confusing. The first unit of subject 103, which provides the fullest
and most useful description of modelling, is more circumspect in requiring that a model should be
valid “for the purpose for which it is put”. “Validity” is however seldom appropriate in its formal
statistical sense.

A more helpful argument might be made on the following lines.

       Mathematical models are attempts to represent reality.

       Actuarial models are constructed to help understand actuarial problems, such as the pricing
        of life products or evaluating the solvency of a life company.

       Their construction depends on making assumptions about reality. The assumptions should
        be justified theoretically, and be tested against experience, in order to ensure their
        reasonability.

       There is seldom enough data to statistically validate actuarial models. Some models are
        "overparameterised". One example is the more complex AIDS model, which requires many
        more parameters than can be accurately estimated. Other actuarial models have too few


                                                  10
        parameters, but are acceptable approximations for practical purposes. The use of a single
        interest rate to model future investment returns provides an example.

       Models represent the past. They must be used tentatively in managing the future. Of
        particular concern is the possibility that new or previously unimportant factors may become
        significant in future.

       Actuaries have, therefore, to exercise "judgement" in determining the structure of their
        models, and in their utilisation.

4.1     Expenses
It is particularly helpful in understanding expense allocations to see that them as an actuarial model.
Actuaries make assumptions that expense drivers can be distinguished into those that are related to
new and renewal business, overheads and marginal costs, premium and sum assured weightings etc.
There will also be a number of significant decisions (such as new computer systems, offices etc)
that affect the outcome.

No company will have enough years of experience to allow for the statistically rigorous testing of
the many parameters that would have to be built into a valid expense model. Actuaries have to be
satisfied with a model that appears to approximately represent reality

Given the uncertainty present, actuaries might be forgiven for pricing products using their best
estimates of costs for the future in the profit testing methodology.

It is suggested, however, that the approach of the core reading to these issues is not sufficiently
coherent. As far as the distinction between direct costs and overheads, unit 16 of 302, reads that:
"In practice, there is not a clear dividing line between the two." It is not clear whether this means
that no line is drawn in practice, or that the line requires judgement. Unit 9 of 402, which deals with
pricing, does have a paragraph on the question, which is also considered in GN22.

This question is explicitly addressed by Chalke (1991), who suggests that they should also
incorporate one of the most basic economic models: pricing should be set when marginal costs
equal revenue. His "macro pricing" approach requires marginal costs to be distinguished from
overheads, and the sales managers to provide the basis for estimating marginal revenue by giving
an indication of the likely sales of different expense and remuneration structures.

While it may not be necessary in practice, future actuaries should be aware of his criticism of the
new tradition of profit tests.

5       OTHER MATTERS
South African students should also be learning about other matters. The product development
course includes South African law and tax that should be included in the South African version of
402 currently being prepared. Another advantage of a South African exam would be that less time
would be spent on net premium reserves, which are clearly of little more than historical interest at
this time.


                                                  11
BIBLIOGRAPHY
Asher A (1998) Effective and Ethical Institutional Investment British Actuarial Journal 20:969-
       1027

Chalke S A (1991) Macro pricing Transactions of the Society of Actuaries XIII 137-230

Core reading (2001) Subjects 302 and 304, Institute and Faculty of Actuaries, Oxford

Cruikshanks D (2000) Bank Review www.bankreview.co.uk

Drucker P F (1977) Management Pan, London

Drucker P F (1990) Managing the Nonprofit Organization: Practices and Principles Harper Collins,
      New York
Duncan G J (1988) The Volatility of Family Income over the Life Course. Life Span and
      Development, 9:317-351
Exley C J, Mehta S J B and Smith A D (1997) The financial theory of defined benefit pension
       schemes, British Actuarial Journal 14:835-966

Gupta A K & Westall G (1993) Distribution of Financial Services Journal of Institute of Actuaries
      475:25-65

Hare D J P, Dickson J A, McDade P A P, Morrison D, Priestly R P and Wilson G J (2000) A
      Market-based approach to Pricing With-Profits Guarantees, British Actuarial Journal
      26:143-196

Iqbal M (1988) Marketing of Retail Financial Services Journal of Institute of Actuaries 461:405-
       494

Levitt T (1975) Marketing Myopia Harvard Business Review, Sept-Oct
Modigliani F (1986) Life Cycle, Individual Thrift and the Wealth of Nations. American Economic
      Review, June 297-313
Myners P (2001) Institutional Investment in the United Kingdom: a Review www.hm-
      treasury.gov.uk/docs/2001/myners_report0602.html

Pemberton J (1999) The Methodology of Actuarial Science British Actuarial Journal 21: 115-195
Wilkie A D (1987) An Option pricing approach to Bonus Policy Journal of the Institute of
       Actuaries 456: 21-77




                                                12
Appendix 1


ACTUARIAL SCIENCE HONOURS: 2000 PRODUCT DEVELOPMENT PROGRAMME

Objective

On completion of the course, the student should understand the financial risks facing individuals
and how insurance and retirement funds assist in managing these risks. They should also be able to
contribute to the design and pricing of insurance policies and retirement fund benefits.

They are expected to put some 7 hours in total a week into the work - including lectures. Projects
and essays are (except where otherwise indicated) due in by Monday 8:00 of the week after the
lecture. Essays should be less than 1500 words. Those handed in late will not be marked.

A double lecture a week will be given by Professor Asher.

Students are required to buy a copy of the Income Tax Act. Other readings will be handed out
before lectures.

10% of the course mark will be given for the spreadsheet. The 8 best marks for essays and projects
(the class presentations counting as one) will count for 40%. The other 50% will come from the
examination to be written in June.

FIRST BLOCK

THE LIFE CYCLE

15th February Reading: The Life Cycle - Modigliani

               Financial Security: Risks and Responsibilities - Asher

       Project: Spreadsheet of life cycle expenses (handed in on 1 April)

        The spreadsheet must give details by year of income and expenses broken down into regular
and irregular spending. It must separately consider at least housing, transport, rates and taxes,
recreation, medical costs and schooling. The accumulation of borrowing and savings must be
shown as must the amounts accumulated inside retirement annuities and retirement funds.

       The outputs required are graphs of income and expenses and of assets and liabilities from
20 through to 90. The format must follow the standards used in Computers for Actuaries.

PRODUCTS AVAILABLE

22nd February Reading: 302 unit 2: Life Assurance products

       302 unit 3: Methods of Distributing Profits



                                                 13
       Income Volatility - Duncan

       Project: Set out a table showing the products offered by the insurance and retirement fund
       industries and the different income security and planning needs of people (by 10th March)

29th February Reading: 304 unit 2: Providers of Pension and other benefits

       304 unit 3: Meeting the needs on interested parties

       Essay: "The advantages and disadvantages of group coverage." (by 10th March)

SELLING

7th March    Reading: Distribution - Gupta & Westall

       Agency systems - Huggins Ch 5

       Essay: "Why are agents and brokers remunerated by commissions?"

PERSISTENCY

14th March, Reading: Persistency and Service - Goodwin Ch 20,21

       Essay: "Are there alternatives to high lapse rates?"

21st March Holiday

SOUTH AFRICAN PERSONAL INCOME TAX

28th March Reading: Personal income tax in SA Any source

       1 - 4 retirement definitions, Income Tax Act

       11(k),(l),(m),(n),(w) Income Tax Act

       2nd schedule, Income Tax Act

       Project: Incorporate personal income tax into spreadsheet

SECOND BLOCK

MARKETING THEORY

4th April Reading from a marketing text book:

       The Marketing Concept

       Market Research

       Customer psychology

                                                 14
     Students will (at random) be asked to make a short presentation on their reading in class.
     Students not present must fax or email (in text format) a short summary of less than one page
     when printed of what they have read.

11th April Reading from a marketing text book:

       Competition and Competitive Strategies

       The Marketing of Services

       As for 4th April

18th April Reading: What is our Business? - Drucker

       Marketing Myopia - Levitt

       Essay: "What is the business of life assurance?"

2nd May Reading: Marketing Financial Services - Iqbal

       Essay: "What would be the important elements of a marketing plan in SA?"

9th May Reading from a marketing text book:

       Product Life Cycles

       Ethics of Marketing

       As for 4th April

        Essay: "The essence of marketing consists is putting the customer first. It is, therefore, a
basically altruistic activity and the conflict with ethical imperatives is greatly exaggerated."

PREMIUM RATING

16th May Reading: 302 Unit 8: Product Design

       302 Unit 9: Setting Assumptions

       303 Unit 9: Rating Bases

       304 Unit 4: Environment ..

       Essay: "What do shareholders want to know about a defined benefit retirement fund?"

EXPENSES

23rd May Reading: Macro Pricing - Chalke



                                                  15
      Essay: "The Difference between Chalke's approach and the conventional approach to
expense loadings."

PUBLIC RELATIONS

30th May Reading: From a marketing textbook

       Project: Collect and criticise two insurance or financial planning articles, then write a press
       release about a newsworthy event of your choice.

Take home examination to count 50% to be handed in on 22 June

REFERENCES
Chalke SA (1991) Macro pricing. Transactions of the Society of Actuaries, XIII 137-230
Drucker PF (1977) Management - Ch s 4 & 5 Pan, London
Duncan G J (1988) The Volatility of Family Income Over the Life Course. Life Span and
      Development, 9:317-351
Goodwin DW (1989) Life and Health Insurance Marketing LOMA Life Management Institute
Gupta AK & Westall G (1992) Distribution of Financial Services Journal of Institute of Actuaries
      120:25-65
Huggins K (1986) Operations of Life and Health Insurance Companies. LOMA Life Management
      Institute
Iqbal M (1988) Marketing of Retail Financial Services. Journal of Institute of Actuaries 461:405-
      494
Levitt T (1975) Marketing Myopia Harvard Business Review Sept-Oct
Modigliani F (1986) Life Cycle, Individual Thrift and the Wealth of Nations. American Economic
      Review, June 297-313




                                                  16
Appendix 2



SURVEY OF PRODUCT DEVELOPMENT GRADUATES




Pre '98 graduates emailed                                33

Useful replies                                           10



Asked to rank:                          Essential - 1

                                      Very useful - 2

                                     Fairly useful - 3

                            Of some interest only - 4

                                   Have forgotten - 5



Number of essential/very useful:



The marketing concept                                     7

What is our business?                                     7

The financial lifecycle                                   7

Distribution channels                                     2

Theory of Profit (offered once)                           2

Product life cycle                                        2

Macro pricing                                             3

Public Relations                                          1

Exposure to academic papers                               6


                                                  17
Lots of written work        6




                       18

								
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