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NOVEMBER 2 0 0 5

T HE N EWSMONTHLY

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A MERICAN A CADEMY

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The Profession at the Crossroads

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of the past 40 years, the Academy has grown into an influential institution whose public policy and professionalism initiatives are respected both within and beyond the actuarial profession. Clearly, the Academy’s annual meeting Oct. 10-11 in Washington was an occasion for Academy leadership and volunteers to celebrate those achievements. But as with all anniversaries, incoming Academy President Peter Perkins told meeting attendees, it also offered the opportunity to take stock of the past and consider the future. As a result, the usual business of the annual meeting, including Perkins’ installation as president, the election of new members to the New Academy President Peter Perkins (left) is congratulated by his predecessor, Bob Wilcox. Academy’s Board of Directors, and the presentation of the Jarvis Farley Service Award, marked Academy achievements at a glittering 40th-anniversary only several aspects of a wide-ranging meeting that offered banquet at the Renwick Gallery of the Smithsonian Muattendees multiple opportunities to reflect on the actuarial seum, located across the street from the White House. profession, to consider its future, and, finally, to celebrate See ANNUAL MEETING, Page 4 VER THE COURSE

Inside

CRUSAP Progress Chairperson Fred Kilbourne reports on task force activities . . . . . PAGE 5 Claire Honored Donna Claire is the 2005 recipient of the Jarvis Farley Award . . . . PAGE 6 Professional Communication Actor Ed Gero offers some tips on public speaking . . . . . . . . . . . . PAGE 8 C-3 Phase II Practice Note The new framework becomes effective on Dec. 31. Are you ready? . . . PAGES 10–11

C-3 Phase II: It’s a Wrap

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of its Joint Executive and Plenary Committees, the National Association of Insurance Commissioners (NAIC) adopted risk-based capital C-3 Phase II instructions, which include the Academy’s C-3 Phase II report and recommendations along with the standard scenario and rules for transition and smoothing. The new instructions become effective on Dec. 31 for year-end 2005 statutory financial statements. “We are very satisfied that after all the years that the Academy and the regulators worked on this, it is finally seeing the light of day,” said Larry Gorski, former chairperson of the Academy’s Life Capital Adequacy Subcommittee. “Everyone wanted it to happen, and I think everyone will be N AN OCT. 14 CONFERENCE CALL

happy that it happened.” Gorski, a former chief life actuary for the Illinois Department of Insurance, was a member of the NAIC’s Life and Health Actuarial Task Force (LHATF) when it first asked the Academy to undertake the project, and he has been a guiding force in the Academy’s multiyear effort. The Academy’s C-3 Phase II report and recommendations focus on determining capital adequacy using stochastically generated economic scenarios and actuarial professional judgment. It is one component of the Academy’s efforts to encourage more principle-based regulation rather than rely on formulas that actuaries must follow. Although relieved that the project was See C-3 PHASE II, Page 10

Actuarial UPDATE

Academy 2005 Annual Meeting

A CTUARIES


Calendar NOVEMBER 2 Academy Tax Work Group meeting, Las Vegas

3–4 Academy Universal Life Work Group meeting, Chicago

6 Academy Pension Practice Council meeting, Portland, Ore.

6–9 ASPPA annual conference, Washington 7 Academy Pension Committee meeting, Portland, Ore.

8–11 Academy Life and Health Qualifications Seminar, Washington

9 CIA professionalism workshop, Toronto 9–10 ASB Pension Committee meeting,

Academy NEWS Briefs

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SB News At its Aug. 31-Sept. 1 meeting, the Actuarial Standards Board adopted a third

exposure draft of its proposed standard, Selection and Use of Asset Valuation Methods for Pension Valuations. The standard applies to actuaries when performing professional services with respect to selecting or using an asset valuation method for any defined benefit pension plan that is not a social insurance plan. The third exposure draft contains a number of changes in response to comments received on the second exposure draft, particularly on the treatment of market value of assets. The ASB Pension Committee welcomes additional comments on the third exposure draft, which is enclosed with this issue of the Update. The comment deadline is Feb. 28.

Washington

10–11 CIA general meeting, Toronto 13–16 CAS annual meeting, Baltimore

Academy Audit The Acad-

13–16 SOA annual meeting, New York

emy’s Board of Directors has appointed the following board members to serve on the 2006 Audit Committee: Stephen Radcliffe, chairperson; Thomas Campbell; and James Verlautz. Audited financial reports and the committee’s schedule for 2005 are available on the Academy’s website.

17–19 IAA Council and committee meetings, Rio de Janeiro

17–20 NCOIL fall meeting, San Diego 19–20 IAA President’s forum, Rio de Janeiro 29 Academy webcast on actuarial communication

DECEMBER 1–2 NAIC Life and Health Actuarial Task Force meeting, Chicago

3–5 NAIC winter meeting, Chicago 4 Academy Risk Management and Financial Reporting Council Meeting, Chicago

6 Academy COPLFR meeting, Chicago 8 CIA professionalism workshop, Montreal 12–14 ASB meeting, Washington 16 Academy Executive Committee meeting, Washington

JANUARY 26 Academy Board of Directors meeting, Washington

FEBRUARY 27 Academy Pension Practice Council Capitol Hill visits, Washington

28 Academy Pension Committee meeting, Washington

28–March 1 ASB meeting, Orlando, Fla.

MARCH 2–3 NAIC Life and Health Actuarial Task Force meeting, Orlando, Fla.

4–7 NAIC spring meeting, Orlando, Fla. 13–14 CAS ratemaking seminar, Salt Lake City 27–29 Enrolled Actuaries meeting, Washington

APRIL 6 Academy Executive Committee meeting, Washington

WEB INTERFACE

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

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

CRUSAP Update An addi-

tional 15 individuals have been tapped to serve on an advisory panel that is helping the Critical Review of the U.S. Actuarial Profession (CRUSAP) Task Force as it identifies and analyzes risks and opportunities the profession faces and develops forward-looking strategies to deal with them (see story, Page 5). Joining the advisory panel are: ® David Axene, president and consulting actuary for Axene Health Partners in San Diego ® David Babbel, professor emeritus of insurance and risk management at the Wharton School of the University of Pennsylvania in Philadelphia ® Todd Bault, senior research analyst with Sanford C. Bernstein & Co. in New York ® Howard Bolnick, chairman of InFocus Financial Group in Chicago November 2005

Kathleen Buto, vice president for health policy and government affairs for Johnson & Johnson in Washington ® J. David Cummins, Harry J. Loman professor of insurance and risk management at the Wharton School of the University of Pennsylvania in Philadelphia ® Stephen D’Arcy, a former president of the Casualty Actuarial Society and a professor of finance at the University of Illinois in Champaign, Ill. ® Jack Ehnes, chief executive officer of the California State Teachers’ Retirement System in Sacramento, Calif. ® Stephen Goss, chief actuary for the Social Security Administration in Baltimore ® Alfred Gross, commissioner of insurance for the Virginia State Corporation System’s Bureau of Insurance in Richmond, Va. ® James Hickman, emeritus dean and professor at the University of Wisconsin Business School in Madison, Wis. ® Stephen Jacobs, an attorney with Reinhart Boerner Van Deuren S.C. in Milwaukee ® David Otto, a consulting actuary with EMB America in San Diego ® Margaret Stanley, executive director of Puget Sound Health Alliance in Seattle ® Patricia Teufel, a consult®

ing actuary and principal with KPMG in Hartford, Conn. IN THE NEWS

An Oct. 4 New York Times article on a new national program to provide low-cost, limited health benefits for uninsured employees of participating employers quoted Steven Coppock, a senior actuary with Hewitt Associates in Norwalk, Conn. Coppock, whose firm is helping the HR Policy Association, a nonprofit organization of senior personnel executives, set up the program, called it a first step toward stopping the growing number of uninsured in this country. ® The Sept. 9 edition of Best’s Insurance News ran an article about the Academy’s report to the NAIC on risk transfer in P/C reinsurance. The article quoted New York insurance regulator Howard Mills saying that the Academy’s report confirms that there is no universal standard to define finite reinsurance and that it broadens the scope of risk transfer alternatives, making it clear that one size does not fit all. Academy member John Purple, chief actuary of the Connecticut Department of Insurance, was also quoted in the article agreeing with the report’s finding that a single bright-line test is not going to be sufficient. The article also


quoted Joe Sieverling, a senior vice president and director of financial service for the Reinsurance Association of America, who applauded the report’s findings. ® A Bloomberg News item on lobbying by Northwest Airlines and Delta Air Lines for provisions in pension reform legislation that could allow them to defer payments to their pension plans for years quoted Academy Senior Pension Fellow Ron Gebhardtsbauer. In the article, which ran Sept. 28 in the Dallas Morning News, Gebhardtsbauer said that the Senate proposal to allow higher discount rates would reduce the carriers’ contributions. ® A Sept. 24 Arkansas Democrat Gazette article on benefits of a state initiative to subsidize public school employees’ health insurance premiums as a means of boosting participation in the struggling state benefits plan quoted Academy Senior Health Fellow Cori Uccello, who said things might not be as bad as they seem because enrollment in the plan has been fairly steady. ON THE MOVE

Robert A. Lyle, retired vice

president and corporate actuary of Thrivent Financial for Lutherans in Appleton, Wis., received the 13th annual Luther College Jacobson-Rugland Award honoring an outstanding fraternal actuary for contributions to the actuarial profession and support of the fraternal benefit system. ® Roger Brooks, chairman and chief executive officer of AmerUs Group in Des Moines, Iowa, and his wife have endowed $1 million to the United Way of Central Iowa through the Greater Des Moines Community Foundation’s LifeTown w w w. a c t u a r y. o r g

Legacy Society. The Greater Des Moines Community Foundation will manage the endowment’s assets, disbursing 5 percent annually to the United Way. Brooks was the 2004 Tocqueville Society Award recipient for United Way of Central Iowa. ® S. Michael McLaughlin has joined Deloitte Consulting in Chicago, where he will lead the U.S. life actuarial practice and oversee the coordination of the actuarial practices of Deloitte Touche Tohmatsu’s member firms. He was formerly executive vice president and chief actuary of AXA Financial in New York. ® Mark Fiebrink has been named president and chief operating officer of Wausau Insurance in Wausau, Wis. He was formerly executive vice president for the Liberty Mutual Group in Boston. ® Randy Rulland has been named vice president of actuarial services and chief actuary for Blue Cross of Northeastern Pennsylvania. He was formerly senior vice president, group specialty operations for CNA Insurance in Chicago. ® Mark Tullis has been appointed senior vice president and chief financial officer of ING Canada in Toronto. Tullis will assume his new position in March 2006. He is currently general manager for ING Americas in Atlanta. ® Nicholas Albicelli has been named a vice president of Bear Stearns Asset Management in New York. He was formerly a senior consultant in the Harbridge Consulting Group in Syracuse, N.Y. ® Paul Brehm has been named senior vice president for Guy Carpenter & Co. in Minneapolis. He was formerly chief actuary at St. Paul Travelers.

Academy Offers Free Webcast on Actuarial Communication Communication is an essential aspect of professional practice. But effective communication of sophisticated and highly technical actuarial work can be difficult.

THE ACADEMY WANTS TO HELP In a free webcast at noon (EST) on Nov. 29, Academy experts will discuss the litigation, professionalism, and public interest aspects of actuarial communications. In addition to a consideration of the disclosure requirements of the code of professional conduct, the session will feature examples of how (and how not) to communicate actuarial findings.

By logging on and listening, you can earn an hour of professionalism CE credit. SPEAKERS: Lauren Bloom, general counsel and director of professionalism; Donna Claire, immediate past vice president for life issues; Ken Kent, immediate past vice president for pension issues.

INTERESTED? You can register online at www.actuary.org. Questions? Contact Rita Winkel, the Academy’s legal assistant (winkel@actuary.org; 202-223-8196).

How trusting are you? Precept 8 requires actuaries to ensure that their actuarial work product is used only as intended.

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

November 2005

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Annual Meeting, Continued from Page 1 The State of the Profession The meeting’s kickoff session featured a presentation on the Academy’s Critical Review of the U.S. Actuarial Profession (CRUSAP) task force by CRUSAP Chairperson Fred Kilbourne (see story, Page 5). Established last spring, CRUSAP plans to identify the actuarial needs of the public and determine whether they’re being met. In the process, the task force will be identifying and analyzing major risks and opportunities the profession faces. Following the presentation, attendees moved to breakout sessions to discuss four key topics that the CRUSAP task force will be examining as part of its review of the profession: continuing education and credentialing, defining the public interest, the multiple organizational structure of the profession, and professional regulation. Whatever the outlook for American actuaries, the time for thinking globally

Shaun Wang

and acting locally is past. At the meeting’s second general session, CRUSAP member Terri Vaughan focused on major changes in regulatory approaches, a move toward global standards, and greater scrutiny of the profession. “It’s clear the world is changing, and changing in some very dramatic ways,” said Vaughan, a former NAIC president who is now a Drake University insurance and actuarial science professor. Actuaries face increased competition from other kinds of risk professionals, she said, and need to develop new tools and expertise to advance the state of the art. Vaughan also urged greater international coordination among actuaries, and more em-

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

Meeting attendees enjoy a banquet at the Renwick Gallery, across from the White House.

phasis on effective communication with nonactuaries. “It becomes increasingly important that we be able to tell our story,” she said. “This changing world is going to need the skills of actuaries. It’s a great opportunity.” Looking to the Future Both luncheon speeches at the meeting gave attendees the opportunity to ponder future directions for the profession. Speaking on Monday, Shaun Wang, director of actuarial science programs at Georgia State University, said that the enterprise risk management (ERM) train is leaving the station, and actuaries not only need to jettison old baggage to get on board; they also need to learn how to compete with a growing number of risk management professionals already there. Financial engineers are now seen as the innovators, Wang said, despite the fact that actuaries are better at dealing with longterm horizons and uncertainty. To better compete, Wang said, actuaries need to broaden their basic education, focus on real-world issues, beef up continuing education, stop talking only to themselves, and learn how to communicate better with their various audiences. Pointing to efforts by the new Enterprise Risk Management Institute International to accredit more than 40 university programs in quantitative risk management, Wang said actuarial organizations ought to be actively involved in this broadening of actuarial education. Speaking at the Academy luncheon on the meeting’s second day, Howard Kunreuther challenged attendees with a discussion of ideas emanating from the Managing Catastrophic Risk project sponsored by the Wharton School at the University of Pennsylvania.

November 2005

Hurricanes Katrina and Rita caught many people in the Gulf region underinsured and unprepared, further exacerbating the personal and public economic devastation in their wake, Kunreuther said. What if homeowners had been offered the opportunity to buy “disaster mitigation insurance,” with the costs rolled seamlessly into their mortgage payments?

Howard Kunreuther

“We need to get better at mitigating risk ahead of time, and this is a good way to do it,” said Kunreuther, who directed the Wharton project. “But so far we haven’t been able to get banks and insurers to take an interest in it.” The project worked with the three major modeling companies to devise strategies for managing hypothetical disasters in four U.S. cities: earthquake risk in Oakland, Calif., Long Beach, Calif., and Charleston, S.C., and hurricane risk in Miami/Dade County, Fla. Models tried out various risk management portfolios to test the solvency of a hypothetical insurance company that


had significant exposure in these areas. The project’s most significant finding, according to Kunreuther, is the need for public-private partnership in reducing the risks before disasters happen. Luncheon speeches on both days of the meeting were supplemented by concurrent sessions on The annual meeting offered many opportunities to ponder future topics such as financial economics, directions for the actuarial profession. principle-based methodology for the regulation of insurance, and Farley Award public policy challenges facing insurance actuaries and pension actuaries and legislative and As one of his final official acts, outgoing regulatory prospects for the coming year. President Bob Wilcox presented the 2005 The final general meeting session was Jarvis Farley Service Award to Donna Claire devoted to a discussion of litigation risk. at the annual meeting luncheon. Claire, the In the breakout sessions that followed, atretiring Academy vice president for life istendees discussed strategies for dealing with sues, has served on at least 52 Academy malpractice litigation based on individual committees, task forces, and work groups practice area. over the past 15 years (see story, Page 6).

New Board Members Four new Executive Committee members took office during the annual meeting: Steven Lehmann as president-elect, David Sandberg as vice president for life issues, Donald Segal as vice president for pension issues, and Timothy Tongson as vice president for risk management and financial reporting issues. Al Bingham, Karl Madrecki, and James Verlautz were elected as regular Academy directors. The Academy’s new special directors are Thomas Myers (president-elect, Casualty Actuarial Society), Edward Robbins (president-elect, Society of Actuaries), Christine Stroud (president-elect, American Society of Pension Professionals and Actuaries), and Thomas Terry (president-elect, Conference of Consulting Actuaries).

CRUSAP Weighs the Public and the Profession

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of the public, and determine whether they’re being met. That, in a nutshell, is the mission of the Critical Review of the U.S. Actuarial Profession (CRUSAP), said the head of the CRUSAP Task Force, Fred Kilbourne, as he delivered the first public progress report on its work. Kilbourne’s presentation kicked off the educational program at the Academy’s annual meeting, and it set the stage for subsequent sessions on four key areas CRUSAP plans to examine: education and credentialing, the public interest, the profession’s multiple-organization structure, and regulation. Meeting the actuarial needs of the public will be the central focus of the CRUSAP initiative, Kilbourne told the audience. Although the task force’s charge may be elusive, he acknowledged, it’s the right place to focus because “our profession rests on a foundation of meeting the public’s needs.” Part of the task force’s work will be to determine whether other professionals currently are meeting some of those needs—or if they’re being addressed at all. In his view, Kilbourne said, the public’s actuarial needs “go far beyond what we’re currently doing.” One example: Actuaries are in a “unique position” to understand the long-term financial problems of social insurance programs like Medicare and Social Security, so “I think it’s our obligation to educate the public about the facts as we know them,” he said. Kilbourne also put CRUSAP’s work in context, noting that it is especially important in an era of globalization when American actuaries are dealing with increased competition, major changes in pension and insurance systems, “ripple effect” concerns after the DENTIFY THE ACTUARIAL NEEDS

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From left, CRUSAP members James Rech and Therese Vaughan, and Task Force Chairperson Fred Kilbourne

U.K. Morris Report, and post-Enron shifts in regulatory views. Amid all these changes, the CRUSAP Task Force will be trying to identify major risks and opportunities for the U.S. profession, which are “sometimes opposite sides of the same coin,” he noted. Kilbourne told the audience that the CRUSAP Task Force has appointed an advisory panel of 30 members, two-thirds of whom are actuaries and one-third of whom are non-actuaries. The panel represents all lines of actuarial practice, as well as former regulators and former members of the Actuarial Standards Board and the Actuarial Board for Counseling and Discipline. The task force itself consists of Kilbourne, Bob Collett, Guy King, Jim Rech, and Terri Vaughan. (For more details, go to www.crusap.net.) Currently, Kilbourne said, the task force is gathering information by reviewing pertinent literature and by surveying and interviewing actuaries and key stakeholders outside the profession. A c t u a r i a l U P D AT E

November 2005

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Claire Receives Farley Award

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When Donna Claire was considering careers as a high school senior in her native Long Island, she almost opted for a full-freight scholarship to MIT to study nuclear physics. But she wanted to be closer to home and the family dog, so she instead chose the College of Insurance in New York and actuarial science. “I’m a klutz, and I think the world is safer that I didn’t pursue nuclear physics,” Claire said in a recent interview with the Update. That’s debatable, but her decision was clearly a gain for actuaries in general and the Academy in particular. Claire, who received the Jarvis Farley Service Award at the Academy’s Oct. 10 annual meeting in Washington (see story, Page 1), has served on at least 52 Academy committees, task forces, and work groups since 1990. Most recently, she was the Academy’s vice president for life issues, helping to usher into existence the Academy’s C-3 Phase II risk-based capital project and move forward the whole principle-based approach to regulation during her term of office. “I appreciate this opportunity to recognize someone who is truly a good and dear friend,” said retiring Academy President Bob Wilcox when presenting the award. “She is someone I have sat with in more meetings than either of us would care to count.” Wilcox, a former regulator from Utah, said that for a number of years Claire has been the voice of the Academy before the National Association of Insurance Commissioners. “Long before she became vice president, when the issue came up of what can the Academy do, what should the Academy do, we would turn to Donna,” Wilcox said. Claire’s career as a volunteer has dovetailed closely with her professional career. Working for the Metropolitan Life Insurance Co. in New York in the 1980s, she became involved in asset adequacy testing and investment. After chairing an industry advisory committee that assisted New York regulators in writing that state’s appointed actuary regulation, one of Claire’s first assignments at the Academy was to oversee the development of practice notes as the regulation was promulgated nationwide. Claire, who currently runs her own consulting firm, Claire Thinking, in Fort Salonga, N.Y., has served as a member of the Academy’s Board of Directors, as chairperson of the Life and Health Qualifications Seminar, and as

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HE DOG MADE HER DO IT.

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

November 2005

Bob Wilcox congratulates Donna Claire.

chairperson of numerous task forces, including the Life Practice Notes Task Force, the Equity Indexed Products Task Force, and the Task Force to the NAIC on Accelerated Benefits. She has also served as a member of the Board of Governors of the Society of Actuaries (SOA) and as an SOA vice president and secretary/treasurer. Asked how she has been able to juggle her extensive volunteer and professional commitments, Claire credited the understanding and support of her husband, Martin (who is also an actuary), and her ability to operate without much sleep. At the same time, Claire said, all the hours she put in as a volunteer for the Academy have been more than repaid by the opportunities she has had to make a difference and shape her chosen profession and by all the good friends she made along the way. Although she feels there is less discrimination against women in the actuarial profession than in other technical fields (“You pass the exams, and no one cares whether you are male or female”), Claire said she particularly enjoyed the opportunity the Academy gave her to work with pioneering female actuaries such as former Academy President Barbara Lautzenheiser. Those friendships and her professional satisfaction came into sharp focus two years ago, Claire said, when she was diagnosed with cancer. “Through the years, I worked on a number of projects and met so many wonderful people. Many became friends and were there for me as I went through these last two years, calling or e-mailing to see how I was, sending their prayers and gifts,” Claire told meeting attendees in her acceptance remarks. “As I went through the surgery, chemotherapy, and radiation, there was plenty of time to reflect on the past years,” Claire added. Her conclusion: “I loved being an actuary.”


BOARD OF DIRECTORS, 2005–2006

Steven Lehmann President-Elect

Peter Perkins President

Bob Wilcox Immediate Past President

Barbara Lautzenheiser Past President

John Parks Secretary-Treasurer

Michael Abroe VP, Health

Mary D. Miller VP, Casualty

David Sandberg VP, Life

Geoffrey Sandler VP, Professionalism

Don Segal VP, Pension

Timothy Tongson VP, Risk Management Financial Reporting

Robert Beuerlein President, SOA

Al Bingham

Paul Braithwaite President, CAS

Thomas Campbell

Frederick Kilbourne President, CCA

Ethan Kra

Thomas Myers President-Elect, CAS

Stephen Radcliffe

Edward Robbins President-Elect, SOA

Sarah Simoneaux President, ASPPA

Elise Liebers

P.J. Eric Stallard

Karl Madrecki

Christine Stroud President-Elect, ASPPA

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Andrea Sweeny

Thomas Terry President-Elect, CCA

Patricia Teufel

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

James Verlautz

November 2005

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PROFESSIONALISM NEWS

Professional Communication

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CARED OF SPEAKING IN PUBLIC? Relax.

If you are speaking too quickly because you are nervous, if you are hanging onto the podium in a death grip, if you are flustered when the PowerPoint blanks out or a cell phone rings (and cell phones will ring), your discomfort is what the audience will remember most about your presentation. Ed Gero leads council members in breathing exercises. On the other hand, “I’m going to be receptive to your message if you are Academy’s director of professionalism. “The making me relaxed,” said Ed Gero, a Wash- council decided they would be the guinea ington actor, professor of performing arts, pigs,” Bloom said. and speaker trainer who spent a morning “The session was excellent,” said Geoff coaching members of the Council on ProfesSandler, the Academy’s vice president for sionalism in effective public speaking as part professionalism. “As actuaries, I think we of the council’s Sept. 27 meeting. excel at developing content. Ed helped us Gero cited studies showing that audi- to focus on how to deliver that content. ences pay the most attention (60 percent) to While we were initially interested in seeing a speaker’s body language. Vocal inflection if Ed’s coaching would be useful as we culnets 30 percent of the audience’s attention, tivate speakers on professionalism, I think while actual word choice logs in at a measly the skills he taught us will prove helpful 10 percent. anytime we need to communicate—both “You need to look relaxed, even if you within and beyond the profession.” aren’t,” Gero said. The key to effective public speaking, Gero’s session at the meeting grew Gero told council members, lies in preparaout of council discussions about offer- tion and practice. Leave nothing to chance. ing training in public speaking to AcadPractice out loud to get your delivery down. emy members, said Lauren Bloom, the Familiarize yourself with the room. Check

out the technology so that nothing surprises you. And then do it all over again. “Organize, organize, organize,” Gero said, “Practice, practice, practice.” Drawing on his 30-plus years as an actor, Gero offered specific pointers on ways to enliven a speech. These include moving away from the podium, using your hands to underscore a point, establishing threesecond eye contact with individuals in the audience, enunciating clearly, and varying inflection and the pace of your speech to give your audience the chance to hear what you are saying. “Pauses can be your friend,” Gero said. “If you need to make a point, give it time to land.” Gero also suggested a variety of physical methods (neck rolls, shaking out your hands and arms, breathing deeply) to relax before a presentation, as well as some vocal exercises to limber up the face and tongue. Speaking to the particular difficulties that actuaries might face in presenting their work products, Gero acknowledged that emotion communicates more than fact. “But just because the data is flat doesn’t mean the delivery of the data has to be flat,” Gero said. “You need to communicate your commitment, your pleasure, your joy in your work.”

Encouraging Peer Review

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N THE THEORY that two sets of eyes are better than one,

the actuarial profession has long stressed the importance of peer review in enhancing the quality of an actuary’s work product. To further encourage the practice of peer review within the profession, the Committee on Professional Responsibility recently published a discussion paper, Peer Review: Concepts on Professionalism. Updating an earlier issue brief, the paper offers definitions and examples of peer review and discusses how an actuary can use peer review to support compliance with the code of professional conduct. Additionally, the paper offers advice on creating or maintaining a peer review program within an actuarial unit, consulting firm, or company. Recognizing that there is a broad range of experience and opinion within the profession about peer review—and that peer review

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November 2005

practices continue to evolve—the Academy is encouraging reader comments on the paper. Those comments will be incorporated into any future releases on the topic. Tom Bakos is chairperson of the committee. Other committee members who contributed to the development of the paper are Cara Blank, William Cutlip, Jeffrey Kucera, Robert Orean, Carl Shalit, Russell Sutter, J. Kevin Watts, and Marc Whinston. PROFESSIONALISM BRIEFS ➤ KEN KENT, former Academy vice president for pension issues and a consulting actuary with Cheiron Inc. in McLean, Va., is the new vice chairperson of the Council on Professionalism. ➤ ELI DONKAR, deputy chief actuary of the Social Security Administration in Baltimore, is the new chairperson of the Committee on Actuarial Public Service


HEALTH NEWS

Healthy Practices

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recently published two new practice notes designed to provide nonbinding guidance to actuaries working in the area of Medicaid managed care and in the area of individual major medical business. The practice note on Medicaid managed care programs is designed to assist actuaries when certifying rates or rate ranges as meeting the requirements of 42 CFR 438.6(c ) for capitated Medicaid managed care programs. The practice note includes an overview of generally accepted actuarial principles and practices and a discussion of regulations governing Medicaid managed care. The practice note also reviews provisions in a checklist developed by a work group of the Centers for Medicare and Medicaid Services to be used in reviewing and approving rates for all Medicaid managed care programs. The practice note highlights areas of the checklist that may have a potential for misinterpretation or may be counter to generally accepted actuarial practice. HE HEALTH PRACTICE COUNCIL

HEALTH BRIEFS

P. Anthony Hammond chaired the Medicaid Rate Certification Work Group, which developed the practice note, and F. Kevin Russell served as vice chairperson. Also serving on the work group were Ben Brandon, Thomas Carlson, April Choi, Robert Damler, Timothy Harris, Joann Hess, Grace Kiang, Julia Lambert, Arlene Livingston, M. Scott Lockwood, Gary McCollum, Mary Murley, David Ogden, Herbert Olson, Richard Pattinson, Robert Ruderman, Martin Staehlin, Jill Stockard, Gordon Trapnell, and Todd Whitney. A work group of the Health Practice Financial Reporting Committee developed the practice note on individual major medical business. The practice note describes some of the current practices used by health actuaries for determining actuarial reserves and liabilities for individual accident and health insurance business. D. Joeff Williams served as chairperson of the work group. Other members of the work group were David Bahn, Karen Bender, Tim Gustafson, Jim O’Connor, Julia Philips, and Bernard Rabinowitz.

➤ Joining the Medicaid Work Group are BEN BRANDON, assistant vice president for American Re HealthCare, in Princeton, N.J.; THOMAS CARLSON, senior manager for Deloitte Consulting in Minneapolis; BILL FINCH, a consulting actuary with Milliman in Wayne, Pa.; LORENZ GLAZA, staff actuary with Kaiser Foundation Health Plan in Pasadena, Calif.; and GREG WINKLER, director of actuarial services for Coventry Health Care Inc. in Bethesda, Md. ➤ SHAUN PETERSON, a pricing actuary for the health products division of Allianz Life Insurance Co. in Minneapolis, has joined the Committee on State Health Issues and the Task Force on Health Risk-Based Capital. He is also the new chairperson of the Stop-Loss Work Group. Joining the Stop-Loss Work Group is IAN MCALISTER, actuarial director for KMG America in Minneapolis. ➤ SHARI WESTERFIELD, an actuary with Blue Cross Blue Shield Association in Chicago, has joined the Health Practice Financial Reporting Committee. ➤ MIKE CARSTENS, vice president and actuary for Physicians Mutual Insurance Co. in Omaha, has joined the Medicare Steering Committee.

CASUALTY NEWS

NAIC to Require Finite Reinsurance Disclosure

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after Hurricane Katrina forced cancellation of its fall national meeting in New Orleans, the executive and plenary committees of the National Association of Insurance Commissioners (NAIC) approved finite reinsurance disclosure requirements in an Oct. 14 joint conference call. The disclosure requirements as adopted for the 2005 annual statement require a P/C insurer to report the contract terms and management objectives of any reinsurance agreement with certain features that has the effect of altering policyholders’ surplus by more than 3 percent. The insurer’s CEO and ICKING UP THE PACE

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CFO must also sign an attestation that there are no side agreements and that they have support for their decision that the contract meets risk transfer requirements. The Academy’s Committee on Property Liability Financial Reporting (COPLFR) com-

mented on the draft attestation requirement

in June when it was being considered by the NAIC’s P/C Reinsurance Study Group. Several of COPLFR’s suggested changes were incorporated by the NAIC into the final requirements.

CASUALTY BRIEFS ➤ The Medical Malpractice Subcommittee issued a strongly worded statement on Oct. 26 criticizing a July report on medical malpractice that was commissioned by the Center for Justice and Democracy and written by attorney Jay Angoff. Calling the report “incomplete, actuarially unsound, and misleading,” the statement was widely distributed to the media with an accompanying news release (see story, Page 11). ➤ KENNETH QUINTILIAN, vice president and chief actuary for Medical Liability Mutual Insurance Co. in New York, has joined the Medical Malpractice Subcommittee.

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November 2005

9


LIFE NEWS

Working With C-3

Two New Life Practice Notes Published

T

recently published two new practice notes, one on reinsurance reserve credit and the other on the implementation of the new risk-based capital (RBC) and reserving requirements for variable annuities. The practice note on reinsurance reserve credit provides a description of practices commonly employed by U.S. actuaries in 2004 when determining reinsurance reserve credit taken on financial statements. The practice note is divided into three sections: general issues, issues relating to the valuation of life insurance policies model regulation, and issues relating to asset adequacy analysis. James Dallas chaired the work group of the Life Valuation Subcommittee that created the practice note. Other work group members are Frank Clapper, Andrew Creighton, Arnold Dicke, Donna Jarvis, James LoderHE LIFE PRACTICE COUNCIL

C-3 Phase II,

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meier, Lloyd Spencer, and Michael Taht. The practice note on C-3 Phase II and Actuarial Guideline VACARVM (commissioners’ annuity reserve valuation method for variable annuities) includes details on products offered and common practice, as well as information on models and granularity, scenarios and scenario generators, and economic, actuarial, and modeling assumptions (see story on the right). Hubert Mueller chaired the work group that developed the practice note, and Larry Bruning and Kory Olsen served as vice chairpersons. Other work group members are Fred Anderson, Rich Ash, Bob Brown, Tom Campbell, Richard Combs, Mark Evans, Tim Gaule, Larry Gorski, Kerry Krantz, Jim Lamson, Dennis Lauzon, Jeffrey Leitz, Bob Meilander, Peter Phillips, Tony Phipps, Scott Schneider, Don Skokan, Sheldon Summers, Mark Tenney, and Bill Wilton.

HUBERT MUELLER

C-3 Phase II, the new risk-based capital (RBC) framework for variable annuities and other products with death benefit or living benefit guarantees, will be phased in effective the end of this year. This culminates several years’ worth of effort by countless volunteers and provides the basis for the future of principlebased regulation of life insurance and annuity products. To assist actuaries in implementing the new RBC requirements, a work group of the Academy’s Life Practice Note Steering Committee recently completed a practice note that is available on the Academy’s website.

What Products Are Covered Under C-3 Phase II? A report describing the C-3 Phase II methodology and requirements was posted on the Academy website in June of this year. Products or features covered under C-3 Phase II RBC include: ➤Individual variable annuity (VA) products, whether or not they include guaranteed living benefits (GLBs) or guaranteed minimum death benefits (GMDBs)

Continued from Page 1

finally complete, Gorski predicted that there would be some fine-tuning of the concept next year, particularly in the areas of smoothing and transition rules. Gorski said he also expected there would be renewed attempts to modify and eliminate the standard scenario that was included by the regulators. As it has since the project’s beginning, the Academy will continue to play a role as the project is tweaked. “As regulators and companies send in their comments, the subcommittee will be monitoring them and deciding what we can do to help,” Gorski said. During the conference call, the NAIC also adopted revisions to Actuarial Guideline XXXVIII, which provides a formulaic framework for the valuation of reserves for life insurance policies. The revisions were approved by LHATF at the NAIC’s June summer meeting effective July 1 and sunsetting on April 1, 2007. The sunset date

10

BY

is intended to allow the NAIC time to develop a longer-term solution based on the principle-based approach to regulation. The

Life Reserving Work Group (formerly the Universal Life Work Group) is working with LHATF to develop this approach.

LIFE IN BRIEF The Life Valuation Subcommittee is still seeking volunteers to help update existing life practice notes and develop new ones where needed. Currently there are three projects in need of volunteers: ■ NAIC Model Regulation XXX update, which will review current practice regarding the use of Xfactors and determine if the existing practice note needs to be revised; ■ Implementation of new AOMR, which will evaluate practice regarding implementation issues, focusing on small companies; ■ State variations in valuation standards, which will evaluate practice on how state differences in reserve standards are communicated. Interested? Contact Amanda Yanek, the Academy’s life policy analyst (202-223-8196, yanek@actuary.org). ➤ ED JARRETT, a consulting actuary with Actuarial Resources Corp. in Centreville, Va., has joined the Life Financial Reporting Committee. ➤ SUSAN DEAKINS, vice president, financial reporting and actuarial valuation, for Penn Mutual Life Insurance Co. in Horsham, Pa., has joined the Universal Life Work Group. ➤ PETER BOYKO, an actuary, NAIC actuarial, for John Hancock in Toronto, has joined the Life Capital Adequacy Subcommittee. ➤ PAUL HEKMAN, a vice president with PolySystems Inc. in Chicago, has joined the Standard Valuation Law 2 Work Group

November 2005


Phase II ➤Group life coverages that provide GMDB amounts for unrelated mutual funds ➤Variable universal life (VUL) products, to the extent they include GLBs not having a separate reserve standard and then only to the extent of establishing a reserve or capital requirements for those benefits ➤Any variable immediate annuity, including those containing guaranteed payout annuity floor (GPAF) benefits

Calculation of C-3 Phase II RBC A five-step process is required when calculating Line 35 in LR023 (Market Risk), as illustrated below. Most companies affected by C-3 Phase II RBC are expected to use the report’s stochastic approach. The requirements for the stochastic model are substantial: The report posted on the Academy’s website is over 100 pages long. An alternative factor-based method (AM) is available for use with variable annuities without living benefit guarantees but is expected to produce higher total asset requirements.

STEP 1

STEP 2

Total Asset Requirement (Post-Tax Stochastic)

Greater of

Apply Smoothing and Transition Rules

Standard Scenario Amount (Post-Tax Deterministic)

STEP 3

Deduct

Statutory Reserves

STEP 4

Add*

Tax “Adjustment”

STEP 5 *To the extent not reflected already

Implications for Insurers Implementing the report’s stochastic approach will require a sophisticated equity-based cash flow projection model and in-depth understanding of product features and dynamic policyholder behavior—as well as capital market instruments if hedging is to be included. In addition, the following items should be noted: ➤When incorporating hedging into the stochastic projections, the risk-neutral and real-world economic scenarios need to be consistent. ➤The standard scenario model may result in higher capital requirements for guaranteed minimum death benefits (GMDBs) and guaranteed minimum income benefits (GMIBs), which include roll-up features, particularly when guarantees are in-the-money.

➤The AM can be used only with GMDBs, not with GLBs, and no hedging credit can be taken. A number of factors will mitigate the impact of the new RBC rules on companies: ➤The smoothing and transition rules contained in the new RBC instructions ➤The availability of hedging credit, if a clearly defined hedging strategy is used ➤The covariance adjustment, since the C-3 Phase II RBC counts toward the C-1 common stock component of the RBC formula. Hubert Mueller is chairperson of the work group that developed the C-3 Phase II practice note and a principal at Towers Perrin in Hartford, Conn. He can be reached at Hubert.Mueller@towersperrin.com.

Casualty Actuaries Go Public with Critique

I

N VIRTUALLY UNPRECEDENTED ACTION, the

Academy’s Medical Malpractice Subcommittee issued a news release and statement Oct. 26 criticizing a report, “Falling Claims and Rising Premiums in the Medical Malpractice Industry,” issued in July by the Center for Justice and Democracy, a nonprofit anti-tort reform organization. Jay Angoff, a former Missouri insurance commissioner, wrote the report. In its statement, the subcommittee called the report “incomplete, actuarially unsound, and misleading” and charged that the report “uses improper data comparisons, incomplete information, and appears to misuse certain insurance industry benchmarks.” Historically, the subcommittee has not commented on individual medical liability studies but decided to make an exception because of the public attention the report has received, the apparent credibility ascribed to its conclusions, and, in the view of the subcommittee, the poor quality of the analysis. As a result, the subcommittee said, w w w. a c t u a r y. o r g

“comments warning readers and potential users of this report are necessary.” Issuing such a statement is a common practice among public policy organizations but unusual for the Academy. Other Media Action The Academy’s media relations program continued on its record-breaking pace with 397 placements through September, compared with 225 in all of 2004. The number of media impressions (combined readers, viewers, and listeners) now tops 64 million, surpassing the 52 million garnered last year. Highlights include a Michael Crowley column in the November Reader’s Digest in which he used estimates by the Bush administration that Social Security’s unfunded liabilities are $11 trillion as an example of how statistics are misused. Crowley cited the Academy’s 2003 letter to Social Security’s trustees criticizing the use of “infinite horizon” estimates for unfunded liabilities as evidence the estimates were exaggerated.

In October, Academy Senior Pension Fellow Ron Gebhardtsbauer was quoted in a series of USA Today articles about the impact of changing demographics on retirement and health care. Thanking Gebhardtsbauer, reporter Dennis Cauchon wrote, “I love numbers — real, accurate, neutral numbers, and you and your organization provide the best on many crucial issues.” Reporters from the San Francisco Chronicle, Pensions & Investments, CNN.com, the Dallas Morning News, and the Detroit News also interviewed Gebhardtsbauer about pension issues. In other interviews, Casualty Practice Council member Rade Musulin spoke to an AP reporter on how actuaries determine property risk for natural disasters, and Academy General Counsel Lauren Bloom responded to questions from National Underwriter about actuarial liability.

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November 2005

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Actuarial Update

2006 Life & Health Valuation Law Manual

ASSOCIATE EDITORS

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

Linda Mallon (editor@actuary.org) DESIGN AND PRODUCTION

BonoTom Studio Inc. MARKETING AND PUBLICATION PRODUCTION MANAGER

Joseph Vallina

American Academy of Actuaries PRESIDENT

Peter Perkins PRESIDENT-ELECT

Steven Lehmann SECRETARY-TREASURER

John Parks VICE PRESIDENTS

Michael Abroe Mary D. Miller David Sandberg Geoffrey Sandler Donald Segal Timothy Tongson EXECUTIVE DIRECTOR

Kevin Cronin

The 2006 edition of the Academy’s Life and Health Valuation Manual, designed to help appointed actuaries comply with NAIC model standard valuation law and the model actuarial opinion and memorandum regulation, can be ordered now for delivery in late December. New in this year’s manual—information on the new actuarial opinion and memorandum regulation, including in which states it has been adopted, when it goes into effect in those states, and whether the states require an executive summary. The manual contains a summary of the valuation laws of all 50 states, the District of Columbia, and Puerto Rico, as well as copies of the NAIC’s model laws and regulations that may have an effect on reserve calculations. It includes a discussion of generally distributed interpretations and copies of the current actuarial guidelines from the NAIC Examiners Handbook. The manual is available through the following: ® A single-user-access license subscription, providing a sole user unlimited Web access to the manual until Dec. 31, 2006 (subscribers receive a user name and password granting access to a restricted area of the Academy’s website) ® A group-access license subscription, permitting a

company and its affiliates to provide their employees unlimited Web access to the manual until Dec. 31, 2006 (subscribers receive a single user name and password for website access that the company may distribute to multiple users) ® A single-user license subscription for the multi-platform CD-ROM version of the manual, permitting a sole user to install the software program on both a primary and secondary computer system ® A multiple-user license subscription for the multi-platform CD-ROM version of the manual, granting a company and its affiliates the authority to reproduce and distribute an electronic version of the manual to employees ® A single-license hard-copy manual.

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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.

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©2005 The American Academy of Actuaries. All rights reserved.

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November 2005

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Actuarial_Update_November_2005