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Measure Risks

Hill Testimony Stresses Actuarial Principles

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s Congress seeks solutions for over-

Define Risks Link to Effective Actions

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Academy member makes Jeopardy! appearance

Global Response

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IAA statement calls for risk management reforms

NCOIL Invitation

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Uccello talks risk pooling with legislators

Manual Updates 2009 Life and Health Valuation Law Manual released

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A ctuaries

The Answer Is…

—Lauren Pachman

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webinar last month on case studies in effective lossreserve opinion writing. The session, which drew nearly 100 actuaries, was presented by Tom Ghezzi, a member of the Committee on Property & Liability Financial Reporting, and was based on one of Ghezzi’s two sessions that were held as part of the Effective Loss Reserve Opinion Seminar this past December in Baltimore. The case studies presented were hypothetical, though they were designed to illustrate key principles of effective lossreserve opinions, including the judgments and trade-offs that such opinions require. For each case study, high-level details, including relevant financial and actuarial analysis data, were presented. Ghezzi then discussed key issues and possible opinion language, including potential disclosures regarding risks of material adverse deviation as well as disclosures within the “Relevant Comment” or other sections of the opinion. The approach used by Ghezzi is illustrated by his case

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study involving the use of non-actuarial models. Ghezzi noted that, in some instances, a significant portion of held reserves may be based on external models like catastrophe models, which are used to estimate prospective losses resulting from earthquakes, hurricanes, and other natural disasters. If a significant portion of held reserves is based on external models, Actuarial Standard of Practice No. 38, Using Models Outside the Actuary’s Area of Expertise (Property and Casualty) applies. Ghezzi noted that an actuary would be wise to undertake due diligence and disclose the extent of his or her reliance on external models. His possible opinion language for this scenario included an assurance that the actuary has a basic understanding of the external model used, that he or she has evaluated whether the models are appropriate for their intended application, and that appropriate validation of the models has occurred. The webinar was the latest in a series of webinars jointly sponsored by the Academy and the CAS.

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See systemic risk, Page 4

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“It begins with understanding and defining risks, measuring those risks over time, and linking the possible measurement outcomes to effective actions,” Rech wrote, citing the essential role actuaries have played in this process as professionals who manage risk to protect public and private insurance systems. The testimony offered an example particularly relevant during the current financial crisis to illustrate the

Webinar Highlights Loss Reserve Case Studies he Academy and the Casualty Actuarial Society (CAS) jointly sponsored a

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Academy Supports Systemic Risk Regulator hauling the financial regulatory system and restoring stability to the U.S. economy, the Academy in its March 5 testimony to a U.S. House Financial Services subcommittee called for the federal government to establish a financial regulator to manage systemic risk. In the written testimony, James Rech, vice president of the Academy’s Risk Management and Financial Reporting Council, emphasized the ability of a governmental systemic risk regulator to effectively manage financial risks and protect the public, provided he or she implements central actuarial principles. The testimony was delivered to the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. Rech further identified several external and internal regulatory structures incorporated in the insurance industry that serve as a valuable blueprint for any potential regulator.

Actuarial Update

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c a l e n d a r MARCH 9-10 Actuarial Standards Board meeting, Washington 15-18 NAIC spring meeting, San Diego 27 Webcast on professional standards in international practice (Academy, ASPPA, CAS, CCA, SOA) 29-April 1 Enrolled Actuaries Meeting (Academy, CCA), Washington

APRIL 7 Academy Executive Committee meeting, Washington

MAY 3-6 CAS spring meeting, New Orleans

Academy News Briefs Eye on the Horizon

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ollowing the White House’s fiscal summit and President Obama’s address

to a joint session of Congress in February, the Academy urged policymakers to take action in reforming the U.S. health care system and protecting retirement security for all Americans. While acknowledging the tough choices that must be made in light of the current economic recession, the Academy stressed the need to prioritize the nation’s long-term fiscal challenges. In a press release issued in response to Obama’s speech, Academy Senior Health Fellow Cori Uccello singled out the announced creation of a health care reserve fund as a positive sign that policymakers are focusing on critical issues on which actuaries can provide needed input.

19-20 Seminar on Actuarial Guideline 43/ VACARVM (Academy, SOA), Denver 20 Council of U.S. Presidents meeting, Washington 21 Academy Board of Directors meeting, Washington 27-30 IAA meeting, Tallinn, Estonia

JUNE 13-16 NAIC summer meeting, Minneapolis

JULY 9-12 NCOIL summer meeting, Philadelphia 23 Council of U.S. Presidents meeting, Charlottetown, Prince Edward Island, Canada 23-26 NAAC meeting, Charlottetown, Prince Edward Island, Canada

AUGUST 5 Academy Executive Committee meeting, Minneapolis

SEPTEMBER 21-24 NAIC fall meeting, Washington

OCTOBER 15-18 NAAC meeting, Colorado Springs, Colo. 18 Council of U.S. Presidents meeting, Colorado Springs, Colo. 21 Academy Board of Directors meeting, Washington 25-29 SOA annual meeting, Boston 26 Academy annual meeting, Boston

NOVEMBER 1-4 CCA annual meeting, Tucson, Ariz. 12-15 IAA meeting, India 15-18 CAS annual meeting, Boston

Links to documents underlined in blue are included in the online version of this issue at www.actuary.org/update/ index.asp

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Spelling Out R-I-S-K While Academy staffer Andrew Simonelli was explaining the principles behind a predictivemodeling system to help pick this year’s NCAA basketball champion in the March/April issue of Contingencies, the profession was busy helping produce another tournament victor: Honolulu District Spelling Bee champion Bri’el Kashiwamura. Kashiwamura, a seventh-grader at Hawai’i Baptist Academy, took the title in February when she correctly spelled actuary, “one trained in mathematics and statistics whose business it is to calculate insurance and annuity premiums, reserves, or dividends.” Super Bowl Streaking When Gen. David Petraeus’ coin toss landed heads up prior to Super Bowl XLIII Feb. 1 in Tampa, Fla., he helped extend an unlikely streak. With the AFC’s Pittsburgh Steelers calling for tails, the NFC’s Arizona Cardinals won the toss, marking the 12th consecutive time the National Football Conference champion has won the pre-game flip. The odds against stringing that streak together were 4,096 to 1. Presidential Committee Updates John Schubert, a specialist

leader with Deloitte Consulting in Chicago, is the new chairperson for the Academy’s Public Interest Committee. Joining the Academy’s Federal Agenda Task Force are Ethan Kra, chief retirement actuary for Mercer in New York; Al Bingham, director of actuarial services for the eastern regions of Kaiser Permanente in Atlanta; and Thomas Campbell, vice president and corporate actuary for Hartford Life Insurance Co. in Simsbury, Conn.

CareerCast.com Top 10 Best Jobs*

In The News Academy member James Miles, a senior lead consultant for Deloitte in Indianapolis, was quoted in a Jan. 9 Forbes.com article on the best jobs for new college graduates. Miles said actuaries are in high demand because in today’s financially uncertain times, assessing risk has become more important than ever. The authors of 200 Best Jobs for College Graduates ranked the actuarial profession No. 8 on their list.

Forbes.com Tob 10 Jobs for College Grads*

1. Mathematician

1. Network Systems and Data Communications Analyst

2. Actuary

2. Sales Agent, Financial Services

3. Statistician

3. Sales Agent, Securities and Commodities

4. Biologist

4. Market Research Analyst

5. Software Engineer

5. Public Relations Specialist

6. Computer Systems Analyst

6. Cost Estimator

7. Historian

7. Educational, Vocational, and School Counselor

8. Sociologist

8. Actuary

9. Industrial Designer

9. Paralegal and Legal Assistant

10. Accountant

10. Computer Support Specialist

*Criteria included environment, income, employment outlook, physical demands, and stress.

*Criteria included beginning wage, annual growth, and annual openings.

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Untimely Bell Tolls for Jeopardy! Contestant

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f nothing else, Academy member Kelly Rabin’s Feb. 24

Jeopardy! debut showed the television audience the importance of her day job. Entering the “Final Jeopardy!” round, Rabin, an associate actuary with life insurer Symetra Financial in Bellevue, Wash., had been in the lead since the game’s fourth question. Along the way, she correctly answered 20 questions (four more than the next closest opponent) without ringing in a wrong answer (three fewer than the next closest opponent). But, as she knows more than most, all it takes is one unforeseen event for all that to change. Hers came in the form of American literature, as she was asked to identify the American novelist who wrote in 1932, “What is moral is what you feel good after and what is immoral is what you feel bad after.” While Rabin guessed F. Scott Fitzgerald, her opponents correctly guessed Ernest Hemingway. (She later found out that none of the three had recognized the actual quote.) Though she correctly calculated her optimal wager, it didn’t matter, as her wrong answer and her opponents’ right ones erased her $2,500 lead and dropped her to third place. “Being an actuary, literature wasn’t a category I would’ve hoped

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Tonya Manning (above, right), a member of the Academy’s Pension

Accounting Committee and senior vice president and chief actuary for Aon Consulting in Winston-Salem, N.C., explained to comedian D.L. Hughley what an actuary does during the Jan. 17 broadcast of CNN’s D.L. Hughley Breaks the News. The segment was sparked by a much-publicized survey by CareerCast.com that ranked the best occupations in the United States and identified the actuarial profession as the second best. The survey was also reported by, among others, the Wall Street Journal and CNBC.com.

The Academy’s position statement advocating increasing

Social Security’s retirement age was summarized in a Jan. 1 SmartMoney column that identified Social Security as one of four issues that Presiw w w . a c t u a r y. o r g 

dent Obama should address to alleviate the financial concerns of retirees and those approaching retirement. In an article in the Jan. 5 issue of National Underwriter Life &

Health, Donna Claire, chairperson of the Academy’s Risk Management and Financial Soundness Committee and president of Claire Thinking in Fort Salonga, N.Y., provided foresight on the road ahead for the principlebased reserving (PBR) project. Claire said she expected the new standard valuation law (SVL) for PBR to be completed and move up through the National Association of Insurance Commissioners in March or June. She said the SVL will move in tandem with a valuation manual so that the 75 percent of states required to adopt the SVL in order for the model law to take effect will be able to adopt the two at the same time in 2010. Academy Senior Pension Fellow Frank Todisco discussed the current economy and how it could add to the Pension Benefit Guaranty Corp.’s obligations in a Jan. 15 FOX Business News article. He noted the high volatility of claims on the PBGC and compared the agency’s business to earthquake insurance, with

the PBGC being exposed to “financial earthquakes.” Academy President John Parks was quoted in a Jan. 21 Congressional Quarterly article reporting on President Obama’s pledge to address entitlement reform. “President Obama’s message shows that he understands that these issues must be addressed now. And the Academy believes this must happen regardless of any other actions taken to address the current economic and fiscal crisis,” Parks said in an Academy statement. The Academy statement was also the subject of a “Notes on Social Security Reform” blog posting by Andrew Biggs, the former deputy commissioner of the Social Security Administration. Biggs wrote on Jan. 21 that “the Academy’s support is very helpful in giving momentum to reform.” To find out about other actuaries in the news or for external links, visit the Academy’s newsroom, http://actuary.org/newsroom/news.asp.

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IAA Responds to Global Financial Crisis Suggested Measures Receive General Academy Support

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he International Actuarial Association (IAA), on behalf of the global actuarial profession, called for

reforms in the management and oversight of financial services industries worldwide in a summary statement it issued last month that presented a risk management framework to improve financial governance and help prevent future financial crises. The statement, Dealing with Predictable Irrationality – Actuarial Ideas to Strengthen Global Financial Risk Management, suggested reforms that would employ risk management concepts commonly used by actuaries in the insurance industries. While the statement called for specific systemic changes, like the creation of national chief risk supervisors and the introduction of more countercyclical regulatory arrangements that would better prepare companies during periods of market stress, it elaborated in greater detail its recommended micro-level reforms. For individual regulated entities, for example, the paper endorsed a “control cycle” approach to the measurement and management of risk. That approach would include better allowance for extreme event outliers, forward-looking financial condition reporting that accounts for risk, and independent approval of liability and loan loss provisioning for regulatory purposes by professionals (such as actuaries) “who are subject to professional codes of conduct and disciplinary processes.” Citing the role subprime lending and collateralized debt obligations played in the current crisis, the IAA faulted traditional regulatory approaches for failing to identify or underestimating risks. One specific example it mentioned was an excessive focus on value-at-risk measures used by banks and hedge funds that, the paper asserted, account for only minimum losses—rather than expected losses—from low probability events. The paper recommended better risk methods, such as tail-value-at-risk measures, which echoes the Academy’s testimony at a Jan. 24 National Conference of Insurance Legislators hearing on potential credit default swap regulation.

While the paper expressed support for initiatives in the G-20 declaration last November, including strengthening transparency and accountability and enhancing sound regulation, it called for additional measures it felt are necessary to prevent future financial crises. Among these are improved risk-governance processes that require more thorough risk identification, more consistent risk measurement, and more stringent stress testing. “The current financial market crisis demonstrates that a principles-based, comprehensive, and risk-sensitive regulatory framework is essential to the stability of the financial services industries,” the paper said. The IAA singled out enterprise risk management principles used by actuaries as a foundation for such governance to be applied to all financial market participants. It also praised actuarial skills of valuing illiquid insurance and pension liabilities and suggested that those approaches may be applied to value other liabilities and assets for financial institutions where trading has “ceased to exist in current market conditions.” Shortly after its release the Academy announced its general support for the IAA paper. “The IAA’s framework capitalizes on risk modeling and the principles of enterprise risk management, a process that actuaries have used successfully to manage uncertainty and mitigate risk in the insurance industry,” said Academy President John Parks. “The Academy looks forward to helping U.S. state and federal regulators interpret this global framework and implement it within the United States’ unique regulatory system.”

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Systemic Risk, continued from page 1 importance of comprehensive systemic risk oversight. In 1990, Rech wrote, Congress mandated annual, independent actuarial studies to report on the financial status of the Mutual Mortgage Insurance Fund. Despite shortfalls in other housing arenas (including almost $1.2 trillion in combined write-downs and credit losses since the subprime market collapsed in 2007), that particular fund had more than $25 billion in assets at the end of the 2007 fiscal year, and the most recent actuarial report projected it to be in relatively healthy shape as it continues to exceed the mandated minimum capital ratio. Rech also cited in his testimony American International Group’s ventures in the credit default swap market as an example of an area w w w . a c t u a r y. o r g 

that the Academy believes could have benefited from regulatory oversight similar to that required by defined insurance products. Accordingly, he included prior Academy testimony submitted in January to the National Conference of Insurance Legislators as supplementary information for the House subcommittee. The House Capital Markets hearing came two days after an insurance reform summit in Washington, during which Rep. Melissa Bean (D-Ill.) outlined a bill she intends to introduce in the coming weeks that would propose the creation of an optional federal charter for all insurers. Rep. Ed Royce (R-Calif.), who planned to cosponsor the bill, reiterated the need for the legislation at the subcommittee hearing.

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H ealth n ews

Academy Discusses Risk Pooling at NCOIL Session

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cademy Senior Health Fellow Cori Uccello explained risk pooling to state policymak-

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ers Feb. 28 at the National Conference of Insurance Legislators spring meeting in Washington. Uccello was one of four speakers at the roundtable session “Future Healthcare Options: Is Healthcare an Insurable Risk?” which explored ideas to reduce health insurance premiums and the number of uninsured. Uccello led off the session with a discussion of health insurance market fundamentals. Many health reform proposals would rely, at least in part, on restructuring the private insurance market. For instance, some proposals would set up regional health markets, while others would allow for purchasing health insurance across state lines. To better understand the impact of these proposals, Uccello first provided background information on risk pooling as well as issue and rating rules. She focused much of her discussion on adverse selection issues, including how they might be affected by various insurance market rules. She then stressed the importance of a level playing field under reform options that would restructure the private insurance market—noting potential pitfalls if alternative pooling arrangements such as regional health markets are created to operate alongside existing markets. “Adverse selection could result if the issue and rating rules are not the same in both markets,” Uccello said.

Other speakers at the panel discussion included representatives from the AARP Public Policy Institute, the America’s Health Insurance Plans’ Center for Policy and Research, and the Ohio Department of Insurance. Their topics addressed obstacles to coverage within the private market for certain individuals, trends in private health insurance, and Ohio’s involvement in the Robert Wood Johnson Foundation’s State Coverage Initiatives program. A lively discussion between the speakers and the legislators in attendance followed the speaker presentations. Because a few of the speakers highlighted the need to address rising health spending, potential approaches to do so were considered, including more care coordination, comparative effectiveness research, and provider payment incentives. In addition, directly related to the session topic of whether health insurance is an insurable risk, discussion focused on how to balance keeping health costs down by increasing patient cost-sharing while also not discouraging unnecessary care. To that end, Uccello referenced information in a recent Academy issue brief on the topic. “Health insurance aims to protect not only financial security but health security as well,” she said. The NCOIL panel discussion topic stemmed from a suggestion the Academy submitted last November to explore the impact of health reform options on premiums and affordability.

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l ife n ews

VACARVM Among Additions to 2009 Manual

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n January, the Academy released its 15th edition of the

Life and Health Valuation Law Manual. The manual, which aids appointed actuaries in complying with applicable state laws when forming actuarial opinions, contains all the valuation requirements for the 50 states, the District of Columbia, and Puerto Rico. The 2009 edition includes the full text of all newly adopted actuarial guidelines, such as Actuarial Guideline No. 43 (previously called VACARVM), a principle-based reserve methodology for variable annuities with guarantees, which was finally passed by the National Association of Insurance Commissioners in September after first being introduced in 2003. Actuarial Guideline No. 44 on group waiver of premium and Actuarial Guideline No. 45 on non-forfeiture for return of premium-type policies were other notable additions. The manual also details which states have adopted the revised Actuarial Opinion and Memorandum Regulation and gives contact information for the Regulatory Asset Adequacy Issues Summary, required to be sent to states as part of the revised regulation. Other highlights include letters and links to states that publish annual valuation letters with additional valuation requirements. Comprehensive listings of state valuation laws and regulations are also updated in the manual to reflect changes throughout the past year. Those listings detail valuation mortality and interest rate history for life, industrial, individual, and group annuities, as well as for disability benefits and accidental death benefits. The manual is still available to order online.

34th Enrolled Actuaries Meeting March 29-April 1, 2009 Marriott Wardman Park Hotel Washington, D.C.

life briefs

➥  Jeffrey Lortie, an actuary with Allstate Financial in Northbrook, Ill.; Marina Adelsky, director for PricewaterhouseCoopers in New York; and Brian Lenius, director and assistant actuary for Standard Insurance Co. in Portland, Ore.; have joined the Academy’s Life Financial Reporting Committee. ➥  Anthony Ferraro, corporate vice president and actuary for New York Life Insurance Co. in Sleepy Hollow, N.Y., has joined the Academy’s Nonforfeiture Improvement Work Group. ➥  Alice Fontaine, president of Fontaine Consulting LLC in Cedar Park, Texas, is the chairperson for the newly formed Academy PBR Valuation Manual Team’s Scope Subgroup. Other members joining that group are Michael Boerner, managing actuary with the Texas Department of Insurance in Austin; Norman Hill, president of Noralyn Ltd. in Gilbert, Ariz.; Christopher Hause, president of Hause Actuarial Solutions Inc. in Overland Park, Kan.; Martin Snow, vice president and actuary for TIAA-CREF in New York; David Neve, second vice president and corporate actuary for Principal Financial Group in Des Moines, Iowa; Pamela Hutchins, senior vice president and chief actuary for Government Personnel Mutual Life in San Antonio; and James Thompson, actuary and consultant for Central Actuarial Associates in Crystal Lake, Ill.

pension briefs

➥  John Steele, a consulting actuary for Watson Wyatt Worldwide in Stamford, Conn., has joined the Academy’s Pension Practice Council.

casualty briefs

➥  Alex Laurie, an actuary with Towers Perrin in St. Louis, has joined the Academy’s Automobile Insurance Subcommittee.

➥  Kristi Carpine-Taber, associate actuary and P/C

To register for the EA Meeting, visit http://enrolledactuaries.org/

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corporate actuary for Liberty Mutual Agency Markets in Seattle, has joined the Academy’s Committee on Property and Liability Financial Reporting.

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Nominations Sought for 2009 Myers Service Award Actuarial Update Associate Editors

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

Tim Dougherty (editor@actuary.org) Design and Production

BonoTom Studio Inc. Marketing and publication production manager

Cindy Johns

American Academy of Actuaries President

John Parks

Do you know an actuary who has made an outstanding public service contribution? The Academy is looking for nominations for the 2009 Robert J. Myers Service Award. The award, named for the former chief actuary of the Social Security Administration, recognizes actuaries with a single noteworthy public service achievement or those who have devoted careers to public service. The nominee may be a current or former government employee, the employee of an organization whose primary focus is government work, or an unpaid volunteer working at a philanthropic organization. Public work completed by a paid consultant, by a member of an actuarial committee, or by someone who is an officer of an actuarial organization is ineligible. Please visit http://www.actuary.org/ awards/myers.asp for more information about the Myers Award or to nominate an outstanding actuary online. You can also print out a nomination form at http://www.actuary.org/awards/pdf/myers_nominate09.pdf. Nominations are due by July 1, 2009.

President-Elect

Bruce Schobel Secretary-Treasurer

Andrea Sweeny Vice Presidents

Al Bingham Thomas Campbell Gary Josephson James Rech Kathleen Riley Thomas Terry Executive Director

Grace Hinchman Director of communications

Steven Sullivan Assistant Director for PublicAtions

Linda Mallon Executive Office

The American Academy of Actuaries 1850 M Street NW Suite 300 Washington, DC 20036 Phone 202-223-8196 Fax 202-872-1948 www.actuary.org 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. ©2009 The American Academy of Actuaries. All rights reserved.

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Jeopardy!, continued from page 3 for—geography or sports, maybe,” she said. “And math would’ve been fine, too.” Rabin also said that the only surefire way to protect yourself from the risk of the final question is to build up an insurmountable lead—something for which she said 74-time champion Ken Jennings had an uncanny ability. “Otherwise, it just comes down to one question,” she said. Though she was ultimately stumped by U.S. literature, Rabin breezed through several other liberal arts categories, almost sweeping the ones related to U.S. presidents and sports history (including a question about “Yankee Clipper” Joe DiMaggio). While she studied up on her commander-in-chief canon by reading Don’t Know Much About History, she said her athletic education was the product of growing up with a dad who played professional baseball and hockey and a sister who played college soccer. One question in particular that asked her to identify Brazilian soccer player Pelé was a must-get. “My family would shoot me for not knowing that one,” she said. Despite the heartbreaking finish, Rabin said she is still thankful for the chance to show her skills. “It was very exciting to even be in that situation going into ‘Final Jeopardy!’” she said. “It was a disappointing outcome but overall a great experience.”

Qualification Standards If you have been qualified to issue statements of actuarial opinion (SAOs) in an emerging area that later becomes the subject of an SOA specialty track, must you then meet the specialty track requirements in the General Qualification Standard (Section 2.1) to remain qualified? You need to meet the basic education and experience (BEE) requirements only once. If you are currently qualified to issue SAOs in a particular area that has no specialty track and if the BEE requirements subsequently change (e.g., a specialty track is added at some point after you first became qualified to issue such SAOs), you need not meet the Section 2.1 requirements again to be qualified. However, if you have never issued SAOs in a particular specialty because you were unqualified in that area, and if that area becomes the subject of an SOA specialty track and you want to issue SAOs in that specialty, you will need to meet the Section 2.1 specialty track requirements.

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Actuarial_Update_March_2009