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hearing on terrorism sponsored by the National Association of Insurance Commissioners in New York, Michael McCarter, chairperson of the Academy’s Terrorism Risk Insurance Subgroup, didn’t mince his words: A major terrorist attack on New York using chemical, nuclear, biological, or radiological (CNBR) weapons could result in $778 billion in insured peaking at a March 29

New York City

losses—$696 billion in property and casualty losses and $82 billion in group life insurance losses. A similar attack in Washington, McCarter told the NAIC panel, could cost $196.8 billion. In San Francisco, the tab would be $171.2 billion, and in Des Moines, Iowa, the cost could reach $42.3 billion. That’s the worst scenario modeled by the Academy. But even a truck bomb attack, such as those used by terrorists in Oklahoma City, the first World Trade Center attack, Beirut, and the Khobar Towers in Saudi Arabia, could cost $11.8 billion in insured losses in New York, $5.5 billion in Washington, $8.8 billion in San Francisco, and $3.0 billion in Des Moines. Without some sort of federal backstop such as the Terrorism Risk Insurance Act (TRIA), McCarter said, much of the property and casualty insurance market could be financially incapacitated after a large-scale CNBR attack. According to Insurance Information Institute figures, policyholders’ surplus for the entire property/casualty industry was $414.3 billion. “Our largest modeled loss is more than two-thirds higher than the entire property and casualty insurance industry surplus,” See terrorism, Page 

Inside Letter to the Editor A disciplinary model worth avoiding. . . . . . . . Page 5 2006 EA Meeting Pension reform: close, but no cigar. . . . . Page 6 Pension Symposium A broader examination of retirement security. . . Page 6 At Home on the Web Dedicated pages for the principlesbased project. . . . . . . . . Page 8

Actuarial Update

Terrorism: Funding the Inevitable

A ctuaries

Getting a Fix on Social Security

F

or the majority of attendees at the Acad-

emy’s April 3 Capitol Hill briefing on Social Security, most of them just settling into working life, retirement might seem to be a lifetime (in fact, several lifetimes) away. But the questions they posed about how Social Security works—and what reform might mean for younger workers like Bruce Schobel, left, and Ron Gebhardtsbauer answer questions themselves—revealed a strong following the briefing. and lively interest in the topic. Referring to long-term lect on their investment, she said, adding, funding concerns, one congressional staffer “I would rather make my own choices.” questioned Academy experts about the Another wanted more specific information mandatory nature of the program. Younger about how the rate of return on investworkers might never even be able to colSee social security, Page 


Calendar May 2 Academy Council on Professionalism meeting, Washington

5 Academy Life Reserves Work Group meeting, Chicago

7-9 ASPPA Mid-Atlantic benefits conference, Philadelphia

7-10 CAS spring meeting, Fajardo, Puerto Rico 8 Academy Life Capital Adequacy Subcommittee meeting, Chicago

15 Academy Life Financial Soundness/

Risk Management Committee meeting, Washington

15 Academy Health Practice Council meeting, Washington

15-16 ASPPA Great Lakes benefits conference, Chicago

15-16 Academy spring meeting, Washington 16 ASB information session at Academy spring meeting, Washington

17 Academy Board of Directors meeting, Washington

17-19 Employee benefits spring meeting (CCA, SOA), Dallas

21 Academy Pension Practice Council meeting, Charleston, S.C.

22 Academy Pension Committee meeting, Charleston, S.C.

Academy News Briefs ASB Approves Standard Revision; Exposure Drafts

T

he Actuarial Standards Board (ASB) recently adopted a revision of Actuarial Stan-

dard of Practice (ASOP) No. 15, now titled Dividends for Individual Participating Life Insurance, Annuities, and Disability Insurance. The revised ASOP applies to actuaries performing professional services in connection with the establishment or modification of the dividend framework and the determination and illustration of dividends for individual participating life insurance, annuities, and disability insurance (including any attached participating riders and agreements). The revised ASOP becomes effective on Aug. 1. The ASB also approved a new exposure draft of a proposed revision of ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation. The proposed standard applies to actuaries performing professional services in accordance with the National Association of Insurance Commissioners’ Life Insurance Illustrations Model Regulation. The comment deadline is Aug. 1. The ASB also approved a second exposure draft of a revision of ASOP No. 38, now titled Using Models Outside the Actuary’s Expertise (for All Practice Areas). The comment deadline is July 15. Both exposure drafts and the final revision are enclosed with this issue of the Update. They can also be downloaded from the ASB’s website.

23 Academy Life Financial Reporting Committee meeting, Hollywood, Fla.

24-25 SOA spring meeting (financial reporting, product development), Hollywood, Fla.

25 North American Actuarial Council meeting, Paris 28-June 2 International Congress of Actuaries meeting, Paris

June 1-2 CAS seminar on reinsurance, New York 2 Academy Life Reserves Work Group meeting, Chicago

5-6 ASB meeting, Washington 7 Academy Life Valuation Subcommittee meeting, Washington

7 Academy Life Practice Council meeting, Washington

7 ASPPA Northeast Area benefits conference, Tarrytown, N.Y.

8 ASPPA Northeast Area benefits conference, Boston

8-9 NAIC Life and Health Actuarial Task Force meeting, Washington

9-10 ASPPA advanced actuarial conference, Boston

10-13 NAIC summer meeting, Washington 20-22 SOA spring meeting (health), Hollywood, Fla.

21 Joint Academy Health Practice Council/SOA Health Section meeting, Hollywood, Fla.

Web Interface

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



Just Rewards The first recipi-

ent of the Actuarial Foundation’s Wynn Kent Public Communications Award is Anna Rappaport of Anna Rappaport Consulting in Chicago. Rappaport received the award for her numerous contributions on financial risk issues and for communicating the work of the actuarial profession. Throughout her career, Rappaport has focused heavily on how risk affects individuals and on issues of importance to women. The award was established last year to honor Irwin (Wynn) Kent, a founding member of the Academy who was a former president of the Conference of Consulting Actuaries. In the News

A March 27 Wall Street Journal column on making smart assumptions when planning for retirement quoted Academy Senior Pension Fellow Ron Gebhardtsbauer and Ron DeStefano, a consulting

A c t u a r i a l U p d at e    M a y 2 0 0 6

actuary with Aon Consulting in Baltimore. Gebhardtsbauer cited statistics on the percentage of older women and men who live past the age of 90, and DeStefano spoke on assumptions that retirees should make on annual investment returns. Gebhardtsbauer quoted similar statistics in April 9 Asbury Park Press and April 16 Pensacola News Journal articles on retirement pitfalls. Gebhardtsbauer was also quoted in a March 20 Pensions & Investments article on cutbacks in General Motors pension benefits. Gebhardtsbauer spoke of the need for Congress to clarify cash balance rules. And in an April 1 BenefitNews.com article on how pension plan managers can grow their assets, Gebhardtsbauer discussed proposed pension accounting standards that would require companies to mark pension surpluses or deficits on their balance sheets.

The comments of Michael McCarter, chairperson of the Academy’s Terrorism Risk Insurance Subgroup and vice president, industry and regulatory affairs, for the American International Group in New York, at a March 29 terrorism hearing by the National Association of Insurance Commissioners were carried that day on the Reuters wire and reported in an April 3 article in BestWeek. McCarter discussed subgroup estimates that a major terrorist attack on New York using chemical, biological, or radioactive weapons could cost $778 billion in insured losses (see story, Page 1). A March 31 Academy news release on McCarter’s testimony sparked placements in National Underwriter, Insurance Journal, and Independent Agent and was quoted in an April 14 San Francisco Business Times article on preparing for large-scale natural disasters.


Jenni Biggs, chairperson of

the Academy’s Mass Torts Subcommittee and a principal and consulting actuary with the Tillinghast business of Towers Perrin in St. Louis, was quoted in a front-page article on asbestos reform that ran in the April 10 property/casualty edition of the National Underwriter. Biggs referred to findings in the Academy’s February issue brief, Current Issues in Asbestos Litigation, and spoke about asbestos claim trends, including the effect of state tort reforms and increases in the cost and number of mesothelioma claims. Donna Claire, chair of the

A Reuters article on how state health care costs may come to dwarf retirement benefit costs that ran in the April 6 New York Times quoted Stephen McElhaney, a principal with Mercer Human Resource Consulting in Richmond, Va. Articles covering the March 27-29 Enrolled Actuaries meeting (see story, Page 6) that ran in the Bureau of National Affairs’ (BNA) Daily Report for Executives quoted a number of Academy members. Bruce Gaffney, a member of the editorial board for the Enrolled Actuaries Report and a principal for Ropes & Gray in Boston, and Brian Donohue, a managing director with CCA Strategies in Chicago, were quoted from their session on the effect of pension reform legislation on funding methodologies. Donald Segal, the Academy’s

Joe Sutliff

Academy’s Risk Management/Financial Soundness Committee, former Academy vice president for life issues, and president of Claire Thinking in Fort Salonga, N.Y., said that the principlesbased approach to life reserving was still on track in an article that ran March 28 on

National Underwriter’s online news service.

Lauren Bloom, former Academy general counsel and director of professionalism, was honored at the 2006 Enrolled Actuaries meeting (see story, Page 6) with a plaque from all five North American actuarial organizations. Presenting the plaque in gratitude for Bloom’s 14 years of service to actuarial professionalism were Academy President-Elect Steven Lehmann (left) and Conference of Consulting Actuaries President-Elect Thomas Terry.

vice president for pension issues and a consultant with CCA Strategies in New York, and Ken Steiner, a member of the Academy’s Pension Practice Council and an actuary with Watson Wyatt Worldwide in Arlington, Va., were quoted from their session on the 2006 Gray Book, a compilation of pension questions posed to the Treasury Department and the Internal Revenue Service (IRS). James Holland, technical manager of IRS employee plans, and Martin Pippins, technical guidance and quality assurance manager of IRS employee plans, were quoted from their session on rulings and examination advice from the IRS. And William Sohn, chairperson of the Academy’s Committee on Pension Accounting and a consulting actuary with Buck Consultants in New York, was quoted from his session on proposed pension accounting standards. On the Move

When you need the job done right, you need to hire a professional. To many employers, clients, and government leaders, the MAAA designation denotes professionalism and credibility.

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

For the third consecutive year, Institutional Investor has named Kriss Cloninger, president and chief financial officer of Aflac Inc. in Columbus, Ga., the best CFO in America

in the insurance/life category. He is one of just 62 of the best American CFOs at institutions ranging from financial to telecommunications. ® Susan Cross has been appointed global chief actuary of XL Capital Ltd. in Hamilton, Bermuda. She was formerly the chief actuarial officer of the company’s reinsurance general operations. ® Michele Van Leer has joined Sun Life Financial U.S. in Wellesley Hills, Mass., as vice president and co-general manager of the individual division. She was formerly executive vice president of the long-term-care insurance business of John Hancock Life Insurance Co. ® Joann Hess has joined the Baltimore office of Aon Consulting as senior vice president and southeast region lead health care actuary. She was formerly chief actuary for Coventry Health Care. ® Don Mango has been appointed senior vice president of Guy Carpenter’s New York Instrat unit, which provides quantitative analysis and modeling services. He was formerly the director of research and development at GE Insurance Solutions. 

A c t u a r i a l U p d at e    M a y 2 0 0 6




casualty news

Qualification Reviews for Signing Loss Reserve Opinions

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who doesn’t belong to the Casualty Actuarial Society (CAS) and you need approval to sign a casualty loss reserve opinion, you may ask the Academy’s Casualty Practice Council to review your qualifications. The National Association of Insurance Commissioners defines a qualified actuary (for the purposes of signing the statement on loss reserves for the NAIC Fire and Casualty Annual Statement) as a CAS member or an Academy member who has satisfied the Academy’s specific qualification standard. If you wish to have the Academy review your qualificaf you’re an Academy member

tions, you will need to submit a request to the attention of the Academy’s casualty policy analyst before Oct. 31. Members of the Casualty Practice Council look at all completed requests for review and vote on whether the applicant meets the qualifications to sign a casualty loss reserve opinion. Information about the application procedure, including education and experience requirements and a request form for the review of qualifications, is available on the Academy’s website. Also posted on the website is a timeline for qualification reviews.

T e r r o r i sm , continued from Page 1

Insured Loss Estimates in Billions of Dollars The following table summarizes terrorism events modeled by the Academy’s Terrorism Risk Insurance Subgroup. The loss estimates are pre-tax and before any reinsurance considerations.

The Risk Insurance Subgroup appreciates the contribution of assistance from AIR Worldwide in the development of these estimates.

Large Chemical, Nuclear, Biological, or Radiological Event



Line of Business New York City Washington San Francisco

Des Moines

Total All Lines 778.1 196.8 171.2 42.3 Auto    1.0    0.6    0.8   0.4 Commercial Property 158.3   31.5   35.5  4.1 Residential Property   38.7   12.7   22.6   2.6 Workers’ Compensation 483.7 126.7   87.5 31.4 General Liability   14.4    2.9    3.2   0.4 Group Life   82.0   22.5   21.5   3.4

Medium Chemical, Nuclear, Biological, or Radiological Event Line of Business New York City Washington San Francisco

Des Moines

Total All Lines 446.5 106.2 92.2 27.3 Auto    0.2   0.1   0.2   0.1 Commercial Property  77.8 15.7 17.1   2.0 Residential Property   10.3   3.1   6.9   0.4 Workers’ Compensation 313.2 71.6 50.8 21.8 General Liability   7.3   1.5   1.6   0.2 Group Life   37.7 14.2 15.6   2.9

Truck Bomb Line of Business New York City Washington San Francisco

Total All Lines Auto Commercial Property Residential Property Workers’ Compensation General Liability Group Life

11.8 0.0 6.8 0.0 3.5 1.2 0.3

A c t u a r i a l U p d at e    M a y 2 0 0 6

5.5 0.0 2.1 0.0 2.8 0.4 0.2

8.8 0.0 3.9 0.0 3.9 0.7 0.3

Des Moines

3.0 0.0 1.2 0.0 1.5 0.2 0.1

McCarter said. And because the industry as a whole doesn’t pay out claims—individual insurers do—“in the absence of TRIA or some other national framework for dealing with terrorism insurance losses, many commercial lines insurers would be devastated,” McCarter said. McCarter���s comments and the Academy’s statistics headlined coverage of the hearing that ran on the Reuters wire on March 29 and was the focus of an April 3 article in BestWeek. A March 31 Academy news release on McCarter’s testimony garnered press interest from National Underwriter, Insurance Journal, and Independent Agent. McCarter’s testimony was based on insurance cost figures that the Terrorism Risk Insurance Subgroup developed from catastrophe risk models created by the risk-modeling firm AIR Worldwide. McCarter reminded regulators that compared with natural disaster insurance, the quantification of consumer and insurer terrorism exposure is more difficult because terrorism models cannot rely on past statistical records and the application of meteorological or geological science. And natural disasters don’t change their tactics to circumvent mitigating strategies. The Academy subgroup was formed last year in response to a request for assistance from congressional staff considering the extension of TRIA. The subgroup


Letter to the Editor Casualty Briefs ➤  Dennis Fasking, chairperson of the P/C Extreme Events Committee and a senior actuary at Allstate Insurance Co. in Northbrook, Ill., is the chairperson of the committee’s newly formed Flood Insurance Subcommittee. Other members are Sara Frankowiak, a pricing manager for State Farm Mutual Auto Insurance Co. in Bloomington, Ill.; Stuart Mathewson, lead product actuary for GE Insurance Solutions in St. Louis Park, Minn.; Miriam Perkins, an actuary with AIR Worldwide Corp. in Boston; John Rollins, an actuary with Citizens Property Insurance Corp. in Tallahassee, Fla.; Dan Spafford, an actuary with the Federal Emergency Management Agency in Washington; Thomas Weidman, a senior vice president and chief actuary of Alea Group in Rocky Hill, Conn.; and Yuanhe Yao, an actuarial analyst for Towers Perrin in Arlington, Va. ➤  Shawna Ackerman, a principal and consulting actuary with Pinnacle Actuarial Resources Inc. in San Francisco, is the chairperson of the P/C Extreme Events Committee’s new Natural Catastrophe Subcommittee. Other members are Daniel Carr, second vice president and actuary for St. Paul Travelers Cos. in Hartford, Conn.; Patricia Furst, vice president of American Re-Insurance Co. in Princeton, N.J.; David LaLonde, senior vice president of AIR Worldwide Corp. in Burlington, Ontario; Thomas Le, senior vice president for Guy Carpenter in Philadelphia; Stuart Mathewson; Jeffrey McCarty, assistant vice president and actuary for State Farm Mutual Auto Insurance Co. in Bloomington, Ill.; and Martin Simons, a public actuarial consultant in Columbia, S.C.

A Disciplinary Model Worth Avoiding

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found the letter from Bruce Schobel (“Transparent Discipline”) in the February Update to be chilling, to say the least. He seems to cite the U.K actuarial disciplinary body’s practice of “publicizing accusations without even awaiting the outcome of the investigation” as the ideal model for the “modern age.” Publicly dunking an actuary to see if he sinks or floats is modern? I would remind Mr. Schobel and the others who signed the letter that any actuary with the slightest professional jealousy can submit a complaint against any one of them to the Actuarial Board for Counseling and Discipline and, according to their letter, they’d be completely supportive of having their names listed publicly at that point in the process. If we ever get to that point, I may have to start sending out an annual mail-merged document with a complaint against every single actuary in the Academy. I could then just take the resulting public listing and use it as a hard copy of the Academy directory—and save myself $60 in the process. As far as citing Europe and Canada as precedents, I agree they should be used as signposts—but as signposts for pathways best to be avoided. Louis Filliger Chatsworth, Calif.

Mike McCarter, seated center, testifies at NAIC hearing on terrorism.

Bruce Schobel Replies: I did not

is currently preparing a report for the President’s Working Group on Financial Markets, which has been asked to report to Congress by Sept. 30 on the long-term availability and affordability of terrorism insurance, including group life insurance and coverage for nuclear, biological, chemical, and radiological attacks. The hearing, chaired by New York Insurance Superintendent Howard Mills, w w w. a c t u a r y. o r g 

was convened to gather information helpful to state insurance regulators and legislators in crafting a long-term solution to terrorism insurance coverage. Also speaking at the hearing were representatives from a variety of insurance and reinsurance firms, insurance industry organizations, the Consumer Federation of America, and the Real Estate Board of New York. 

propose that the U.S. profession follow the U.K. practice of publicizing accusations before adjudication. I merely pointed out that the Canadian and U.K actuaries take a much more aggressive position on public discipline without suffering a deluge of defamation cases. So U.S. actuaries could move modestly in that direction without great fear. A c t u a r i a l U p d at e    M a y 2 0 0 6




pension news 2006 Enrolled Actuaries Meeting

Pension Reform: Gauging Change

A

Enrolled Actuaries meeting, congressional action on pension funding reform seemed to be close enough that most attendees could taste it—but not quite. And so the dialogue continued on the expected effects of reform-based changes and whether they will solve the problems of this country’s stumbling defined benefit (DB) system. “I believe moderate voices must prevail if our ailing system is going to survive its cure,” said Jerry Mingione, a member of the Academy’s Pension Committee who spoke at the meeting’s March 27 opening session. If DB plans are to survive, Mingione said, reform will have to balance the expectations of employees and employers. Those dueling expectations were the t the 2006

From left, opening session panelists Ethan Kra, Kent Mason, Jerry Mingione, Ron Gebhardtsbauer, and Don Segal

focus of the second general session, where panelists looked at the struggle between DB and defined contribution (DC) plans as it played out in a California ballot initiative last year. Launched by a state legislator worried about funding volatility for California public pension plans, the failed initiative would have precluded DB plan coverage for public employees hired after July 1, 2007, switching them to a DC system instead.

In his mind, said session speaker Paul Angelo, the initiative went to the heart of why he and others became pension actuaries in the first place. “The idea that we are somehow solving volatility by dumping it on the members is hard for me to track. Individuals can’t manage money as well as asset managers,” Angelo said. “If the goal is to fund a financial engine that will convert taxpayer dollars into retirement security for people who

Planning the Pensions of Tomorrow Now that the passage of some type of pension funding reform legislation appears to be imminent, what’s next on the agenda? The March 26-27 third annual pension symposium, immediately following the 2006 Enrolled Actuaries meeting, attracted approximately 80 actuaries interested in discussing that very question. “This year, we chose to focus the symposium on key issues that face us as retirement plan professionals—those issues associated with a broader examination of retirement security,” said Thomas Terry, president-elect of the Conference of Consulting Actuaries and chairperson of the Academy’s Stock Options Task Force, in opening remarks. The previous two symposia centered on examining and brainstorming funding rules



in anticipation of reform. A wide variety of issues were on the table for discussion at the symposium, including: ®  The role of investments in mitigating pension plan risks (following up on the EA meeting’s closing session on trends in asset allocation) ®  The pooling of longevity risk and the role that traditional defined benefit (DB) plans have played in accomplishing this, plus discussion of traditional and nontraditional means of achieving annuitization ®  Trends in dealing with uncertainty in managing pension plans, and what can be learned by adopting an enterprise risk management perspective ®  The seemingly inevitable transition of pension actuaries from specialists in a well-defined

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compliance role to professionals dealing more broadly in investments, risk analysis and mitigation, and the value of all forms of contingent compensation such as stock options. The overriding topic of discussion was the uncertain future of DB plans in this country and how best to address retirement-planning risk if DB plans become extinct. Symposium participant Robert North summed it up in one sentence: “What happens after DB plans?” If DB plans are indeed going away, and defined contribution (DC) plans are seen as less preferable, what are the responsibilities of actuaries in developing products that provide retirement security but are attractive to a changing workforce? “Employers aren’t turning to DC plans because they are the

right answer but because we currently have a binary system—the options are either a DB or DC plan,” said Ethan Kra, vice chairperson of the Academy’s Pension Practice Council. “We need new options, new solutions, for the 21st century.” Symposium attendees participated in a freewheeling discussion of a variety of ways to bolster retirement security, from partnering with insurance companies to develop new products to broadening Social Security and other social programs. Recognizing that developing new solutions for retirement security requires ongoing thought, Terry encouraged all attendees to continue to share ideas, brainstorm with colleagues, and be prepared to reconvene at next year’s symposium to further the debate.

—Heather Jerbi


work their whole lives, the DB is a more efficient engine.” At the same session, Ron Seeling, chief actuary for the California Public Employees’ Retirement System (CalPERS), which administers pension and health benefits for about 1.4 million active and retired public-sector employees in California, discussed CalPERS’ research into ways to address volatility in plan contribution rates. After generating 1,500 sets of 50-year investment returns using 32 different asset-smoothing methods, CalPERS recently adopted a new method that is expected to optimize stability in rates without significantly increasing the probability of lower funded status. The concluding session of the March 26-29 EA meeting, which also kicked off the third annual pension symposium (see story, Page 6), focused on alternatives to traditional asset allocation principles for pension investments, particularly in light of still-pending reform. “It’s a brave new world now, or, said differently, a new

world for the brave,” said session panelist John Lowell When the joint program committee for the Enrolled Actuaries meeting began deliberations on meeting content last fall, it was pretty much assumed that some form of reform legislation would have passed by the time the meeting rolled

around, said Donald Segal, the Academy’s vice president of pension issues. “What were the odds that we wouldn’t have pension reform by now?” Segal told meeting attendees at the opening session. “About the same odds that George Mason University would be in the [NCAA basketball] final four.”

Pension Briefs ➤  In an April 17 letter to the Governmental Accounting Standards Board (GASB), the Academy’s Joint Committee on Retiree Health commented on a proposed GASB technical bulletin on employers’ and others’ accounting and financial reporting for Medicare Part Drelated payments from the federal government. In its letter, the joint committee disagreed with GASB’s assertion that other post-employment benefit liabilities should be determined without reduction for Medicare Part D payments and that such payments are voluntary nonexchange transactions. ➤  The Academy’s Pension Committee commented to the Securities and Exchange Commission on a proposed rule governing the disclosure of executive compensation in an April 14 letter. The committee had significant concerns with aspects of the proposed rule on defined benefit and defined contribution plans, particularly the determination of currentyear compensation. ➤  On April 7, Ron Gebhardtsbauer, the Academy’s senior pension fellow, spoke on pension funding reform and on regulatory changes needed to enhance retirement income offerings in separate sessions at the 2006 Retirement Industry Conference sponsored by LIMRA International, LOMA, and the Society of Actuaries.

s o c i a l s e c u r i t y , continued from Page 1 ments is calculated. A third took the long view and asked about the relevance of earnings just before retirement. Important questions, all. And an important opportunity for the Academy to reiterate its availability as an educational resource and unbiased source of information for policy-makers tackling Social Security reform. The briefing, which attracted 40 congressional staff and other policy-makers, focused on basic information about the structure of the Social Security system, how benefits are currently calculated, and benefit taxation and replacement ratios. “Ninety percent of what you are paying in taxes goes out immediately to pay current beneficiaries,” said Bruce Schobel, chairperson of the Academy’s Retirement Principles Task Force, responding to the questioner who wanted the option of investing her Social Security tax dollars herself. “Your money isn’t just sitting in w w w. a c t u a r y. o r g 

an account waiting for your retirement. It’s long gone paying for your parents’ and grandparents’ benefits.” At the same time, Social Security’s benefit formula provides a higher rate of return for those with lower incomes—a reflection, said Ken Steiner, a member of the Academy’s Social Insurance Committee, of the program’s compromise between social adequacy and individual equity. A program aiming solely at social adequacy would offer everyone the same benefit level irrespective of his or her earnings, Steiner explained. Conversely, Steiner said, “If you had a program that emphasized 100 percent individual equity, everyone would get 40 percent of their average indexed monthly earnings.” Ultimately, said Academy Senior Pension Fellow Ron Gebhardtsbauer, workers still need to take responsibility for accruing retirement savings beyond

Social Security. “You are not going to continue your standard of living into retirement unless you have Social Security, something from your employer, and something that you save yourself,” Gebhardtsbauer warned audience members, adding that if benefits are cut to fix the system’s predicted insolvency, they’ll probably need to pony up more from personal savings to keep their income level in retirement. The briefing also featured the introduction of a new, improved Social Security game on the Academy’s website. The game walks players through the major Social Security reform options, providing both the pro and con arguments, and tracks their progress toward achieving a solution to Social Security’s financial problems. The Academy plans to publicize the game more broadly to its membership, the media, and the public beginning next month.  A c t u a r i a l U p d at e    M a y 2 0 0 6




life news

Academy Webcasts Principles-Based Update by

Donna Claire

O

n March 22, the Academy’s

Life Practice Council sponsored its second quarterly webcast to update actuaries on developments related to principlesbased reserves and capital. Despite technical glitches caused by vendor errors, more than 1,000 people listened to the webcast in over 200 different locations around the country. In contrast to the current rulesbased approach to valuation that uses the same formulas for everyone, a principles-based approach permits the use of company-specific experience if that experience is relevant and credible. A principles-based approach relies more on actuarial judgment and requires more sophisticated tools in risk analysis and risk management. As chairperson of the Life Financial Soundness/Risk Management Commit-

From left, Mark Paster, Donna Claire, and Amanda Yanek man the computers during the principlesbased webcast.

tee, the group charged with steering and overseeing the Academy’s principles-based efforts, I moderated the webcast. Other speakers on the webcast, which included

information coming out of the March 4-7 spring meeting of the National Association of Insurance Commissioners (NAIC), were Tom Campbell, Dave Neve, and Shirley

Principles-Based Project: At Home on the Web

W

hat’s the Academy’s

principles-based project all about? Who’s working on it? And what are they doing that matters to you? The principles-based project now has a home on the web to help answer questions like these. The newest section of the Academy’s website has been created as part of the Life Financial Soundness/Risk Management Committee’s effort to keep actuaries, regulators, and other stakeholders informed about this important effort. The project aims to transform the U.S. approach to determining life insurers’ required capital and reserves. It’s intended to capture underlying product risks more accurately than the traditional rule-based regulatory framework does, and it would



A c t u a r i a l U p d at e    M a y 2 0 0 6

rely more on actuarial judgment. And it has generated intense interest—both inside and outside the Academy. So the Life Financial Soundness/Risk Management Committee, chaired by Donna Claire, has been holding webcasts and making presentations. (Academy members will have a chance to attend one of those presentations May 16, during the Academy Spring Meeting.) And

under the leadership of Website Work Group Chairperson Shawn Loftus, volun-


Shao. (For information on purchasing a DVD of the webcast, turn to Page 12.) Campbell, who chairs the Variable Annuity Working Group, updated webcast participants on developments in the area of variable annuities. At its meeting just before the NAIC spring meeting, the NAIC’s Life and Health Actuarial Task Force exposed a revised actuarial guideline for variable annuities. Although the Academy’s goal is for a guideline to be adopted this year, at this time there is some question whether the guideline will apply to all guarantees in variable annuities for this year or for next year. Neve, who is co-chairperson of the Life Reserves Work Group, gave an update on life reserving efforts. In the first quarter of 2006, work has focused on the application of the new principlesbased approach on term insurance. Work is continuing on a proposed regulation and guidelines, and the work group still expects to have a regulation ready for adoption by December 2006. Shao, chairperson of the Regulatory Interface, Governance, and Peer Review

Work Group, offered new information on the review aspects of the principles-based approach. The principles-based approach will require a reviewer to look over the actuary’s assumptions and documention of the valuation and capital with the goal of providing consistency among companies and promoting commonly accepted actuarial practices. Governance procedures at both the company and regulatory level may be modified because of this approach to reserves and capital. So—lots of work is being done, and lots of decisions are being made along the way, with other decisions pending. The Academy will continue to do a quarterly webcast after every NAIC meeting. The next one is scheduled for the end of June. A blast e-mail from the Academy with the exact time and date will be coming your way soon. Donna Claire is the chairperson of the Academy’s Life Financial Soundness/ Risk Management Committee and former Academy vice president for life issues. She is president of Claire Thinking Inc. in Fort Salonga, N.Y.

Call for Volunteers The Academy’s Variable Annuity Practice Note Work Group is looking for volunteers to help update the September 2005 variable annuity practice

note. The revisions will largely reflect updates, questions, and comments received on the new C-3 Phase II risk-based capital regulation passed by the National Association of Insurance Commissioners (NAIC). The revised practice note will not include references to Actuarial Guideline VA CARVM, which is still under discussion at the NAIC. The updated practice note is expected to be completed before the Valuation Actuary Symposium, Sept. 18-19, in Scottsdale, Ariz.

teers worked with Academy staff to create the project’s own web section, too. The new section has its own home page ( www.actuary.org/risk.asp), and it includes pages on principles-based reserving and risk-based capital for life insurance, variable annuities, and fixed annuities, as well as information on related experience studies and other resources. It encompasses the popular C-3 Phase II web pages, which offer thousands of pre-packaged scenarios, related tools, and other documents created by the Life Capital Adequacy Subcommittee to help actuaries with C-3 Phase II RBC implementation. And it includes information on numerous other projects under the principles-based umbrella, such as ® Proposed model regulations for life reserving ® Proposed actuarial guidelines on life valuation assumptions, documentaw w w. a c t u a r y. o r g 

tion and disclosure, and assumption margins ® A report on modeling principles-based reserving for a 20-year-term plan ® A proposed actuarial guideline for applying C-3 Phase II RBC principles to variable annuity reserving. Other parts of the project in the works include creating a peer review framework for principles-based valuation, working with other groups to develop recommendations for principles-based governance, and developing a principles-based reserving approach for all non-variable annuities. Updates on these and other efforts will all be posted on the website. The Website Work Group welcomes feedback. If you have comments or suggestions for the principles-based project web section, please contact Anne Asplen, the Academy’s managing editor of Internet and new media (asplen@actuary.org; 202-223-8196).

The work group is still looking for some additional volunteers. Interested in helping? Contact Amanda Yanek, the Academy’s life policy analyst (yanek@actuary. org; 202-223-8196), or Hubert Mueller, chairperson of the work group (Hubert.Mueller@ towersperrin.com). Life Briefs ➤  Joining the Annuity Reserves Work Group are John Froehle, a consulting actuary with Actuarial Resources Corp. in Overland Park, Kan., and Sarah Hamid, vice president and valuation actuary with Chase Insurance in Elgin, Ill. ➤  Alan Routhenstein, senior vice president, life reinsurance division, for Aon Re Global in Stamford, Conn., has joined the Life Reserves Work Group.

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risk management and financial reporting

AICPA Confers With Academy Envoys

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members of the Academy’s Financial Reporting Committee (FRC) and Life Practice Council met in Manhattan with the Insurance Experts Panel of the American Institute of Certified Public Accountants (AICPA). Representing the FRC at the meeting were Chairperson Henry Siegel and Vice Chairperson Andrea Sweeny, Rowen Bell, Kermitt Cox, Marc Oberholtzer, and Darren Zimmerman. Representing the Life Practice Council was former Academy vice president for life issues, Donna Claire. Academy representatives and AICPA panel members enjoyed a wide-ranging discussion on a number of issues, including the Academy’s principles-based approach to valuation and capital requirements for life and health products, risk transfer in casualty reinsurance, disclosure surrounding actuarial estimates, revenue recognition for Medicare Part D, the

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AICPA’s accounting standard on internal replacements, and current developments in the international accounting arena. With regard to principles-based efforts, AICPA representatives indicated both that AICPA members will be able to audit insurance company reserves under such an approach and that they are very interested in continuing their dialogue with the Academy as the principles-based approach is developed. Members of the AICPA panel urged the actuarial community to continue its current work on the measurement and disclosure

of potential variability in property/casualty reserves. They noted ongoing interest on the part of the Securities and Exchange Commission and others in improving the meaningfulness of disclosures surrounding loss reserves and in ensuring consistency in the insurance industry’s disclosure surrounding loss reserves. The Academy and AICPA discussion, which has become an annual event, provided valuable insight into the parallel worlds of actuary and auditor, offering insight into future practices. —Tina Getachew

Risk Management and Financial Reporting Briefs ➤  Tina Getachew is the Academy’s new risk management and financial reporting analyst. She replaces Ethan Sonnichsen, who left the Academy for a position in the Washington office of the National Association of Insurance Commissioners. Getachew is a recent graduate of Syracuse University and was formerly the Academy’s legislative assistant. ➤  In a March 27 letter to the International Actuarial Association, the Academy’s Financial Reporting Committee commented on a preliminary exposure draft of a practice guideline on the disclosure of insurance risk information under international financial reporting standards.

Health Briefs

Professionalism Briefs

➤  The Individual Medical Market Task Force has two new work groups. Chairing the Individual Market Barriers Work Group is Mark Litow, a consulting actuary with Milliman in Brookfield, Wis. Other members are Thomas Ahmann, a health actuary with Golden Rule Insurance Co. in Indianapolis; Kenneth Clark, an actuary with Milliman in Chicago; James Oatman, senior vice president of Assurant Health in Milwaukee; Victor Paguia, senior vice president and chief actuary for Celtic Insurance Co. in Chicago; Steele Stewart, director of actuarial services for Blue Cross Blue Shield of Kansas City in Kansas City, Mo.; Rod Turner, vice president and chief actuary of America’s Health Insurance Plans in Washington; and Thomas Wildsmith, a consultant with the Hay Group in Arlington, Va. The Individual Market Affordability Work Group is being chaired by Michael Abroe, the Academy’s vice president for health issues and a consulting actuary for Milliman in Chicago. Other members of the work group are Ron Bachman, president and CEO of Healthcare Visions Inc. in Duluth, Ga.; David Bahn of Jacksonville, Fla.; Karen Bender, a principal with Mercer Oliver Wyman in Milwaukee; Richard Hauboldt, a consulting actuary with Milliman in Brookfield, Wis.; Timothy Luedtke, director and head of KPMG LLP’s Health Actuarial Services in Radnor, Pa.; and Martha Spenny, a senior associate actuary with Blue Cross Blue Shield of Michigan in Southfield. ➤  Andrew Bren, assistant director, large group pricing, for Regence in Seattle, and Richard Tash, an actuary with Anthem Blue Cross and Blue Shield in Indianapolis, have joined the Disease Management Work Group. ➤  Steve Schoonveld, a consulting actuary with Ernst and Young in Boston, has joined the LTC Principles-Based Work Group. ➤  Jonathan Shreve, a consulting actuary with Milliman in Denver, has joined the Health Practice International Task Force. ➤  Thomas Stoiber, a consulting actuary with Stoiber & Associates in Onalaska, Wis., has joined the Individual Medical Market Task Force.

➤  Joining the Actuarial Standards Board’s newly created Task Force on Enterprise Risk Management are Jennifer Bowen, second vice president, account consultant, and valuation actuary for Swiss Re Life & Health America in Armonk, N.Y.; Renee Cassel, director of capital management and decision support for Thrivent Financial for Lutherans in Minneapolis; James Hall, a consulting actuary with Huggins Actuarial Services in South Burlington, Vt.; Claus Metzner, a consulting actuary with Milliman in Brookfield, Wis.; Robert Miccolis, a director at Deloitte Consulting in Philadelphia; Godfrey Perrott, a consulting actuary with Milliman in Wakefield, Mass.; John Stark, regional vice president and large group actuary for Anthem Blue Cross and Blue Shield in Richmond, Va.; and Suzanne Wille, director of product and financial risk management for North American Co-Life/Health in Chicago.

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Missed the Webcast? Buy the CD The American Academy of Actuaries’ March 22 webcast on principles-based approaches to reserving and solvency for life insurance and annuity products is now available on CD. Featuring up-to-date information from the National Association of Insurance Commissioners (NAIC) Spring Meeting and the work of the Life Practice Council, the CD contains the complete webcast audio presentation and Q&A, along with the PowerPoint presentation, in a single self-executing file. Among the topics covered in the webcast (and included on the CD) are: ®  The role of peer review in the process ® Potential changes in insurance company governance to accommodate principles-based approaches to reserving and solvency testing ®  A summary of developments during the Spring NAIC meeting ®  An activities report from the Life Reserve Working Group ®  An update from the Variable Annuity Reserve Working Group Featured speakers: ® Donna Claire, chairperson of the Risk Management and Financial Soundness Committee (also called SVL2 Steering Committee), which is overseeing the Academy project ® David Neve, co-chairperson of the Life Reserve Work Group, which has developed a regulation and accompanying proposed actuarial guideline for a new reserve methodology for life insurance products ® Tom Campbell, chairperson of the Variable Annuity Reserve Work Group, which has developed a new reserving methodology for variable annuities ® Shirley Shao, chairperson of the Regulatory Interface, Governance, and Peer Review Work Group For more information, contact Virginia Keene (202-872-1948; keene@actuary.org). To order a copy, go to www.actuary.org.


HOUSTON

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

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Associate Editors

NEW YORK

Actuarial Update

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Welcome to the Club

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Joseph Vallina

American Academy of Actuaries President

Peter Perkins President-Elect

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John Parks Vice Presidents

Michael Abroe Mary D. Miller David Sandberg Geoffrey Sandler Donald Segal Timothy Tongson Executive Director

Kevin Cronin director of communications

Noel Card Assistant Director for PublicAtions

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Linda Mallon (editor@actuary.org)

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Editor

The Academy now holds corporate membership at the Club Quarters, a small chain of hotels in Washington, New York, Boston, Philadelphia, Chicago, San Francisco, Houston, and London. Designed for business travelers, the hotels provide private, club-like facilities at lower prices than comparable hotels. Room rates are reduced further on most weekends and holidays, both for members and for members’ families and friends. Use the Club Quarters’ website to book a room or get information about room rates and availability: ®  Go to www/clubquarters.com/home_pub.asp. ®  Enter “aaoa” (without the quotation marks) as your member password. ®  Click on “go.” You’ll be sent to a new page. ® Select “Make reservations” near the top of the left column. You’ll be sent to a new page that has a list of hotels. ®  Choose a hotel, then follow the instructions as you continue. For more information, assistance, or offline reservations, contact Club Quarters directly: Club Quarters Member Services, 49 West 45 Street, New York, N.Y. 10036, (212) 575-0006, memberservices@clubquarters.com.

Steven Sullivan Managing Editor, Internet and New Media

Anne Asplen Executive Office

The American Academy of Actuaries 1100 Seventeenth Street NW Seventh Floor 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. ©2006 The American Academy of Actuaries. All rights reserved.

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of major legislative, regulatory, and judicial developments affecting your practice? Think you might be interested but aren’t sure? Sign up for a half-year subscription to Academy Alerts. As a subscriber, you can receive e-mailed Alerts in the practice areas that interest you. You also get web access to those Alerts and receive complimentary Alerts that cover general insurance issues. Generally, Alerts are offered as a paid annual subscription that starts each January. If you aren’t already a subscriber, discounted rates for a half-year subooking for timely summaries

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scription, running from July to December 2006, are as follows: ®  Health insurance. . . . . . . . . . . . . . . . . $15 ®  Life insurance . . . . . . . . . . . . . . . . . . . $15 ®  Pension and employee benefits . . . . . . $25 ®  Property and liability insurance. . . . . . $15 You can order your subscription and pay for it online, using a credit card, by going to www.actuary. org. For more information, contact Kasha Shelton, the Academy’s legislative manager (Shelton@actuary.org; 202-223-8196).


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