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In this issue



From the Executive


Letters to the Editor


ASB Roster


New Design Identity


NAIC Report


Editor Hired for Contingencies


Meeting of the Minds


Academy Testifies on Long-Term Health Care Bill



Technical Corrections Bill Includes Key Life Insurance Provisions


Our Secret is Outl


Checklist of Academy Statements-, June 1988


Academy Membership Office to Move

1 r

Pension Actuaries Take Note

Enclosures Included in this month's issue of The Update are the following : • Government Relations Watch • In Search Of . . .

• ASB Boxscore • Supplemental List of Members • Actuarial Standard of Practice for Documentation and Disclosure in Property and Casualty Insurance Ratemaking and Loss Reserving • Actuarial Compliance Guidelines for Financial Accounting Standards No . 88 (FAS 88)


1 Update


Academy Membership Approves Bylaw Amendment Establishing Actuarial Standards Board by George Soules By a three-to-one margin, the Actuarial Standards Board (ASS) has been formally adopted by the members of the American Academy of Actuaries, a watershed event for the actuarial profession in the United States . Culminating a two and one half year experiment in standards setting by the Interim Actuarial Standards Board (IASB), the bylaw amendment vote reflects the mandate of a membership ready to adopt change, if not universally in favor of it. By choosing this course, Academy members are acknowledging that it is time for professional standards of practice to be recognized as a critical element, perhaps even the foundation, of the actuarial profession . The vote count, tabulated as of June 15, 1988, was as follows : In favor : 2,431 . Opposed : 798 . Abstained : 6 . Invalid : 1 . Accordingly, as of July 1, 1988, the ASB exists as an independent structure within the Academy, paid for by Academy dues, and responsible for the setting and promulgation of standards of practice for the actuarial profession in the United States .

Strong Endorsement Ronald L . Bornhuetter, chairman of the ASB, called the result "a strong endorsement" of the standards movement. "We tested it for over two years and found the process could work," he said . "Now we hope to get a better and better product coming out of it ." Bornhuetter emphasized that the onus is on the ASS to make sure the development of standards is conducted "in the proper way ." TheASB's first official meeting is scheduled for late July, with an active slate involving the ongoing agendas of the operating committees and the appoint-

ment of two vice-chairs to the ASB . The standards board is expected to function in essentially the same manner as the IASB with one major difference : ratification of new standards of practice will no longer require the approval of the Academy's Board of Directors . This responsibility will fall to the ASB, itself, as outlined in the final report of the Standards Organizing Committee (SOC), a report that went out to Academy members in January as part of a special subject supplement on the standards movement . The SOC had been charged with monitoring the activities of the IASB ; their report was overwhelmingly endorsed by the Academy's board, paving the way for the bylaw amendment vote . John Harding. chairman of the now discharged SOC, said he was "delighted" with the membership's endorsement of the standards board and promised to follow closely the future progress of the ASB . Contrasting the profession's previously "reactive" posture regarding the issue of professional standards of practice, Harding predicted that the creation of an ASB could mean that, "if we are effective in what we are doing, we should assemble a set of standards that would

(continued on page 4)


The Actuarial Update

we are to have the kind of profession we want in the next century . Under the circumstances it is a realistic expectation, but not a certainty, that we will succeed in these goals .

American Academy of Actuaries President John A . Fibiger President-Elect W. James MacGinnitie Vice Presidents Phillip N . Ben-Zvi Committees on Public Issues-Insurance Burton D . Jay Committees on Accreditation, Qualification and Communication Joseph J. Stahl, II

Committees on Public Issues-Employee Benefits and Social Insurance

Mavis A . Walters Committees on Accounting and Financial Reporting

Secretary Virgil D . Wagner Treasurer Daniel J . McCarthy Executive Director Stephen G. Kellison Executive Office 1720 1 Street, N.W. 7th Floor Washington, D .C . 20006 (202) 223-8196

FAX (202) 872-1948 Membership Administration 500 Park Boulevard Itasca, Illinois 60143 (312) 773-4204

Chairperson Committee on Publications Carl R. Ohman Editor Charles Barry H . Watson Associate Editor Warren .P Cooper Managing Editor Erich Parker Contributing Editor George Soules Production Manager Renee M . Cox

American Academy of Actuaries 1720 I Street, N .W. 7th Floor Washington, D .C . 20006 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.

Stephen G . Kellison It is with a satisfied, yet wistful, reflection on the past and an optimistic, yet guarded, eye to the future that I write my last editorial as executive director of the American Academy of Actuaries . I will, this autumn, be opening my own firm in Washington. At this moment of transition for both the Academy and myself, I would like to share some personal thoughts and observations about our

profession. Much has changed in the twelve years since the Washington office opened in 1976 . At that time, our profession was suffering a major, even jolting, discontinuity. Congress had just enacted the Employee Retirement Income Security Act (ERISA) in 1974 and turned pension actuarial practice upside-down. There were many more questions than answers in early 1976 .

In the insurance area, we were faced in quick succession with the accounting profession defining GAAP accounting standards for stock life insurance companies (1972) and the National Association of Insurance Commissioners adopting its statement of actuarial opinion on the Life and Accident and Health Blank (1975). It became evident suddenly on all fronts that we could no longer comfortably ply our craft as before-external audiences were now directly involved in a major way. Our world would never be the same again. The above developments were visible indicators of the broader phenomenon that the actuarial profession was rapidly undergoing a transformation from a private, somewhat obscure discipline to a true public profession with public responsibilities . This process continues unabated to this day. It was against this backdrop that the Academy made the decision to increase substantially its level of commitment to deal with public issues by opening the Washington office .

Was that the correct decision? Absolutely. Should it have been done earlier? With benefit of hindsight, yes . How successful has it been? Given the constraints that exist, quite . Is there a need for more to be done today? Without question, if

Rather than recounting my version of the Academy's rousing successes and its not-so-successful initiatives over the past twelve years, in the space remaining I'd prefer to focus on the future . Permit me these few observations .

My abiding concern as I leave the executive directorship is what I perceive to be the weakness of membership support for the Academy and its activities . Our membership support is like a reservoir : a mile wide and an inch deep . As evidence . I would cite the observation that the Academy is all too often the second priority actuarial organization for many of its members-their "home" organization is elsewhere. Despite our best efforts to find new, effective ways to reach out to the membership, achieving the needed identity and loyalty remains an uphill battle . If we are to earn and retain the stripes of being a self-regulating profession, and If we are to become a stronger voice in the public arena-we must have greater membership understanding, support, and participation . Having articulated that underlying concern, I will set forth my "wish list" for the actuarial profession ; it consists of five major goals :

We should un t.fy the profession. This is at the top of my list . Our current structure is confusing not only to everyone outside the profession, but even to ourselves! It is the major factor leading to the problems inherent in the divided loyalty just commented on . In an era of rapidly increasing budgets for all the organizations, unification is becoming an economic imperative . The organizational structure is an impediment in achieving many of our profession's goals, both internal and external. Moreover, this problem cannot be solved bybetter coordination and goodwill. We already have that . The basic problem is structural . As fond as we are internally of keeping track of all of our specialties, we must never forget that very few outside the profession really care about all these designations . In most of their minds, actuarial science is a relatively narrow discipline to begin with, and we do ourselves no favors by publicly splintering the profession . We should commit to professionalism. A public profession, if it is to be (continued on page I0)


August 1988

Letters to the Editor 0 Underground Insurance in Poland Several months ago a major news magazine contained an article commenting on the recent official approval for publication by the Polish authorities of the long-time underground magazine Res Publica . Actually the Jaruzelski government tolerates a number of underground magazines, albeit reluctantly . Operating an underground press is still a risky business, however, because of occasional large government fines levied against those who illegally sell scarce printing supplies to these companies.

The article goes on to point out a most interesting response by the larger presses-formation of an informal insurance pool to indemnify them against the effects of these government fines . It is said to go by the name of Lloyd's of Warsaw. Have any other actuaries heard of private individuals organizing for financial protection against the actions of their wn government elsewhere in the world? Stewart Wilder Washington, DC Verification and Explanation A letter from Lloyd Sloan, who is not a member of the Academy, in the May issue of The Actuarial Update, strongly condemns actuaries who have "blessed Social Security with technical apologies until the end. If he believes that the numerous qualified actuaries who have performed services for the Social Security program over the years have committed "technical

apologies" and irresponsible professional work, I urge that hebring charges against the responsible individuals under the Academy's Guides to Professional Conduct .

As to the Social Security program's life expectancy, I can best quote President Reagan when he signed the 1983 Amendments into law. He said : "This bill assures us of one more thing that is equally important . It's a clear and dramatic demonstration that our system can still work when men and women of good will join together to make it work . There has been one point that has won universal agreement : The Social Security system must be preserved ." I believe that those of us who have been grievously offended and insulted by Sloan deserve to have him provide some verification and explanation of his charges. Robert J. Myers Silver Spring, Maryland

Penostrisaur We pension actuaries have buried our heads in the sand and are about to be suffocated into extinction . Our air supply has been diminished by othersaccountants, actu-businesses, and government . Where are our defenses? Then. 1989 marks the twenty-fifth year of my pension consulting existence . In 1964, pension actuaries' credibility was great and retirement plan fabric was woven by desires to increase benefits for employees throughout business and government. We actuaries were busy determining the additional benefits to be af-

Drawing by Brant Parker and Johnny Hart, Š 1988 .

forded by 1/2 increments in collectively bargained plans . Corporate benefits increased by 1/S% increments for past and/ or future service units, and we were busy notifying staffs of the effects of the benefit increases and the offsets due to changes of actuarial assumptions- e.g., interest rates from 3% to 31/2% . There was plenty of food and clean air for all of us, and we were perceived to be the most knowledgeable and forthright of the groups dwelling in the realm . Now. Today the conditions are very different. The body of law has increased exponentially, the involvement of the accountant has leapt forward with the passage of FAS 87 and FAS 88, large corporations have surveyed the labor and fiscal terrains and deemed it timely to lower employee benefit budget lines, and the consumers' perception of actuaries has advanced negatively. What to do . The furthering of the vested interests of each independent actuarial body is a fatal condition . The actuary's character is suspect as a result of his perception as the hired gun of his client . We have failed to evolve. The roving bands must combine into one body of actuaries to gain strength and to gain territory . We should assign the various groups, and levels of competency within these groups, some part of the turf. Administration of the process by a single actuarial body will allow us to grow and deal with the warring tribes of accountants and government . One actuarial body is likely to regain and add to the landscape . One actuarial body stands a chance of resurrecting the positive notions of integrity and respect that were once attributed to actuaries .

(continued on page 12)

The Actuarial Update


MEMBERSHIP CREATES ASB (continuedfrom page 1) deter attempts by the government or other professions to impose their own version on us." From an internal standpoint he stressed that, "in order for the standards process to be truly viable, we must abide by the standards ." In this regard, Harding urged the Academy's Committee on Discipline to vigorously pursue its mandate .

Discipline Process In the past, alleged wrongdoings by actuarieswere generally treatedby the Committee on Discipline as "ethical" and not as "practice" matters . Now, with the adoption of the ASB, "there will be more potential for disciplinary action," although the sanctions, themselves, will remain unchanged, according to Academy General Counsel Gary Simms . The Discipline Committee's enforcement powers are derived from the Academy's bylaws requiring adherence to the Guides to Professional Conduct . Guide 4(b) requires Academy members to abide by sound actuarial principles and, in turn, Interpretative Opinion 4(c) requires that the actuary follow generally sound actuarial principles as promulgated by the Actuarial Standards Board . Therefore, an alleged violation of a standard of practice is deemed to be a violation of the Guides' requirements . Communication between the ASB and the Discipline Committee will be very

much a two-way proposition . The committee will need to come to the ASB for advice on how a particular standard would apply in a specific situation . Conversely, the Discipline Committee, as it proceeds, may suggest areas in which there is a need for standards . Simms elaborated : "If the Committee on Discipline cannot process a particular case, they may suggest to the ASB that there ought to be a standard written that would help resolve the issue ." Simms added that as more standards are written, "the scope of the discipline procedure could expand."

Membership Involvement Already, under the auspices of the IASB, five final standards of practice have been issued and eight exposure drafts have been circulated to the membership for their comments . Every view expressed is carefully considered during the revision stage of the process from initial draft to final standard . ASB ChairmanBornhuetter advised members wanting to become actively involved in the standards setting process to communicate directly, preferably in writing, to the committee chairs of the various operating committees . "The operating committees are the blood and guts of the standards process," he said. "They are where the action is ." At this time there are six operating committees : Casualty, Health, Life, Pension, Specialty, and the newly formed Retiree Health Care Committee . The primary functions of the committees are to

develop and draft standards, with the assistance of the technical writer, Alan Kennedy, the standards officer, Eleanor Mower, and any sub-committees or task forces the operating committees need to appoint in order to facilitate the process . Final standards are promulgated by the ASB only when at least six members of the nine-member board vote in the affirmative. Additionally, the learned bodies of the profession, the Society of Actuaries and the CasualtyActuarial Society (CAS), have agreed to support the work of the ASS by promulgating statements of principles in their areas of expertise . In that regard, the CAS recently conducted a membership survey to determine the level of priority that should be given the development of principles and standards . The overwhelmingly positive member response, according to Casualty Committee Chairman Charles .F Bryan, fostered the development of two principles-in ratemaking and reserving-that have been used as the foundation for two standards of practice that will be presented to the ASB at its July meeting for approval as exposure drafts . Bryan said the affirmative vote on the A$i3 "has increased our confidence level "' regarding future standards setting activi ity. He also hopes that the official establishment of the ASB will galvanize more members to volunteer their time to the operating committees, in addition to engendering a higher number of comments in the exposure process .

Actuaries and the Casualty Actuarial Society. He also serves as one of six U .S . delegates to the ruling council of the International Congress of Actuaries . He was graduated from the College of Wooster and received an M.B.A. from Columbia University. He became chairperson of the Interim Actuarial Standards Board following Academy President John Fibiger's resignation to become the Academy's president .

ASB Roster The ASB comprises nine individuals, including its chairperson, representing a broad range of backgrounds and areas of practice. The Selection Committee for the ASB is composed of the presidents-elect of the Academy, the Conference of Actuaries in Public Practice, the Casualty Actuarial Society, and the Society of Actuaries .

Ronald L . Bornhuetter A casualty actuary, Ronald L . Bornhuetter is president and chief executive officer of MAC Re Corporation and its subsidiary, North American Company for Property and Casualty Insurance . Bornhuetter joined NAC Re in 1985, after having been with General Reinsurance Corporation for nineteen years, serving as vice president-finance and chief finan-

E. Paul Barnhart


A specialist in the field of health insurance, E . Paul Barnhart has headed his Bornhuetter, ASB chairman cial officer. Bornhuetter is a past president of both the American Academy of

own consulting practice since 1964 . Previously he worked for Washington National and American National, serving both companies as actuary for individ-


August 1988

utive Committee . Before joining Wyatt in 1956, Boynton held a position in the office of chief of finance in the U .S . Army. Boynton has been active in several actuarial organizations : he served on the Board of Governors of the Society of Actuaries from 1983--86, on the Board of Directors of the American Academy of Actuaries from 1971 to 째`1980, and as president of the American Academy of Actuaries from 1977-78 . Boynton is a fellow of the Conference of Actuaries in Public Practice. He is also a past member of the Pension Task Force of the Financial Accounting Standards Board . Boynton is a charter member of the Interim Actuarial Standards Board.



uai and group insurance. He began his actuarial career with Occidental Life in 1954 . In 1957, he became a health actuary at Occidental. Barnhart has been active in various actuarial organizations : he served on the Board of Directors of the American Academy of Actuaries and as chairperson of the Academy's Committee on Health . He also served on the Board of Governors of the Society of Actuaries and is a past president of the SOA. Bamhart Is a charter member of the Interim Actuarial Standards Board .

Barbara J . Lautzenheiser


James C . Hickman


Edwin F. Boynton A pension actuary now retired, Edwin F. Boynton is a former consulting actuary with The Wyatt Company, where he served on the Board of Directors and the Exec-

An educator, James C . Hickman has been dean of the School of Business at the University of Wisconsin since 1985 . From 1972-85, he served the university as professor of business and statistics . Previously, Hickman was affiliated with the University of Iowa from 1957-1972, serving as professor in the Department of Statistics from 1967-70, and from 1971-72 . He was with the actuarial staff of Bankers Life Company from 1952-57 . Hickman is a past vice president and member of the Board of Governors of the Society of Actuaries. He is also a past member of the Board of Directors of the American Academy of Actuaries. Hickman holds a a B .A. degree from Simpson College, a M.S . and a Ph.D . in mathematics from the University of Iowa . He is a charter member of the Interim Actuarial Standards Board .

A consulting actuary, Barbara J . Lautzenheiser is principal of Lautzenheiser and Associates, a firm specializing In insurance, government relations, planning, and project management . Prior to forming her own company in 1986, Lautzenheiser was with the Signature Group, serving as president and chief operating officer. Before joining the Signature Group, Lautzenheiser was senior vice president for the Phoenix Mutual Life Insurance Company . Lautzenheiser is a Fellow and past president of the Society of Actuaries, and served on the Board of Direcotrs of the American Academy of Actuaries from 1974-1977 . She is also a past chair of the National Committee for Fair Insurance Rates . Lautzenheiser holds a B.A . degree from Nebraska Wesleyan University. She is a charter member of the interim Actuarial Standards Board . (continued overleaf)

New Design Identity The logo below the front-page story is the primary graphic design component of the Actuarial Standards Board's new look . An abstract representation of the letters A-S-B, the logo is being incorporated into the design of stationery; envelopes, business cards, booklets, reports, and a host of other standards related products . Sea-green and gray are the colors that will be used in renderings of the logo and on various booklet covers .

The Actuarial Update


Thomas E . Murrin


Walter N . Miller A specialist in product development and financial management, Walter N . Miller is currently vice president and actuary for the Prudential Insurance Company. Before joining Prudential in 1986, Miller served with NewYork Life Insurance Company from 1951-86, with various responsibilities in actuarial, product development, marketing, and corporate planning . He is a fellow of the Society of Actuaries and is now serving his fourth term on that organization's Board of Governors . He is a member of the American Academy of Actuaries . Miller also chairs the NAIC Yield Index Advisory Committee as well as the SQA's Nonforfeiture Task Fbrce . He was graduated from Swarthmore College in 1951 . Miller became a member of the Interim Actuarial Standards Boardwhen Ronald L . Bornhuetter assumed its chairmanship.

A casualty actuary Thomas E . Murrin is executive consultant with Coopers & Lybrand . Before joining Coopers & Lybrand, he served for seven years as executive vice president of Insurance Services Office . Murrin also has fifteen years experience as senior vice president and actuary of Fireman's Fund Insurance Company . He began his career in 1946 with the National Bureau of Casualty Underwriters in New York . Murrin is a Fellow of the Casualty Actuarial Society and served as its president from 196 .3-65 . He is a member and past president of the American Academy of Actuaries . He is also a member of the International Actuarial Association . Murrin received aB .S . degree from St . John's University in New York . He is a charter member of the Interim Actuarial Standards Board .


George B . Swick


A specialist in employee benefits . George B . Swick, is currently an independent consultant and lecturer with the Heller Graduate School of Brandeis University. Swick retired from Buck Consultants in 1982, where he served as chief executive officer from 1977-81, and on the Board of Directors from 1970-8 L Swick has been actively involved with several actuarial organizations : he is a charter member of the American Academy of Actuaries and served on the Academy's Board of Directors from 1977-80. Swick is also a Fellow of the Conference of Actuaries in Public Practice, serving on its Board of Directors from 1975-82, and as president in 1982 . He was graduated from Dartmouth College in 1949 with a B.A. degree in mathematics . Swick is a charter member of the Interim Actuarial Standards Board .


Jack M . Turnquist A specialist in life insurance, Jack Turnquist is currently an independent consultant following his retirement from Tilling hastUlbwers Perrin where he was vice president . Before joining Tillinghast in 1973, Turnquist was in private practice and previously served with the Modem America Companies . He began his actuarial career in 1955 with Continental Assurance Company. A charter member of the AmericanAcademyofActuaries, Turnquist is a past chairperson of the Academy's Committee on Guides to Professional Conduct. 'Ihmquist is also a former president of the Conference of Actuaries in Public Practice. He holds a B .S . degree In mathematics from Illinois Wesleyan University, and a M .S . degree in mathematics from the State University of Iowa . 'Ihmquist is a charter member of the Interim Actuarial Standards Board .

Length of Terms Six-month appointment (July 1988 to December 1988) : Edwin Boynton, Thomas E . Murrin, and Walter N . Miller (with reappointment for 3 years) . One-year, six-month appointment (July 1988 to December 31, 1989) : Ronald L. Bornhuetter (chairman), James C . Hickman, and Barbara Lautzenheiser. Two-year, six-month appointment (July 1988 to December 31, 1990) : E . Paul Barnhart, George B . Swick, and Jack M . Turnquist.


August 1988

NAIC Report by Gary D . Simms The National Association of Insurance Commissioners ( NAIC) convened their Summer National Meeting in New York City on June 11 . What follows is a summary of issues and actions of significance to the actuarial profession .

Life and Health Actuarial Task Force The "actuarial agenda" of the NAIC meeting began on the Saturday preceding its formal kick-off with the first day of a two-day session of the Life and Health Actuarial (EX5) Task Force . As a result of the task force's deliberations, a variety of actionswere initiated, including the preparation of exposure drafts on newly proposed Actuarial Guidelines IX -A and IX B on structured settlements and substandard annuities . In addition, an exposure draft on proposed revisions to the valuation and nonforfeiture provisions of the Universal Life Model Regulation were discussed, and exposure of a proposal was agreed to later on during the intensive week of NAIC meetings . The task force also discussed possible revisions to the standard valuation law, although the group is awaiting a report from a newly reconstituted advisory committee before it prepares an exposure draft on the results of its deliberations . Several new projects are on the (EX5) Task Force agenda, including problems related to whole life policies without cash values (if permitted by the states) ; reserves for life insurance plans with guaranteed increases in death benefits ; an update of Actuarial Guideline 1V (reserving for term insurance) and expansion of the guideline's coverage; leveraged corporate-owned life insurance ; accelerated death benefits due to longterm care ; and, further work on the yield index (discussed in more detail later In this article) . The task force also discussed the results of an NAIC survey on the level of interest by regulatory staffs in a special seminar on the valuation actuary. The response was positive, and the Academy's Committee on Life Insurance has agreed to work closely with NAIC staff to develop an appropriate program .

On the health side, the major focus of task force deliberations was on a proposal dealing with standards for minimum health reserves, a subject that has been the center of intense debate within


the actuarial profession and the insurance industry for several years. The task force decided to eliminate the controversial benefit ratio reserve from the proposal and to circulate a new draft of its proposal for comment through the Health Section of the Society of Actuaries and the Health InsuranceAssociation ofAmerica. The benefit ratio reserve concept is, however, not dead ; it has, instead, been transferred for additional consideration to a new project dealing with premium rating guidelines for health insurance . A new health project for the task force concerns accident and health policies with non-accident and health benefits, as when health policies contain major significant death benefits .

Casualty Actuarial Task Force The Casualty Actuarial Task Force agenda centered on technical changes to Schedule P, guidelines for loss reserve discounting for troubled companies, and casualty loss reserve opinion rendering. Two new proposals for model bills each included requirements for statements of actuarial opinion on casualty loss reserves . The first arose in connection with the Financial Study Group of the NAIC Surplus Lines (E) Task Force, relating to a requirement for a loss reserve certification for companies listed by the NonAdmitted Insurers Information Office. This proposal raised concern because it deviates from current loss reserve requirements by requiring that the actuary be "independent" from the company and, second, because the definition of "qualified actuary" does not include membership in the American Academy of Actuaries as a requirement . The task force took no final action on the proposal . The second casualty opinion related to work by the Brokers Controlling Insurers Working Group of the Special Insurance issues (E) Committee . Its proposed model would require an actuarial certification on companies controlled by brokers concerning business placed by the brokers with the company. This model also requires that the actuary be "independent" of both the broker and the company, but does define the qualifications of the actuary as a "casualty actuary who is a member of the American Academy of Actuaries ." The committee took no final action on the proposal, but indicated that it will take final action on the proposal when It meets this September. These discussions underscore the growing trend on the part of regulators to demand "independence" by actuaries

when they prepare casualty loss reserve statement of opinions . While the profession continues to oppose the Imposition of such requirements, explaining patiently the distinctions between actuarial work and CPA audits, the regulators appear to be heading in a direction that may ultimately lead to broad independence requirements .

Yield Index Report The Academy's Committee on Life Insurance presented its yield index report to the Life Cost Disclosure (A) Task Force . The Academy report included a series of calculations under the interest adjusted cost (IN-') and yield index (Yl) methodologies for interest sensitive products, primarily universal life . The report concluded that due to a strong correlation between the Yl and the IAC and the strong correlation between rankings of policies by these methods, neither method provides a superior index when comparing similar plans . The report also noted that neither index is adequate when comparing dissimilar plans . The report was received by the task force and will be reviewed in depth by an advisory committee and the Life and Health Actuarial (EX5) Task Fbrce .

On-Site Audits, Data Sufficiency, and Actuarial Opinions A joint meeting of the Financial Examiners Handbook and Examinations Suggestions Committee and the Grievances Technical Committee, both of the Exam-, ination Oversight (EX4) Task Force continued as the focus for NAIC consideration of a mushrooming area of concern dealing with actuarial practice and statements of loss reserve for property and liability insurance companies . There was a good deal of discussion on the role of actuaries regarding data sufficiency and the desire of regulators for actuaries to take increasing responsibility for the data upon which calculations are based . The Actuarial Standards Board project on data insufficiencies was noted as a significant undertaking. The regulators also cast aspersions on the effectiveness of the Academy's discipline procedures, but were reminded that precious few regulators avail themselves of Academy processes. Finally, concern was raised regarding the common actuarial practice of providing relatively broad ranges of results ; the regulators expressed a desire for increased specificity .

(continued on page 9)


The Actuarial Update

Editor Hired for Contingencies In June, it was reported to Actuarial Update readers that the Academy' s Board of Directors had approved the start-up of a first-class, four-color actuarial magazine, Contingencies . This new flagship publication of the Academy, slated to debut in June 1989, now has an editor: Dana H . Murphy. The selection committee made its recommendation In early July, and Murphy joined the Academy staff three weeks later. She will manage the launching and subsequent publication of Contingencies, a bi-monthly periodical that will offer insightful discussions of some of the hottest issues of the day, and should prove fascinating reading for the pivotal decision-makers in the U.S ., as well as for those in the actuarial community. Murphy most recently served as editor for the several publications of the American Home Economics Association in Washington. These included the quarterly, scholarly Journal of Home Economics and a monthly newspaper, AREA Action. She managed the redesign of each publication, and the revamping of both budgets . Printing costs were cut in half, and the overall designs conveyed a

more focused, and more professional, image . She also added several new departments to each publication, and these

Meeting of the Minds

tees regarding the utility of actuarial statements on loss reserves, as well as the CPA audits of property and casualty companies required to file annual statements with insurance departments. It is an area of inquiry that may well spread to other areas of actuarial practice .

The National Association of Insurance Commissioners (NAIC) Examiners Handbook Technical Committee and the NAIC Financial Examinations Suggestions and Grievances Committee have been involved for some time in questions surrounding CPA and actuarial practice, with respect to loss reserve opinions and data that support these opinions . The issue was kicked off by a complaint raised by a former regulator serving as a conservator of an insolvent insurance company. He was distressed that (among other things) CPAs are not required to audit subsidiary insurance companies owned bya holding companywhen the subsidiary's activities are less than material as measured against the parent's total financial exposure. He was also concerned that actuaries can base reserve opinions on unaudited data, and he questioned whether a CPA or an actuary can accomplish the task without an "on-site" visit to the Insurer. This discussion has engendered a wideranging review by various NAIC commit-

Dana Murphy , Contingencies editor.

were enthusiastically received by association members .

Fbr four years, Murphy served as assistant editor for the American Phannaceu-

The Academy's Committee on Guides to Professional Conduct, which is charged to draft and review the Guides and Interpretative Opinions regulating ethical conduct by Academy members, has begun a discussion of these issues . This, In a real sense, is part of the committee' s mission to answer " inquiries about professional conduct, whether of a general or a specific nature." Of particular relevance to this discussion is Guide 4, Actuarial Calculations and Communications . The Guide states that in any report, the actuarywill "clearly identify . . . the data and the actuarial methods and assumptions employed" and that the members will exercise "due diligence" to ensure that "opinions rendered . . . are based on sufficient and reliable data, to the extent that such data are reasonably available ." Interpre-

tical Association's award-winning publication, American Pharmacy . During her tenure, the magazine doubled its editorial pages, and several popular departments (such as "Medical News," a column on general events of interest in the health care community) were added .

Fbr the Humane Society of the United States, Murphy served as editor for the International Journal for the Study of Animal Problems. This magazine's somewhat quixotic taskwas to furnish soundly scientific, statistically valid underpinnings for the morally grounded goals of the animal welfare movement. In other positions, Murphy was a major contributor to a New Drug Application for the first "orphan" drug ; did program evaluations on the costeffectiveness of an academically based alcohol studies center and on a blood lead abatement program in New York City for children ; and ran an electron microscope at Yale University School of Medicine (in the course of studying the neurohormonal maintenance of muscle tissue) . Murphy received her B .A. degree, with honors, from the University of Illinois . She has also done graduate work in medieval history, which continues to be a satisfying hobby.

tative Opinion 3(a)(4) specifically provides for expressions of reliance upon the work of others, meaning that the actuary makes "use of that person's work without assuming responsibility therefore ." Applying these statements to the problem at hand, we see that where an actuary explicitly expresses reliance for underlying data on another (e .g ., the insurer's management) in making a statement of opinion on loss reserves, he has satisfied ethical requirements provided that the actuary is satisfied that the data is sufficient and reliable, to the extent that such data are reasonably available . Can the actuary satisfy the requirement that the data are "sufficient and reliable" without an "on-site" visit? Certainly, facts and circumstances may impact on the answer, but it is clear that an on-site visit is not necessarily required under current ethical principles to assure data sufficiency or reliability. What, then, can the actuarial profession suggest in this situation? It seems to the committee that a major reason for (continued on page 11)


August 1988

NAIC REPORT (continued from page 7) S The accounting and auditing professions were also on the receiving end of significant criticism from the regulators, although they chose not to appear to defend themselves before the regulators . While no formal action was taken or recommended, the debate underscores increasing scrutiny being given by the NAIC to actuarial statements of opinion .

Technical Services (EX5) Subcommittee Meeting At the conclusion of the NAIC meeting, the Academy Committee on Liaison with NAIC presented its semiannual report to the Technical Services (EX5) Subcommittee. The subcommittee, which is charged with setting priorities for both the Life and Health Actuarial (EX5) Task Force and the Casualty Actuarial (EX5) Task Force, received the Academy report on the myriad of NAIC-related activities in which the Academy is engaged .

designed to end the use of collision "damage waivers" by automobile renting companies . Much discussion took place regarding the need for the NAIC to develop appropriate models to assist in the implementation of the newly adopted federal catastrophic health insurance plan, particularly as they related to so-called medigap policies . Several NAIC sessions focused on the

state attorneys general lawsuit against the Insurance Services Office and property/liability insurance companies alleging antitrust violations . The Universal and Other New Plans (A) Task Force established a new working group to concentrate on remedying confusion among consumers related to guarantees promised by sales representatives and policy forms for interest sensitive products . A

Academy Testifies on Long-Term Health Care Bill

Briefing Session 10The Academy conducted its regular brief ing session, attracting actuaries from insurers, consulting firms, and state regulatory departments . The session was highlighted by a review of the NAIC agenda, and an exchange of"Intelligence" on developments not always clear to the casual observer . For example, the roundtable discussion included observations on the development of new casualty opinions by the Surplus Lines and Special Insurance Issues committees . These are areas where actuarial issues are not commonplace, and where Academy oversight is not often available . The briefing session also included a visit from the Academy President-Elect Jim MacGinnitie, who was on hand to welcome attendees . The session continues to be the one place during the tumult of an NAIC meeting where actuaries can meet and discuss matters as actuaries, relatively free from the pressures of employers and political agendas .

Other NAIC News The NAIC is beginning to focus on CCRC regulation . The Academy discussed the actuarial aspects of CCRC regulation with the Long-Term Care Subgroup and Advisory Committee of the Medicare Supplement (B) Task Force . The Market Conduct Surveillance (EX3) Task Fbrce adopted an amended version of the 1988 Collision Damage Waiver Act,

Robert H. Dobson, chairperson of the Academy 's Committee on Health , testifies at a recent hearing on long-term care .

Induced utilization is likely to drive up the costs of providing long-term healthcare insurance, according to Robert H . Dobson . testifying on behalf of the Academy at a June 1 7 hearing before the Senate Finance Subcommittee on Health . In a prepared statement, Dobson, chairman of the Academy's Committee on Health, told the subcommittee : "Once chronic home care benefits are provided through the public or private sector, the mentality of the consumer will likely be to liberally use these benefits ." Dobsonwas commenting on provisions of the Long-Term Health Care Assistance Act of 1988 ( S .2305), a bill Introduced by Senator George Mitchell (D-ME), a member of the Finance Committee . 5 .2305 would cover nursing home benefits to Medicare beneficiaries who qualify for chronic nursing home services, following a two-year exclusionary period . Addressing Senator Mitchell and subcommittee members, Dobson made, in

part, the following opening statement : "Health insurance programs, whether they be private or public, affect overall expenditures by their very existence . This is the basic insurance principle that actuaries deal with every day . Medicare is perhaps the best case in point ." In the case of the proposed legislation, Dobson predicted that demands will increase from a couple of factors. "One, families will do less perhaps ; second, once public financing is available, fewer people will do without services they may need now, but cannot afford . At the same time, the supply will increase as the health care industry responds to the additional financing available and devotes more resources towards providing long-term care services . All we are really suggesting is that costs will inevitably increase because of additional financing ."

While Dobson noted that "induced utilization of the nursing home benefit may (continued on page 12)

The Actuarial Update


FROM THE EXECUTIVE DIRECTOR (continued from page 2) self-regulating in this day and age, must have credible standards and enforcement of those standards . Although we have come a long, long way with the creation of the Actuarial Standards Board (ASB), more remains to be done . We need to convince the 25% of those who voted against the creation of the ASB that standards are vital to them . We need to increase the level of participation of the membership in the exposure process . We need standards to become integrated into the day-to-day practice of all actuaries . And finally, we need an effective, credible disciplinary mechanism . With all the visibility given to the creation of the standards board, it is important not to lose sight of other dimensions of professionalism : professional conduct standards, qualification standards, and development of a publicly credible continuing education recognition program, to cite three . There are many facets to professionalism . We should strengthen our government relations program . Even after twelve years, I still am often struck by the number and diversity of public issues that have an actuarial dimension . A reading of the "Government Relations Watch" in this newsletter mailing quickly and vividly illustrates this point . It is a real challenge for a small profession such as ours to deal effectively with such a broad array of Issues and forums for their consideration. We are spread pretty thin most of the time . There are any number of specific program goals I could cite, but I will mention four that immediately come to mind. First, we need to continue to stress accreditation issues, the original motivating force leading to the creation of the Academy, and an issue every bit as important as it was back then . Second, we need to find ways to halt and reverse the increasingly arbitrary restrictions on legitimate professional actuarial practice, as has been happening in the employee benefits area in recent tax bills . Third, we need to find ways to deal more effectively with state and local issues, a vexing problem given our small size . Fourth, we need to assume more leadership in moving a valuation actuary concept toward adoption and implementation .

We need to continue to emphasize communications outreach pro-

grams. We have made significant progress in this area in the last several years. We see more references to actuaries in the media, we interact with more organizations than formerly, and general awareness of our profession is higher than ever before . We have even been ranked the Number One profession in the country this year! Despite these great strides, however, this area will always be a major challenge for our profession . Our small size and the difficult-to-understand nature of what we do make this inevitable . One exciting new venture in this area is the creation of an actuarial magazine, Contingencies, to be launched in 1989. This magazine will be oriented to external audiences every bit as much as internal ones . Although' a great deal can be done in this area at a national headquarters level, effective people-topeople interaction and communication begins at the grassroots level . Every actuary should strive to bring greater identity and stature to our profession in the eyes of the public . We need to expand our professional horizons. If we find ourselves comfortable with the status quo, we are in peril . The quantitative training received by others, such as accountants, economists, statisticians, and MBAs is vastly superior today to what it was in years past . We are not automatically guaranteed the future role as a profession we have had in the past or that we may envision for the future . It is imperative that our education and examination system deliver contemporary training on a quality basis . Also, we need to apply our training in broader areas in which we have expertise . In this regard, the growing role of actuaries in investments and with CCRCs is exemplary of what we must continue to do if our profession is to thrive. Although I will no longer hold the title of executive director after August, in no way has my interest waned in issues such as those described above . In fact, I intend to continue to work on public and professional issues as the core of my new consulting practice . We have a surplus of lawyers and economists engaged in such activities today. It's time for a fresh perspective! It has been a great privilege and an honor to work for the profession these past twelve years. Without exaggeration, I can say that it has been the highlight of my professional career. A

Pension Actuaries Take Note Actuaries interested in serving on the Advisory Committee on Actuarial Examinations of the Joint Board for the Enrollment of Actuaries should express their interest and qualifications for such a post, in a letter to the Joint Board, in care of the U .S . Department of Treasury, Washington, D.C . 20220 . Deadline for applications : September 15, 1988 . Questions may be directed to Les Shapiro, executive director of the Joint Board, at (202) 535-6787 .

Technical Corrections Bill Includes Key Life Insurance Provisions The technical corrections bill (H .R . 4333) approved by the House on August 4 includes a provision that addresses single-premium life insurance policies . It would establish a class of insurance contracts known as modified endowments, cash distributions from which would be taxed under rules similar to those applicable to premature distributions from annuity contracts . Contracts classified as modified endowments would be those funded at a more rapid rate than that allowed by the payment of seven annual premiums . A second insdrance-related provision would amend the definition of life insurance found in Section 7702 of the Internal Revenue Code to require -reasonable mortality and expense charges ." The Ways and Means Committee released the following statement : "The Committee agreed to provide, for all life insurance contracts, that the mortality charges taken into account for purposes of the definition of life insurance would be required to be reasonable as determined under Treasury regulations, and could not exceed the mortality charges required to be used in determining the Federal income tax reserve for the contract . The expense charges taken into account for purposes of the guideline premium requirement would be required to be reasonable based on the experience of the company, and other insurance companies, with respect to similar life insurance contracts . . :" The version of technical corrections (S . 2238) adopted by the Senate Finance Committee does not contain similar provisions. However, the Committee has instructed its staff to prepare a "committee amendment" that would include "loophole closers like single premium ." The Senate will probably wait until September to bring the bill to the floor .


August 1988

Our Secret Is Out! It was only a matter of time . The word is out . Our best-kept secret is secret no more. Actuary has been rated the number-one job in America by The Jobs Rated Almanac . The editors of this reference book surveyed 250 occupations in "the American work place," ranking them against the following criteria: (1) the work environment (job hazards, outdoor vs . indoor, for example), (2) income (entry level, median and advanced earning potential), (3) outlook for continued employment (including such considerations as seasonality and umemployment rates), (4) physical demands (type and degree of physical stamina required), (5) levels of stress (immutable deadlines, competitiveness, for example), (6) security issues (including unionization and turnover). (7) travel opportunities, and (8) extras and perks (defined as private offices, company cars, and the like) .

Actuary, did not rate number one

in any of the eight ranking categories . It did, though, rate number one overall .

The Associated Press picked up a news release on the book, which is distributed by Ballantine Books, a division of Random House, and as a result stories on the actuary as having the top job in the nation have appeared in hundreds of newspapers and over countless radio and television broadcasts in the past several weeks . This kind of publicity the actuarial profession couldn't buy from the top ten public relations firms combined . Director of Public Information Erich Parker has, himself, given eleven interviews on the profession in the weeks since the story hit the wires . The public consciousness is being raised about actuaries and their work. It's a slow, cumulative process this chipping away at such vast ignorance, but we're succeeding . So, at least until the next edition of The Jobs Rated Almanac, the next time someone says . "Actuary??? What's that?" You can reply : "Just the top-ranked profession in the country."

The Committee on Guides to Professional Conduct reached the conclusion


The Update welcomes letters from readers . Letters for publication must include the writer's name, address, and

that in this case, the parties to the engagement failed to reach a "meeting of the minds" regarding the specifics of the assignment. This raises other questions, however.

• Is such a "meeting of the minds" an ethical requirement for actuaries, or is it simply a matter of good business practice? • Should the Guides and Opinions be amended to require (or suggest) the use of engagement letters specifying the scope of the assignment before an assignment is undertaken? • If so, would this requirement (or suggestion) apply equally to consultants and to in-house actuaries? • What are the practicalities of such a suggestion? The committee is interested in yourviews on these questions and welcomes your comments .

telephone number, and should be clearly

marked as Letters to the Editor submissions . Letters maybe edited for style and space requirements.

TO : Internal Revenue Service, June 1, 1988 . RE : Minimum funding standards for qualified pension plans . BACKGROUND : The Academy offered comments on provisions contained in the Omnibus Budget Reconciliation Act of 1987 establishing new minimum funding standards for pension plans . TO : National Association of Insurance Companies, June 1, 1988 . RE : Life insurance yield index study. BACKGROUND : Report on comparison of interest adjusted cost and yield index calculations for certain interest-sensitive products (primarily universal life) . TO : National Association of Insurance Commissioners, June 6, 1988 . RE : Universal life model regulations . BACKGROUND : Commentary on proposed revisions to valuation and nonforfeiture sections of model laws . TO : Supreme Court of the United States, June 9, 1988 . RE : Accrued benefits in pension plans . BACKGROUND : Amicus curiae brief filed by the Academy in Mead v. Tilley case. TO : Office of Personnel Management (OPM), June 10, 1988. RE : Proposed qualification standard. BACKGROUND : Comments on OPM draft qualification standard for various professional occupations, including actuarial series .

MEETING OF THE MINDS (continued from page 8) this complaint was the fact that the conservator and the actuary had differing views about the work product to be delivered by the actuary . If the conservator had known ahead of time that the actuary would not be using audited data, the conservator might well have insisted on such data, and the actuary could have undertaken the assignment with this requirement understood (and compensated for, as well) . Similarly, the actuary could have been informed that an on-site visit was expected and required, and the engagement could have been conducted on that basis .

Checklist of Academy Statements June 1988

Comments should be submitted to the Academy 's Washington Office, attention of Gary D . Simms , general counsel.

TO : National Association of Insurance (continued on page 12)

Academy Membership Office to Move TheAcademy's membership administration office will have new address and telephone number as of August 15, 1988 . Address : 475 North Martingale Road, Suite 800, Schaumburg, Illinois 60173-2226 . Telephone : (312) 706-3513 . This move is part of a relocation of the headquarters of the Society of Actuaries (SON and the Conference of Actuaries in Public Practice (CAPP), both of which will share the Martingale Road address with our membership office . The new SO telephone number is (312) 7063500 : the new CAPP telephone number is (312) 706-3535 .

The Actuarial Update


LETTERS TO THE EDITOR (continuedfrom page 3) We have done it to ourselves . We have allowed business and government to scale down their concern for retirement bene-

Senator George J. Mitchell (D-ME) (left), and Senator Bob Packwood (R-OR) (right) receive testimony at a recent hearing on long-term health care insurance .

ACADEMY TESTIFIES (continued from page 9) be less severe, particularly because of the two-year exclusionary period," his prepared statement forecast a spiraling burden on Medicare beneficiaries, some of whom may not have enough left over to pay premiums for Medicare supplemental or LTC insurance to fill the gaps left by the two-year exclusionary period . Under provisions of Mitchell's legislation, home health care benefits would be available after a $500 deductible and 20% copayment . The bill would also create a Long-Term Care Trust, funded from an increase in the Medicare Part 13 premium, elimination of the wage cap on the Medicare hospital insurance tax, and an estate and gift tax surtax. Although the Academy neither supports nor opposes such legislation, it believes that the cost of providing these benefits has been seriously understated . The over sixty-five population in the United States is expected to increase from 25 .5 million in 1980 to 39 .2 million in 2010 and "given these projections," Dobson stated, "the need for, and expenditures on, long-term care are likely to increase dramatically in ensuing years . Cost estimates to finance a program to provide long-teen health care are difficult to make, said Dobson . "Adding homemaker and chore services, as well as serving significantly more beneficiaries will be very expensive . Removing homebound and intermittent service requirements will add further to the cost. This will also be a growing cost in the future, not only due to inflation, but also due to the increase in exposure . Changes in demand and supply will also affect cost ."

Cost estimates to finance a program to provide long-term health care are difficult to make, said Dobson . "Adding homemaker and chore services, as well as serving significantly more beneficiaries will be very expensive . Removing homebound and intermittent service requirements will add further to the cost . This will also be a growing cost in the future, not only due to inflation, but also due to the increase in exposure . Changes in demand and supply will also affect cost . Some 7 million persons may currently be eligible for long-term care assistance, according to Academy estimates . The Congressional Budget Office has estimated that the nursing home cost in 1993, with a two-year exclusionary period, will approximate $13 .2 billion . The Academy's rough estimate for the 7 million extra beneficiaries of home health care might range from $22 to $34 billion for the first year, and an additional $3 billion for respite care . In effect, participation in such a program will mean that all Part B beneficiaries will see increases in their basic premium, according to the Academy. "However," said Dobson, "political reality may not allow this increase to become too extreme . As program costs increase, the only'moving target,' the supplemental premium, will impose a significant and unpredictable'tax'burden on those who would have to shoulder the experience for the whole group ." The combination of this bill (5 .2305) and the Medicare Catastrophic legislation could add up to a "significant amount in supplemental premiums in a few years," said Dobson . A

fits . We have been unable to keep in front ofthe volatility of legislation, asset growth and changing employer/employee dynamics . We have failed as consultants in preparing our clients for the likely future changes of scenery. We have failed to establish rules-yet we have narrowed our activities to complying to rules established by others . It became advantageous and off-balance sheet fashionable to terminate defined benefit plans and replace them with lower profile coverage, such as 401(k) plans . Why did we let this happen? Where was our strength and knowledge and courage to tell employers to maintain these plans? We gave in . We told employers what they wanted to hear and showed them the way to more palatable alternatives . No wonder our lack of credibility amongst law makers, other professionals and industry . No wonder the consolidation of many regional actuarial practices into actu-business .

All conditions alternatebetween chang and equilibrium. The changes, over long periods of time, are equal and offsetting . Brian R . Demsey San Jaun Capistrano, California

CHECKLIST OF ACADEMY STATEMENTS (continuedfrom. page 11) Commissioners, June 16, 1988 . RE : Liaison activities . BACKGROUND : Report to the NAIC Technical Services (EX5) Subcommittee summarizingAeademyactivitles related to the NAIC . TO : Subcommittee on Health of the Senate Committee on Finance, June 17, 1988 . RE : Hearing on long-term care . BACKGROUND : Statement on proposed Long-Term Care Assistance Act, S . 2305 . TO : Subcommittee on Labor Management Relations ofthe House Committee on Education and Labor, June 24, 1988 . RE : Hearing on access to health insurance . BACKGROUND : Statement on proposed Minimum Health Benefits for All Workers Act of 1987, H .R . 2508 . A

August 1988 Actuarial Update