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THE ACTUARIAL

Academy Task Force Report Emphasizes Financial Viability as Key to Insurer Solvency ctuaries should promote the concept of insurer viability as a measure of solvency for risk-bearing entities, the Academy Insurer Solvency Task Force has recommended in a report to the Academy Board of Directors . The report also recommends use of dynamic financial condition analysis (DFCA) as a tool to assess via-

bility. The task force was chaired by Ted Athanassiades, former president of Metropolitan Life and a member of the Academy Board . Short-term threats to solvency have receded in the past few years, cording to Athanassiades . "Companies and regulators have done much correct the problems that we saw in the 1980 ;" he said. "More capital was raised, troubled companies were absorbed by healthy companies, and consolidation of the insurance industry accelerated through mergers and acquisitions . Actuaries have helped in this effort through development and use of loss reserving, models measuring risk exposure, scenario testing, and risk based capital standards. At the same time, however, we believe that accelerating changes in the competitive environment pose potential threats to the viability of many companies . Therefore, our task force's emphasis has been on insurer viability." The task force report defines viability as "the ability of the insurer to deliver value to its customers in terms of competitive products and ffi ifilhing their expectations, support its near-term business plan, and be able to attract investor capital as necessary" The report also states that insurer viability is the foundation of long-term solvency because it addresses customer concerns in a multidimensional way and gives owners a reasonable expectation of return on their investment . Over the last decade , there have been major changes in the markets for financial security products and services and, as a consequence, in the overall competitive environment for life, health , and property and casualty carriers. Changes include excess capacity and lagging sales in the life insurance and property / casualty sectors; expansion into international markets; greater consumer sophistication , particularly in the commercial property/ casualty market ; increased competition from banks , money managers, and mutual fund companies ; and the entry of new marketers into the realm of the life, health and property and casualty industry . "Dynamic financial condition analysis represents an excellent strategic planning tool for measuring a company's ability to compete in a fastchanging environment ,' the report states . DFCA relies on the actuary to analyze an insurer's current and potential future financial condition over a variety of future economic, operating, competitive , and regulatory environments . The Academy report emphasizes that "DFCA should not be viewed as a defensive tool , helping companies to avoid threats to solvency, but mainly as an executive-level strategic planning tool, helping companies to grow effectively." Much work will need to be done to incorporate DFCA into the work of the various Academy groups that deal with insurance financial practice issues .The recommendations in the report should be viewed as directional . They deal with the concept of insurer viability and the role of

the actuary in assessing such viability (through the use of DFCA or oth_ er tools) . _ The Academy Board of Directors was urged to continue to encourage research and provide facilities which update awareness of the profession's progress in its research and implementation of DFCA. "Ourpeport does not say that all insurers should undergo DFCA," sai Athanassiades. "It is an evolving con-7 cept that should be applied by insurers according to the needs of their 5- or 10-year business plan . Insurers should determine whether the DFCA makes sense from the point of view of investors and policyholders :' The Academy report emphasized that actuarial involvement is essential for measuring both solvency and viability. "Solvency is, and should remain, the concern of the regulators ; market viability should become the concern of company boards of directors and senior management," the task force wrote. "With the adoption of these recommendations , the actuarial profession can support both groups in their respective responsibilities ." The actuarial profession can offer meaningful advice about an insurer's current and future ability to deliver on promises made. The profession's education and research capability make it natural for actuaries to provide the analysis and tools to foster successful utilization of the insurer viability concept . Task forces of both the Casualty Actuarial Society and Society ofActuaries have made definitions of DFCA for specific application. As for a specific Academy role , the task force recommended that "all Academy activity with respect to the actuary's role in serving insurers as to their viability should incorporate ongoing dynamic financial condition analysis . . . . Academy committees that address insuran ce financial practice issues should consider insurer viability, and consider the use of DFCA in the actuary's work:' Such consideration should be viewed as "a natural and important extension of actuarial practice ." In response, the Academy practice councils will discuss ways to promote dynamic financial condition analysis and report on their activities next year to the Academy Board of Directors . In addition, the Academy Council on Professionalism will review an expanded role for the appointed actuary. Other members of the Insurer Solvency Task Force are James P. Galasso, Harry D Garber, Frank S. Irish, Henry K . Knowlton, Daniel K. Lyons,Terry Lennon, James F Reiskyd, Alan E . Morson, Walter S . Rugland, Susan T. Szkoda, Stanley B .Tulin, and Robert E .Wilcox .


Academy Assists in Plans for DC Pensions Academy Helps States on Health The Academy continues to carry out Congress's request to help implement health-care provisions of the Balanced Budget Act of 1997 . In November, David Shea, a member of the Academy Uninsured Children's Work Group, represented the Academy during the National Council of State Legislators (NCSL) winter meeting on children's health-care provisions in the act. The act's legislative language calls for an Academy role in certifying the actuarial equivalency of benefits under the Children's Health Insurance Plan (CHIP) . The children's health plan is a state-based initiative, and CHIP implementation was a major topic of discussion for legislators at this year's NCSL . As Academy representative, Shea discussed the actuarial implications of the plan and highlighted the role the Academy plays on state health issues. Serving on a panel of health-policy e convened to demystify the le~on, Shea responded to questions from representatives of states seeking to apply for funding under the legislation . Most questions concerned plan factors that con e to the concept of actuari valence . According to Academy Health Policy Analyst Alison Kocz , the questions raised at the NCSL meeting show that states are at a very early stage of implementing the legislation. Some confusion persists . For example, one meeting attendee asked whether families could be covered under the CHIP legislation, which is specifically targeted to children. States are also uncertain about how coverage options and eligibility requirements differ from existing Medicaid coverage. The funds available under the CHIP plan are not intended to supplant cuts to state Medicaid funds . Overall, it is an objective of the legislation not to preclude privately funded employer- provided health insurance in favor a publicly funded program. The Academy may also be called on for further assistance . Specifically, officials of the Health Care Financing Administration indicate they may need assistance in addressing actuarial equivalency between family health insurance coverage and coverage for children . .,o

Pro Bonn Opportunity Actuaries who wish to provide technical assistance to pension plan beneficiaries with pension

problems are invited to participate in the pension help registry sponsored by the US Department of Labor (DOT.) . The DOL receives more than 60,000 calls and letters annually from people needing pension help. Typical questions deal with such concerns as pension formulas and the conversion of annuities to lump sums . "Certainly many of the people we hear from have problems that require the expertise of actuaries, and getting that kind of technical assistance could make a tremendous difference," says Assistant Secretary of Labor Olena Berg. Interested actuaries should contact Academy Pension Policy Analyst David Rivera by fax at 202-8721948 or by e-mail at rivera@actuary.org . Names on the registry will be provided to DOL field offices . Actuaries are under no obligation to take specific cases referred to them . However, all work performed is subject to the standards of practice, qualifications, and conduct of the actuarial profession .

A recent Washington Post opinion piece has given kudos to the Academy for its assistance in the D.C. bailout legislation enacted earlier this year. According to the November 30 article titled "The Amazing but True Story of Something That D.C . Didn't Do Wrong," the Academy was contacted by the

D.C . Appleseed Center, a group seeking financial and management reform in the city. The Appleseed Center chose the Academy as one of several organizations contacted because of its "disinterested analysis and expertise :" The Academy was called upon to analyze a plan, put together by the center, to solve the woes of the District's pension fund. The plan returned to the federal government the responsibility for meeting un funded pension obligations incurred before D.C . gained home rule in the 1970s . A net underfunding of $5 billion was transfrerred to the

federal government, which freed the D.C. government from $200 million in annual contributions while protecting the pension plans of District civil servants . After gaining the Academy's support of the actuarial analysis and underlying conclusion of the plan, the center used the endorsement to approach the federal government with its plan, . The proposal made by the center was later included not only in the White House's proposed legislative package, but in the legislation proposed by Representative Tom Davis (R Va .) .

Planning for the Academy's Future s the only organization representing US. actuaries in all areas of practice, the Academy enjoys a unique role within our profession. The Academy was created to focus on two areas of critical importance for all actuaries-professionalism and public interface.

Allan Kaahnan

The Academ tern three groups that serve the professionalism function on behalf of S. actuaries : the Acadeemmmittee on Qualifications, Actuarial Standards Board, and Actuarial Board ounseling and Discipline. It is through these groups that the profession polices itself. While police work is not always

Christine Cassidy Bids Farewell After five years, Director of Public Policy Christine Cassidy left the Academy at the end of October to pursue other professional opportunities . Cassidy came to the Academy in 1992 from the NationalAmerican Wholesale Grocers Association. Her first Academy position was as a legislative and regulatory specialist . She was promoted to assistant director in 1993 and became director of public policy in July 1996 . Chrisstina Cassssidy During her Academy tenure, she worked on a wide range ofAcademy projects in all practice areas, perhaps most notably the development of the health organizations risk-based capital formula in 1994. Executive Director Wilson Wyatt said,"Christine was a tireless worker for the Academy and the actuarial profession. She was an advocate for the Academy's members and worked well with many volunteers, who will miss her. We appreciate her contributions and wish her well :' After leaving in October, Cassidy continued to work as a consultant for the Academy's Valuation Task Force, which presented its report to the National Association of Insurance Commissioners at the NAIC Winter Meeting in Seattle in December.

the most agreeable task, and the fear oÂŁbeing .the.subject ofpolice work is never pleasant, the professionalism boards should receive our full support as they work to maintain our high standards . We need to remember that it is better to police ourselves than to have others do it for us . Moreover, cognize that the profession's credibility with regulators and other outside nces depends on our utation for professionalism . The Academy will work to better communicate e fact that actuaries' professional judgments are supported by meaningful standards of qualification, practice, and conduct . The Academy's second key mission is to serve as the profession's public policy voice . By taking our talents and expertise to elected officials and regulators, the Academy aims to make sure that the actuarial perspective is represented when decisions are made . Our work benefits die American people because, ideally, better public policy decisions are the result of our involvement. In addition, the profession benefits from the increased visibility that the Academy's public policy work brings to actuaries . Communication is key to the success of both our public policy and professionalism missions . To ensure the effectiveness of those efforts, the Academy will place renewed emphasis on communicating our public policy activities to the full range of the profession's audiences . Our public policy "customers" include members of Congress and staff, executive branch personnel, state regulators and elected officials, accounting bodies, and other professional and trade organizations . If our public policy achievements are to make a difference for the profession, they must be focused on issues of importance to these audiences and communicated in a timely and suitable fashion . In 1998, the Academy will carry out two initiatives to help bring focus to its important mission . First, the Academy has begun a process to update the 1994 strategic plan . The strategic planning task force will need to consider some perennial Academy issues, both external and internal, such as how to most effectively communicate to our public policy audiences and how to increase our already high level of support to all members of the profession . The task force will undertake its work in light of lessons learned since adoption of the 1994 plan . As it looks at the Academy's future, the task force will consider such factors as the transformation of the organizations that employ actuaries, changes in the U.S. and global economy, the globalization of the actuarial profession, and evolving regulatory and financial reporting requirements . Members of the strategic planning task force have been chosen on the basis of their proven commitment to the profession and because of their association with the other organizations representing actuaries . I look forward to a thoughtful consideration of the Academy's future and to a document that will serve as a useful blueprint. Second, in January the leaders of all Academy committees, task forces, and work groups will meet in Washington at our first annual leadership meeting . The Academy depends on its volunteers for the substance of its work, and maximizing the effectiveness of those volunteers is an ongoing Academy priority . At the meeting, the grass-roots leadership of the Academy will provide input to the Academy's 1998 strategic planning effort . In addition, the leadership will discuss ways to better coordinate work among the practice areas ; focus our efforts to serve our public policy customers ; involve more members on Academy committees ; and better utilize our hard-working staff who have been increasingly stretched to support the expanding Academy activity of the past several years . It is my hope that Academy leaders will emerge from the meeting with a clearer idea of our common destination and a road map of how to get there . The Actuarial Update willl keep members informed of the progress of these important initiatives . In the meantime, I welcome your comments or suggestions for making the Academy a more effective voice for our profession .

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Continuing Education : A Du 4

for All Professionals

ctuaries, accountants, and lawyers share many common concerns, not least of which is the need to improve and broaden their knowledge . In all three professions, continuing professional education (CPE) is an essential part of a practitioner's ongoing duties . How do CPE requirements for actuaries stack up against the requirements for other professionals? This article reviews CPE requirements for actuaries practicing iu the United

States and compares them with requirements for U.S. accountants and lawyers, and actuaries in the United Kingdom . The handbook on continuing professional development of the United Kingdom's Institute of Actuaries and Faculty ofActuaries states the guiding principle that actuaries "only practice in areas in which they are competent,"and sets out three areas for continuing professional development : technical skills that complement basic actuarial training; professional skills (an understanding of how the profession implements its standards of actuarial practice and what is expected of a leading profession) ; and non-technical skills in such areas as management, personal effectiveness, and supporting disciplines . For actuaries practicing in the UK, the onus is placed on individuals to "make their own professional decision Adam Raesa on their individual CPE needs ." In contrast, the U.S. legal, accounting, and actuarial professiore greater emphasis on meas g and reporting CPE, and increasingly require a portion of CPE be gained in specific subject areas . As shown in Table 1, the minimum Academy CPE requirement average of 12 hours per year is in line with the lawyers' average, which varies by state up to a maximum of 15 hours . Eleven states plus the District of Columbia have no mandatory CPE program . The range is illustrated by looking at the specific provisions for California and Pennsylvania . In contrast, the CPE requirement of the American Institute of Certified Public Accountants (AICPA) dwarfs that of the Academy. Most states require lawyers to include a minimum of one to three hours per year on specific topics such as ethics, professionalism, malpractice prevention, and substance abuse. The reporting cycles vary from an annual cycle for lawyers in some states, to a three-year cycle for enrolled actuaries, accountants, and .lawyers in ten states . The accounting profession has a carryback provision, allowing practitioners a grace period of two months to make good on their CPE . In contrast, lawyers in a few states have a carryforward option that allows "excess credits" to count toward the following years' compliance requirement.

Table 2 shows that it is not only in psychiatrists' offices where 50 minutes make an hour . The actuarial profession, in keeping with accountancy, places greater weight on organized activities, during which an opportunity exists for practitioners to share experiences . This is supported by the ability to earn an hour's credit in 50 minutes. While self study counts for both professions, the actuaries earn an hour for each 60 minutes spent in self study, while accountants get only 50 percent credit for nonin-teractive self study programs . These structural elements strongly encourage organized professional meetings and interaction among practitioners . Table 3 shows that all the professions reward presenters well for their time spent preparing the presentation material. The state-specific rules for lawyers range from a less than encouraging single credit for teaching in Missouri, Minnesota, and Texas, to a rewarding eight times credit for lecturing in Delaware . When it comes to documentation and verification of CPE credits, each profession seems to have looked to the salient qualities of their profession . In most states, lawyers are required to sign an affidavit, while accountants keep their own records which are subject to a random audit . Actuaries who must satisfy the requirements of the General or Specific Qualifications Standards must keep appropriate records as evidence that their contin uing education requirements have been met. SUMMARY All three professions have established requirements for practitioners to hone their skills through post-qualification continuing education. While CPE is important to all the professions, accountants run the risk of losing their membership in the AICPA if they fail to meet their CPE requirement . Looking at the different requirements we can see that the minimum thresholds established by the Academy are quite reasonable and in many aspects less restrictive . One thing we can plan on with certainty is that the future will bring changes to the actuarial profession's CPE requirements as we respond to market forces and public needs . Adam Reese is a mem ber of the Academy Committee on Qua!jfirutions.

Table I - Minimum CPE Hours and Reporting Cycles FA

Academy

Public

Non-Public

Requirements Vary by State calffarnia Pennsylvania

Reporting Cycle 3 years

2 years

3 years

3 years

3 years

1 year

Minimum in Cycle 36

24

120

80

36

12

Average Annual 12

12

40

30

12

12

Minimum Annual 0

0

20

15

0

12

Special Conditions At [east At least half Grace period . Members allowed half must of the required two months immediately following be "core" credit hours the period to make up a deficiency . to retain must consist of EA status. "organized" activities ." Up to 25% may be devoted to professionalism topics .

8 hours/3 years Ethics on legal ethics. (1 hr./yr.) (min 4 hours/ Sufficient 3 , ears on legal) credits for the ethics} or law next 2 practice management. compliance years may be Self-s earned for up perm for to 2 years

up to half the compliance hours. years .

Table 2 - How Many Minutes In An Hour? ACTUARIES FA 50 minutes

LAWYERS

ACCOUNTANTS Academy

AICPA

anized activities: 50 minutes r activities : 60 minutes W

50 minute "contact hours" (minimum program consists of one "contact hour")

Varies by State fro minutes (11 States) to 60 minutes (28

Interactive self-study programs count full.

Califonria Pennsylvania 60 minutes 60 minutes

Non-interactive self study programs count one-half.

Exclude introductory and welcoming remarks unless they are substantive

Organized activities include :

Attending local or national meetings Attending meetings with actuarial content Teleconferences or other electronic conferences Time spent taking actuarial examinations

(if successful) Listening to tapes if accompanied by live sentations or discussions leader .

or activities include: Independent study Listening to cassettes of seminars or meeting sessions

Luncheon/dinner speeches accredited if they satisfy standards

Participating on committees, studying for actuarial examinations, writing a paper, preparing a presentation, or successfully completing a correspondence course . The content of study must be relevant to the actuarial practice area of qualification .

Table 3 - Special Credit for Presenters CTAI EA

RNTANTS Academy

Three additional credit Two additional credit hours each hours attributable program hour. to organized activities for each credit hour No additional credits as an instructor . for repeat presentations

in the same cycle .

No additional credit for repeat

No more than half of presentations . total CPE hours can be credited as a presenter

AICPA Instructors and discussion leaders receive up to two additional hours for time spent in preparation for each hour of presentation . No more than half of total CPE hours can be credited for preparation and presentation. Writers of published articles, books, or CPE programs receive credit up to 25% of the total CPE hours in the reporting period .

Requirements Vary by State California Pennsylvania Three additional One additional hour credit hours for credit for each hour each original of presentation presentation where the applicant has prepared quality Additional single materials for use in credit for a the presentation . for repeat presentations Actual time for is given repeat presentations . Credit for writing if No credit for material is writing published or accepted for publication

Table 4 -- Documentation and Verification of CPE

IN Documentation should include: Program spansor Title and description of course Date(s) Location Hours of core and non-care credit Name of instructor Certificate of completion This material must be retained for three years after the end of the cycle

Academy Must keep records as evidence of CPE requirements having bean met Records should contain: Date Number of CPE credit hours Brief description of the subject matter Hecords must be maintained for at least four years beyond the year(s) to which the records are applicable

AICPA CPAs affirm compliance each year with s return their dues statements; some members randomly selected to document their CPE

Documentation should include: Program sponsor Title and description of content Data Location Number of CPE contact hours Evidence of completion (e .g. certificate from program sponsor)

Requirmnents VarybyState California Pennsylvania Affidavit Transcript Officers and elected officials of State are exempt, as are full-time law professors and full-time state and US

employees


Health Ratemaking Standard Adopted he October meeting of the Actuarial Standards Board (ASB)began with the adoption of Documentation in Health Benefit Plan Ratemaking as Actuarial Standard of Practice T (ASOP) No. 31 . Presented to the board by Health Committee Chairperson Ted Lyle, the standard applies to the documentation of the ratemaking process for health benefit plans . Specific language was added to the scope, clarifying again that the standard does not apply to the establishment or documentation of prices, but is limited to documentation related to the development of rates . Language was also added to exclude any work done in connection with Statement of Financial Accounting Standards No . 106, Eniployers'Accounttng for Postretirement Benefits Other Than Pensions. The standard will be effective for work performed after April 1, 1998 . This was the third health standard that the board has adopted in the past twelve months . As this is Mr . Lyle's last year as chairperson of the committee, he can look back at this last year as especially successful. David Ogden will chair the committee in 1998 . The next standard reviewed at the October meeting was a proposed revision to Actuarial Standard of Practice No. 18, Long-Term Care Insurance. The proposed revision was presented with skill and patience over a long afternoon of questions by Long-term Care Task Force Chairperson Bart Munson. ASOP No . 18 is being revised to recognize both the new developments in this field and to reflect the new format ofASOPs, which now include less educational material . The proposed revised standard would apply to individual and group LTC insurance, including LTC insurance benefits issued as riders or included within other insurance and annuity products, and to self insured plans providing LTC benefits . In its review of the text, the board was concerned with a number of issues, such as the difference between long-term and acute care, the choice of assumptions that change over time, and the issue of to whom an actuary should disclose information concerning the basis for assumptions. One of the board's main concerns was that the text should focus on estimating costs, as opposed to determining premium rates . The task force plans to meet by conference call December 8 and hopes to present the proposed revision again to the board next April . Heidi Dexter, chairperson of the ASB's Pension Committee, presented to the board a proposed standard, Actuarial Practice Concerning Retirement Benefits in Domestic Relations Actions. Although the board did not approve the text for exposure, it will reconvene on December 5 to discuss the text again. Although part of the difficulty the board had in agreeing to ex-

Comment Deadline Extended for Ifualificatinn Standard Draft

Allan M .Kaufnan

pose was simply that it lacked the time to examine the lengthy text, it had a number of other concerns as well, For one thing, the proposed standard currently contains much educational material . Although this may be necessary to some degree because of the newness of this practice area, the board would like to see some of this material at least moved to an appendix.The board would also like the committee to reexamine its discussion of demographic assumptions, the determination of who the actuary's client is, and the implications ofa standard that addresses work that other non-actuarial professionals have license to perform. The Pension Committee met November 6 to respond to the board's requests for revisions, and is currently voting on a modified text . Committee member Dick Joss, who will chair the committee next year, will represent the text to the ASB on December 5 . Dexter will be joining the ASB next year as a board member . Other changes regarding the membership of the board and the operating committee chairpersons include the departure of board members Harper Garrett Jr. and Richard Robertson (although their terms will not officially end until December 31), with Heidi Dexter and William Koenig joining the board next year . Current ASB member David Hartrnan will serve as chairperson, and Lew Nathan will to reins from Koenig as chairperson of the ASB Life Committee. Another item on the board agenda was the formation of a task force composed of Health and Pension Committee members to review Actuarial Compliance Guideline No . 3 and Actuarial Standard of Practice No. 6 for purposes ofpossible revision .The issue ofpossible revision came up during the board's review of the Health Committee's standard on documentation in health benefit plan ratemaking . Guest speaker Jeff Petertil was concerned that the proposed standard should apply to SFAS 106 work (see above) .Although the board eventually decided against this suggestion, it would like for a task force to look at these and other related issues (possibly even how SFAS 106 relates to ASOP No. 27) .The board wants to make sure that SPAS 106 practitioners get consistent guidance . The ASB will next meet January 13-14 at the American Academy of Actuaries office in Washington, DC . At this meeting, committee chairpersons will present their respective project status reports, and various actuarial subjects of concern will be discussed .The board also hopes to review (1) a proposed standard on the use of models in actuarial practice, (2) a proposed revision to FRR 8 (entitled Statements fAckaarial Opinion Regarding PmpertylCasualty Loss and LossAdjuctment Expense Reserves), and (3) a proposed final standard, Social Insurance . The board meetings are open to the public, and anyone may attend .

s

Please note that the January 15 comment deadline for the second exposure draft of Qualification Standardsfor Pr fessâ‚Źonal Statements ofActuarial Opinion, included with November's Update, has been extended to February 15 .

PRESTD$NT-ELECTRichard A. Robertson VICE PRESIDENTS William . F B1uhm Ken W Hartwell Lawrence A . Johansen Kenneth A . Steiner Michael L.Tootbman Robert E .Wilcox ` SECRETARY-T 1 1ASCRiER Stephen R. Kern

EXECUTIVE OFFICE ExEcuT Dn CT-OR Wilson W.Wyatt Jr . The American Academy ofActuaries ' 1100 Seventeenth Street NW 7th Floor Washington, DC 20036 , ._~~fl2]223S141a_._ Fa : (202) 872-1948

Ac ademy-Repent; T' 'i,

I s , ~ to

tlIVellcY

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Ka u f man: Pl an ning the Academy's future Continuing Education Is Professional Duty

EDITOR Adam Reese

Ratemaking Standard OK'd

AssociATE EDrTORs William Carroll Ronald Gebhardtsbauer Patrick J . Grannan MANAGING EDITOR Jeffrey Speicher speicher@actuary.org , CoNTRwuTiNG EDITOR Ken Krehbiel

In Search Of, ∎ A ctu arial Standard . 'of Practice No. 31 Statements offact and opinion in this publication . inch g editorials. and letters to the editor, are the mtponsibility of the author` alone an-not necessarily imply or represent the position of theAmericanAcademy ofActuaries, the editors, or the members of the Academy . 01997 The American Academy of Actuaries . All Rights Rcservcd


December 1997 Actuarial Update