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AUGUST 2 0 0 3






t its summer meeting in New York, the NAIC adopted a proposal of its NAIC/AICPA Working Group to revise certain guidance in the Model Regulation Requiring Annual Audited Financial Reports. The language in Section 9, “Scope of Examination and Report of Independent Certified Public Accountants,” was amended to include the following paragraph on the design of data audits:

The insurer shall also require that the independent certified public accountant subject the data used by the appointed actuary to testing procedures. The auditor is required to determine what historical data and methods have been used by management in developing the loss reserve estimate and whether the auditor will rely on the same data or other statistical data in evaluatNAIC NEWS ing the reasonableness of the For updates on other action at the NAIC’s loss reserve estimate. After idensummer meeting in tifying the relevant data, the auNew York, including a ditor should obtain an undercomplete digest of standing of the controls related Academy reports and to the completeness, accuracy, work products, turn and classification of loss data to Page 4. and perform testing as the audi-

Inside Annuity Nonforfeiture A helpful Q & A on the new model law . . . . PAGE 5 C-3 Phase II A status report for the NAIC . . . . . . . . PAGE 6 Letter to the Editor Alerting the profession to malpractice action . . PAGE 6 Academy Annual Meeting Register now for the Oct. 27 meeting in Florida . . . . . . . . . . . . . PAGE 8

tor deems appropriate. Through inquiry of the appointed actuary, the auditor should obtain an understanding of the data identified by the appointed actuary as significant. It is recognized that there will be instances when data identified by the appointed actuary as significant to his or her reserve projections would not otherwise have been tested as part of the audit, and separate testing would be required. Unless otherwise agreed among the appointed actuary, management and the auditor, the scope of the work performed by the auditor in testing the claims data in the course of the audit would be sufficient to determine See NAIC DATA AUDITS, Page 4

Optional Federal Insurance Charters

Debating Market Efficiency


s optional federal chartering of insurance companies an improvement on the traditional state-based regulatory system now in place? Who are you talking to? The lines were clearly drawn at a June 16 Academysponsored Capitol Hill briefing on the future of insurance regulation. Allen Caskie, chief In the foreground, Tim Tongson, left, and Ethan Sonnichsen counsel for federal relations at discuss the briefing as, from left, David Wetmore, Allen Caskie, the American Council of Life and Hill staffers confer. Insurers, argued strongly in favor of optional federal regulation of insurance, and David Wetmore, director of federal and international See MARKET EFFICIENCY, Page 8

Actuarial UPDATE

NAIC Suggests Actuaries Audit Data Quality


Calendar AUGUST 4-5 Academy leadership meeting, Washington 6-7 Academy media training sessions, Washington 7-9 Actuarial Research Conference, Ann Arbor, Mich.

Academy NEWS Briefs

(Academy, SOA)

11-12 ASB Pension Committee meeting, Washington 14 Academy Life Capital Adequacy Subcommittee meeting (Chicago) 24-27 ASTIN 2003, Berlin 25 ASB General Committee meeting, Washington 27 Academy Council on Professionalism meeting, Boston

SEPTEMBER 4 Academy Life Financial Reporting Committee meeting, Washington

4-5 SOA Stochastic Modeling Symposium, Toronto 8-9 Casualty loss reserve seminar, Chicago (Academy, CAS, CCA)

9-10 CAS asset liability management seminar, Chicago 10 Academy Social Insurance Committee meeting, Washington 11-12 SOA Valuation Actuary Symposium, Coronado, Calif. 11-12 ASPA mountain states benefits conference, Denver 13-17 NAIC fall meeting, Chicago 15 Academy Committee on Actuarial Public Service meeting, Washington 17-19 AFIR Colloquium, Maastricht, The Netherlands 18-19 CIA appointed actuary seminar, Montreal 20-23 ASPA business leadership conference, Uncasville, Conn. 24 Academy Board of Directors meeting, Washington 24-25 Academy Life Products Committee meeting, San Antonio

OCTOBER 1-2 ASB meeting, Washington 22 Academy Committee on Qualifications meeting, Washington 26-29 ASPA annual conference, Washington 26-29 SOA annual meeting, Lake Buena Vista, Fla. 27 Academy annual meeting, Lake Buena Vista, Fla. 29 CIA/SOA joint general meeting, Lake Buena Vista, Fla. 30-31 CIA general meeting, Lake Buena Vista, Fla.

NOVEMBER 2-5 CCA annual meeting, Tucson, Ariz. 9 Academy Pension Practice Council meeting, Charleston, S.C.

9-11 Investment seminar, Toronto (CIA, SOA) 9-12 CAS annual meeting, New Orleans 10 Academy Pension Committee meeting, Charleston, S.C. 11 Academy Casualty Practice Council meeting, New Orleans 11-14 Academy Life and Health Qualifications Seminar, Crystal City, Va. 12 CIA professionalism workshop, Toronto 19 Academy Committee on Professional Responsibility meeting, Washington 23-24 IAA Council and Committee meetings, Berlin

DECEMBER 5-10 NAIC winter meeting, Anaheim, Calif. 10-11 ABCD meeting, Williamsburg, Va. 15-16 ASB meeting, Washington WEB INTERFACE Links to documents underlined in blue can be found at


Actuarial U P D A T E

Spam, Spam, Spam, Eggs, and Spam


ust like the café in the famous Monty Python sketch, it may seem on some mornings as if the only thing on your e-mail menu is spam. We sympathize. Academy employees also receive their share of fortune-sharing offers from the dependents of dead foreign oligarchs. At the risk of sounding defensive, however, not all bulk e-mail is spam. The Academy uses bulk email to reach its members quickly and cheaply with information we think you can use. One example: the monthly Inside the Academy e-mail newsletter, which alerts members to items of interest in upcoming issues of the Update and Con-

Standard Revision On June 16,

the ASB approved the exposure draft of a proposed revision of Actuarial Standard of Practice No. 11, now titled The Treatment of Reinsurance Transactions Reflecting Life or Health Insurance Risks in Financial Statements. The proposed revised standard would apply to actuaries preparing, reviewing, or analyzing financial statement items that reflect reinsurance ceded or assumed on life insurance (including annuities) or health insurance risks. The exposure draft will be mailed with next month’s Update and is expected to be available soon on the ASB website, www.actuarialstandards CASUALTY NEWS

On June 11, James Hurley, chairperson of the Medical Malpractice Subcommittee, testified on medical liability reform before the Ohio Medical Malpractice Commission in Columbus, Ohio. ® Walter Wright III, chairperson August 2 0 0 3

tingencies, as well as to other online resources. Unfortunately, when we send out bulk e-mails to Academy members, some get bounced back, having set off spam sensors in recipients’ systems. On our end, there is nothing we can do about it. And if you don’t want to receive these timely bulletins from the Academy, then there is nothing you need to do either. But if you would like to receive Inside the Academy and haven’t been receiving it, you should notify your network administrator to make sure that bulk e-mail originating from is allowed through the system. We promise not to abuse the privilege — what you receive from the Academy is food for thought, not spam.

of the Risk Classification Subcommittee, submitted written testimony to the House Financial Services Subcommittee on Financial Institutions and Consumer Credit for a June 4 hearing on the Fair Credit Reporting Act. ® James Biller, senior vice president and actuary for the Chubb Group of Insurance Cos. in Warren, N.J., Dennis Fasking, senior actuary for Allstate Insurance Co. in Northbrook, Ill., and Steven Goldberg, senior vice president at Benfield in Minneapolis, have joined the P/C Extreme Events Committee. HEALTH NEWS

Shortly before the June 27 passage of House and Senate bills adding a prescription drug benefit to Medicare, Jan Carstens, the Academy’s vice president for health issues, sent a letter to congressional leaders requesting that any final legislation specify that actuarial activities required by the legislation be performed only by a qualified actuary who

is a member of the Academy. ® The Health Practice Council has created a new Disease Management Work Group, chaired by Rob Parke, a consulting actuary with Milliman USA in New York. Other members are David Axene, president of Axene Health Partners in San Diego, Calif.; Ian Duncan, a partner with Lotter Actuarial Partners in New York; Donna Novak, president and CEO of NovaRest Inc. in Fox Lake, Ill.; Tim Robinson, a consulting actuary with NiiS/Apex Group Holdings in Princeton, N.J.; Chuck Smith, senior actuary for Principal Financial Group in Des Moines, Iowa; Michael Thompson, a principal of PricewaterhouseCoopers LLP in New York; and Margaret Wear of Scottsdale, Ariz. PENSION NEWS

The Pension Accounting Committee wrote to the Financial Accounting Standards Board in May about the appropriate discount rate to use for cash balance

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Joseph Applebaum has been ap-

pointed chief actuary for the General Accounting Office (GAO) in Washington. A member of the Academy’s Board of Directors and the Committee on Social Insurance, Applebaum was formerly senior actuary at GAO. ® Eric Klieber, chairperson of the Committee on Social Insurance and associate principal and consulting actuary for Buck Consultants in Cleveland, has been elected a member of the National Academy of Social Insurance. ® Tom Johnston has been named senior vice president and chief actuary for property/casualty operations of The Hartford Financial Services Group in Hartford, Conn. He was formerly the finance director for property/casualty claim. ® Robert Conger has been named location manager for the Chicago office of TillinghastTowers Perrin. He was formerly a consultant in Tillinghast’s Atlanta office. A former member of the Academy’s Board of Directors, Conger is immediate past president of the Casualty Actuarial Society. ® Galen Barnes is retiring on Dec. 31 as president and chief operating officer of Nationwide Insurance in Columbus, Ohio. ® William Silvanic has been appointed vice president of annuity finance and chief actuary for Massachusetts Mutual Life Insurance Co. in Springfield, Mass. He was formerly senior vice president and controller for CIGNA’s retirement and invest-

ment services division. ® Lawrence White has been appointed director of actuarial services for CompServices Inc. in Philadelphia. He was formerly a manager and consulting actuary at Ernst & Young. ® Jeffrey Morris has been promoted to senior vice president and chief actuary for Family Heritage Life Insurance Co. of America in Cleveland. He was formerly chief actuary. ® Stephen Belden has been named chief actuary for Meadowbrook Insurance Group Inc. in Southfield, Mich. He was formerly chief actuary for Zurich North America’s construction division in Minneapolis.

has been appointed vice president of product development and strategy for Old Mutual U.S. Life in Baltimore. He was formerly vice president and individual annuities product manager for Union Central Life in Cincinnati. ® Richard Pretty

Joe Sutliff


A June 30 U.S. News & World Report article on medical malpractice reform cited information given in congressional testimony by James Hurley, chairman of the Academy’s Medical Malpractice Committee. It also quoted Robert Hunter, director of insurance for the Consumer Federation of America. ® A June 24 Wall Street Journal article on insurance companies that are lowering the cost of life insurance policies because of the new CSO tables quoted James Van Elsen, who was a member of the Academy’s CSO Task Force. Following up on behalf of the Academy, Michael Taht, who was also a member of the task force, wrote a letter to the reporter about ambiguities in the article. ® A June 17 article on optional federal charters that ran on BestWire quoted Tim Tongson, chairperson of the Academy’s Federal Charter Work Group, and referred to an Academy monograph and the Academy’s June 16 Capitol Hill briefing on the topic (see story on Page 1). ® Mike Rust, a consulting actuary with Millman Strenk & Cuni Inc. in Cincinnati, was quoted in a June 29 article in the Tampa, Fla., Tribune on retirees who get into debt trouble. ® An Associated Press article on medical malpractice caps

that ran in the Raleigh, N.C., News Observer quoted Robert Hunter.

I T ’ S A FA C T

plans that refer to a market yield as the interest-crediting rate on notional account balances within the plan. ® The Pension Committee released an analysis in June examining proposals to change the discount rate used to determine lump sum pension benefits.

The Academy is currently waiving the dues of four members (out of a total membership of 14,851) who are on active duty serving in the military.

Clearly, Tootsie doesn’t have the story straight. For actuaries, annotation 8.1 of the Code of Professional Conduct warns that an actuary should recognize the risks of misquotation. While the cat didn’t get it quite right from its owner, you need to take reasonable steps to ensure that your principal hears and understands you perfectly.

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NAIC SUMMER Academy Updates State Regulators


hen the NAIC adopted revisions to the Standard Nonforfeiture Law for Individual Deferred Annuities at its March meeting, the move represented the culmination of months of work by members of the Life Practice Council, who participated in discussions and submitted several reports to the Life and Health Actuarial Task Force (LHATF) on the issue. But the work continues. At the NAIC’s summer meeting in New York, the Annuity Nonforfeiture Implementation Work Group presented a memo to LHATF discussing ramifications of the new model law and providing implementation strategies. While the potential advantages from significantly revising nonforfeiture requirements are considerable, the memo states, there are a number of issues that must be addressed for an effective transition. Speaking to another aspect of nonforfeiture law, the Nonforfeiture Improvement Work Group presented a report to LHATF on the development of basic principles to deal with the importance of equity and value for terminators and persisters, the need for nonforfeiture values as a method for guaranteeing value, and the importance of aligning insured and company interests for persistency. Following a request from LHATF at the spring NAIC meeting, the Academy presented a report on certifying illustration actuaries, referring to Actuarial Standard of Practice 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation. The report may lead to a practice note on the issue. Also at the NAIC summer meeting, the Academy’s Life Capital Adequacy Subcommittee presented a status report to the

Life Risk-Based Capital Working Group on its work on riskbased capital (RBC) C-3 Phase II (see story on Page 6). In the casualty arena, the Committee on Property and Liability Financial Reporting (COPLFR) reported to the Casualty Actuarial Task Force on its work developing a model actuarial opinion summary. COPLFR also presented a report to the Casualty Actuarial Task Force suggesting technical improvements to draft changes of the annual statement instructions regarding the draft Actuarial Opinion Summary Model Law. The P/C Risk-Based Capital Committee submitted written reports on the treatment of RBC factors in reinsurance A (non-proportional assumed property) and reinsurance C (non-proportional assumed financial), and on retroactive insurance. Members of the Academy’s Health Practice Council gave a written report on long-term care reserving to the Accident and Health Working Group. Rowen Bell, a member of the Committee on State Health Issues, presented an oral update on HMO and hospital, medical, and dental service or indemnity reserves for health insurance companies, and also spoke on the task force’s progress studying the individual health market. The Academy’s recently published practice note on pricing long-term care insurance (LCTI) policies under the rate stability provisions of the NAIC’s LTCI model regulation was presented both to the Accident and Health Working Group and the Senior Issues Task Force, as was a Medicare Supplement Work Group report on refund formula issues. An interim report from the Long-Term Care RBC Work Group was presented to the RBC Task Force, and the Health Liquidity Work Group gave an update to the Health Entities Working Group.

NAIC Data Audits, continued from Page 1 whether the data tested is fairly stated in all material respects in relation to the statutory financial statements taken as a whole. The auditing procedures should be applied to the claim loss and defense and cost containment expense data used by the appointed actuary and would be applied to activity that occurred in the current calendar year (e.g., tests of payments on claims paid during the current calendar year).

This provision calls for additional testing of data that is deemed by the actuary to be “significant for use in determining reserve projections” but that has not otherwise been tested for audit purposes. The language also places responsibility on actuaries, along with management and auditors, to potentially determine that the scope of data testing by auditors is sufficient to determine that the data is fairly stated. In comments at the meeting prior to the vote, Pat Teufel, the Academy’s vice president for financial reporting issues, referred to a letter from Actuarial Standards Board Chairperson William Koenig, which says that actuaries are not necessarily


Actuarial U P D A T E

August 2 0 0 3

trained for — and therefore should not be responsible for — designing or determining such material aspects of data audits. Koenig’s letter points out that Actuarial Standard of Practice (ASOP) No. 23, Data Quality, specifically declines to recommend that actuaries audit data. ASOP 23 states that, “the accuracy and comprehensiveness of data supplied by others are the responsibility of those who supply the data.” Despite Teufel’s concerns, the NAIC, with the support of the Casualty Actuarial Task Force, adopted the modified language. “The NAIC/AICPA Working Group felt we were unduly concerned that the language could be interpreted as extending responsibility for the design of audit procedures to the actuary,” Teufel said. “They see the responsibility as one of discussing relevant considerations with the auditor.” In light of the newly adopted language, the Academy is considering sponsoring joint educational sessions with the AICPA to help implement the new requirements. —ETHAN SONNICHSEN

MEETING Annuity Nonforfeiture Q&A BY



ince the NAIC passed the new model Standard Nonforfeiture Law for Individual Deferred Annuities, there has been a lot of activity in the profession to try and understand the changes and their impact on the practicing actuary. To help actuaries understand some of the more basic concepts, this Q&A was prepared in plain English. (It’s not easy English, but it’s meant to be as plain as possible.) The answers provided below reflect discussion by members of the Life and Health Actuarial Task Force (LHATF) at the NAIC’s summer meeting in New York. Is it the intention that the guaranteed interest rate not be required to equal the nonforfeiture interest rate?

Yes. LHATF clarified that its intent for the model law was to allow companies to set the guaranteed interest rate higher, lower, or the same as the nonforfeiture interest rate, as long as the product’s values meet or exceed the minimum values described in the law. In fact, some of the wording in the model law was changed specifically to ensure that the interpretation is made on a more consistent basis. I have a product with a 3 percent guaranteed interest rate and no expense loadings. Will I have to refile this product under the new law?

Since the product complies under both laws, it is expected that this product will not need to be refiled. I have a product with a 3 percent guaranteed interest rate. When I filed the product, I relied upon 15 percent of expense allowance because it is a flexible premium product design. Will I have to refile this product under the new law?

Since the 15 percent expense allowance is greater than the 12.5 percent allowance included in the new law, you will likely need to adjust the product and refile. But what about the changes to Section 3(A)(2) with regard to the deferral of payments? Since that changed, will I need to refile?

No, you don’t need to refile. This one gets tricky because the law doesn’t require any specific wording in your policy forms. Therefore, generally you won’t need to refile. However, if you wanted to actually exercise a deferral on a product filed under either the old or new version of the law, then you probably need approval of your commissioner before doing so. So this provision of the new law will apply to all policies when exercising the deferral, but it probably doesn’t require everyone to refile all of existing annuity policy forms. My company wants to remove the provision from our policy form about the six-month deferral of proceeds. Under the new law, can we do that?

mine, with clear disclosure, the timing and frequency of the index reset feature?

Yes, but the disclosure has to be specific as to the timing and frequency without the company having discretion to adjust based on the outcome of the values. In other words, the company has discretion to choose the method at the time the product is filed, but has no discretion based on whether interest rates are high or low. For example, within the same contract the frequency shouldn’t be 10 years when interest rates are less than 2 percent, but four years when interest rates are 2 percent or greater. As another example, it is acceptable for one product to have a frequency of four years, another with a frequency of 10 years, and a third with a frequency of one year. Under Section 4(B)(4), is it allowable to have the initial redetermination period last for the entire life of the contract?

Yes. Is the length of the redetermination period up to the discretion of the company, as long as it is fully disclosed in the contract?

Yes, but the disclosure has to be specific. A disclosure in the contract that the company will reset the rate at its discretion isn’t good enough. How does a company go about producing guaranteed illustrations?

It depends on the specific facts and circumstances. For example, let’s say you have a product with a 10-year redetermination period and the initial guaranteed interest rate is 2.5 percent. After that first 10-year period, the guaranteed interest rate floats with the nonforfeiture interest rate so that it could drop to 1 percent. In this case, you should be on safe ground using a guaranteed interest rate of 2.5 percent for 10 years followed by 1 percent thereafter. The averaging period can be no longer than 15 months prior to the issue date/redetermination date. Does the beginning or end of the averaging period have to be within that 15-month period?

Both the beginning and the end of the averaging period need to be within the 15-month period. Can the Treasury rate be rounded to the next highest quarter percent?

Yes, since the law defines the minimum nonforfeiture interest rates, higher rates would therefore be compliant. What implications does the law have for the guaranteed interest rate for the payout phase of a deferred annuity?

None. What implications does the law have for single premium immediate annuities?

Yes, it’s now optional under the new model law.


Is it the intention of the new law to allow each company to deter-

Andrew Erman is chairperson of the Academy’s Life Products Committee and a member of the Life Practice Council.

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Actuarial U P D A T E

August 2 0 0 3


C a p i t a l S t a n d a r d s f o r Va r i a b l e A n n u i t y G u a r a n t e e s

C-3 Phase II Status Report BY



ast December, the Academy’s Life Capital Adequacy Subcommittee submitted a report to the NAIC’s Life Risk Capital Working Group recommending ways that capital requirements for death and living benefit guarantees under variable annuity contracts could be set. In brief, the subcommittee recommended that companies model the statutory balance sheet for these products (using a very simplified value for reserves) in aggregate for all such products, on a year-by-year basis for a large number of equity scenarios calibrated to standardized risk measures specified in the report. The scenario results are ranked by the amount of assets needed to be solvent for this product category at the end of each year under that scenario. The average of the highest 10 percent of these scenarios is the total amount required for reserves and risk-based capital (RBC) combined, so RBC becomes the difference between this total and the reserves held. Companies will be allowed to use tables of standard factors instead of doing their own modeling in many instances. The NAIC exposed the report for comment, eliciting an unusually large number of comment letters, many of them quite extensive.

In addition, the Variable Annuity Reserve Work Group, a new Academy group formed to explore the possibility of using a similar approach for setting statutory reserves (but at a lower confidence level), came up with a few questions and comments for the NAIC. Between the time of the NAIC’s winter and summer meetings, the Academy spent substantial time reviewing and discussing input and building and testing models, including a model for minimum death benefit guarantee (MGDB) factors. Our progress, conclusions, and recommendations to the NAIC were included in a progress report presented at the June meeting. This report includes some MGDB factors and sensitivities in Appendix 2, which may be of special interest as they are relatively recent. In reviewing these factors, keep in mind the following: ® Results include the required excess of the sum of reserves, plus RBC above cash surrender value. ® Factor tables are for static lapses, but one of the sensitivity test lines shows the result of using dynamic lapse. The final requirements will reflect dynamic lapse. ® A company with product and/or duration diversity will be able to benefit from this diversification if they do their own modeling. In this case, the whole will probably be less than the sum of its parts.

Letter T O T H E Editor Malpractice Alert I read the article “Managing Malpractice Risk” in the June Update, and agree that this issue should not be ignored. We have seen in other professions that when lawyers find a cash cow, they try to milk it dry. If we are quick to react, this legal specialty may never develop. One way I would suggest to raise awareness in the profession is to send out a short synopsis (via e-mail) of any case that is brought to court (including relevant details such as precedent cases that are cited and actuarial principles that are not followed). I feel this would be a valuable service to all actuaries in all fields of practice, and clearly this is the type of stuff I would expect the Academy should be working on. Claude Bunick New York Lauren Bloom, general counsel and director of professionalism, replies: The Academy issues Alerts to members when legal decisions of interest to them are handed down. For example, the Academy recently issued an Alert to its pension subscribers summarizing the decision of the U.S. Court of Appeals for the Second Circuit in Gerosa v. Savasta, 2003 U.S. App.LEXIS 9558. As not all Academy members want to receive these Alerts, they are offered as a paid annual subscription that starts each January. Half-year subscriptions are also available, running July to December. For more information, contact Eric Opanga, the Academy’s legislative assistant (; 202-223-8196).


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NEW MEMBERS In the first six months of 2003, the Academy added 243 new members to its rolls. By joining, they have demonstrated a commitment to ethical and responsible actuarial conduct and an interest in keeping up with the issues and events that are shaping their profession. We welcome them. They are in good company.

® Since the progress report data was produced, the Phase II group has changed the calibration standards to be included in the final report. This will have the effect of increasing these factors. ® Some of the other assumptions are not yet final. It is also important to look at the sensitivities shown in the report’s tables. Since these factors are the differences between the present value of benefit guarantees under extreme conditions and the present value of net revenue, a modest change in expense structure or charge structure can lead to significant changes in asset requirements. The progress report documents a few changes from what was suggested in the December report. Most have to do with the product scope to which the recommendation applies. The Academy is now excluding variable life products entirely, and including nonvariable annuity contracts that include similar guarantees (such as group annuities providing minimum death benefits for 401(k), 457, and other plans, or group insurance providing such protection to mutual fund customers without any annuity contract). Also, individual variable annuities without such guarantees are included in the progress report’s aggregate results. Over the summer, the Academy will be nailing down the few remaining open issues documented in the progress report and expects to provide sufficient actual values for required assets to allow interested parties the information they need for review when a revised document is again exposed after the NAIC’s fall meeting in September. A new capital standard, as adopted by the NAIC, should be in effect by the end of 2004. Bob Brown is vice chairperson of the Academy’s Life Capital Adequacy Subcommittee and a member of the Life Practice Council. He chairs the C-3 Work Group.

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Andrea Abolafia Joseph F. Acri Pedro L. Alcocer Dean P. Aloise Madhu Gupta Amar Jeffrey S. Amrose Eric A. Anderson Rita Arora James Paul Baker Danielle L. Bartosiewicz Theresa S. Bauer Paul M. Baugher Elizabeth H. Bennett Mark Joseph Bethke Jeremy A. Bill Michael D. Bishop Carolyn Bittner Michael D. Blakeney Nathan L. Bluhm Andrea Bolliger Caroline Bowen Marlisa Sue Bruno Lisa Buege Mark Buis Caroline Burkhardt Simon Buxton Nicholas J.D. Campbell Jonathan Carmire Brian Kenneth Carteaux Jensen Chan Katherine Chang Yichung Chen Bartlomeij Cichosz Jonathan Todd Clymer Carolyn J. Coe Christian J. Coleianne Matthew Collins Adam Condrick Christopher J. Conforti Michael D. Cook Jerrie L. Crook Michael Anthony Crow Keith Cummings Gregory M. Curran Richard Cuzzone Peter Daggett Eric Daout Mujtaba Datoo James M. Derengowski Josee Deroy Jennifer Dewey Karen Lyn Dierker Patrick T. Donlan Eric Philip Edwardson Rhett W. Elder Rhys Wyn Evans Derek L. Farmer Tim P. Finnegan Vincent Philip Fiorino Jr. Sarah Florreich Guy J. Foutz Robert C. Fox

M. Myrna C. Francisco Jeffrey J. Fratantaro Andrea G. Frick Karl H. Froese David C. Fry Patrick J. Gabel Serge Gabovich Virginia K. Gammill Robert Garbus Charles Gegax Robert Giulietti Lorenz Glaza Joel Davied Glockler Tony A. Goettl Melanie T. Goodman James T. Gordon III Matthew Gray Anthony Donovan Green Michael Kent Griffin Jason E. Grosse Johathan Michael Guy Christina Link Gwilliam Jon Hamberg Amanda W. Hammell Omar Haq David M. Hauer Sean M. Hayward David Hennings Michael T. Holloway Zhi Hu Jean Scott William P. Jirak Aimee Johaneson William Johnson Gabriel Kahan-Frankl Bennett D. Kleinberg Andrew Richard Knapp Genevieve Knight Jonathan Koch John William Koelling Sharon D. Kophamel Therese A. Kudick Gregory E. Kushnir Daniel Kutliroff Kristine Kuzora Claudel Laguerre Stacey Boswell Lampkin David Lamoureux Steven W. Larson Brad Lawson Damon Lay Youngmi Lee Yan H. Lee Kathleen Leonard Sandra Carlson Leonard Lauren Levine Guoxian Liang Olga V. Lifson Hus-Feng Lin Yi-Ling Lin Janet Lindstrom Molly E. Loftus

Michael Robert Mace Karen M. Mack Kevin Barry Mahoney Raja Malkani Matthew D. Mammenga Brian Christopher Mamola Yuwan Wendy Mao Steven R. Marcus Rahsmi Mathur David Maurer Frank McGoldrick Christopher M. McGoldrick Finlay James Edward McPherson Emma Jacqueline McWilliam Teresa M. Medeiros Nola Misthos Mark Mistretta Martin Edward Molloy Anne Moonen Christian Morency Jaime Mosquera Marianne Mousserie Karen E. Myers Lisabeth K. Myers Christopher A. Najim Serge Yanic Nana Michael Nast Hanh Thi Nguyen Larry O’Brien Patrick John O’ Neill Wade H. Oshiro Robert A. Painter Craig F. Pedersen Waylon Peoples Matthew Perkins Todd Petersen John Phillips Martin L. Pippins Michael Polakowski Denis Plouffe Daniel A. Powell Kristin L. Quade Kevin William Rabin Noor Rajah Scott E. Ramsay Scott Renard Joseph Rizzo Jeremy C. Roberts Randall James Rogers Janet Kramer Romanelli Brian S. Rosenblum Lance Paul Roteman John Rottkamp Patrick Ryan Paul Sanchez-Masi Matthew David Schafer Randall James Schauder Jonahan J. Schaum Casey Schmierer

Actuarial U P D A T E

Kurt Schneider Sheila Abery Schroer Brett Schwab Andreana Shanley May Shuang Yu Abednigo Sibanda Paul Silberbush Terrence W. Singh Stephen G. Slocum Lawrence R. Smart Todd G. Smith Julie L. Spore Anneliese St. Rose Laurence H. Stauffer Jonathan Stern Rachel St-Laurent Stephen J. Streff David W. Strey Gregory Scott Sucher Christiie Sullivan Wei Sun Beth M. Sweeney Ron H. Tani Christopher Teh Alex M. Terry Craig Thorburn Drew Arthur Tindall Gregory Topakian Joseph S. Tripodi Huan Tseng Meredith Turner Ashwini Vaidya James A. Vallee Jason M. VanPelt Stephen Michael Vincent Natalie Vishnevsky Frank Walton Qingi Want Russell Weatherholtz Joshua J. Weber Thomas E. Weist Amanda Michelle Westphal Joleah White Mark William Whitford Wesley J. Wickenheiser Symeon Williams Alvin K. Winters Tracy Lynn Witter Kenneth Mack Woodson Jr. Brian Woolfolk Rick A. Workman Andrew D. Wozniak Edward Wright R. Jeffrey Wright Shu-Fang Sherry Yeh Gene Win Zhang Hu Zhi Jeffrey S. Zimmerman

August 2 0 0 3


The Actuarial Update

A M E R I C A N A C A D E M Y o f A C T UA R I E S



Michael Braunstein William Carroll Ronald Gebhardtsbauer Rade Musulin Peter Perkins Adam Reese EDITOR



Becky Horst

American Academy of Actuaries PRESIDENT


Barbara Lautzenheiser

October 27, 2003 ■ Lake Buena Vista, Florida The Academy’s 2003 Annual Meeting will be held at the Dolphin and Swan Resort at Walt Disney World in Lake Buena Vista, Fla., in conjunction with the SOA Annual Meeting. The Academy’s Annual Meeting features the installation of 2004 Academy President Barbara J. Lautzenheiser, the election of new members to the Board of Directors, and the presentation of the 2003 Jarvis Farley Service Award. Attorney Ralph Levy will give the keynote address,“Situational Malpractice: If You Hear Barking, It’s Probably a Dog.” Levy is an experienced litigator who has represented actuarial, accounting, and law firms in professional malpractice defense cases. Afternoon refreshments will be served.

Registration The meeting is open to all Academy members, as

well as attendees of the SOA Annual Meeting. There is no fee to attend. If you are registered for the SOA Annual Meeting, you are automatically entitled to attend the Academy Annual Meeting. If you wish to register only for the Academy Annual Meeting, go online to the SOA website,, click on the SOA Annual Meeting registration form and check the “Academy member only” box. You can do the same with a printed SOA Annual Meeting registration form. For further information about the Academy Annual Meeting, contact the Academy’s meeting planner, Denise Winston, at 202-223-8196 or



Jan Carstens Jan Lommele John Parks Stephen Preston Robert Rietz Patricia Teufel EXECUTIVE DIRECTOR





The American Academy of Actuaries 1100 Seventeenth Street NW Seventh Floor Washington, DC 20036 Phone 202-223-8196 Fax 202-872-1948 Statements of fact and opinion in this publication, including editorials and letters to the editor, are made on the responsibility of the authors alone and do not necessarily imply or represent the position of the American Academy of Actuaries, the editors, or the members of the Academy. ©2003 The American Academy of Actuaries. All rights reserved.


Market Efficiency, continued from Page 1 relations for the NAIC, argued just as strongly for continued reforms at the state level. Tim Tongson, chairperson of the Academy’s Federal Charters Work Group, moderated the session, which attracted some 50 staffers, policy-makers, and journalists. The current state-based system of regulation has been in place since 1869, but with global and technological changes and the passage of the Financial Services Modernization Act in 1999, the dynamics affecting the insurance industry have changed, Tongson said. “The state system has become a real obstacle to market efficiency and is slowly strangling the business,” said Caskie. This is most obvious in speed to market, where banks can bring a product to the market in as little as 30 days, but the process for life insurers of getting a new product approved by regulators can take a year or longer, Caskie said. Acknowledging that in some instances state regulation is better, Caskie said that insurers are not interested in dismantling the state system entirely, but rather would like to establish an optional federal charter system. “What we are really looking for is a system that would allow companies to select a form of regulation that best suits their corporate organization and strategic planning,” said Caskie. “Change needs to take place to create greater efficiencies in the system,” agreed Wetmore. “But at the end of the day, insurance regulation is put in place to protect consumers.”

Actuarial U P D A T E

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Because so much of insurance use, particularly in the health and casualty areas, is local, its regulation should also be local, Wetmore said. “We like to think of insurance commissioners as the cops on the beat,” Wetmore said. “If you place a 911 call, you don’t want it going to Washington to someone who isn’t accountable to you.” Responding to Caskie’s criticism about speed to market, Wetmore pointed to the NAIC’s fledgling SERFF (System for Electronic Rates and Forms Filing) system that allows insurers to file rates and forms electronically with a turnaround time of about 18 days. Wetmore also mentioned the interstate compact, which would create uniform guidelines and a single point of filing for certain lines of insurance. The NAIC is working with the National Conference of Insurance Legislators and the National Conference of State Legislatures to ensure quick adoption of the compact by state legislatures. The Academy does not take a position for or against optional federal charters, Tongson said, but would like any federal charter legislation to recognize the role that actuaries play in insurance regulation. As outlined in a recent monograph by the Federal Charters Work Group, Role of the Actuary Under Federal Insurance Regulation, any federal charter legislation should establish an office of the chief actuary to assist in federal regulation of insurance, as well as require that actuaries be involved in developing regulatory provisions related to solvency and other actuarial aspects of insurance regulation.


Optional Federal Insurance Charters T HE N EWSMONTHLYOFTHE A MERICAN A CADEMYOF A CTUARIES t its summer meeting in New York, the NAIC adopte...

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