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By Steve Strommen

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Hill Heats Up

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Insurance, pension legislation gaining attention in Congress

SVL Approved NAIC passes revised valuation law

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See critical issues, Page 7

Parting Thoughts Academy VPs reflect on past two years

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Standards Deviation

Practice note examines AFTAP certifications

A ct u ari e s

Health Practice Council’s efforts to provide policymakers with basic educational information on various components of reform that are under consideration. Many of the current health reform proposals in Congress include provisions to impose stricter issue and rating rules for the individual and small-group markets. As part of the Academy Health Practice Council’s Critical Issues in Health Reform series, the council’s Small-Group Medical Market Task Force explained in an August policy statement that the structure of the transition to these new rules will play

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a crucial role in limiting market disruption as insurance plans adapt to the new rules. The statement focuses on issues related to possible language that allows existing plans to enforce current issue and rating rules for a period of time, while imposing stricter rule changes on all new plans. The paper noted that imposing stricter issue and rating rules can lead to adverse selection and market disruption, or significant rate changes or mandated benefit changes contributing to a high cancellation rate among individuals or groups. Lower-risk individuals and groups may be more likely to continue in

A cad e m y

Steve Strommen, senior actuary for Northwestern Mutual in Milwaukee, is vice chairperson of the Academy’s Financial Reporting Committee and chairperson of the Academy’s Discounting Subgroup.

A m e rican

in FAS 157 but that meet the stated measurement objective. Such methods include stochastic techniques that use calibrated (risk-neutral) probabilities and/or scenario-specific discount rates, as well as methods that utilize a company’s portfolio rate in valuation of insurance contracts that contain non-guaranteed investment elements. The paper does not suggest adding descriptions of these alternate methods to future accounting standards. Instead, the purpose of the paper is to highlight the importance of continuing to allow the use of alternate valuation methods that are not specifically mentioned in accounting standards.

Exploring More Critical Health Reform Issues s the heated debate about health care reform continues, so do the

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Fair Value Paper Informs Accounting Projects rently under review by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), the discount rate used in valuation has become a frequent discussion topic. Members of the Academy’s Financial Reporting Committee became concerned that such discussions could be leading to rules that restrict the valuation techniques actuaries are allowed to use for accounting purposes. In an effort to prevent such restrictions, the Academy Financial Reporting Committee’s Discounting Subgroup drafted a white paper, Notes on the Use of Discount Rates in Accounting Present Value Estimates, that the group sent to FASB and the IASB in September along with other background material for members of the two boards. The paper’s scope is limited to valuation techniques that are used when the valuation is intended to reflect economic conditions (mainly interest rates) on the date of valuation. The paper’s introduction notes the flexibility that exists under current accounting standards. While many Academy members are aware of the specific discounting methods listed in Financial Accounting Standard (FAS) No. 157, Fair Value Measurements, not as many are aware of the statement in FAS 157 recognizing that alternate methods are allowed if they meet the stated measurement objectives. The Academy subgroup’s paper highlights this statement before outlining a sampling of valuation methods in current use, focusing on some that differ from those specifically mentioned

Actuarial Update

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Academy News Briefs Financial Summit, continued from page 1

OCTOBER 7 Academy webcast on Precept 13 of the Code of Professional Conduct 14 Academy post-NAIC PBA webcast 15 Council of U.S. Presidents meeting, Colorado Springs, Colo. 16-17 NAAC meeting, Colorado Springs, Colo. 19 Joint orientation meeting, Denver 20 Academy Board of Directors meeting, Denver 25-28 SOA annual meeting, Boston 26 Academy annual meeting, Boston

Krueger Addresses Attendees NAIC Passes Revised Valuation Lawbanks and trouble in the real e FINANCIAL SuMMIT ATTENDEES

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1-4 CCA annual meeting, Tucson, Ariz. 9-12 Life and Health Qualifications Seminar (Academy, SOA), Arlington, Va. 12-15 IAA meeting, Hyderabad, India 15-18 CAS annual meeting, Boston 19-23 NCOIL annual meeting, New Orleans

DECEMBER 2-3 Academy P/C Loss Reserve Opinion Seminar, Baltimore 2-3 ASB meeting, Washington 5-8 NAIC winter meeting, San Francisco 8 Academy Executive Committee meeting, Washington 9 Qualification Standards audiocast (Academy, CCA)

January 25-26 Actuarial collaboration meeting, Washington 27 Council of U.S. Presidents meeting, Washington 28 Academy Board of Directors meeting, Washington

april 15 Academy Executive Committee meeting, Washington

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

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

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and credit markets. He also ac

proposed revisions to the standard valuation during executive/plenary sessionhave Sept.been 23 more sev statistics alan Kruegerlaw deliver theansummit’s at its fall meeting in National Harbor, Md. The Academy was quick to praise the NAIC move as expected but insisted the reco keynote address. Krueger broadly plan isacross “on course” addressedof the the finana development that will enable greater uniformity lifeaftermath insuranceofreserve requirements states. and is “bols disposable crisismodernize but focused his comments If enacted by the states, the valuation lawcial would reserve calculations to more closelyincome, reflect consumer ing, and domestic produ on an theaccompanying economic stimulus efforts of by year’s a company’s risks. The NAIC hopes to pass valuation manual end.[gross Academy “It is clear that stabilizing the the Obama administration. groups have assisted the NAIC through the long process, providing numerous comments.

NOVEMBER 1-4 ASPPA annual conference, National Harbor, Md.

BROKE from their group sessions to

he National Association of Insurance Commissioners (NAIC) passed edged that the lagging employ listen to assistant Treasury Secretary

Happenings on the Hill Two pieces of legislation related to insurance and pensions were recently passed by the House of Representatives. The Nonadmitted and Reinsurance Reform Act (H.R. 2571), which passed on Sept. 9, is intended to streamline the regulation of surplus lines and reinsurance by vesting the domiciliary state with the sole authority to regulate and collect taxes on surplus lines and reinsurance transactions. The bill would establish national standards for state regulation of surplus lines and prohibit regulators from applying their states’ laws to reinsurance agreements of ceding insurers domiciled in other states. Also on Sept. 9, the House passed a bill to require chairpersons or designees of the Securities and Exchange Commission, the Financial Accounting Standards Board, and the Public Company Accounting Oversight Board to present oral testimony to the House Financial Services Committee annually for five years, beginning this year. The testimony will focus on the organizations’ efforts to promote transparency and reduce the complexity in financial reporting. Rep. Earl Pomeroy (D-N.D.) also released Aug. 27 a draft of the legislation he

cial sector, increasing bank equ Krueger sifted through economic restoring the flow of credit play data both before and after President essential role in preventing job Obama signed the american Recovplansery to introduce in Congress NAIC also expressed Krueger support said. and Reinvestment act in February, Krueger spoke including the administration’s financial to provide funding relief to for reform principles, such as from prepar remarks to summit attendees stability plan to address in defined benefit pension plans.shortfalls achieving universal coverage;

an individual mandate; no deniAcademySupport of Actuaries has producedalsconsiderable workconditions; product.” for pre-existing Seeking in anticipation of regulatory of theon financial banningreform rating based health Vice however, President Joe Biden services sector, Parks called to play even greater status, gender, oran occupation; addressed the National Asso-for the Academy role inofsharing the profession’s to ensurepolicy actuaries and removing capsare onkey ciation Insurance Commis- expertise players(NAIC) in shaping regulatory landscape. annual or lifetime benefits. sioners at itsany fallchanges meet- to the proud of our timely and significant contributions to the ing to“I’m discuss current health policy process, but much more is needed for us to increase our Volunteer Request care reform efforts. Biden’s presence in these discussions,” Parks said. “With your continued speech focused on the need to The Academy Health Praceffort, the profession can continue to add to the public discourse curb rising health care costs. He tice Council’s newly forming and make relevant, meaningful contributions to sound financial Solvency Task Force is lookalso sketched out “basic ground regulatory policy.” rules” he’d like to see reflected ing for interested volunteers. Parks also sketched out the goals of the summit, including establishtask force, will be ining health care reform, includthe priorities and specific actionsThe required as the which Academy builds chaired by Donna Novak, will ing banning practices such as and executes a strategic plan to help shape potential regulatory reform. solvency issues at the discrimination based on pre-openinganalyze following the summit’s session that recapped Academy existing conditions, cost-sharstate level, including NAIC work in that area since the fall of 2008, attendees split into four risk-based capital formulas, ing for preventive care,sessions drop- to identify groups for breakout key issues that should be emerging NAIC principleping coverage for the seriously addressed by Academy volunteers and to chart a course of action based requirements, ill,toimposing lifetime caps on address those issues—before reconvening to pull those and ideasindiinto specific suggestions. a result of those subsequent coverage, and requiringAsexorvidualsessions—and state rules. The task conference calls after the summit—leaders fromfollow the Academy’s pracbitant out-of-pocket expenses, force will emerging tice councils a report that introduced prioritized action deductibles, ordeveloped co-pays. The international requirements items for Academy volunteer groups.

Seminar on effective p/c loss reserve opinions: tools for the appointed actuary westin Baltimore/washington Airport Hotel Dec. 2-3, 2009 | Baltimore, Md. following up on last year’s success, the Academy’s annual seminar on casualty loss reserve opinions will again be divided into two parts. The first day’s sessions will cover introductory issues, while the second day will focus on more advanced topics. participants may register for either or both days of the seminar. The seminar is presented annually by the Academy’s Committee on property and Liability financial reporting. For more information, visit http://www.actuary.org/seminars/casualty/opinion09.asp.

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The re urgency. systemic ture, data In march Council s sary for a and prote Internatio reforms a for financ aries in t address h regulator be produ participat The se essential a financia the projec internatio solvency U.S. regul the risk m to the wid Anoth actuarial security s actuaries be a math model th (insuranc make the Other assessme review an ary in a fe to suppor areas for

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and federal regulation of insurance companies in relation to their effect on solvency requirements. Members interested in volunteering should contact Academy State Health Policy Analyst Melissa Stevens (stevens@actuary.org). In The News The Academy’s new issue brief on value-based insurance design was cited in a cover story in the August issue of Managed Care Magazine. The actuaries wrote that “with value-based insurance design, health insurers are taking consumerdirected health care to the next level and lowering cost barriers to high-value services that otherwise might be delayed or avoided to save money. It is useful in grouping services into higher- and lower-value categories based on the cost of the service and the degree of clinical benefit. A higher-value service, for example, would have a clinical benefit commensurate with its cost.” An actuarial analysis of the Community Living Assistance Services and Supports Act, a proposed federal long-term care program, performed by a joint work group of the Academy Federal Long-Term Care Task Force and the Society of Actuaries Long-Term Care Insurance Section, was cited in an op-ed by former Congressional Budget Office

Director Douglas Holtz-Eakin published Aug. 6 by the New Majority. The analysis was also discussed in an article in Congress Daily on Aug. 12. An Associated Press retirement-planning article on when to collect Social Security benefits was published in more than a dozen publications between Aug. 6 and Sept. 3, including The Orange County Register and The Buffalo News. The Academy was cited as the source of average life expectancy statistics for 62-year-old males and females as well as the source of the estimated “break-even age.” Retirees who live beyond the break-even age, which the Academy estimates to be around 80, will benefit more by choosing to wait to collect Social Security. Academy Senior Pension Fellow Frank Todisco was the special guest Aug. 9 on the Ohio retirement planning radio show, “Retirement Matters.” Todisco discussed various retirement security issues including risks associated with different retirement systems. Academy Senior Life Fellow Nancy Bennett was quoted in an Aug. 13 St. Louis PostDispatch feature on aging. Bennett said that smokers are charged higher life insurance premiums because they face an increased risk of earlier death.

life briefs

➥ Joining the Academy’s Invested Asset Work Group are Brian Trust, senior vice president of investments for Scottish Re in Charlotte, N.C.; Catherine Ehrlich, vice president for Zurich North America in New York; Roger Brown, assistant vice president and actuary for Cincinnati Life Insurance Co. in Cincinnati; Jin Yan, assistant actuary for Fidelity Investments in Boston; and Scott Christensen, actuarial assistant for Principal Financial Group in Des Moines, Iowa. ➥ Michael Kaster, managing principal for Kaster Actuarial Resources in Carmel, Ind., and James Thompson, an actuary and consultant for Central Actuarial Associates in Crystal Lake, Ill., have joined the Academy’s Life Products Committee.

casualty briefs

➥ Patrick Causgrove, actuary for Allstate Insurance Company in Northbrook, Ill., has joined the Academy’s Flood Insurance Subcommittee. ➥ Robert Walling, principal and consulting actuary for Pinnacle Actuarial Resources in Bloomington, Ill., and David Riek, senior vice president of ACE Tempest Re USA in Stamford, Conn., have joined the Academy’s Medical Malpractice Subcommittee.

The Academy’s critical issues paper on gender considerations in a voluntary individual health insurance market was cited in an Aug. 13 Scripps Howard Foundation Wire article on health care reform. Academy Committee on State Health Issues Chairperson Shari Westerfield, an actuary with Blue Cross/Blue Shield Association in Chicago, was also quoted, remarking that without a requirement to have health insurance, gender ratings and other premium factors are needed

Life and Health Qualifications Seminar Nov. 9-12, 2008, Arlington, Va.

The Life and Health Qualifications Seminar provides state- and country-specific basic education that may not have been provided as part of the Society of Actuaries examination process or acquired through subsequent testing or alternative education. It can also serve as a basic education refresher or as a source of continuing education for more experienced actuaries. For more information or to register, visit www.actuary.org/seminar/.

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to make a voluntary insurance system function. “In order for people to buy insurance, they need to see that there’s some value for them,” she said. “The price needs to reflect their expected claims.” Remarks by Donna Claire, chairperson of the Academy’s Life Financial Soundness/Risk Management Committee and president of Claire Thinking in Fort Salonga, N.Y., during an Aug. 12 joint call of the National Association of Insurance Commissioners’ Capital Adequacy Task Force and the Life and Health Actuarial Task Force were cited in an Aug. 14 Insurance Bellwether article. Claire demonstrated how a principle-based approach would benefit both regulators and companies. To find out about other actuaries in the news and for external links, visit the Academy’s newsroom.

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Parting

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Setting a Foundation for Modernization By James Rech

F

inancial modernization is the popular nomenclature. Change is the result. It is never easy; it is timeconsuming and uncertain but must be forward-looking. The approach

of the Risk Management and Financial Reporting Council has been to ensure there is process and structure to the management of such change. The council has been following the market crisis while concentrating its response within the regulatory activities of organizations such as the International Association of Insurance Supervisors, National Association of Insurance Commissioners, Financial Accounting Standards Board, and International Accounting Standards Board. Additionally, it has contributed to the legislative activities of the National Conference of Insurance Legislators and in Congress, as all of these entities work on their initial paths toward financial modernization for insurers. Globalization, securitization, enterprise risk management, value at risk/tail value at risk, principle-based, idiosyncratic risk, systematic risk, and now systemic risk are part of our common vocabulary relating to the identification, measurement, and mitigation of risks. As individual actuaries, our primary concerns are often centered on the internal risks of the insurance process for our employers and clients. Financial modernization has led to an expansion of the risk horizons for insurers and pension funds. Legislators, regulators, and public opinion are hoping management—and actuaries—can move beyond simple awareness to actually confront the external risks arising from our traditionally isolated markets. Through our work in insurance and for pension funds, actuaries are most aware of risks arising from the insurance process; but as financial entities, insurance and pensions also play a major role in the functioning of overall financial markets. In our role as actuaries, we have developed strong reputations in analyzing w w w . a c t u a r y. o r g 

the microeconomic influences of the insurance business for our employers and clients. In the near future, some portion of us must also set our sights on the macroeconomic characteristics of market risks. It has become evident that systemic risks can swamp an entire system; if they do, society expects regulators to intervene, and insurance regulators will need actuarial help. We actuaries have experience in this area. In insurance markets, actuaries assist in the development of data calls, analysis, and market conduct rules. The Risk Management and Financial Reporting Council has contributed to the oversight of macroeconomic events in the insurance markets through our work with regulators in the development of risk-based capital models. Actuaries have an important role to assume in systemic risk regulation. Regulators are familiar with traditional banking and financial market systems. Innovation in financial markets has facilitated disruption to the financial systems. A prime example is found in derivative products. Derivatives were initially designed to provide insurance protection in the financial markets. Their growth attests to the demand for such protections, and they will continue to be major financial products. The regulation and market parameters for derivatives, however, are not that well established. For example, are credit default swaps insurance or financial products? Either way, actuaries can and do perform pricing functions for this product. The question of who will be responsible for regulating these instruments may lead to an even larger role for actuaries. As I end my term as vice president for Academy risk management and financial reporting issues, I leave the council in good hands. I thank Rowen Bell, chairperson of the Financial Reporting Committee, and Dave Sandberg, chairperson of the Solvency and Risk Management Committee, and the many volunteers who have spent time on these major endeavors for the actuarial profession. In the near future, the theories we have been discussing will evolve into issues of practical implementation. With such change there is additional need for broader input into developing the role of the actuary under financial modernization. We continue to look for volunteers for this great expedition into the future, and I look forward to working with my successor Henry Siegel and all the other volunteers who are members of the council and its committees. It is important that actuaries continue in a prominent role in the future of the financial industry. James Rech, an actuary for AmeRisk Consulting in Phoenix, is the Academy’s outgoing vice president for risk management and financial reporting issues.

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Parting

Thoughts

Past Changes Pave Way for New Challenges B y To m Te r r y

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t has been a privilege to serve as the Academy’s vice president for pension issues these past two years. Our work in the pension area is accomplished through nearly 100 volunteers from

our various committees, subcommittees, and task forces. These are the folks who have been representing our profession so well with countless Hill briefings, issue briefs, letters, and practice notes on the many public policy and practice advancement issues at hand. These past two years, we’ve prepared numerous commentaries providing the actuarial perspective on current funding and accounting matters related to public and private (single-employer and multiemployer) pension plans. We’ve also been working diligently on key practice notes that clarify good practice in assumption setting and on funding certifications under the Pension Protection Act—all the while continuing to monitor and comment on relevant international accounting developments. I’m proud of the council’s efforts in promoting an open discussion of important pension liability measurement and disclosure topics about which there is no clear consensus in our profession. As part of these efforts, we sponsored a forum in New York City in February 2008 at which actuaries and non-actuaries alike were invited to exchange views on measurements and disclosures for public pension plans. I’m also pleased to have helped in the council’s efforts to stay active in shining a light on actuarial aspects of Social Security. Most noteworthy was an initiative the Academy launched in 2008 to focus attention on raising the Social Security retirement age as an important element of any reform package. In fact, the Academy adopted this initiative as its first-ever advocacy position. A highlight of 2009 was the Academy-sponsored financial summit on July 20. This cross-practice leadership conference was an opportunity for actuaries from all practices to apply themselves toward some of the pressing financial risk problems of the day. An outcome from that conference of particular importance to pension actuaries was a commitment to define a generalized actuarial framework that identifies the key elements of any financial security system from a risk management perspective. The w w w . a c t u a r y. o r g 

vision is that actuaries will be able to talk with policymakers and the general public in a common way, using a common vocabulary, regardless of the financial system under discussion. What’s ahead? For sure, we’re in challenging times. While health care reform is grabbing top headlines right now, the retirement security crisis also looms large. The Pension Practice Council will continue to focus on bringing the best actuarial thinking and perspectives to both current and emerging problems in our retirement system. I offer particular thanks to these dedicated volunteer chairpersons who provided outstanding leadership this past year: Steve Alpert, Eli Greenblum, Ken Kent, Evan Inglis, Nadine Orloff, Dick Schreitmueller, and Jim Verlautz. Also a big thank you to our very talented staff at the Academy—especially Frank Todisco, our senior pension fellow, and Jessica Thomas, our pension policy analyst. Tom Terry, chief executive officer for JPMorgan Compensation and Benefit Strategies in Chicago, is the Academy’s outgoing vice president for pension issues.

health briefs

➥  James Spencer, senior director of actuarial services for Blue Cross Blue Shield of Montana in Helena, has joined the Academy’s Individual Medical Market Task Force. Other Academy members joining that task force are Vicki Zhang, an actuary for GGY Axis in Toronto; Scott Fitzpatrick, a life and health actuary for the Oregon Insurance Division in Salem; Barbara Niehus, president of Niehus Actuarial Services in Skokie, Ill.; Karin Swenson-Moore, director of actuarial pricing for the Regence Group in Seattle; Graham Sutherlin, director of actuarial services for QualChoice in Little Rock, Ark.; Walter Liptak, president of Novamark Consulting in Jacksonville, Fla.; Ernest Jaramillo, an associate actuary for Blue Cross Blue Shield of Arizona in Phoenix; Jenny Stevens, manager for individual rating and forecasting for Blue Cross Blue Shield of Arizona in Phoenix; and Alan Furan, a health actuary for the Ohio Department of Insurance in Columbus. ➥  April Choi, principal and consulting actuary for KAC Group in West Hills, Calif., has been appointed the chairperson for the Academy’s Health Practice International Task Force. ➥  Brad Linder, a health valuation actuary for Employers Reassurance Corp. in Ft. Washington, Pa., has joined the Academy’s Federal Long-Term Care Task Force.

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Parting

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Progress to Be Praised, Work Remains B y To m C a m p b e l l

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t ’ s b e e n a n h o n o r t o s e rv e a s c h a i r p e r s o n o f t h e Ac a d e m y ’ s L i f e P r ac tice Council and to work with such a committed and professional group o f v o l u n t e e r s. I b e l i e v e t h e c o u n c i l

and all of its committees and work groups h av e ac c o m p l i s h e d m u c h , a n d w e a r e w e l l positioned to continue our contribution to t h e ac t ua r i a l p r o f e s s i o n. Over the past two years, many of our biggest accomplishments have been associated with our work on a key Academy initiative— the development of a statutory framework that uses principlebased approaches (PBA) for reserves and risk-based capital. We are seeing the results of all our hard work at the National Association of Insurance Commissioners (NAIC): the recent adoption of a new standard for variable annuity reserves (Actuarial Guideline No. 43), the final adoption of a revised standard valuation law, the exposure of a new standard for life insurance risk-based capital, and significant progress toward finalizing the new valuation manual, which contains principle-based reserves approaches for life insurance and non-variable annuities that were developed and recommended by Life Practice Council work groups. But it is not just the work groups developing these approaches that are responsible for the success of the principle-based project; there are about two dozen other work groups that have contributed expertise on issues such as tax, reinsurance, mortality, economic scenario generators, model efficiency, corporate governance, and project oversight. We’ve also reached out to audiences outside of the NAIC and the actuarial profession, such as the U.S. Treasury Department and the National Conference of Insurance Legislators. Yet our key accomplishments have not been limited to the development of principle-based approaches. Life Practice Council work groups have opined on issues such as nonforfeiture improvement, statutory accounting and generally accepted accounting principles (GAAP), travel underwriting, and the Security and Exchange Commission’s treatment of indexed annuities and life illustrations. We’ve also developed actuarial practice notes on many different GAAP accounting issues. Looking forward, there’s still much that needs to be accomplished. In addition to implementing and maintaining PBA, the Academy and the Life Practice Council need to become more active in the finanw w w . a c t u a r y. o r g 

cial and accounting reforms we are seeing both in Washington and around the globe. The Academy’s financial summit, which was held in Washington on July 20, was an excellent forum and is only the first of many steps the Academy is taking in these areas. I think we are well positioned to participate in these activities. Through implementation of the Academy’s strategic plan, the Life Practice Council has strengthened its ability to recruit new volunteers, it has better defined its peer review process, and it has welcomed the hiring of Nancy Bennett into the newly created position of senior life fellow at the Academy. But we can’t do this alone, and so we have made strides to better open the lines of communication and have increased the collaboration with other Academy councils and with the Society of Actuaries. It has been a very exciting (and a very busy) two years. I have many people to thank but too many to list here. In all, the Life Practice Council consists of over 450 active and hardworking volunteers—and this is the accomplishment of which I am most proud. I would, however, like to acknowledge the exceptional and professional staff at the Academy who have supported the council during my term—specifically, Dianna Pell, life policy analyst, her predecessor Natalie Jones, and Craig Hanna, director of public policy. Without them, we could not have accomplished all that we have, and I thank them for that. Tom Campbell, vice president and corporate actuary for the Hartford Life Insurance Cos. in Simsbury, Conn., is the Academy’s outgoing vice president for life issues.

professionalism briefs

➥ Karen Glenn, an actuary with the Social Security Administration in Baltimore, has joined the Academy’s Committee on Actuarial Public Service.

risk management briefs

➥  Joy Schwartzman, principal and consulting actuary for Milliman in New York, has joined the Academy’s Risk Management and Solvency Committee. ➥  Robert Miccolis, director for Deloitte Consulting in Philadelphia, has been appointed the vice chairperson for the Academy’s Financial Regulatory Reform Task Force. ➥ Philip Heckman, a consulting actuary for Heckman Actuarial Consultants in Park Ridge, Ill., has joined the Academy’s Financial Reporting Committee.

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Actuarial Update Associate Editors

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AFTAP Certification Examined

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he Academy’s Pension Committee

published a practice note in August to assist actuaries with current and emerging practices in preparing the certification of a U.S. taxqualified pension plan’s adjusted funding target attainment percentage (AFTAP). The certification is required under the benefit-restriction provisions of the Pension Protection Act of 2006 (PPA) and related proposed regulations. The practice note discusses the potential applicability of various actuarial professional standards to AFTAP certifications. In the committee’s view, an AFTAP should be considered a statement of

actuarial opinion that is subject to the Qualification Standards. The practice note points to sections of various actuarial standards of practice regarding actuarial communications and actuarial reports that the committee believes are relevant to AFTAP certifications. The practice note also discusses the important issue of the timing of AFTAP certifications, including the role of the actuary and plan administrator therein. The practice note, which is not a promulgation of the Actuarial Standards Board, was prepared by the committee to be an illustrative document to spur professional discussion on the topic.

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Critical Issues, continued from page 1 their existing plans as opposed to joining a new plan that—because of its limits or prohibitions on varying premiums based on age, health status, and other factors—may require higher premiums than the current plans offer, while higher-risk individuals may consequently favor plans under the new rules. Because different states currently operate under different issue and rating rules, the more significant changes in rules leaves greater potential for market disruption. The statement also explains how an effective and enforceable individual mandate and clearly defined grandfathering rules can help reduce market disruption, and it discusses how risk-sharing mechanisms may be used to help mitigate adverse selection.

Merging Markets

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.

Massachusetts’ health care reform initiative included a provision that would merge the individual and small-group markets, leading to consideration of a similar approach at the national level. As such, a new Academy policy statement examines the implications of the two potential approaches to merging the markets on a national level: treating the individual market as a “group of one” or including small groups below a specified size in the individual market. Encouraging policymakers to consider the issues associated with plan portability, taxation of benefits, and adverse selection, the policy statement explains that the impact of a merged marketplace may depend on the basic differences in the current issue and rating rules for the respective markets among the various states.

©2009 The American Academy of Actuaries. All rights reserved.

Administrative Expenses

Linda Mallon Executive Office

The American Academy of Actuaries 1850 M Street NW Suite 300 Washington, DC 20036 Phone 202-223-8196 Fax 202-872-1948 www.actuary.org

Additionally, there has been a lot of attention w w w . a c t u a r y. o r g 

focused on potential provisions that seek to streamline or reduce administrative costs associated with health insurance coverage (e.g., a public plan option and/or health insurance exchange). A new Academy policy statement on administrative expenses outlines the basic administrative functions performed by health insurers and discusses the potential for an exchange and/or a public plan to actually lower these administrative costs. Using primarily Blue Cross Blue Shield data, the paper examines how widely administrative costs can vary by product as well as market. It also discusses the role state taxes and assessments play and explains how the cost of capital is factored into health insurance premiums.

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

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