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AUGUST 2 0 0 4





Risky Business


O COVER THE COST of workers’ compensation for its employees working in downtown Washington, the Washington Post currently pays annual premiums of approximately $700,000. And the only way the Post, an account that insurers aggressively sought prior to Sept. 11, 2001, can get that coverage is through the residual market — a last resort for companies that otherwise cannot get insurers to cover their risks. The Post’s experience is not extraordinary. A number of other premier Washington establishments — including the National Geographic Society, the British Embassy, and the Kennedy Center — have had to resort to the residual Rich Hofmann, standing, fields questions at the Academy briefing. market because insurers refuse to voluntarily and directly underwrite their workers’ compensation risk, compensation insurance. Current laws in all states and said Barry Llewellyn, an Academy member who is senior the District of Columbia mandate that employers carry divisional executive for the National Council on Compen- workers’ compensation insurance and that those policies sation Insurance, a nonprofit industry group that manages cannot exclude terrorism or war risks. a database of workers’ compensation information. In response to the Sept. 11 terror attacks, Congress Llewellyn was part of a panel that offered sobering passed the Terrorism Risk Insurance Act (TRIA) in 2002 to statistics to an overflow audience of congressional staff, provide a short-term federal backup for insurers offering journalists, and other policy-makers at the Academy’s June terrorism insurance. But TRIA is due to expire in 2005, 29 Capitol Hill briefing on terrorism’s effect on workers’ See WORKERS' COMPENSATION, Page 4

Inside Life After TRIA The Extreme Events Committee considers what’s next . . . . . . . . . . . PAGE 4 Membership Milestone Academy rolls now top 15,000 . . . . . . . . . . . PAGE 6 Educating the Electorate The Social Insurance Committee prepares for the 2004 election . . . PAGE 6 Prepare for C-3 Phase 2 An Academy seminar will bring you up to speed . . . . . . . . . . . . . PAGE 8 Annual Meeting Schedule and registration information . . . . . . . SEE BACK

HSAs: Good Idea, Needs Work BY



in a dark room running stochastic simulations and don’t get out much, you’ve probably heard some of the buzz on health savings accounts (HSAs), which were created as part of the Medicare Modernization Act of 2003. It’s safe to say that opinions differ. Some believe that these accounts will revolutionize the way people save to meet their health care needs. Others contend that HSAs are an ingenious way of undercutting employer-provided health care coverage. While this debate rages, we are left with the task of figuring out how to properly integrate these accounts and related high deductible health plans (HDHPs) into NLESS YOU’VE BEEN STUCK

an individual or group product. The provisions are relatively straightforward, but as with any new legislation, there are loose ends. Over the last few months, the Academy’s Health Savings Account Subgroup has corresponded with the Treasury Department about a number of gray areas. Recently, Treasury released helpful clarifying guidance. Preventive Care—Definition Preventive care expenses that aren’t subject to the HDHP deductible (as further defined by recent guidance) mirror traditional preventive benefits: annual physicals, immunizations, screening services, routine prenatal and well-child care, and tobacco cessation See HSAs, Page 5

Actuarial UPDATE

W o r k e r s ’ C o m p I n s u r a n c e a n d Te r r o r i s m


Calendar AUGUST 2-3 Academy leadership meeting, Washington 8-9 Pension Practice Council meeting, Santa Fe 12 Academy Life Capital Adequacy Subcommittee meeting, Chicago

SEPTEMBER 8 Academy Life Practice Council meeting, Anchorage, Alaska 11-14 NAIC fall meeting, Anchorage, Alaska 13-14 Casualty loss reserve seminar (Academy, CAS, CCA), Las Vegas

15 Academy Committee on Professional Responsibility meeting, Washington

20-21 CIA appointed actuary seminar, Toronto 20-21 ASB meeting, Washington 20-21 SOA valuation actuary symposium, Boston

21-22 Academy C-3 Phase 2, RBC, and reserves seminar, Boston 22 Academy Committee on Professional Responsibility meeting, Washington

23 Academy Board of Directors meeting, Washington

24 Academy Council on Professionalism meeting, Washington

27-28 ASB Pension Committee meeting, Washington

Academy NEWS Briefs Goss Honored by NASI


TEPHEN GOSS, Social Security’s chief actu-

ary and a member of the Academy’s Social Insurance Committee, was honored on June 9 by the National Academy of Social Insurance (NASI) as the first-ever recipient of the Robert M. Ball Award for Outstanding Achievements in Social Insurance. In conjunction with the Washington award ceremony, NASI prepared an informational presentation on the history and role of the office of Social Security’s chief actuary that will become part of a broader effort to educate the public on the importance of the office of chief actuary at both Social Security and Medicare. Speaking at the award ceremony, Brookings Institution economist Peter Orszag said of Goss, “My alma mater’s charter was that while goodness without knowledge is weak, knowledge

without goodness is dangerous. We are very fortunate to have found in Steve both intelligence and goodness.” Goss, a member of NASI since 1990, has been with Social Security for over 30 years, representing the office of the actuary at the President’s Commission on Pension Policy; the 1979, 1991, and 1995 Advisory Councils; the National Commission on Social Security; and the National Commission on Social Security Reform. He worked closely with congressional staff on the 1983 Social Security amendments and was instrumental in developing the provision for increasing the normal retirement age.

30-Oct. 1 Academy Life Products Committee meeting, New Orleans

OCTOBER 13-15 Council of Presidents meeting, Kohala Coast, Hawaii 17-20 CCA annual meeting, Kohala Coast, Hawaii

18-20 Academy annual meeting, Kohala Coast, Hawaii 24-27 ASPA annual conference, Washington 24-27 SOA annual meeting, New York 31-Nov. 6 IACA biennial meeting, Sydney, Australia

NOVEMBER 7-8 Pension Practice Council meeting, Salt Lake City

9-12 Academy Life and Health Qualifications Seminar, Washington

11-13 IAA council and committee meetings, Washington

14-17 CAS annual meeting, Montreal 14-17 N.Z. Society of Actuaries biennial conference, Napier, N.Z.

16 Academy Casualty Practice Council meeting, Montreal

17-19 CAS/CIA joint meeting, Montreal

DECEMBER 4-7 NAIC winter meeting, New Orleans 13-14 ASB meeting, Washington

WEB INTERFACE Links to documents underlined in blue can be found at


A c t u a r i a l U P D AT E

A Coordinated Approach to New Medicare Regs The new

Medicare drug law isn’t just about the prescription drug benefit. It also includes provisions that will affect Medigap, Medicaid, disease management, health savings accounts, and retiree health insurance plans. Although the Academy has separate groups that cover each of these issues, many of the new law’s provisions cut across multiple areas, necessitating coordination among the various entities. To this end, the Academy recently created the Medicare Coordination Work Group. Chaired by Cori Uccello, the Academy’s senior health fellow, the work group comprises chairpersons of relevant Academy health committees who keep each other informed of activities related to the new Medicare legislation and coordinate with each other when appropriate. One of the Medicare Coordination Work Group’s first orders of business relates to the new law’s actuarial equivalence August 2004

requirements, which will apply not only to the stand-alone prescription drug benefit but also to Medicare Advantage, Medigap, and retiree health plans. A prescription drug actuarial equivalence subgroup, chaired by John Bertko, has been created to examine and comment on the coming regulations for these requirements. Draft regulations from the Centers for Medicare and Medicaid Services (CMS) are expected this summer. ASB Action At its June meeting, the Actuarial Standards Board approved an exposure draft of a proposed revision of Actuarial Standard of Practice No. 19, now titled Appraisals of Casualty, Health, and Life Insurance Entities. The proposed standard, enclosed with this issue of the Update, applies to actuaries when they are performing appraisals of casualty, health, and life insurance entities that are involved in assuming insurance risk such as an insurance company or health mainte-

nance organization, a collection of existing policies or contracts that cover insurance risk, a distribution system that sells such policies or contracts, or any combination of these elements. The deadline for comments is Nov. 30. HEALTH NEWS

Ian Duncan, a partner at Lotter Actuarial Partners in New York, has joined the Academy’s Health Practice Council. ® Mark McGuire, an actuary with Anthem Blue Cross and Blue Shield in Louisville, Ky., has joined the Academy’s Committee on Federal Health Issues. ® Joining the Academy’s Actuarial Equivalence Group are Mark Bartorelli and David Walker, respectively vice president/chief actuary and director of actuarial services for United Health Group in Fort Washington, Pa. ® Eric Sock, a consultant with Towers Perrin in Denver, has

joined the Academy’s Defined Contribution Health Plan Work Group. ® Joining the Academy’s Disease Management Work Group are Kevin Dolsky, a consulting actuary with Actuarial & Health Care Solutions in Mequon, Wis., and Chuck Fuhrer, vice president and chief health actuary for the Segal Co. in Washington. ® The following have joined the Academy’s Uninsured Work Group: Patrick Collins, chairperson of the Academy’s Health Savings Account Subgroup and vice president for AmericanRe Healthcare in Princeton, N.J.; Michael Dekker, an associate actuary with Milliman in Seattle; John Klemm, an actuary for the Centers for Medicare and Medicaid Services in Baltimore; Stacey Lampkin, an actuary with Milliman in Tampa, Fla.; and Stephen Meskin, chief actuary for the U.S. Department of Veterans Affairs in Washington. ® David Tuomala, director of actuarial services for Definity Health in St. Louis Park, Minn., is the chairperson of the CDHP Emerging Data subgroup of the Academy’s DC Health Work Group. Other members are Jennifer Fleck, an associate actuary for Aetna in Hartford, Conn.; Brent Greenwood, a principal with Reden & Anders in Duluth, Ga.; Penny Hahn, a senior actuary with Humana in Louisville, Ky.; James Murphy, director of actuarial services and underwriting at Dean Health Plan in Madison, Wis.; Sunit Patel, vice president of Fidelity Investments in Marlboro, Mass.; Daniel Plante, a senior manager at PricewaterhouseCoopers in Chicago; Brett Roush, an assistant actuary for Trustmark Insurance Co. in Lake Forest, Ill.; Harry Sutton, an actuarial consultant in Edina, Minn.; and Kurt Wrobel, a director for Pacificare Health Systems in w w w. a c t u a r y. o r g

Cypress, Calif. ® William Weller, president of

Omega Squared of Sedona in Sedona, Ariz., is the chairperson of the Academy’s newly formed Experience Rating Work Group, and Donna Novak, president and CEO of NovaRest Inc. in Fox Lake, Ill., is vice chairperson. Other members are Damian Birnstihl, vice president of actuarial for MVP Health Care in Schenectady, N.Y.; Michael Burks, vice president and actuary for Wellpoint Health Networks in Atlanta; Gerald Byers, chief actuary for Blue Cross and Blue Shield of Nebraska in Omaha; Tim Deno, corporate actuary for Anthem Blue Cross and Blue Shield in Indianapolis; Peter Hendee, vice president and health actuary for United American Insurance Co. in McKinney, Texas; James Oatman, senior vice president for Assurant Health in Milwaukee; Tove Stigum, director of pricing for United Health Group in Hartford, Conn.; and Thomas Wildsmith, a consulting actuary with the Hay Group in Arlington, Va. LIFE NEWS

Joining the Academy’s Life Financial Reporting Committee are Robert Frasca, a senior consulting actuary for Ernst & Young in Boston; Randy Freitag, senior vice president for Jefferson Pilot Financial in Greensboro, N.C.; Larry Gulleen, a senior actuary with Principal Financial Group in Des Moines, Iowa; Len Reback, vice president and actuary for Metropolitan Life Insurance Co. in Bridgewater, N.J.; and Darin Zimmerman, managing actuary for Aegon USA in Cedar Rapids, Iowa. ® James Lodermeier, a senior actuary with Northwestern Mutual in Milwaukee, has joined the Academy’s Life Valuation Subcommittee.


Thomas Terry,

president of Chicago Consulting Actuaries, is chairperson of the Academy’s newly formed Stock Options Task Force, which will be studying the application of actuarial science to the valuation of stock options. Other members are Todd Bault, senior research analyst at Sanford C. Bernstein & Co. in New York; Glenn Bowen and John Burke, both consulting actuaries with Milliman in Wayne, Pa.; Charles Cahill, a senior vice president at Aon Consulting in Boston; Don Delves, president of the Delves Group in Chicago; Carrie Duarte and Albert Johnson Jr., both directors at PricewaterhouseCoopers in Boston; Ken Kent, the Academy’s vice president for pension issues and a principal at Mercer Human Resource Consulting in Washington; John Parks, former Academy vice president for pension issues and a consulting actuary with Principal Financial Group in Pittsburgh; Larry Rubin, a principal with PricewaterhouseCoopers in New York; Marcia Sander and Eric Schwartz, both consulting actuaries with Milliman in New York; Sean Scrol, a principal at Chicago Consulting Actuaries; Donald Segal, vice chairperson of the Academy’s Pension Practice Council and senior vice president and actuary at the Segal Co. in New York; Lawrence Sher, a principal at Mellon Human Resources & Investor Solutions in New York; and James Verlautz, a consulting actuary with Mercer Human Resource Consulting in Minneapolis. ® Art Conat, a principal with Ernst & Young in Chicago, has joined the Academy’s Retirement Age Task Force. ON THE MOVE

U.S. Secretary of Labor Elaine Chao recently announced the

appointment of Charles J. Clark, senior vice president at Aon Consulting Co. in Somerset, N.J., to the 2004 Advisory Council on Employee Welfare and Pension Benefit Plans. ® U.S. Comptroller General David Walker has appointed John Bertko, chief actuary for Humana, to the Medicare Payment Advisory Commission. ® Gary Venter, managing director for Guy Carpenter & Co. in New York, and Shaun Wang, group research director for SCOR Reinsurance Co. in Itasca, Ill., were awarded the Ronald Ferguson Reinsurance Prize from the Casualty Actuarial Society. Venter’s award was for a paper establishing a methodology for quantifying correlation among various loss distributions, giving insurers and reinsurers a better understanding of a portfolio’s risk attributes. Wang’s award was for a paper on calculating risk premiums for catastrophe bonds. ® Frank Douglas has been promoted to senior vice president and casualty actuary for American International Group in New York. He was formerly vice president and casualty actuary. ® Elizabeth Riczko has been named president of insurance operations for the Ohio Casualty Insurance Co. in Fairfield, Ohio. She was formerly executive vice president and chief operating officer of the personal lines division. Derrick Shannon has been named senior vice president of the personal lines division, succeeding Riczko. He was formerly vice president of personal lines product management. ® Rod Turner has been named vice president of product policy for the trade association America’s Health Insurance Plan in Washington. He was formerly vice president of government and industry affairs at American Republic Insurance Co. in Des Moines, Iowa.

A c t u a r i a l U P D AT E

August 2004


Workers’ Compensation, Continued from Page 1

This isn’t just about insurance; this is about the economy at large.

and, the panelists contended, the insurance industry hasn’t had enough time to build up the capital and doesn’t have the experience necessary to manage the huge claims that could result from another terrorist attack. The Academy’s Extreme Events Committee has just published a new monograph, P/C Terrorism Insurance Coverage: Where Do We Go Post-Terrorism Insurance Act?, that reviews how TRIA has stabilized the property/casualty insurance market since its 2002 enactment and suggests that the partnership of the federal government with the insurance industry in providing terrorism coverage continues to be critical (see story below). The monograph also discusses the difficulty in quantifying terrorism risk exposure. “This isn’t just about insurance; this is about the economy at large,” said Debra Ballen, executive vice president for the American Insurance Association, referring to the ripple effect if insurers are bankrupted by massive claims arising out of another terrorist attack. And it’s not just a problem for target cities like New York and Washington. John Leonard, president and CEO of Maine

Employers’ Mutual Insurance Co., the guaranteed market for workers’ compensation insurance in Maine, told the briefing audience that without TRIA his company’s New England subsidiary, MEMIC Indemnity Co., would have to cease writing business, leaving employers such as the University of New Hampshire — and its 40,000 employees — without workers’ compensation coverage. “The bottom line is that (insurance industry) capital remains inadequate in the absence of a federal backstop,” Ballen said. “Given the numbers, the stark reality is that even pooling together the industry’s capacity, it’s not enough.” Although members of the briefing panel recommended a two-year extension of TRIA, they stopped short of advocating that TRIA be permanently enacted. “TRIA one day may be held as a success, but what hasn’t been tested is the system that’s been put in place,” said panel moderator Richard Hofmann, chairperson of the Academy’s Workers’ Compensation Subcommittee. Extending the law will buy more time to study whether the TRIA mechanism is the best way to go, said Hofmann.

ACADEMY WEIGHS LIFE AFTER TRIA BY PROVIDING A BACKUP of federal reinsurance coverage, the Terrorism Risk Insurance Act (TRIA) of 2002 helped stabilize the market for commercial terrorism insurance. But with TRIA set to expire at the end of 2005, it is unclear how well private reinsurance markets will cope when federal reinsurance coverage lapses. In a new monograph, P/C Terrorism Insurance Coverage: Where Do We Go Post-Terrorism Risk Insurance Act (TRIA)?, the Academy’s Extreme Events Committee examines current insurance market conditions, the impact of TRIA, and whether the insurance industry can provide needed terrorism coverage if TRIA is allowed to expire. (A bill to extend TRIA for an additional two


A c t u a r i a l U P D AT E

years was introduced June 22 in Congress and has been referred to the House Committee on Financial Services.) The monograph updates and expands on information contained in an earlier monograph, Terrorism Insurance Coverage in the Aftermath of Sept. 11. Among the committee’s findings in the new monograph: ® Although TRIA requires that insurers offer coverage to all commercial line policyholders, it is estimated that less than 20 percent take advantage of the option, perceiving it to be expensive or unnecessary. As a result, only those who most need the coverage buy it, potentially resulting in adverse selection. Similarly,

August 2004

the perceived concentration of terrorism risk in major urban areas makes it harder for insurers to diversify the risk. ® An accurate prediction of the frequency of terror attacks is still largely elusive. In the absence of adequate quantification and risk management tools, a vibrant reinsurance market for terrorism coverage has yet to develop. ® The cost to commercial lines of a future extreme terrorist attack ranges from $50 billion to $100 billion, compared with industry surplus across all lines at the end of 2003 of $347 billion. Another extreme terrorist attack could result in widespread insolvency in the insurance industry.

® Any long-term solution to the problem of terrorism coverage will require the partnership of private insurance industry with other sectors, possibly including the federal government. The monograph also examines the effect of terror attacks on personal lines of property/casualty insurance that currently aren’t covered under TRIA. John Kollar is the chairperson of the Extreme Events Committee. Other members are James Biller, Peter Burchett, Kay Cleary, Dennis Fasking, Pat Furst, Steven Goldberg, Dave Lalonde, Barry Lipton, Stuart Mathewson, Anthony Pipia, Jack Swisher, and Thomas Weidman.

HSAs, Continued from Page 1 and obesity weight-loss programs. Also, preventive care generally does not include the treatment of existing conditions. State-Mandated Non-Preventive Benefits State-mandated non-preventive benefits, such as first-dollar coverage, could have effectively barred the sales of HDHPs and subsequent HSA contributions. Recent guidance provides for a transition period allowing access to HSAs while states review and modify their laws. This transition period will last until Jan. 1, 2006. Prescription Drugs There has been pressure from some quarters to exempt prescription drug costs from the deductible. Treasury guidance makes it clear that drug coverage isn’t exempt. ERISA Plan Status The Labor Department issued a release stating that HSAs generally don’t qualify as ERISA-covered employee benefit plans. An employer may contribute to an employee’s HSA without it being considered an ERISA-covered plan, provided that the involvement is limited by certain conditions, such as: ® The employer can’t dictate how HSA

funds are used. ® The employer can’t make or influence investment decisions on funds contributed to the HSA. Permitted Insurance Treasury’s guidance specified that gap and limited benefit medical plans that can be sold along with an HDHP and still allow an individual to be eligible to contribute to an HSA are limited to coverage for accidents, disability, dental care, vision care, or long-term care. HSAs, HRAs, and FSAs While the statute does not permit individuals to contribute to an HSA while covered by general-purpose flexible spending accounts (FSAs) and health reimbursement accounts (HRAs), there is some flexibility. For example, eligible individuals may contribute to an HSA while covered by certain types of employer-provided plans that reimburse employee medical expenses. One allowable type of plan cited is a limitedpurpose HSA or FSA that restricts reimbursements to certain permitted benefits such as vision, dental, or preventive care benefits. While the guidance has provided clarity, there are still some issues left to ad-

dress, including: ® Non-discrimination rules, when HSAs are included as part of a cafeteria of plans ® Lifetime benefit maximums, based on earlier Treasury statements, may or may not be allowable. Treasury is also seeking comments on what would be a reasonable relationship between the lifetime benefit amount and other amounts such as deductibles, out-of-pocket maximums, etc. ® The timing of when inflation-indexed components of HDHPs, such as the minimum amount of the deductible, are set. It appears that indexed amounts will be reset annually effective Jan. 1. If Treasury determines that the new HDHP minimum deductible is now higher than $1,000, it’s not entirely clear when the newly established amount would apply. While most large group programs become effective Jan. 1, this is not the case with many individual and small group policies. There are other questions that the subgroup has raised, and assuredly others that it has yet to contemplate. How and when guidance is issued could have a big impact on the acceptance and success of HSAs. Patrick Collins is chairperson of the Academy’s Health Savings Account Subgroup.

Last Year the Academy’s Life and Health Qualifications Seminar SOLD OUT Early!

This Year, Don’t Miss Out—Register Now! Should You Attend? New FSAs (effective 2000 or later) may not meet all of the life- and health-specific qualification standard requirements to be able to issue prescribed statements of actuarial opinion. The L&H Seminar can solve this problem. Others

w w w. a c t u a r y. o r g

can take this opportunity to earn significant PD and

November 9-12, 2004

CE credit. Register on-

Alexandria, Virginia

line today at www.actuary. org. Questions? Contact Rita

The Early Registration Deadline Is August 13!

Winkel at 202-223-8196 or

A c t u a r i a l U P D AT E

August 2004


Academy Membership Milestone


S THE BOOKS CLOSED ON THE FIRST HALF OF 2004, the Academy reached a milestone: With the addition of 36 new members approved in June, the Academy’s membership topped 15,000 for the first time in its 39-year history. Specifically, the Academy now boasts 15,016 members. And while the 36 new members joining in June helped, membership had been growing throughout the first half of 2004, with a

total of 222 members joining in the first six months of the year. By joining, these new members have demonstrated a commitment to ethical and responsible actuarial conduct and an interest in keeping up with the issues and events that are shaping the profession. To the following new members: Welcome to the Academy! You are in good company.

Adebowale Oluranti Ajayi Kris Bagchi Brian T. Ballard Kim Balls Stevan Baloski Steven R. Barclay Dana Barlow Brian Bedwell P. J. Beltramini John A. Beneventano Neil Berns Pamela BinderEscobosa Lowell D. Bittinger Michael J. Blackburn Marshall Peden Blaine James C. Blydenburgh Thalia V. Bouklas Kelly M. Bowler Tobias E. Bradley Heather Rae Brady Jennifer Brady Brian J. Brown Robert A. Brown Suejeudi Buehler Tamara Lois Ann Burden

Caixia Ge William J. Gerhardt Kenneth R. Germann David Gilliland Robert M. Glus Erik Goodhard Christina S. Goodrich Andrew E. Gordon Ryan Edward Gould Michael S. Green Marshall C. Greenbaum Joseph P. Greenwood Elizabeth Skiba Hall Toby Lincoln Hall Thomas Hanson Adam D. Hartman Steven M. Hastings Ia Hauck Tina DeAnn Haugbro Sara Haugerud Joseph T. Hayes Stephanie Hayes Jonathan Hede Geoffrey Robert Hileman Simon Hill Jeremy Hoch Jeffrey Dale Holzbauer Allen J. Hope Dylan W. Huang Liangjiao Huang Daniel P. Hulten Allison Ann Hurt Katherine Rose Ignagni Luca Inserra Joseph Marino Izzo Jesse T. Jacobs Mona D. Jani Darrell Gordon Johnson Mark Raymond Juneau Rebecca C. Justice Sarah M. Kadlecik Sheetal Kaura David Anthony Kelly Catherine E. Kennedy Emily Kessler Justin Kindy Raymond Kluesner John E. Kollar Michael C. Kuhse Joseph Scott Lancaster Jr.

Herschel Day David De Nicola Paul B. Deemer Carrie Derksen Stephen Devine Melanie S. Dihora Joey M. Dizenhouse Jonathan E. Dobbs Steven David Draper Jeffrey J. Drzazgowski Ramakrishna Duvvuri Amy Eby Seong-min Eom Richard G. Faw III Matthew B. Feldman Rebecca Bodek Feldman Yu Feng David Fenster Julius John Fernandez Steven Ferrara Daniel Francis Feucht Jason Fine Daniel E. Flynn Sy Foguel Edward W. Frees Russell P. Gallagher Michelle Garshon

Joe Sutliff

Gregg M. Burk Lian He Cai Scott W. Carpinteri Greg Carther Audrey Cervas Kenneth Chang Ching-yi Angela Chen Yi Chuan Chen Ching-Zen Cheng Hung-Hsun Jonathan Cheng Kate Fung Yen Chiew David G. Chilkowitz Evan Christensen Traci M. Christian James Christou Wesley Clifton Charles N. Coatsworth Jr. Brian Allan Coley Joy Conetta David Coplan William Paul Cross Gregory Michael Cryer Gregory A. Dafler Thomas A. Dahl Francois Dauphin

While this line might actually work for superheroes, actuaries who find themselves in similar situations shouldn’t try it. Precept 12 dictates that actuarial titles and designations may be used only in a manner that conforms to authorized practices (and getting out of a ticket isn’t one of them).


A c t u a r i a l U P D AT E

August 2004

Michael Leonberger James T. Leung On Man Julian Leung Eric F. Liland Amy Mei-Chu Liu Caroline Liu Alicia S. Loftus Roger Loomis Wendy Ludbrook Kevin Q. Luu John Maher James W. Mann Catherine Prevost Martin Dennis Cameron Martin Matthew Martin Catherine Maxwell Brendan McCallum Jess McGrath John David McMichael Patrick Mele Amol Mhatre Troy Milbrandt Cheryl Mizrahi Timothy C. Mosler Zohair Motiwalla Seth Myers Jason H. Natof James P. Nau Joseph P. Newton Yuri Nisenzon Brian O’Hara Chris Ogburn Vanessa Olson Jason H. Ou Wayne E. Pages David Palmerino Amy K. Peach Kristin Piltzecker David Andrew Pitts Timothy K. Pollis Robert Pope Ladd Preppernau Yubo Qiu Brad Ramirez Ronaldo Cifra Ramos David W. Reed Mendy Reichman William Augustus Reynolds Jr. John P. Richardson Wendi Richmond Michael Ridler Brandon J. Robertson

Robert Roddy Keith A. Rogers Janelle P. Rotondi Denis Roy Julie C. Russell Andrew Ryba Judith Sackrowitz Jasyn Sadler Tazemmen Samji Jeff Samu Beth R. Sanders Graham A. Schmidt Robert John Schutte Erin Sheriff Reid Allen Smiley Gerald Todd Stewart Tom Strickland Feng Sun Hope C. Swedenburg Chang Sean Tan Yuan Tao Marcus Tarrant Elizabeth Moran Taylor Jing Teng Neeza Thandi Patrick Thorpe Michael Tiernan Michael Tivilini Maria Mercedes Torres-Jorda Anne Treankler Christopher Ryan Tucek Gregory D. Turner William J. Turner Nazir Valani Susan Van Horn Marie-Eve Vesel David J. Vnenchak Jeffrey J. Voss Brian J. Walker Daniel Wallace Keith A.Walsh Kristen Jeanne Walter Lieping Wang Arthur Scott Whitson Rodelle Williams William S. Winkler Josh Worsham George Xenakis Guixin Xu Su Yang Donghai Yu Yuan Yuan Ryan K. Ziemann

Social Security Reform

Public Education in an Election Year BY




that relies primarily on volunteer labor weigh in on important issues in all the rough-andtumble of a national campaign? This was the question facing the Academy’s Social Insurance Committee in the run-up to this year’s presidential election. For over a decade, Social Security’s trustees — using intermediate (best estimate) assumptions over a 75-year period — have been reporting that the system is not in close actuarial balance. As a result, the need to change the system (usually characterized as reform) is a perennial election issue. The proposal of the Bush campaign to introduce individual accounts as part of the solution to Social Security’s financial problem made this issue even more prominent before the last election. Social Security individual accounts are part of a larger administration theme of moving away from a comprehensive social safety net toward greater reliance on self and family for achieving financial security. But currently Social Security reform is on the administration’s back burner, behind tax reduction, education reform, the war in Iraq, and other initiatives. Will these issues overshadow Social Security in the upcoming campaign? The Social Insurance Committee felt it was impractical for the Academy to respond in real time to specific campaign proposals from the presidential candidates. Campaign proposals on complex issues such as Social Security always contain blank spaces the candidates promise will be filled in later after they are elected. This is necessary both to simplify the campaign message and to avoid unduly limiting policy options once in office. But as a result, the main thrust of any Academy response inevitably would be that the proposal is incomplete. Consequently, the committee decided it could play a more dynamic role as an educator. As a first step, the committee has updated 11 of 13 Academy issue briefs on Social Security to reflect the current state of the debate. Two in particular, Social Security Individual Accounts: Design Issues and Social Security Benefits: Changes to the Benefit Formula and Taxation, now include actuarial evaluations of current reform proposals with and without individual accounts. Both have been widely circulated to policymakers on Capitol Hill and in the administration. To address the problem of candidates’ making incomplete proposals from the stump, the committee prew w w. a c t u a r y. o r g

Academy Senior Pension Fellow Ron Gebhardtsbauer makes a point at the April 16 Capitol Hill briefing.

pared The Questions Candidates Should Answer about Social Security Reform, an election guide for journalists and voters that highlights issues that need to be addressed in any comprehensive reform proposal. Finally, the committee recently sponsored two Capitol Hill briefings on Social Security reform for congressional Currently Social Security reform staffers and policy-makers. An is on the administration’s back April 16 briefing focused on reform proposals that do not burner, behind tax reduction, involve individual accounts. On May 3, Academy experts education reform, the war discussed reform proposals inin Iraq, and other initiatives. volving individual accounts. Having set the stage, the Will these issues overshadow committee still has one more Social Security in the upcoming audience to reach: the general public. This is an area where campaign? individual Academy members can help. The slides from the two Hill briefings have been combined and are available on the Academy’s website. They are available for you, your department, or your actuarial club to use in bringing an actuarial perspective on Social Security reform to your community. The issue briefs contain the comprehensive background material you will need for presenting the slides, and Academy staff and members of the Social Insurance Committee are available to provide further assistance. If you feed us well enough, some of us might even be willing to help out in person. Eric Klieber is chairperson of the Academy’s Social Insurance Committee.

A c t u a r i a l U P D AT E

August 2004


Prepare Now for The Actuarial Update



William Carroll Andrew Erman Ronald Gebhardtsbauer Rade Musulin Peter Perkins Adam Reese EDITOR



Becky Horst

American Academy of Actuaries PRESIDENT

Barbara Lautzenheiser PRESIDENT-ELECT



Jan Carstens Donna Claire Burt Jay Ken Kent Jan Lommele Robert Rietz


RE YOU READY FOR C-3 PHASE 2? The NAIC is moving to-

ward adopting the Academy’s recommendations on statutory reserves and risk-based capital (RBC) for variable annuities, with the stated goal of a year-end 2005 effective date. If adopted, the new requirements would put the actuary in the driver’s seat in a number of important ways. If you are responsible for statutory reserving and/or RBC and your employer insures or reinsures variable annuities, you need to prepare. One way to get up to speed is to register for the Academy’s C-3 Phase 2 RBC and Reserves Seminar, Sept. 21-22 at the Marriott Copley Plaza in Boston. The seminar is scheduled to run immediately following the SOA Valuation Actuary Symposium.






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.

A c t u a r i a l U P D AT E

I have to build a scenario generator? ® How should I structure the model and framework to achieve the most useful results? ® How should I calculate standard scenario amounts, and what impact will they be likely to have? ® Is the Academy developing a practice note? Will the practice note affect the way my company operates? ® I would like to recognize hedging in my results. What will be permitted? ® What do I need to do to comply with the certification and documentation requirements? In addition to Brown and Campbell, others who are signed up to lead the Academy seminar are Larry Gorski, chairperson of the Life Capital Adequacy Subcommittee, Philip Barlow, Geoffrey Hancock, Jim Lamson, John O’Sullivan, and Bill Wilton.

HOW TO REGISTER You can register for the C-3 Phase 2 seminar by downloading a form from the Academy’s website,, or by calling Academy Legislative Manager Kasha Shelton, 202-2238196, who can fax you a form. The seminar registration fee is $675.00 (the fee is waived for government actuaries). The registration deadline is Sept. 10. LODGING The C-3 Phase 2 seminar will be held at the Boston Marriott Copley Place immediately following the Society of Actuaries’ Valuation Actuary Symposium (Sept. 20-21). Please make your room reservations by Aug. 20; room reservations after this deadline are subject to availability. To make your room reservations contact: Boston Marriott Copley Place 110 Huntington Avenue Boston, MA 02116 Phone: 617-236-5800 Fax: 617-236-5885

©2004 The American Academy of Actuaries. All rights reserved.


Led by Bob Brown, vice chairperson of the Academy’s Life Capital Adequacy Subcommittee and chairperson of its C-3 Work Group, Tom Campbell, chairperson of the Academy’s Life Valuation Subcommittee, and others who have been developing the Academy’s recommendations, the seminar will provide you with the information you need to know for proceeding under the new regulations. Questions that the seminar will address include: ® Are my products (variable annuities with or without death and living benefit guarantees or others) within the scope of the requirements? ® Should I use the modeling approach for guaranteed minimum death benefit risks or the alternative factor-based methodology? ® If I use the modeling approach, do

August 2004

If you are phoning for your room reservation, please mention that you are part of the room block for the Society of Actuaries meeting. Room reservations can also be made online at ROOM RATES AND ONLINE RESERVATION GROUP CODES: Single or double room . . . . . . . . . . . . . . $229 Group Code: soasoaa Triple (3 people) . . . . . . . . . . . . . . . . . . . $249 Group Code: soasoab Quad (4 people) . . . . . . . . . . . . . . . . . . . $269 Group Code: soasoac CONTINUING EDUCATION CREDIT The American Academy of Actuaries is a provider of continuing education for actuaries under the Qualification Standards for Prescribed Statements of Actuarial Opinion. Up to 10 hours of organized continuing education activity credit in the life practice area may be earned by attending the entire seminar.


Workers’ Comp Insurance and Terrorism T HE N EWSMONTHLY OF THE A MERICAN A CADEMY OF A CTUARIES BY P ATRICK C OLLINS an individual or group...