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Revised standard valuation law passes at fall meeting

Show of Strength

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Outgoing president asks actuaries to come together

See House testimony, Page 10

New Officers Academy officers join the board

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Refining Definition CAS syllabus change prompts concern over NAIC requirement

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A ctuari e s

NAIC Wrap-up

fied in an Oct. 8 House judiciary subcommittee hearing on the effects of removing health insurance and medical professional liability insurance from an antitrust exemption currently granted to the insurance industry. As a corollary to health insurance reform proposals being debated in Congress, the House Judiciary Committee’s Courts and Competition Policy Subcommittee hosted the hearing to discuss a measure in the proposed Health Insurance Industry Antitrust Enforcement Act of 2009 (H.R. 3596) that would remove the exemption given to insurance companies from federal prosecution of antitrust violations for activities considered part of insurance business. The bill prohibits companies from engaging “in any form of price fixing, bid rigging, or market allocations.”

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James Hurley testifies to a House subcommittee on behalf of the Academy’s Medical Professional Liability Subcommittee.

cademy member James Hurley testi-

A cad e m y

Academy Testimony Defends Consumer Protection Regulations

A m e rican

Antitrust Hearing Challenges Exemption

th e

See hill briefing, Page 9

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meltdown, President Obama went to Wall Street to prepare the financial industry for tighter regulation. With Washington policymakers finally ready to address financial regulation and its role in preventing future financial crisis, the Academy hosted a briefing Sept. 29 on Capitol Hill to discuss lessons learned from the aftermath of the housing bust and eventual economic upheaval. The Academy teamed up with the Society of Actuaries (SOA) to present the results of an SOA study released earlier in the month. The study, sponsored by the SOA’s Committee on Finance Research and the Joint Management Section of the SOA, Casualty Actuarial Society, and Canadian Institute of Actuaries, looked at the impact of the financial crisis on insurers as a result of the industry’s mortgage investments. During the briefing, Shaun Wang, professor at Georgia State University and coauthor of the SOA paper, confirmed that the study determined the primary cause of the financial crisis to be the “widely held belief that housing prices couldn’t decline significantly on a national basis.” That misplaced confidence was exacerbated by secondary causes such as a complex and ineffective regulatory regime, incentive problems in the originate-to-distribute model for securitization, and overreliance on credit ratings by market participants and regulators.

Wang used visual representations to track the inflation of the housing bubble earlier in the decade. The steep rise in home values, he explained, corresponded to lower interest rates at the turn of the century and an increase shortly after in overall loans issued by non-governmentsponsored enterprises—of which subprime loans constituted a disproportionate percentage. Insurers’ exposure to mortgages, the study concluded, didn’t change much over the past 15 years, but the quality of those mortgages may have, as government bonds and agency-guaranteed obligations have given way to increased corporate bonds and private-label or non-agency mortgage-backed securities. While some groups may have tended to generally invest more aggressively than others and some insurance holding companies took on disproportionately large mortgage exposures through structured credit instruments, insurance regulations appear to have served the industry and its consumers well throughout the crisis. “The life insurance industry has always had significant exposure to mortgages,” Wang said, “but we found little evidence that the industry as a whole chased the real estate bubble.” Wang noted the paper’s finding that key regulatory structures protected the insurance industry, including strict regulation of derivatives developed by the National Association of Insurance Commissioners that prevented some insurers

N e wsmonth l y

Financial Regulation Takes Cues From Crisis year after the collapse of Lehman Brothers and the subsequent stock market

Actuarial Update

N O V 2 0 0 9


c a l e n d a r NOVEMBER 1-4 ASPPA annual conference, National Harbor, Md. 1-4 CCA annual meeting, Tucson, Ariz. 9-12 Life and Health Qualifications Seminar (Academy, SOA), Arlington, Va. 12-15 IAA meeting, Hyderabad, India 15-18 CAS annual meeting, Boston 19-23 NCOIL annual meeting, New Orleans

DECEMBER 2-3 Academy P/C Loss Reserve Opinion Seminar, Baltimore 2-3 ASB meeting, Washington

Academy News Briefs Annual Meeting

T

he Academy hosted its 2009 annual meeting Oct. 26 in Boston. At the meeting, new Academy officers assumed their roles, including new President Ken Hohman, Presidentelect Mary Frances Miller, and Vice Presidents Henry Siegel (risk management and financial reporting), Ethan Kra (pension), and Art Panighetti (life). New Academy Directors Ron Gebhardtsbauer, Mary D. Miller, Dave Neve, and Tom Wildsmith were elected. (For a photo spread of the 2009-10 Academy board, see page 6.) Meanwhile, the Academy handed out its Robert J. Myers Award to John Purple and its Jarvis Farley Service Award to Donald Segal. For in-depth coverage of the annual meeting, check out the December Update.

5-8 NAIC winter meeting, San Francisco 8 Academy Executive Committee meeting, Washington

25-26 Actuarial collaboration meeting, Washington

ASB Clarification The Actuarial Standards Board (ASB) recently voted to add the word “significantly” in Section 3.4.1 of Actuarial Standard of Practice (ASOP) No. 44, Selection and Use of

27 Council of U.S. Presidents meeting, Washington

Asset Valuation Methods for Pension Valuations, to make it

9 Qualification Standards audiocast (Academy, CCA) 18 Academy webcast on ASOPs 36 and 43

January

28 Academy Board of Directors meeting, Washington

March 3-6 IAA meeting, Capetown, South Africa 7-12 International Congress of Actuaries, Capetown, South Africa

april 11-14 Enrolled Actuaries Meeting (Academy, CCA), Washington 15 Academy Executive Committee meeting, Washington

May 19 Council of U.S. Presidents meeting, Washington 20 Academy Board of Directors meeting, Washington

August 2-3 Acturial Collaboration Meeting 10 Academy Executive Committee meeting, Washington

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

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clear that only significant bias needs to be disclosed. Since the ASB was clarifying the original intent of the ASOP, rather than modifying it, no exposure of this clarification is needed, and given the deadline for pension reports, such exposure would be counterproductive. ASOP No. 44 was issued as a new standard in September 2007, with an effective date of March 15, 2008. Since then, practitioners using the new standard have done so in the context of events that have included an extreme market downturn and the implementation of new federal pension legislation. The ASB Pension Committee had been observing and listening to reactions to the new standard by practitioners and other persons interested in the selection and use of asset valuation methods for pension valuations, and it will continue to do so in its responsibility to determine if and when any pension stan-

dard might require more formal review.

bailout of the American International Group.

Manuals Coming The Academy is now accepting orders for its annual

Bank Change The Academy has recently moved its banking operations from Harris Bank in Chicago to PNC Bank in Washington. The move will result in increased services, reduced costs, and enhanced systems integration. In addition to other banking services, PNC will take over the Academy’s lockbox and credit card processing operations. The Academy’s new lockbox address is: American Academy of Actuaries, P.O. Box 824093, Philadelphia, PA, 19182-4093. Additional dues payment details and address change reminders will be provided in the future.

Life and Health Valuation Law Manual and Property and Casualty Loss Reserve Law Manual, reference tools

designed to help appointed actuaries comply with National Association of Insurance Commissioners regulations.

Derivatives Scrutinized On Oct. 21, the House Agriculture Committee passed an amended version of H.R. 3795, which would move all trading of derivatives to a public exchange if the trades are between financial institutions. The Over-the-Counter Derivatives Markets Act of 2009 previously passed the House Financial Services Committee on Oct. 15 by a vote of 43 to 26. H.R. 3795 and H.R. 977, introduced by House Agriculture Committee Chair Collin Peterson (D-Minn.), were introduced in response to last year’s largely unregulated credit default swaps trading that led to the fall of Lehman Brothers and the Federal Reserve

In The News An actuarial analysis of the Community Living Assistance Services and Supports (CLASS) Act, a proposed federal long-term care program, performed by a joint work group of the Academy’s Federal Long-Term Care Task Force and the Society of Actuaries’ Long-Term Care Insurance Section Council was discussed in a Sept. 3 Fortune article. Steve Schoonveld, a member of the joint work group and chief financial officer of Life

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➜ continued from

Media Relations Activity Report—Third quarter, 2009

Page 2

Plans Inc. in Waltham, Mass., was quoted. The analysis was also mentioned in the Sept. 1 issues of Agent’s Sales Journal and Investment & Financial Advisor Monthly. The Academy’s ConsumerDriven Health Plans Work Group’s recent analysis of consumer-driven health plan studies was cited in numerous opinion pieces in September, including those recently published online by BusinessWeek on Sept. 9 and Real Clear Politics on Sept. 13. The analysis was also cited in an op-ed in the Sept. 15 issue of the Investor’s Business Daily. Academy Senior Pension Fellow Frank Todisco’s letters to FOX News Channel and Rep. Anthony Weiner regarding the congressman’s appearance on “Your World With Neil Cavuto” were cited in a Queens Tribune article published on the web on Sept. 10 and in print on Sept. 16. Todisco wrote to clarify inaccuracies about the process of determining cost-of-living adjustments for Social Security, the subject of Neil Cavuto’s interview with Rep. Weiner. On Sept. 6, Todisco appeared for the second time this summer as the sole guest on the

Ohio radio show “Retirement Matters.” Todisco discussed seven sources of retirement security: Social Security, traditional defined benefit pension plans, personal savings including defined contribution plans, health and long-term care financing, employment, housing wealth, and family and community support. He also noted the risks associated with each. Academy Senior Health Fellow Cori Uccello was quoted in a Sept. 9 Health Plan Week article regarding proposed health care reform legislation. She warned that a guaranteed-issue system would likely cause an increase in average medical services utilization and would require an individual mandate to try to reduce adverse selection. Uccello also outlined the Academy’s three principles for actuarially sound health care reform in a Sept. 18 Bureau of National Affairs article. She said reform should make sure that insurance attracts a broad cross section of risks, level the playing field so that plans competing for the same people abide by the same rules, and reduce spending growth. A Sept. 22 New York Times

risk management and Financial reporting briefs

➥  Denis Tauscheck, senior vice president and chief actuary for National Guardian Life Insurance Co. of America in Madison, Wis., and Michael Lockerman, director for PricewaterhouseCoopers in New York, have joined the Academy’s Financial Regulatory Reform Task Force.

pension briefs

➥  Jeffrey Litwin, senior vice president for the Segal Co.’s Sibson Consulting Division in New York, and Ellen Kleinstuber, managing consultant for the Savitz Organization in Philadelphia, have joined the Academy’s Pension Committee.

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Three-Year Quarterly Average Third Quarter, 2009

41

30 Requests

24

24 Interviews

207

260 Placements

Note: A request is a media inquiry for more information (e.g., statistics, comments, work products, etc.) or for media credentials to an Academy event. An interview occurs when the Academy is able to provide a spokesperson to meet a media request. When an interview is fulfilled, it is no longer tallied as a request. A placement is an article containing an Academy reference, quote, or attribution from an Academy spokesperson or the placement of an Academy-produced letter to the editor/op-ed. A pickup is the publication of an Academy news release, media alert, or statement. A three-year quarterly average is the statistical mean of the past 12 quarterly totals for each category (requests, interviews, placements, and pickups).

Economix blog entry on the Senate Finance Committee health care reform bill also quoted Uccello. She said that if premiums for high-risk individuals do not adequately reflect the costs associated with the coverage, low-risk individuals will “have to pick up the tab.” Absent an effective and enforceable mandate, these low-risk individuals may choose to drop coverage. Remarks by Donna Claire, chairperson of the Academy’s Life Financial Soundness/Risk Management Committee and president of Claire Thinking in Fort Salonga, N.Y., during a Sept. 9 National Association of Insurance Commissioners (NAIC) Life Insurance and Annuities Committee conference call were published later that day by the Insurance Bellwether. In discussions about passing proposed revisions to the standard valuation law, Claire said that the Academy wholeheartedly supports the proposal. The committee voted to pass the proposed revisions, and subsequent articles by BestWire on Sept. 11 and LexisNexis Insurance Law Center on Sept. 16 quoted the Academy’s Life Practice Council Vice President Tom Campbell, a vice president and corporate actuary with Hart-

ford Life in Simsbury, Conn. Campbell said the committee’s decision to pass the revisions was a milestone toward implementing a principlebased approach. The NAIC then voted on Sept. 23 during the executive/ plenary session of its fall meeting to adopt the proposed revisions to the valuation law. News reports surrounding the decision, including ones in National Underwriter Life & Health on Sept. 21, BestWire on Sept. 23, and BestWeek on Sept. 28, cited the Academy’s support. A Sept. 30 National Underwriter Life & Health article discussed an Academy comment letter to the NAIC’s Annuity Disclosure Working Group regarding an annuities illustration proposal by the American Council of Life Insurers. Linda Rodway, chairperson of the Academy’s Annuity Illustrations Work Group and a consulting actuary from Roslyn Heights, N.Y., was quoted as the letter’s author. Among other suggestions, the work group proposed moving the annuitization section to precede the cash value section, since the purpose of an annuity is to provide income. To find out about other actuaries in the news and for external links, visit the Academy’s newsroom.

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2009 NAIC Fall Meeting

Valuation Law Tops NAIC Actions

T

he National Association of Insurance Commissioners (NAIC) finally adopted a revised stan-

dard valuation model law at its fall national meeting Sept. 23 in National Harbor, Md. More than five years in the making, the model law is a major development in the effort to improve the way life insurers calculate reserves held to protect consumers’ financial interests in insurance products. “This significant action replaces static formulas with a principlesbased approach—using risk analysis techniques such as modeling and simulation to better capture the various risks inherent in establishing adequate reserves,” said Roger Sevigny, NAIC president and New Hampshire insurance commissioner. “Modernizing these methods provides regulators with better tools to protect insurance commissioners.” Pending adoption by individual states, the law will replace the calculation of insurance reserves based on static formulas that aren’t always optimal when matching risks to reserves. Specifically, the law will add reserves for certain benefits, options, and guarantees that involve significant risks but previously had little or no reserves required under old formulas. The law will also improve reserve calculations for products that consumers find beneficial but that required reserves in excess of reasonably conservative estimates. A companion to the revised law, the valuation manual, which is nearing completion by the NAIC, will provide specific guidance for each product to make sure life insurers hold correct amounts of reserves to meet policyholder obligations. The manual is expected to be completed by the end of 2009, an intention noted in the NAIC Life Insurance and Annuities Committee’s September vote to advance the valuation law. The NAIC’s Life and Health Actuarial Task Force (LHATF) continued its work on the valuation manual at the fall meeting. Most of the major topics of discussion regarding the manual are issues to be resolved within VM-20, a section in the manual that governs life insurance. Gary Falde and Alan Routhenstein from the Academy Life Reserves Work Group’s Asset Subgroup presented the group’s results after evaluating alternative methodologies for prescribed default costs on existing investments. Based on the presentation, LHATF directed the Academy group to abandon an approach proposed by the New York Insurance Department and to focus on fully developing the methodology proposed by the Academy’s Life Reserves Work Group. LHATF plans to have the valuation manual completed for at least one type of product by the Dec. 31 deadline. At the meeting, the task force received a draft of VM-21, which would govern variable annuities and is planned to be a nearly word-for-word reiteration of Actuarial Guideline 43 (the commissioners reserve valuation method for variable annuities), which was passed in 2008 and goes into effect at the end of 2009. The draft will likely be deliberated on interim conference calls to meet the Dec. 31 deadline to have a valuation manual completed. At the fall meeting, LHATF also received a project update from Tim Harris of the joint Academy/Society of Actuaries Valuation Table Team, which will eventually be providing recommendations on mortality margins to be added when calculating principle-based reserves. The task force also discussed economic scenario generators, and Academy Senior Life Fellow Nancy Bennett presented an update from the Academy’s Economic Scenario Implementation Work Group. w w w . a c t u a r y. o r g 

Health Opinions The Academy’s Health Practice Financial Reporting Committee has released a practice note on the revised actuarial statement of opinion instructions for the NAIC Health Annual Statement. The practice note was created to assist actuaries in understanding the new requirements adopted by the NAIC. The changes to the opinion instructions are effective for the 2009 annual statement filing. The revised health actuarial opinion instructions require a qualified health actuary to be appointed by the board of directors; prescribe language for each section, deviations from which require notation in a “check box” section; and require a supporting actuarial memorandum. The Academy included discussion of these changes at the Life and Health Qualifications Seminar Nov. 9-12 in Arlington, Va.

On the capital side, the NAIC’s Life RBC Working Group received a final report from the Academy’s C3 Life and Annuity Capital Work Group on its recommendations for C3 Phase III risk-based capital requirements. In anticipation of the principle-based approach (PBA) rollout to state insurance departments and legislatures over the next couple of years, the Academy participated in an education session for regulators on the basics of PBA. Nancy Bennett presented on behalf of the Academy, along with Larry Bruning and Philip Barlow on behalf of the NAIC, on the history of PBA, details on how reserve and capital calculations work under PBA, and what steps are necessary to fully implement PBA at the state regulatory level.

Life Notes The NAIC’s Annuity Disclosure Working Group continued its consideration of a model annuity illustration. Cande Olsen presented the Academy’s Annuity Illustration Work Group’s revised recommendations for changes to a draft model proposed by the American Council of Life Insurers at the spring national meeting. In addition, Nancy Bennett participated in a public hearing of the Rating Agency Working Group on the use of rating agency ratings in state insurance regulation. Specifically, Bennett covered the use of ratings in the insurance industry and detailed how ratings affect the determination of capital and other uses such as calculating prescribed default costs and investment spreads.

Federal Notes The NAIC’s Government Relations Leadership Council sent Congress a suggested federal bill to modernize regulation of reinsurance through the states. The proposed Reinsurance Regulatory Modernization Act of 2009 would create two new classes of reinsurers in the U.S., national reinsurers and port-of-entry (non-U.S.) reinsurers. The bill would allow reinsurers the option of operating under the existing regulatory approach but would also allow national reinsurers to be licensed through a single home state, while port-of-entry reinsurers would be certified through a single port-of-entry state.

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Milestones, Millstones Call for Renewed Professional Commitment By John Parks

I

t’s been both an honor and certainly a challenge to serve as the Academy’s president this year. I’d like to thank all the Academy volunteers and staff, especially Executive Director Mary Downs, for their incredible dedication. The Academy’s leadership has had to deal with unfortunate and unprecedented litigation, but I firmly believe our board of directors acted responsibly and deliberately in the organization’s best long-term interests. I also firmly believe that we have an unparalleled opportunity to emerge from this turmoil a stronger and better Academy. But not all of our challenges this year have been internal. Our country is in the grip of one of the most serious financial crises in recent memory. On July 20, the Academy stepped forward to help our nation respond to that crisis, hosting a financial summit that drew more than 60 members from all over the country to map out a strategy for how actuaries in general, and the Academy in particular, can contribute to solving the crisis. We even had the honor of being joined by Assistant Secretary of the Treasury Alan Krueger. Along with the financial crisis, health care reform called for the nation’s and the Academy’s attention in 2009. In addition to hosting briefings and meetings with congressional staff on Capitol Hill, the Health Practice Council issued and promoted a series of brief policy statements, Critical Issues in Health Care Reform, to educate policymakers on underlying reform subjects, such as risk pooling, gender considerations, market reform principles, and actuarial equivalence. In the past few months, we’ve also passed significant milestones in a decade-long effort to establish and implement a principle-based approach for life insurance reserves and capital. A revised standard valuation model law was adopted in September by the National Association of Insurance Commissioners. I congratulate the hundreds of volunteers who have tirelessly worked on this effort. The Academy welcomed a new senior life fellow this year. Nancy Bennett joins Frank Todisco, senior pension fellow, and Cori Uc-

cello, senior health fellow, as part of the Academy staff. Collaboration continues to be a priority for the actuarial profession. Two Capitol Hill briefings on retirement and the impact of the financial crisis brought together SOA research and Academy policy work to update Hill staffers and media on the latest information and trends. Collaboration was also an essential element in the development of TRACE, the new online continuing education credit tracking tool for all actuaries, and in bringing to fruition the North American Actuarial Council’s professionwide search engine, developed and hosted by Mexico’s National College of Actuaries. There’s much to be done going forward. One of the hard lessons learned this year is that some of the Academy’s processes and procedures need to be re-examined. Many members have expressed a desire for a more direct and transparent involvement with these processes. We also recognize the need for improved communication and feedback channels between leadership and members. Ken Hohman, my successor as president of the Academy, is exactly the person for the job. He is a healer, a unifier, and most important, a proven leader. With Ken at the helm, we will accomplish the goals we set at this year’s financial summit, we will add the voice of actuarial expertise to the health care reform debate, we will honestly and impartially analyze the financial consequences of proposed legislation, and, yes, we will overcome the rifts that have opened in our ranks this year. Thank you for allowing me the opportunity to serve as your president of our prestigious organization. John Parks became the Academy’s immediate past president on Oct. 26.

Seminar on Effective P/C Loss Reserve Opinions: Tools for the Appointed Actuary Westin Baltimore/Washington Airport Hotel Dec. 2-3, 2009 Baltimore, Md. Following up on last year’s success, the Academy’s annual seminar on casualty loss reserve opinions will again be divided into two parts. The first day’s sessions will cover introductory issues, while the second day will focus on more advanced topics. Participants may register for either or both days of the seminar. The seminar is presented annually by the Academy’s Committee on Property and Liability Financial Reporting. For more information, visit http://www.actuary.org/seminars/casualty/opinion09.asp.

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B oard of D irectors , 2 0 0 9 – 2 0 1 0

Ken Hohman

Mary Frances Miller

John Parks

Bill Bluhm

John Schubert

Andrea Sweeny

President

President-Elect

Immediate Past President

Penultimate Past President

Treasurer

Secretary

Al Bingham

Gary Josephson

Ethan Kra

Vice President, Health

Vice President, Casualty

Vice President, Pension

Art Panighetti

Kathleen Riley

Henry Siegel

Vice President, Life

Vice President, Professionalism

Vice President, Risk Management and Financial Reporting

Ralph Blanchard

Larry Bruning

Tom Finnegan

Ron Gebhardtsbauer

Roger Hayne

Darrell Knapp

President-Elect, CAS

Michael McLaughlin President, SOA

President-Elect, ASPPA

Mary D. Miller

Donald Segal President-Elect, SOA

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David Shea

Dave Neve

Cande Olsen

President, CAS

Adam Reese

Stephen Rosen

President-Elect, CCA

Lawrence Sher President, CCA

Annie Voldman

Tom Wildsmith

President-Elect, ACOPA

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New Academy Officers The Academy’s Board of Directors has approved the slate of 2009 Academy officers put forward by the Nominating Committee. New officers assumed their duties at the Academy’s annual meeting in Boston Oct. 26. The new officers are: Mary Frances Miller President-Elect Miller has previously served on the Academy board during her term as president and president-elect of the Casualty Actuarial Society (CAS). In addition to her volunteer work with the CAS, she has volunteered for the Academy as a member of the Academy’s Casualty Practice Council, Council on Professionalism, and Committee on Qualifications. She is also a member of the Actuarial Standards Board’s Subcommittee on Reserving and chairs the International Actuarial Association’s Education Committee. Miller is a founder and senior consulting actuary with Select Actuarial Services in Nashville, Tenn. She is a fellow of the CAS and a chartered property and casualty underwriter. She was also elected an honorary fellow of the U.K.’s Institute of Actuaries.

Henry Siegel Vice President for Risk Management and Financial Reporting Issues Siegel has volunteered in numerous leadership positions within the Academy throughout his career, including as chairperson of the Financial Reporting Committee and the International Financial Reporting Standards Task Force. He has managed the Academy’s response to projects from the International Accounting Standards Board and Financial Accounting Standards Board. He has also held leadership positions with the Society of Actuaries (SOA), the Actuarial Standards Board, the Group of North American Insurance Enterprises, and the Actuarial Society of Greater New York, for which he served as president in 2006. He is also an Academy representative to the International Actuarial Association. Siegel was the recipient of the Academy’s Jarvis Farley w w w . a c t u a r y. o r g 

Service Award in 2008. Currently, he is vice president of the New York Life Insurance Co.’s Office of the Chief Actuary in New York. He is a fellow of the SOA.

Ethan Kra Vice President for Pension Issues Kra has previously served on the Academy’s board as a regular director from 2003-2006. He has served in a number of volunteer positions for the Academy, including as vice chairperson of the Pension Practice Council, member of the Pension Committee, member of the Joint Academy/Society of Actuaries (SOA) Pension Finance Task Force, and as chairperson of the Joint Academy/SOA Task Force on Financial Economics. He also served on the General Committee of the Actuarial Standards Board. Kra is a worldwide partner and chief actuary for retirement for Mercer Inc. in New York. He is a fellow of the SOA, a fellow of the Conference of Consulting Actuaries, a member of the American Society of Pension Professionals and Actuaries, and an enrolled actuary.

Art Panighetti Vice President for Life Issues Panighetti has been serving as regular director on the Academy’s board since 2007. He has served as chairperson of the Life Tax Work Group and as a member of a variety of Academy volunteer groups, including the Life Practice Council and the Tax Reform Work Group. He is also a member of the Academy’s Public Interest Committee and a member of the Actuarial Foundation’s board of trustees. Panighetti is a vice president with Northwestern Mutual Life Insurance Co. in Milwaukee. He is a fellow of the Society of Actuaries.

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C asualty n ews

Academy Asks NAIC to Review Instructions

T

he Academy’s Casualty Practice Council

submitted a letter in September to the National Association of Insurance Commissioners’ (NAIC) Casualty Actuarial and Statistical Task Force concerning the task force’s definition of a “qualified actuary” with respect to statements of actuarial opinion (SAOs) for property and casualty annual statements. A qualified actuary is defined in the NAIC’s SAO instructions as a person who is either a member in good standing of the Casualty Actuarial Society (CAS) or a member in good standing with the Academy who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Council. The letter was prompted by the CAS board of directors’ recent approval of changes to its syllabus for associate-level exams, which will take effect in 2011. The U.S. actuarial profession’s current Qualification Standards address basic and continuing education and experience requirements for actuaries issuing SAOs. Specifically, the council’s concern is that while membership in the CAS may meet the NAIC’s definition of a qualified actuary, future CAS members who complete associate-level exams in accordance with the new CAS syllabus may not have met the basic education requirements specified in the Qualification Standards. Such members may need to demonstrate that they have either completed the exam topics set forth in Section 3 of the Qualification Standards, which will not have been included on their exam syllabus, or have met the alterna-

life briefs

tive to basic education set forth in Section 3 of the Qualification Standards. The council also noted that the Qualification Standards contain experience and continuing education requirements. It opined that while membership in the CAS is necessary to be a qualified actuary, it may not be sufficient to meet all of the Qualification Standards. The council suggested alternative language for the section of Exhibit B to the NAIC statement of actuarial opinion in which the actuary discloses the basis for one’s qualification. A related article co-authored by Mary Frances Miller and David Menning appeared in the August 2009 edition of The Actuarial Review. The article alerted CAS members and candidates that the revised exam requirements for associateship in the CAS will not cover all of the exam requirements set forth in Section 3 of the Qualification Standards for actuaries issuing the loss and expense reserves actuarial opinion in connection with the NAIC property and casualty annual statement.

—Lauren Pachman

casualty briefs

➥  Andy Ferris, senior manager for Deloitte Consulting

➥  Dennis Lange, actuarial services manager for QBE

in Chicago, has joined the Academy’s Life Products Committee. ➥  Martin Kline, senior director for Allianz Life Insurance Co. of North America in Minneapolis, has joined the Academy’s Life Settlements Work Group. ➥  Dean Miller, vice president for institutional products for Jackson National Life Insurance Co. in Roseland, N.J., and Albert Manning, assistant vice president of financial reporting for Jackson National Life Insurance Co. in Lansing, Mich., have joined the Academy’s Annuity Reserves Work Group. ➥  Roland Rose, associate actuary for Guardian Life Insurance Co. of America in New York, and Robert Ellerbruch, associate actuary for American Memorial Life Insurance Co. in Indianapolis, have joined the Academy’s Life Reserves Work Group. Ellerbruch has also joined the Academy’s Reinsurance Work Group. ➥  Barbara Snyder, senior vice president and chief actuary for Guardian Life Insurance Co. of America in New York, has joined the Academy’s Tax Work Group. ➥  Jean Forrest, manager for Ernst & Young in Chicago, has joined the Academy’s C3 Life and Annuity Work Group.

Regional Insurance in Sun Prairie, Wis., and Robert Curry, assistant vice president and actuary for Insurance Services Office Inc. in Jersey City, N.J., have joined the Academy’s Property and All Other Lines Subcommittee. ➥  Sean McAllister, consulting actuary for Milliman in Wayne, Pa., and Bonnie Maxie, principal for Oliver Wyman Actuarial Consulting in San Francisco, have joined the Academy’s Workers’ Compensation Subcommittee. ➥  David Spiegler, executive vice president and chief actuary for BMS Intermediaries in East Brunswick, N.J., has joined the Academy’s Committee on Financial Soundness/Risk Management. ➥  Michael Angelina, chief risk officer and actuary for Endurance Specialty Insurance Ltd. in Bermuda, has been named chairperson of the Academy’s Emerging Issues Task Force, and Eric Drummond-Hay, chief actuary for Liberty Mutual Agency Markets in Seattle, has been named vice chairperson of the task force. ➥  Michael Lu, assistant actuary for Farmers Insurance Group in Simi Valley, Calif., and Rebecca Williams, data analysis manager for the North Carolina Rate Bureau in Raleigh, N.C., have joined the Academy’s Natural Catastrophe Subcommittee.

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P ension n ews

Analyzing Social Security’s Assumptions

T

he Academy’s Social Insurance Committee

recently updated its issue brief Understanding the Assumptions Used to Evaluate Social Security’s Financial Condition. Originally published in 2001 and previously revised in 2004, the issue brief explains Social Security’s major assumptions, addresses how variations in those assumptions affect reform results, and encourages policy advo­cates to disclose the assumptions underly­ ing their reform proposals and to apply them consistently. Every year, when the Social Security Administration’s board of trustees issues its report to Congress on the program’s long-term financial condition, the trustees base their projections on actuarial assumptions. The assumptions used for Social Security’s financial projections fall into two broad categories: demographic and economic. Demographic assumptions are used to project the future population, providing a basis for estimating the number of workers paying into the system, the number of retired- and disabled-worker beneficiaries, and the number of family members and survivors re-

ceiving benefits. Economic assumptions are used to project wages and the resulting tax income of the program, benefit amounts, and the investment income on the system’s accumulated assets. Together, these assumptions underlie the projections of the program’s short-term and long-term financial condition. Making assumptions is critical for evaluating the current status of the Social Security program, as well as evaluating the various proposals for reforming it. A number of different proposals for Social Security reform are before the public. The issue brief encourages policymakers, when evaluating these plans, to be aware of the demographic and economic assumptions that underlie the analyses. In some cases, the potential advantages of a particular reform plan may depend as much on the assumptions used as on the proposal’s actual provisions. Furthermore, policymakers should take care that assumptions are being used consistently across all proposals that are being compared.

—Jessica Thomas

Hill Briefing, continued from page 1 from adding leveraged exposure to the implosion of the housing market. He also highlighted rules enforcing compartmentalization of the industry that may have kept the housing bust from affecting policyholders outside of the mortgage guaranty and financial guaranty lines. Lastly, he acknowledged the risk-based capital framework that discourages companies from investing in risky assets. “Insurance regulation did comparatively better compared to banking regulations,” Wang said. In order to better protect the public from this financial crisis and future crises, Jesse Schwartz and Robert Miccolis, chairperson and vice chairperson of the Academy’s Financial Regulatory Reform Task Force, laid out actuarial public policy recommendations for stemming systemic risk among all financial entities. They were joined by moderator Henry Siegel, who was recently named Academy vice president for risk management and financial reporting issues. Effective regulation, Schwartz said, would establish limits on corporate actions that may create systemic risk, ensure functional regulation to assess the ability of companies to evaluate and manage their risks and to implement any necessary actions, and ensure rating agencies and third parties are transparent about their assumptions, methodologies, and recommendations. Schwartz also highlighted the importance of minimum capital requirements for companies whose investments, such as derivatives, have significant exposure to systemic risk. Effective regulation, including higher capital requirements, is needed, he said, for risky investments by financial services companies in cases where high volatility of results is expected and/or the availability of information is limited, making expectation of future returns speculative. He also stressed that derivatives have a place in managing asset/liability risk when used to manage risk rather than to create it in an attempt to increase returns. “There is a need to understand the limitations of the models and assumptions to protect the public from the adverse financial consequencw w w . a c t u a r y. o r g 

Shaun Wang, co-author of an SOA research paper examining the financial crisis, joins the Academy for a briefing on Capitol Hill.

es of risk and uncertainty under a principle-based system, especially where there is a lack of information to quantify risk,” added Miccolis. Wang also stressed the need to create the right balance of rulebased and principle-based regulation in order to protect against systemic risks, suggesting some form of an enterprise risk management approach. The good news, he pointed out, is that the very nature of systemic risk requires some period of accumulation and thus gives policymakers a window of time to monitor and act. On the other hand, picking out the right signals from mere noise is a challenge. For instance, he said that the real strength of the economy lies in how efficiently productive economic activities are carried out, not just a snapshot of the stock market. As Miccolis observed, “Risk management is most effective when used to prevent crises rather than manage them.”

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House Testimony, continued from page 1

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The American Academy of Actuaries 1850 M Street NW Suite 300 Washington, DC 20036 Phone 202-223-8196 Fax 202-872-1948 www.actuary.org Statements of fact and opinion in this publication, including editorials and letters to the editor, are made on the responsibility of the authors alone and do not necessarily imply or represent the position of the American Academy of Actuaries, the editors, or the members of the Academy. ©2009 The American Academy of Actuaries. All rights reserved.

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In his testimony, Academy Medical Professional Liability Subcommittee member Hurley contended that this proposal would seem to be a “non-event on its face,” since engaging in those specifically prohibited acts is already illegal based on state laws that were enacted as a result of the McCarran-Ferguson Act of 1945, the law that established insurers’ shield from federal prosecution. However, due to potential interpretations of the proposal, Hurley warned that some could use the phrase “in any form” as justification to try to prohibit the current practice by many medical professional liability carriers to collect and share analysis of claims data, a process that is currently overseen by state regulators, as stipulated in the McCarran-Ferguson Act. Due to the low-frequency, high-severity nature of medical professional liability claims and the long lags between events occurring, claims being reported, and claim resolution, estimation of losses and premium rates can be more uncertain than in other lines of insurance, Hurley explained, including most health insurance. “Analyses of aggregated data serve several purposes that align with the original intent of the McCarran-Ferguson Act and assist state regulators charged with overseeing the pricing of insurance coverage,” Hurley explained in his oral testimony. Reasons include allowing for companies to compile enough data to credibly base loss estimates and premium rates. Absent that data, Hurley explained, companies either would be forced to rely on their own limited data, which would likely increase volatility in rate determinations, or face greater likelihood of insolvency. House subcommittee chairperson Hank Johnson (D-Ga.) asserted in the hearing’s opening comments that the proposal would prevent health and medical malpractice insurers from using the McCarran-Ferguson Act “as a shield for” price fixing, bid rigging, or market allocation, citing increases in general health insurance profits and premiums. Although Peter Mandell, former president of the California Orthopaedic Association in Burlingame, Calif., testified that there is little evidence of commercial health insurers engaging in price fixing, he asserted that industry consolidation has restricted competition. However, Hurley’s comments, which focused strictly on medical malpractice insurance, indicated that shared analysis in the industry enhances rather than restricts competition, encouraging both new competitors and new products. Medical professional liability losses and rates, he noted, have been flat or fallen in the past two to three years

under the current system of regulation. “Absent the use of industry information, [insurers and self-insuring companies] may be reluctant to assume or retain this exposure,” he said. “Their decision not to provide coverage reduces competitive alternatives in the marketplace.” If the goal of the proposed act is to reduce medical professional liability premiums, Hurley said, it is more likely to have the opposite effect. Previous attempts to repeal portions of the McCarran-Ferguson Act included explicit safe harbor recognition for specific company conduct, such as that of insurers, that is necessary for consumer protection. Ilene Knable Gotts, chairperson of the American Bar Association’s Section of Antitrust Law, questioned in her testimony why this proposal would put a greater burden on health and medical malpractice insurance. The Oct. 8 hearing was the first in a series that eventually included testimony from Senate Majority Leader Harry Reid (D-N.V.) and Assistant Attorney General Christine Varney, who heads the Department of Justice’s Antitrust Division. As a result of the hearings, the House Judiciary Committee eventually adopted an amendment by Rep. Dan Lungren (R-Calif.) clarifying that the bill generally wouldn’t apply to the collection or dissemination of historical loss data, determination of a loss development factor applicable to historical loss data, or performance of actuarial services. On Oct. 21, the committee approved the bill. The provisions were incorporated into the health overhaul bill (H.R. 3200) passed by the House Nov. 7.

Qualification Standards To whom do the revised Qualification Standards apply? The revised Qualification Standards apply to all actuaries who are members (associates or fellows) of one of the U.S.-based actuarial organizations and who issue statements of actuarial opinion (SAOs) in the United States, and they apply to members of any actuarial organization that is not U.S.-based but requires its members to meet the Qualification Standards when practicing in the U.S. They are not limited to Academy members. The U.S-based organizations are the Academy, the American Society of Pension Professionals and Actuaries, the Casualty Actuarial Society, the Conference of Consulting Actuaries, and the Society of Actuaries.

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