The approaches to liability valuation, assessment of prudential capital and measurement of profit for life offices are undergoing radical change. A common thread runs through all of these proposed changes ö each change represents a move away from traditional actuarial approaches towards a more economically coherent, market-consistent approach. These changes should encourage a general improvement in the life industry's risk management processes. However, they will come at a cost. The measurement of the economic risks generated by the complex guarantees written by life offices is far more difficult than applying the latest resilience test equity fall. This will require a step change in the sophistication of life offices' risk and capital measurement and management know-how. The measurement of value, risk and capital will soon demand the application of`stochastic' modelling tools. In this paper, we explore some of the issues raised by the application of these approaches to the valuation and risk management of with-profits business.

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.

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