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A merican A cademy


Using Reinsurance to Expand Health Coverage


in expanding health insurance opportunities for small businesses in this country? Maybe, but only as part of a larger effort. And not without the potential for unintended adverse consequences. That was the response of Patrick Collins, testifying on behalf of the Academy at a May 25 House Small Business Committee hearing on expanding small-business health insurance coverage using the private reinsurance market. It’s important to understand what private market reinsurance does and doesn’t do, Collins told legislators. Reinsurance by itself doesn’t reduce overall medical costs but simply shifts them from one entity to the other. It also can’t make uninsurable risks insurable. While the existing commercial medical reinsurance market is vibrant, it’s used mostly by small and mid-sized insurance companies, with most of the programs customized for particular needs, Collins said. Large health plans and employers that can absorb more risk are less likely to buy reinsurance protection. “A standardized reinsurance program will tend to work well for some and not for others,” Collins told legislators. “While it may work on average, it may not an reinsurance play a role

Inside Medicare Reform Options According to a new monograph, there are no simple solutions���������� Page 4 Capitol Hill Briefing Academy experts discuss options for Medicare and Social Security reform������������������������������ Page 6 International Accounting The Academy responds to an IAA exposure draft on measuring liabilities for insurance contracts ���������� Page 8 NAIC Action Coverage of Academy activities at the summer meeting in San Francisco�������������� Page 10

Patrick Collins, second from left, testifies before the House Small Business Committee.

work well for any one health plan or employer.” Applauding the committee for tackling a difficult and complex issue, Collins said there’s no quick or simple fix for relieving the burden of high health costs for small employers. In trying to set up a reinsurance program for small businesses, Collins said, legislators need to clearly define their objectives. At the same time, Collins said, legislators need to be wary of provoking unintended consequences. “Often programs are put in place and an assumpSee Reinsurance, Page 

Qualification Standards Near Final


t its May 23 meeting ,

the Academy’s Board of Directors adopted revisions to the Qualification Standards as recommended by the Academy’s Committee on Qualifications. Pending clarification of the language in connection with draft statements of actuarial opinion (SAO), the revised standards are expected to be finalized this summer. In a June electronic letter to all Academy members, Academy President Steven Lehmann discussed the changes in detail. “These revised Qualification Standards represent a significant step forward for the integrity of our profession,”

Actuarial Update

A c a d e m y C o n g r e s s i o n a l Te s t i m o n y

A ctuaries

Lehmann wrote in his letter. “They will enhance the actuary’s reputation and, ultimately, increase the value proposition actuaries bring to clients.” “The new standards—the culmination of a major effort by the Committee on Qualifications, chaired by Kathy Riley—are consistent with the profession’s goal of uniform continuing education requirements,” said Allan Ryan, the Academy’s vice president for professionalism. “The broadening of the scope of the Qualification Standards will affect most practicing actuaries.” Major highlights of the revised stanSee standards, Page 

Calendar July 12-14 North American Actuarial Council meeting, Montreal

16 Academy Financial Reporting Committee meeting with SEC, Washington 19-22 NCOIL summer meeting, Seattle 20 Academy Life Reserves Work Group meeting, Chicago

29 Academy Pension Practice Council meeting, Vancouver, Canada

30 Academy Pension Committee meeting, Vancouver, Canada

August 2 Academy Executive Committee meeting, Washington

5-9 National Conference of State Legislatures annual meeting, Boston

9-11 SOA 42nd annual research conference, Pittsburgh

September 5-6 ASB meeting, Washington 10-11 CAS Casualty Loss Seminar, San Diego, Calif.

17-18 SOA Valuation Actuary Symposium, Austin, Texas

19 Academy Council on Professionalism meeting, Washington 20-21 SOA small-group health underwriting seminar, Raleigh, N.C.

24-26 SOA critical illness conference, San Antonio

26-28 SOA DI and LTC insurer’s forum, San Antonio

29-October 2 NAIC fall meeting, Washington

October 1 Council of U.S. Presidents meeting,

Academy News Briefs Talking Heads


he Academy has been training

individuals to serve as volunteer spokespersons for nearly five years. In the first half of 2007, the Academy sponsored three more classes in as many months. On April 25, Chet Andrzejewski, vice chairperson of the Pension Committee and a member of the Pension Practice Council; Grady Catterall, a member of the Health Practice Council; and Tonya Manning, a member of the Joint Program Committee for the Enrolled Actuaries Meeting, were trained. On May 16, Shawna Ackerman, co-chairperson of the P/C Extreme Events Committee and a member of the Casualty Practice Council; Darrell Knapp, chairperson of the Health Practice Council Financial Reporting Committee and a member of the Health Practice Council; and David Shea, chairperson of the Committee on Federal Health Issues and a member of the Health Practice Council, received training. And on June 20, Larry Bruning, chairperson of the Centralized Examination Office Team and a member of the Life Practice Council; Patrick Collins, vice chairperson of the Committee on Federal Health Issues and a member of the Health Practice Council; and Ron ­Gebhardtsbauer, the Academy’s

Grady Catterall, left, practices on-camera interview techniques.

senior pension fellow, completed training. One more training session is scheduled for October. Academy vice presidents nominate volunteers from their practice areas to receive training. Those chosen for training are usually involved in high-profile Academy projects that are of interest to the media. So far, the Academy has trained nearly 60 individuals willing to represent the profession on air and in print. Through training, a willingness to try, and a lot of practice, they have learned to communicate clearly, succinctly, and effectively.


2 Academy Board of Directors meeting, Washington

3 Academy leadership and annual meeting, Washington

4-6 North American Actuarial Council meeting, Lake George, N.Y.

14-17 SOA annual meeting, Washington 17 Academy P/C loss reserve opinion seminar, Chicago 18 Academy P/C loss reserve opinion seminar, Chicago 21-24 ASPPA annual conference, Washington

22-24 CCA annual meeting, San Antonio 25-28 IAA meeting, Dublin, Ireland Web Interface

Links to documents underlined in blue are included in the online version of this issue at

Volunteer Resources At its May 23 meeting, the Academy’s Board of Directors formed a new presidential committee to follow up on findings from the Academy’s recent web survey on volunteerism. The Volunteer Resource Committee, chaired by Bob ­Conger, will have responsibility for volunteer recruitment, management, and development. The committee will have to hit the ground running: Nearly 500 Academy members took the monthlong

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web survey, which gave participants the opportunity to rank their interest in participating in various Academy volunteer groups, ranging from practice councils to committees to task forces. As work of the committee progresses, further information will be available in the Update and on the Academy’s website.

Philadelphia Actuaries Club. Lehmann spoke to the local club on current and upcoming Academy efforts, including work on a principlebased approach to insurance regulation, revisions to the Qualification Standards (see story, Page 1), and efforts to update the Academy’s strategic plan. Timed Out While not fre-

Philly Declaration Academy President Steven Lehmann

was the guest speaker at the May 8 meeting of the

quent, the rising sequence for time and date that was reported in the May and June issues of Update

nomic costs to reach nearly $6 billion in 2004.




Approximately the number of Google search results when you type in the key words: American Academy of Actuaries

(02:03:04 05/06/07) is not as rare as we thought. ­ ichael Mudry, a retired M actuary living in St. Davids, Pa., points out that 9 percent of the years in each century will have a time/date sequence where the numbers each increase by 1. Taking things a step further, Mudry uncovers other options such as a number being repeated six times (01:01:01 01/01/01), which occurs in this century 12 times from 2001 through 2012; or using a reverse sequence where numbers decrease by one (05:04:03 02/01/00), which occurs eight times in 100 years (from 2000 through 2007 in the 100 years beginning with 2000). Expanding to the use of a 24-hour clock or changing the sequence to move up (or down) by differences of two or more opens up even greater possibilities. But you get the idea. One thing is certain: Time has run out on this topic. In the News

Several news sources reported on the testimony of Patrick Collins, chairperson of the Academy’s Medical Reinsurance Work Group and a vice president with Munich Re America HealthCare in Princeton, N.J., at a May 24 House Small Business Committee hearing on medical reinsurance (see story, Page 1). Collins’ comments were published May 25 in the w w w. a c t u a r y. o r g 

Washington Times, in the National Underwriter Life & Health online edition, and on Best Wire. An interview with former Academy President Dan ­McCarthy, a consulting actuary with Milliman in New York, on how small businesses could hold down health care costs while still providing valuable benefits for their employees, was featured in the Wall Street Journal’s online edition. An opinion piece by Rep. Paul Kanjorski (D-Pa.) on the Terrorism Risk Insurance Act was featured on May 2 in The Hill, a daily newspaper aimed at legislators and congressional staffers. The op-ed referred to the Academy’s 2006 insured-loss estimate from a large nuclear, biological, chemical, or radiological terrorist attack in New York. The estimate was also featured in a May 7 Financial Week article and was combined along with estimates from three other cities into a graph accompanying a May 28 BestWeek article. A community opinion piece published in the Dallas Morning News on May 4 referred to the 2006 fact sheet by Academy Senior Health Fellow Cori Uccello on the costs of nonsmokers’ exposure to secondhand smoke. Uccello estimated medical and eco-

A May 7 National Underwriter Life & Health article reported on the Academy’s work developing a draft valuation manual for consideration by the Life and Health Actuarial Task Force of the National Association of Insurance Commissioners (NAIC) at the NAIC’s June meeting in San Francisco. The manual was received by the NAIC at that meeting and exposed for comment (see story, Page 10). Saul Friedman’s May 12 Newsday column on the impact of economic growth on Social Security’s financial shortfall directed readers to the Academy’s Social Security Game.

A May 10 Academy ­letter to the U.S. Department of Energy on pension and medical benefits, signed by James Verlautz, chairperson of the Academy’s Pension Committee and a consulting actuary with Mercer Human Resource Consulting in Minneapolis, was quoted in a May 18 article by the Bureau of National Affairs. Verlautz wrote that the perception that defined benefit plans are more expensive than defined contribution plans is flawed because the benefit levels of the plans are usually not comparable. On June 15, as the Update was going into layout, the DOE announced it was dropping the proposed change and would operate under the previously established contractor benefits policy. Look for the complete details in the August Update. A May 27 Orlando Sentinel article on phased retire-

ment cited the Academy as a source for the ratio of years spent working compared with years spent in retirement in 1940 and in 2006. The ratios came from a 2006 Academy issue brief about longevity and retirement policy. Rade Musulin, a member of the Update editorial board and head of Aon Re Services Australia in Sydney, was quoted in an op-ed in the May 3 Bradenton Herald that urged free market approaches to improving property insurance availability in Florida. Musulin compared insurance regulation in Australia, where regulation is at the federal level and focuses on solvency, with the U.S. system. There are no property residual markets in Australia, Musulin said, and no evidence that insurers, who operate in a competitive climate, are gouging customers when they set their rates. Kudos

Howard Bolnick, an adjunct

professor of finance at the Kellogg School of Management at Northwestern University and a former president of the Society of Actuaries, was named an honorary member of the Actuarial Society of South Africa at its annual general meeting, held in Cape Town in conjunction with the May 14-16 fourth annual International Health Colloquium. On the Move

Les Richmond has been

named a senior consultant for the Hay Group in Jersey City, N.J. He was formerly senior vice president with Aon Consulting in Somerset, N.J.

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health news

Medicare Reform: No Simple Solutions


edicare trustees released their 2007 report on the short- and long-term financial condition of the Medicare program in April, and the picture is bleak. Hospital Insurance (HI) non-interest revenues are expected to fall below spending this year, and assets are projected to be depleted by 2019. In 2006, Medicare expenditures totaled $402 billion, representing 3.1 percent of the gross domestic product (GDP). By 2080, expenditures could represent over 11 percent of GDP. There is no simple solution to Medicare’s challenges, according to a new monograph from the Academy’s Medicare Steering Committee. The monograph, Medicare Reform Options, discusses numerous alternatives available to policymakers as they consider ways to reform the program but warns that very few would solve Medicare’s financing problems by themselves. “There are specific criteria on which any reform should be evaluated,” said Cori Uccello, the Academy’s senior health fellow and one of the authors of the monograph. “Would it improve Medicare solvency? Would it reduce the strain on the federal budget or the economy? Is it a one-time improvement or a permanent reduction in spending growth?” standards,

Options to decrease Medicare expenditures include: ➤  Reducing provider and plan payments. This would include slowing the growth of provider payments or reducing payments to Medicare Advantage plans. ➤  Cutting benefits and/or increasing costs to beneficiaries. Medicare could incorporate an increase in the eligibility age, similar to Social Security. Other options include increasing beneficiary cost-sharing requirements and reducing or eliminating some services. ➤  Improving delivery efficiencies/quality. Provider practices could be structured around evidence-based practice models. ➤  Implementing a defined contribution (DC) approach. This offers an alternative to adjusting benefits and places more control on the individual. There are a number of ways to accomplish this. One option

interaction with actuaries or other professionals working for different organizations. Relevant in-house meetings can satisfy the requirement of interaction with actuaries or professionals working for different organizations by using outside speakers. ➤  Other than the six organized CE credit hours, the remaining credit hours under the new standards may be obtained from other activities, including reading actuarial literature, statutes or regulations, and other books, papers, or articles, or by writing professional papers on relevant

technical or professional topics. ➤  The new CE requirements will take effect on Jan. 1, 2008, but will be phased in so that only 24 hours of CE will be required in 2008. Beginning in 2009, the full 30-hour CE requirement will apply. ➤  To satisfy part of the general qualification standard, actuaries will need three years of responsible actuarial experience—defined as work that requires knowledge and skill in solving actuarial problems, among other general qualification requirements.

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dards include the following: ➤  The new standards define what an SAO is and will apply to all actuaries who issue SAOs in the United States. The current standards apply only to Prescribed Statements of Actuarial Opinion. ➤  Annual continuing education (CE) requirements will increase under the new standards from 24 hours every two years to 30 hours per year, of which a minimum of three CE credit hours must cover professionalism topics and a minimum of six must be from organized activities that involve

The monograph breaks down potential reforms into two broad categories—those that will increase Medicare revenues and those that will reduce program expenditures. Options to increase Medicare revenues include: ➤  Increasing the HI payroll tax rate. The rate would have to increase from a combined 2.90 percent to 6.41 percent (a 122 percent increase) to eliminate the deficit over the next 75 years. ➤  Making the HI payroll tax rate progressive. With this option, those with lower earnings would face lower payroll tax rates, and those with higher earnings would face higher tax rates. ➤  Increasing general revenue funding. Allocation of general revenue funds could supplement the HI program, although as the deficit increases, the general revenue contributions would need to increase gradually as well. ➤  Increasing beneficiary premiums. The Supplementary Medical Insurance program already gets 25 percent of its revenue from beneficiary premiums, but policymakers could consider adding an income-related beneficiary premium requirement to the HI program.

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could allow the government to specify a contribution level, which beneficiaries could then apply to the cost of coverage under a traditional fee-for-service or a Medicare Advantage plan. ➤  Setting up automatic adjustments to revenues and/or spending. As long as such provisions weren’t overridden, adjustments could be set up to go into effect at certain funding shortfall thresholds or when spending growth exceeds specified levels. The monograph also discusses a trigger provision included in the Medicare


Modernization Act of 2003. If two consecutive trustees’ reports project that general revenue funding sources will account for more than 45 percent of Medicare spending within the next seven years, the president is required to develop a proposal to reduce the share of Medicare funding that comes from general revenues. This

provision was triggered this year, and the president’s proposal must be released within 15 days of the 2008 budget submission. While Congress only needs to consider the proposal, the requirement offers an opportunity to focus on Medicare’s financing problems.  — Heather Jerbi

health Briefs ➤  Joining the Academy’s Health Principle-Based Work Group are Van Jones, a principal and consulting actuary with Mercer Oliver Wyman in Milwaukee, and Norman Zwitter, a valuation actuary with BlueCross BlueShield of Tennessee in Chattanooga.

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tion is made that everything else will remain the same,” Collins said. “Often, everything does not remain the same.” Collins’ comments were echoed by several others who testified at the hearing. In developing any kind of insurance pool for small businesses, said Edmund Haislmaier, a senior research fellow at the Heritage Foundation, Congress needs to be careful it doesn’t unintentionally create incentives for carriers to try to transfer more of their risks onto taxpayers. In a question-and-answer period following his testimony, Collins fielded questions from the legislators on whether it was possible to improve health care access and keep health care costs affordable for small-business owners. Referring to small-group rate reform plans

enacted in various states in the 1990s, Collins said that while they limited certain rate practices, they also effectively raised the overall cost of insurance for the entire small-business­ market in those states. “Increased access tends to result in higher costs, so you Patrick Collins, center, meets with Rep. Nydia Velazquez (D-N.Y.), chairwoman of the House Small Business Committee, and Ranking have to balance the Member Rep. Steve Chabot (R-Ohio). two,” Collins said. In addition to Collins and HaislmaNational Association of Professional ier, others testifying at the hearing were Insurance Agents; and Janet Trautwein, Leonard Crouse, a Vermont insurance executive vice president and chief execuregulator; Steven Harter, a Missouri small tive officer of the National Association of businessman speaking on behalf of the Health ­Underwriters.

➤  To satisfy additional specialty requirements, actuaries may be required to have responsible actuarial experience in the specific area of actuarial practice relevant to the subject of the SAO. ➤  Currently enrolled actuaries (EAs) are deemed to meet the CE requirements under the current standards for the issuance of PSAOs in the pension practice area if they are in compliance with the Joint Board for the Enrollment of Actuaries’ CE requirements. Through 2010, EAs who issue SAOs related to retirement plans

to which ERISA applies will be exempt from the CE requirements of the new standards. However, beginning in 2011, the EA exemption will be very limited. EAs who issue SAOs other than the Form 5500 Schedule B certification and other government forms will need to satisfy the CE requirements of the new standards. Development of new Qualification Standards has been a multi-year project of the Academy’s Committee on Qualifications. A first draft was exposed for comment in May 2004 and a second version

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

was exposed for comment in January 2006. The committee received more than 200 comments on the second exposure draft from various groups and individuals. As the standards are finalized, the Academy will be launching an effort to publicize the new standards and answer questions from the profession about how they will affect working actuaries. Among planned events is an informational webcast. Look for future articles in the Update and on the Academy’s website for details. 

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Capitol Hill Briefing

Medicare and Social Security Reform


n back-to-back briefings on June 11, Academy experts offered congressional staff and other policymakers an in-depth look at options for reforming looming funding shortfalls in Medicare and Social Security. At the top of the bill was Medicare reform. Basing the discussion on a new Academy monograph, Medicare Reform Options, Academy Senior Health Fellow Cori Uccello stressed the importance of moving quickly to resolve funding issues for the hospital insurance portion of Medicare. According to the 2007 Medicare Trustees’ report, payments out of the system will exceed all money coming into the system, including interest on trust fund assets, in 2011. Trust fund assets are expected to be depleted a short eight years later, in 2019. More worrisome, the deficit in the program over the next 75 years is projected to be $11.6 trillion. Eliminating that deficit would require an immediate 122 percent increase in payroll taxes, or an

immediate 51 percent reduction in benefits, or some combination of the two. And that’s only if action is taken immediately. The longer we wait, the worse it will get, Uccello told the briefing audience. At the same time, said Tom Wildsmith, chairperson of the Academy’s Medicare Steering Committee, there are no easy solutions. “If this were easy, we would already be talking about doing it,” Wildsmith told the briefing audience. Options to reduce Medicare spending include reducing payments to providers and health plans, cutting benefits, improving efficiency in health care delivery, shifting more of the cost to beneficiaries through defined contribution health options, and investing trust funds in equities. Each solution has drawbacks, said Wildsmith, and there are a lot of unknowns that make it hard to project cost savings moving forward. “The equivalent of investment risk in the health care world is cost risk,” Wildsmith said. “We don’t know how much a day in the hospital will

Cori Uccello, left, and Tom Wildsmith discuss Medicare reform options at the first of back-to-back briefings.

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Options cost 20 years from now.” “There are a lot more moving parts to projecting Medicare spending than Social Security spending,” agreed Uccello, referring to projecting for health costs up to 75 years out. “So there’s a lot more ways to get it wrong.” As a result, Wildsmith and Uccello said, it is vital that policymakers consider Medicare’s problems in the context of spending growth in the health care system as a whole. “When we talk about reducing the cost of health care, what we are really talking about is reducing the growth rate so that it’s closer to the growth in the general economy,” Wildsmith said. On the other hand, said Academy experts at the second session, Social Security’s problems are not as difficult to solve. According to the 2007 report by Social Security’s trustees, benefits and administrative expenses are first expected to exceed tax income into the program in 2017. By 2041, it is expected that Social Security trust funds will be exhausted, although tax income will be sufficient at that point to pay 75 percent of the cost of benefits as they are currently structured. “Clearly the news isn’t as bad with Social Security,” said Ken Steiner, a member of the Academy’s

Pension Practice Council. “But while Social Security’s problems may be easier to fix than Medicare’s, it’s still very complicated.” The presentation, based on the Academy’s January monograph on Social Security reform, broke reform options into three categories: decreasing benefits, increasing taxes, or increasing investment returns. Because of increasing longevity, said Eric Klieber, former chairperson of the Academy’s Social Insurance Committee, “to an actuary, raising the retirement age is part of a sensible solution.” But it’s also important to consider the “money’s-worth” analysis, Steiner said, and how changes in the current system would affect an individual’s return on his lifelong investment in the system. While the Academy continues to remain neutral on the specific details of any reform option, said Academy Senior Pension Fellow Ron Gebhardtsbauer, it takes the position that Social Security reform should occur sooner rather than later in order to have more options in structuring the reform, to allow reforms to be phased in, and to instill confidence in the future of the program. 

Ranking IRS Guidance Needs Provisions of the Pension Protection Act of 2006 (PPA) top the Academy’s list of key issues on which it is awaiting guidance from the Internal Revenue Service (IRS). Contained in a May 31 letter to the IRS, the list prioritizes items the Academy’s Pension Committee would like to see addressed in 2007. Most important is guidance on certain PPA provisions, including guidance on lookback rules and on the April 1 measurement of funding status for calendar-year plans, since plan sponsors need to begin planning how to address these items this summer. The list isn’t comprehensive but targets areas of greatest urgency within broad topic areas such as funding, hybrid plans, and benefit restriction rules. The letter, signed by Pension Committee Chairperson James Verlautz, also urged the IRS to provide proposed guidance as early as possible to allow time for comments and the issuance of final guidance.

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risk management and financial reporting news

Academy Touches Base with AICPA


n May 23, the American Institute of Certified Public Accountants (AICPA) Insurance Experts Panel hosted its annual meeting with members of the Academy’s Financial Reporting Committee. A variety of issues were on the agenda, including business combinations, Financial Accounting Standards (FAS) 157 and 159, risk transfer in casualty reinsurance, valuation guidance, the International Actuarial Association (IAA) risk margin paper, restrictions on actuarial reports, and the International Accounting Standards Board (IASB) insurance contracts discussion paper. In the discussion on FAS 157 (Fair Value Measurement) and FAS 159 (Fair Value Option), AICPA panelists spoke about how best to establish risk margins for policyholder behavior given the lack of readily observable market inputs for these parameters. It was their opinion that most companies will be implementing FAS 157 by the end of the year and that some insurers have been considering the election of FAS 159 for certain assets and blocks of business, such as fixed annuity contracts. Marc Oberholtzer, chairperson of the Academy’s Committee on Property and Liability Financial Report-

International Accounting: Estimating Liab by

Kris DeFrain


t the request of the International

Association of Insurance Supervisors (IAIS), an ad hoc work group of the International Actuarial Association (IAA) is currently researching how to estimate liabilities for regulatory accounting purposes. Because the IAA’s findings could be used in implementing internationally accepted general purpose and regulatory reserving standards, the Academy’s Risk Margin Task Force has been closely monitoring the project. The IAA’s work is in response to a 2006 request from the IAIS. At the time, the International Accounting Standards Board (IASB) was also considering the issue. The IAA work group decided to develop a solution that would meet the needs of

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both the IASB and of the IAIS. In a recent discussion paper on accounting for insurance contracts, the IASB splits insurance reserve liabilities into two separate components: a current estimate (recognizing the time value of money) and a risk margin. The IASB has indicated that it doesn’t expect to define rules or dictate methodologies for implementing the principles it is establishing but would leave that work for others. In February, the IAA work group exposed for comment a first draft on the topic, Measurement of Liabilities for Insurance Contracts: Current Estimates and Risk Margins. In May 25 comments to the IAA on this exposure draft, the Academy’s task force said it would like to see further revisions in the paper, based

ing, discussed the updated risk transfer practice note published by COPLFR earlier this year. He highlighted the additional work done in describing situations where risk transfer may be considered reasonably self-evident. Kris DeFrain, chairperson of the Academy’s Risk Margin Task Force, told AICPA panelists of Academy concerns with the International Actuarial Association’s risk margin paper. On May 25, subsequent to the meeting, the task force sent a comment letter to the IAA detailing its concerns (see story, below). DeFrain also discussed recent work on international issues by the International Association of Insurance Supervisors and by the IASB. The meeting closed with a discussion on the IASB insurance contracts discussion paper. Both the Academy and AICPA expect to submit comments on the paper. In addition to DeFrain and Oberholtzer, Academy representatives attending the meeting were Henry Siegel and Andrea Sweeny, respectively chairperson and vice chairperson of the Financial Reporting Committee, Ralph Blanchard, Darrell Knapp, Michelle Smith, and Darin Zimmerman. — Tina Getachew

ilities on this round of commentary, and that the paper should then be exposed at least one more time. We believe the paper needs to be thoroughly vetted and broadly supported by actuarial associations throughout the world in order to have the desired effect should the IAIS and IASB proposals be adopted. The task force believes the guidance for current estimates needs to be more thoroughly developed, especially since the current estimates will be the largest components of the technical provisions. Since the initial and immediate uses of this paper will very likely be taken from the risk margin research, we believe it’s imperative to more completely and clearly document the pros and cons of the methodologies that can be used to calculate risk margins. A thorough analysis, even a cost-benefit w w w. a c t u a r y. o r g 

analysis, of the practicality of each of the risk margins methodologies needs to be explored. Kris DeFrain is chairperson of the Academy’s Risk Margin Task Force and chief managing actuary— property/casualty for the National Association of Insurance Commissioners in Kansas City, Mo.

Risk Management and financial reporting briefs ➤  Joining the Academy’s International Financial Reporting Standards Task Force are Ralph Blanchard, second vice president and actuary for St. Paul Travelers Cos. in Hartford, Conn.; Kermitt Cox, senior advisor, actuarial, for Aflac in Columbus, Ga.; Mark Freedman, a partner with Ernst and Young in Philadelphia; William Hines, a consulting actuary with Milliman in Wakefield, Mass.; Burt Jay of Omaha, Neb.; Kal Ketzlach, an actuary in Mendham, N.J.; and Stephen Strommen, a senior actuary with Northwestern Mutual in Milwaukee, Wis.

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life news

NAIC Exposes Draft Valuation Manual


t the summer meeting of the National ferred equity versus debt or common equity, Association of Insurance CommisWork Group Chairperson Nancy Bennett sugsioners (NAIC) in San Francisco, the gested in a presentation to the NAIC’s Hybrid Academy presented the NAIC’s Life and Risk Based Capital (RBC) Working Group that Health Actuarial Task Force (LHATF) with a draft most risks in hybrids are already captured in the manual providing a set of centralized standards for NAIC’s RBC formula under the C1 component statutory reserves for life, annuity, and health prod- for risk of asset default and the C3 component ucts. LHATF voted to expose the Academy’s draft capturing extension risk. valuation manual for comment. Questions about the treatment for hybrid secuAn integral part of the Academy’s ongoing prinrities first arose in 2006, triggered by a request from ciple-based initiative, the draft manual is designed the New York Insurance Department to the NAIC’s to give regulators, the Securities Valuation Office insurance industry, and (SVO). The SVO classified consumers a sense of a particular hybrid as comThe valuation manual is a key how the updated valumon equity, resulting in a step toward establishing a ation manual will be 30 percent RBC charge. The structured, including new classification promptly coordinated and manageable how reserve standards created major disruption in process for implementing a will fit in. At least inithe hybrid market because tially, many of the stanof confusion about the principle-based approach dards in the draft new amount of capital required manual (intended to be for hybrid securities. At its adopted by all states) will be the same as current fall 2006 meeting, the NAIC adopted an interim NAIC models, although several reflect the shift to solution in which the RBC is based on ratings from a principle-based approach. nationally recognized statistical ratings organiza“The valuation manual is a key step toward tions, notched down to capture certain risks that establishing a coordinated and manageable process the NAIC believes aren’t captured by the ratings for implementing a principle-based approach,” said agencies. Dave Sandberg, the Academy’s vice president for life The Academy’s final recommendations on a issues. “Following the requirements in the valuation replacement for the interim solution will be premanual, as provided under the current exposure of sented to the NAIC at the September meeting. the Standard Valuation Law, will ensure uniformity across all U.S. jurisdictions. Coordination with the life briefs Accounting Practices and Procedures Manual will ➤  Patricia Matson, senior manager and consulting also permit a more efficient exposure and adoption actuary for Deloitte Consulting in Hartford, Conn., process as changes are made in the future.” has joined the Academy’s Life Practice Council. The Academy will be incorporating any com➤  Joining the Academy’s Economic Generator Work ments the NAIC receives on the draft manual into Group are Faye Albert, president of Albert Associates a proposed final version it expects to deliver to in Miami; Jonathan Mossman, a consultant with LHATF at the NAIC’s fall meeting in Washington Towers Perrin in Philadelphia; and Sam Nandi, a in September. The final version will also contain consulting actuary with Milliman in Chicago. any additional regulatory decisions that are made ➤  Joining the Group-Term Life Waiver Table on principle-based life requirements. Work Group are Charles DeWeese, president of In other NAIC action, the Academy’s Invested DeWeese Consulting in Canton, Conn., and Randall Asset Work Group offered an interim report on Stevenson, chief managing life/health actuary for the National Association of Insurance Commissioners in its efforts to develop a long-term mechanism for Kansas City, Mo. assessing the risk in hybrid securities. Concluding that hybrids are similar to pre-


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Registration Has Begun For the Academy’s Popular Life and Health Qualification Seminar November 5-8, 2007, Arlington, Va.

Who Should Attend? 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 Life and Health Seminar can solve that problem. For more experienced actuaries, it may also serve as a basic education refresher or a component of continuing education.

For more information and to register online, go to or contact Rita Winkel, the Academy’s legal assistant (202-223-8196;

Save the Dates: October 17 and 18 Effective P/C Loss Reserve Opinions Seminar To meet expected demand, this annual one-day Academy seminar will be presented on Oct. 17 and again on Oct. 18 at the Chicago O’Hare Hilton. The instructors, content, and location will be the same for both sessions.

More information about the seminar will appear on the Academy website as it becomes available.

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The Actuarial Foundation has developed new supplementary materials for elementary-age students in grades 3–6 that can be used to enhance math instruction while staying true to the academic rigor required by state standards.

Actuarial Update Associate Editors

William Carroll Patrick Collins Andrew Erman Rade Musulin Geoffrey Sandler Donald Segal Editor

Linda Mallon ( Design and Production

BonoTom Studio Inc.

Download a copy, and take it to a school near you!

Marketing and publication production manager

Cindy Johns

American Academy of Actuaries

Copies are free online from the foundation’s website, http://www.actuarialfoundation. org/youth/mathacademy.html


Steven Lehmann President-Elect

William Bluhm Secretary-Treasurer

John Parks Vice Presidents

Robert Miccolis Allan Ryan David Sandberg John Schubert Donald Segal Timothy Tongson Executive Director

Kevin Cronin Director of communications

Mark Your Calendar September 18-19, 2007 Austin, Texas

A new Academy seminar on applying a principle-based approach to capital—status update and lessons learned from C-3 Phase II

John Schneidawind Assistant Director for PublicAtions

Steven Sullivan Managing Editor, Internet and New Media

Anne Asplen

Don’t miss this opportunity to get the big picture behind principle-based capital and reserves as well as hear knowledgeable panelists discuss lessons learned from implementation of the new requirements for the C-3 component of risk-based capital for variable annuities. The moderator of the seminar is Hubert Mueller.

Executive Office

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. ©2007 The American Academy of Actuaries. All rights reserved.

Seminar speakers will include:

Philip Barlow Peter Boyko Larry Bruning Tom Campbell Bob DiRico Todd Erkis Larry Gorski

Jim Lamson Hubert Mueller Dave Neve Max Rudolph Dave Sandberg Cheryl Tibbits Bill Wilton

Look for more details in the August Update. 12

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Qualification Standards Near Final Academy Congressional Testimony Medicare Reform Options According to a new monograph, there are no simple...