: tlc~,uarial Upda e We
VOLUME 20 NUMBER 1
In t his issue 2
From a Guest President
Letters to the Editor
Americans without Health Insurance
MEWAs : A Call for Information
EA 1 Examination-
Summary of NAIC Actuarial Guidelines
1 0 Annual Committee Reports
Driving Home the Truth 1 6 about Prop 103
AMERICAN ACADEMY OF ACTUARIES
A Major Victory for the Profession in Florida Pension Practice Case by Gary D . Simms In a unanimous 7-O decision, the Supreme Court of Florida rejected a proposal by that state's bar association to impose stringent rules on actuaries and other nonlawyers who prepare pension
documents and design pension plans . The court stated that - . . .we cannot prohibit authorized professionals from preparing and presenting the necessary documents to federal agencies before which they are admitted to practice ." The controversy had its genesis in actions by the Florida Bar Association to investigate so-called "dangers" to the public in the drafting of pension plan documents by nonlawyers . During a 1989 hearing held by the bar association, several attorneys testified to "horror stories" alleged to have taken place because of nonlawyers' errors in plan
Health Care Benefits for the Uninsured : Actuaries' Roles by Nancy F . Nelson
Included in this month's issue of The Update are the following : Government Relations Watch
â€˘ ASB Boxscore
A total of 33 .3 million Americans under the age of sixty-five were without health insurance in 1988-approximately 15% of the nation ' s nonelderly population . Of this number, about 56 % were employed, and close to 28 % were children . (Employee Benefit Research Institute, July 1990 EBPJ Issue Brief.) A great deal is known about the uninsured : their family status, average family income, their age and geographic distributions, their attachment to the work force . ( See sidebar.) What is not known
drafting. The state bar then recommended a new definition for the "unlicensed practice of law" that could be applied in such cases . The proposed definition would have prevented actuaries and other nonlawyers from (1) analyzing client information and making a determination concerning what particular plan would be best for the client ; (2) drafting plan documents ; (3) qualifying the plan before the Internal Revenue Service (IRS) ; and (4) terminating the pension plan, including preparing corporate resolutions and applying to the IRS for a termination letter. The Academy was one party to actively oppose the Florida Bar Association's recommendation, filing a brief with the Supreme Court of Florida in September, 1989 . The American Society of Pension Actuaries and the Conference of Actuaries in Public Practice filed briefs . The American Institute of
(continued on page 4)
is how to best meet the health care needs of these people . The uninsured and the need to make health care services available to them is a problem that has been discussed at both the federal and state levels. Alternative solutions to the problem have been suggested, but no consensus has been reached . The most comprehensive proposal made so far is to establish a national health-service system, such as Canada's . Although this suggestion has Its proponents, most proposals for meeting the needs of the uninsured can be categorized as incremental changes to our current system of health insurance . Some of the proposals to date include expansion of the Medicaid program ; mandatory employer coverage ; (continued on page 4)
The Actuarial Update
American Academy of Actuaries President Mavis A. Walters President-Elect Harry D . Garber Vice Presidents Robert H . Dobson Charles E . Farr Daniel J . McCarthy Michael A . Walters Secretary Richard H . Snader Treasurer Thomas D . Levy Executive Vice President James J . Murphy
Executive Office 1720 1 Street, N .W. 7th Floor Washington, D .C. 20006 (202) 223-8196 FAX (202) 872-1948 Membership Administration Woodfield Corporate Center 475 N . Martingale Road Schaumburg, Illinois 60173-2226 (708) 706-3513
G . Patrick Byrnes
Celebrating Milestones in Cooperation During my term as 1991 president of the American Society of Pension Actuaries (ASPA), the organization will be celebrating Its twenty-fifth anniversary . Such a milestone naturally leads me to think about ASPA's past and to speculate about its future . ASPA's activities have reflected its statement of purpose, which is "to educate pension actuaries, consultants, and administrators and to preserve and enhance the private pension system as part of the development of a cohesive and coherent National Retirement Income Policy ." ASPA is involved with aspects of retirement plans beyond those of a purely actuarial nature . Actuaries, consultants, and administrators work together as members ofASPA to achieve the organization's stated purpose .
Where We' ve Been Chairperson Committee on Publications Roland E . King Editor E . Toni Mulder Executive Editor Erich Parker Associate Editors Gary D . Lake Stephen A . Meskin Charles Barry H . Watson Managing Editor Jeanne Casey Contributing Editor Ken Krehbiel Production Manager Renee 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.
Enormous resources, in terms of both volunteer time and money, have been expended in providing education for pension actuaries, consultants, and administrators . In 1990, we had more individuals sitting for exams and taking our courses than ever before . In a time of ever-changing tax laws affecting the retirement plan field, our course materials have been constantly revised . For the third year In a row, our annual conference has topped 1,200 attendees . Our regional seminars, our business owner conferences, and our teleconferences have been exceptionally well attended also . It is no secret that we have been and continue to be proactive in government affairs. Unlike many of our sister organizations, ASPA will speak out on nonactuarlal matters if they affect the preservation and enhancement of the private pension system .
Notably, we have taken a strong position with respect to the Internal Revenue Service's (IRS) approach to the actuarial assumptions issues in the
small plan actuarial audit program . This has not been a fun experience, but we view our involvement in this area as essential to the preservation of the vate pension system . Our attempt obtain, under the Freedom of Information Act, the background documents on the government's estimates that the small-plan actuarial audit program would raise an additional $666 million in revenues have been well publicized . Two of our members, Frederick Reish and Bruce Ashton, have written a book entitled, Actuarial Audits : A Legal and Tactical Analysts . ASPA has produced a variety of material that demonstrates that the IRS has adopted an approach to the interest-rate and retirement-age issues, which is not only arbitrary, but is also inconsistent with prior IRS positions and the tax code . ASPA took an early and strong position concerning the proposal of the Florida Bar's Standing Committee on the Unauthorized Practice of Law . The proposal would have severely restricted the permissible activities of pension actuaries and consultants . ASPA submitted an amicus brief in opposition to this proposal . We were pleased that the Academy decided that the issue, though not purely actuarial, was important enough for them to part pate as a party in the case . Where We' re Headed It is comparatively easy to look back on twenty-five years; it is extremely difficult to predict what will happen in the next twenty-five . Even so, ASPA Is closing in on its goal to develop a cohesive and coherent national retirement income policy . We issued a paper in 1988 providing an overview for a national retirement income policy . We are currently preparing a series of detailed technical papers with respect to the implementation of this proposed policy . These papers relate to personal savings, replacement ratios, the Social Security system, work after retirement, and the private pension system . The publication of these papers should focus attention on the need to establish a national retirement Income policy .
It is quite possible that ASPA will become involved in the health and welfare benefits area in the future . We already have had preliminary disc sions with the SOA concerning t matter, and If we enter this arena will do so in a cooperative manner . One of the most exciting aspects of our future was formalized when ASPA's board of directors unanimously ap-
January 1991 proved the working agreement, October 14 . 1990 . From our vantage point, the working agreement documents
Lcooperation that already exists ng the six organizations representing actuaries in North America and provides for continuing and increasing cooperation . ASPA is pleased to be a party to this working agreement, and we feel that our unique perspective can be helpful to the profession as a whole . My congratulations to John Harding for the excellent job he did in chairing the Working Agreement Task Force and in formulating a workable working agreement despite diverse viewpoints . My good wishes to all member organizations in 1991 as they work to expand our cooperation .
Byrnes is thepresident of theAmerican Society of Pension Actuaries . This past year, while president-elect, he was involved in drafting the working agreement .
Letters to the Editor A Stand Alone Policy In the September 1990 Actuarial Update, President Mavis Walters writes of the Academy's disagreement with the National Association of Insurance Commissioners' (NAIC) recent definition of a casualty actuary qualified to certify loss reserves . The NAIC will permit a member in good standing of the Casualty Actuarial Society to sign loss reserve opinions, even if he or she is not a member of the Academy . For life actuaries , membership in the Academy is a requirement to sign an annual statement, unless the actuary "has otherwise demonstrated his or her actuarial competence to the satisfaction of the Insurance regulatory official of the domiciliary state ." The Academy will recommend that the NAIC change its definition of a qualified casualty actuary to make it similar to that for life actuaries .
I disagree . I am glad that the NAIC has made it possible for nonmembers of the Academy to certify loss reserves, and I regret that membership is virtually compulsory for life actuaries . Last year, a letter I wrote was published in the May 1989 Bulletin of the Joint Task Force on Strengthening the Actuarial Profession . In it, I objected to a proposal to make Academy membership compulsory . I quote the letter: "If the Academy were to take a position with which I disagreed strongly enough, I would consider resigning from the organization . I wouldn't want my membership dues used to express an opinion I opposed . . . As the price of his professional credentials, an actuary would then have to provide monetary support to an organization that might be espousing views with which he disagrees .-In the same issue of the Bulletin, a letter from Donald S . Grubbs . Jr. appeared . He had done in actual fact what I had written about only in a hypothetical sense . He had left the Academy because of his strong moral objections to positions the Academy had taken . In doing so, he lost the ability to sign an annual statement, unless he could meet the very elusive criteria of somehow "demonstrating otherwise his actuarial competence to the satisfaction of the insurance regulatory official ." However,
I suspect he remained in firm possession of his integrity . Why should he have been forced to choose between the two? Why should any of us? The tasks of conferring professional credentials and passing judgment on professional conduct should rest with politically neutral bodies. The Academy is not such a body . Mark J. Chartier Springfield, Massachusetts The editor replies : We appreciate this thoughtful letter from Mr. Chartier. We have asked Jim Murphy to respond in the next Actuarial Update . This issue is going to be discussed at the next executive committee meeting .
(continued on page 5)
"That's Tuttle, the new whiz-kid in Accounting . They say he has a mind like fly-paper!"
The Update welcomes letters from readers . Letters for publication must include the writer's name, address, and telephone number, and should be clearly marked as "Letters to the Editor" submissions . Letters may be edited for style and space requirements .
The Actuarial Update
4 VICTORY FOR PROFESSION (continued from page 1)
UNINSURED HEALTH CARE (continued from page 1)
Certified Public Accountants, the Florida Institute of Certified Public Accountants, and many consulting companies also filed briefs . Arthur England, former Chief Justice of the Florida Supreme Court, presented oral argument on behalf of the Academy on March 8, 1990 . In rejecting the proposal, the court opinion closely followed the legal reasoning suggested by the Academy and other parties by stating:
small-group insurance reform ; and establishment of a national minimumbenefit program, with elimination of state mandated benefits . Health actuaries could contribute expertise to the design and costing of any of these reforms by applying their knowledge of morbidity and selection .
"It is apparent that pension plan preparation and administration is a field of practice that requires the knowledge and expertise of lawyers . CPAs, actuaries, and life insurance professionals . Further, the federal government, through acts of Congress, particularly ERISA and provisions of the Internal Revenue Code, as well as through regulations implementing congressional acts, clearly intends to protect pension plan beneficiaries . These federal statutes and regulations expressly allow nonlawyers to practice before federal agencies ." The court found there was no public need for the protection sought in the Florida Bar's proposal and, therefore, refused to adopt It . Going even further, the court specifically noted that a 1974 Florida decision on nonlawyer preparation of pension plans , upon which the Bar Association had attempted to justify its new proposal, was effectively overruled by the adoption of the Employee Retirement Income Security Act of 1974 (ERISA) . Notably, other legal arguments presented to the court claiming infringement of First Amendment rights and potential antitrust violations were rejected by the court .
This court decision constitutes a major victory for the actuarial profession . Not only should it prevent other professions from usurping areas legitimately within the scope of actuarial practice, but it clarifies the basis for pension practice by actuaries within federal law . In short, this decision is likely to serve as a disincentive to further attempts to restrict legitimate actuarial practice, both in Florida and around the country. Academy Vice President Charles E . Farr commented, "This wise decision of the court is both gratifying and reassuring to actuaries practicing in the pension field ."
Simms is Academy .
general counsel for the
Costing New Benefit Designs Most programs contemplated for the uninsured would involve public funding . Therefore, any restriction on coverage, as a public-policy measure, would be difficult for ele cted officials to achieve, since their constituencies are more likely to urge them to extend benefits . Whether publicly or privately funded, a program's costs are controlled by limiting benefits . Limits on benefits can take avariety of forms : limits to the services covered ; cost-sharing provisions, such as deductibles or copayments ; or restrictions on what providers can be selected . Covered benefits can emphasize protection against catastrophic events, or they can provide first-dollar coverage for preventive and primary service and limit other benefits .
Health actuaries would be able to evaluate the relative cost of various benefit proposals and analyze the effects on cost of introducing preferred-provider or other alternative-delivery systems.
Projecting Costs Mandatory employer coverage has been suggested as one way to reduce the number of uninsured, since according to statistics for 1988, 56% of the uninsured were employed . One such proposal would establish a minimum benefit plan at the federal level and eliminate state-mandated benefits . Of course, ifthis option were pursued, it would be valuable to insurers and employers to estimate the projected cost of mandated health care benefits . One factor in such an estimate : What was the value of the state-mandated benefits before they were preempted? Often, proponents ofstate-mandated benefits will argue that mandating the benefit will not increase its cost . Some health care providers claim that their services might be substituted for other, more costly services, and therefore overall costs could either remain constant or decrease . At the other extreme, those opposed to state-mandated ben-
efits point out that state-mandated benefits contribute as much as an estimated 20% to the aggregate cost of health care In certain states . Definitively establishing the cosle all types of benefits is impossible because of the various limitations of billing and coding practices, the potential effect that coverage may have on utilization, and the possibility that provision of mandated services would reduce or eliminate other services . Nonetheless, actuaries should be sensitive to the value of any quantitative data on mandated benefits and look for ways to collect additional relevant data .
Evaluating Assumptions Estimating the cost of providing health insurance to the uninsured necessitates projecting the morbidity of the uninsured, relative to the insured .
Often, an assumption is made that the morbidity of the uninsured will be much worse than that of the insured . The reasoning is that the uninsured may have delayed seeking necessary medical care and therefore have a'pentup" demand for medical services . A corresponding assumption Is that the uninsured have no attachment tophysician provider and, as a resu large proportion of their medical car received through hospital emergency rooms, rather than other, less costly settings . Are these assumptions appropriate? Many persons considered medically at risk eventually become uninsured . So, the assumption that the morbidity rate of the uninsured population is higher than that of insured population maybe reasonable . However, studies on the relative morbidity levels between comparable segments of the two populations might provide more definitive information . For example, how does the morbidity of the 56% of the uninsured who are employed, and the 28% who are children, compare to their insured counterparts? Such questions should be examined . A related question is the level of use of medical services by the uninsured, and the degree to which consumption of services is influenced by the existence of insurance coverage . Demonstration programs for the uninsured should include efforts to determine the relative morbidity 96 utilization levels of the uninsu Studies of underwriting experlen e,` such as a review of the reasons that small-employer groups were denied coverage . may also be useful .
(continued page 6)
NAIC Report by Gary D . Simms 1990 winter meeting of the National Association of Insurance Commissioners (NAIL) was held December 3-5, in Louisville, Kentucky . A number of the NAIC's actions at this meeting are of interest to actuaries.
ASB Standards Backed by NAIC The NAIC Blanks Task Force amended the instructions to the 1991 Life and Health Blank to require that an actuary signing the statement of opinion on the blank specifically state that his or her methods conform with the standards of practice of the Actuarial Standards Board (ASB) . The NAIC Blank and related instructions are recognized by all legal jurisdictions . Therefore, this recent NAIC action makes ASB standards legally enforceable for all actuaries submitting life and health annual-statement opinions, even if they are not members of the Academy . This marks the first time that ASB standards have received the backing of a legal mandate. A similar ,proposal is to be considered for the Fire Casualty Blank. This NAIC action had its origin in the NAJC's original request for the ASB to provide standards of practice for costing HIV-related claims. Following the ASB's determination that the matter was covered within existing standards, the NAIC considered the value of requiring conformance to all actuarial standards of practice relating to life and health practice for actuaries signing Life and Health Blanks . The NAIC Life and Health Actuarial Task Force then suggested to the Blanks Task Force that the instructions be changed so as to give explicit reference to ASB standards. The adopted changes to the instructions now require the actuary to attest to the following :
"Actuarial methods, considerations and analyses used in forming my opinion conform to the appropriate Standards of Practice as promulgated from time to time by the Actuarial Standards Board, which standards form the basis of this, statement of opinion ."
?'yo del Law Revised After years of work, the NAIC adopted revisions to the model Standard Valuation Law (SVL), Incorporating the con-
5 cept of the valuation actuary, that is, the premise that an actuary should be involved in the valuation of a company- evaluating liabilities and assets -for purposes of filing the company's annual statement to state regulators . Furthermore, the model SVL now requires that a qualified actuary's opinion be based on ASB standards . And the actuary is potentially liable only to the insurance company and to the state Insurance commissioner, thereby making the actuary less vulnerable to suits from outside parties relating to the actuary's statement of opinion and accompanying work product .
The NAIC also adopted for exposure an accompanying model regulation . The model SVL, as revised, will remain heavily dependent on this model regulation for most of the model SVL's implementation . The draft model regulation defines in detail what Is required In the actuarial opinion and accompanying memorandum . In addition, the draft model regulation specifically creates the concept of a qualified "appointed actuary," the one who prepares the actuarial opinion and supporting
LETTERS TO THE EDITOR (continued from page 3)
What Happened to Due Process? On page three of the October 1990 Actuarial Update, Actuarial Standards Board (ASB) Chairperson Walter Miller responds to a letter from William Schreiner regarding the ASB's proposed HIV standard . I am troubled by Mr . Miller's reply on two counts .
First, he completely ignores the main point of Mr. Schreiner's letter, that the "ASB has yet to develop the criteria by which an issue is to be judged worthy of an actuarial standard of practice ." This is a significant point worthy of res ponse by the ASB . The ASB seems to be operating In a reactive mode, responding to politically charged issues in a piecemeal fashion, rather than creating a comprehensive set of standards that satisfies a clearly thought-out, broad design . Second, Mr . Miller responds to Mr . Schreiner's concerns regarding the proposed HIV standard, using phrases such as "It is the ASB's position . . .," "The ASB believes that . . .," and "The ASB's position also reflects . . . .' To my knowledge, the only way the ASB can formally take a position is by a vote of
memorandum . The model regulation specifically defines the "qualified actuary" as a member in good standing of the Academy, who meets Academy qualification standards and is familiar with the state's laws .
Joint Committee Meets The newly formed joint committee of the Academy, ASB, and NAIC met for the first time . John Montgomery, chairperson of the NAIC Life and Health Actuarial Task Force, presided over the meeting .
The joint committee was formed to provide for ongoing communication among regulators and actuaries on standards of practice, qualification standards, and disciplinary matters . The committees's initial discussion focused on the NAIC's adoption of changes to the blank instructions, recognition of ASB standards, and the valuation actuary model law and regulation, as discussed above . Representatives from the ASB, including Chairperson Walter Miller and (continued on page 6)
the board . I find it peculiar that It can be claimed that the ASB has a position on a proposed standard when the document Is only in the process of being exposed for comments . If indeed the ASB has already determined its position so definitively prior to receiving all comments on the discussion draft, then why go through the motions? Where's the due process? It is truly unfortunate that Mr. Miller feels the need to defend so adamantly positions embodied in a draft standard before the ASB officially takes a position by voting on a proposal . Indeed, it Is my understanding that, based on the many comments received, the Life Committee of the ASS has now recommended that an HIV standard not be adopted (a decision I personally support) . I wonder how Mr. Miller can reconcile his premature expression of an "ASB ` position" with this turn of events. Barry Paul Northbrook, Illinois Editor's note: The HIV standard was not adopted . Mr . Paul's letter was received before that decision and the release of interpretation 7-D by the Actuarial Standards Board. We invited Walter Miller to respond in an upcoming Update .
6 UNINSURED HEALTHCARE (continued from page 4)
quantifying Effects of Selection Selection should also be considered when addressing the problem of the uninsured . To the extent that a health insurance program is voluntary, selection will occur- as the persons most likely to require medical services will be the first to elect coverage. Actuaries quantify the effects of selection in other arenas, such as flexible benefit plans, small-group rating, and conversion pricing . However, estimating the effects of selection on programs for the uninsured is much more difficult, as no standard of comparison exists .
A first step in quantifying the effects of selection may be the use of modeling techniques to evaluate the range of results that may occur at varying levels of selection . This type of analysis would be similar to that used in pricing new products and would involve technical expertise that actuaries are well qualified to provide .
The Actuarial Update
Americans Without Health Insurance Family Status :' F lv- i~. pcr(rttt >l the unmsur<_nd pcpttlaticc in 19Rd t'vere Lhcrosehvcs workers . two-third ., c:f the ttt,instire rl pupul~?tintl 'iue crc in families sup norted by ft fi lime, steadily em ploycd workers . Average Family Income . Slaty-one percent Of the uninsuredd in 1 r8 lf,<<d in f t tikes with total income of less ft an 0,CNji ~ . Nearly -i0 :- :, ul the uninsured iln 1988 were pith- or near Poor -.e .,i Xith fam T\ i ~cc t~,e less than 125"%+, of the federal poverty level .'t-j i stof heunisredacfrontlw-incomeFhril e. , at sie3,]i1 is int minority are. middle elalss . to I =itif3, 22% were in f ;irr3ilicu W id) a,'.nt tai illr_r,~yrrs of x :30,0 ) or in re, t i :/',here in Gtrrtilies ~~ :ith inc_ornes of 'at least $40,000 .
Age Distributio n . Fifteen percent of Arneric .: ;;u children under ~igt -million children----rite t3ttirtsuretl ; two-thirds all uninsured chilelncn mare over apt,. Geographical Distributi on . In eh-,,-(-1i states, UL least one in lip, e_ re ~itlrttl uder ;tt c sl t y iivt° i > uttitt urrd ; iii two states . "I-el~is anc; ?gin hl~_~i~ o . nlr,e .lt ;_n one itt Fnt r ;j c utuusurcd .
Attachment to Work Force . Nc' ;nly tale hill vl n,ins ~rcd ~,~orkets ;.lrc
Contributing Solutions It is unlikely that the problem of access to health care for the uninsured will disappear; it is also unlikely that the problem will be addressed through any broad reform of the United States health-care financing system . In my opinion, incremental solutions, rather than a comprehensive one, are much more likely. Health actuaries can contribute their existing knowledge of ben-
NAIC REPORT (continued from page 5) Vice Chairperson Jack Tumquist, reviewed the current agenda of ASB activities and sought input on where regulators thought additional actuarial standards of practice are needed. Suggestions Included cash flow testing Interpretation, the relationship of cash flow testing to risk-based capital, and a review of illustrations of nonguaranteed elements . Additional health standards were also suggested . The need for Academy qualification standards to support the valuation actuary was discussed, as well as Academy actions in reviewing the qualifications of Academy members, who are not members of the Casualty Actuarial Society, to sign loss reserve opinions .
sell-einipl : yecl i)!' f'Tfitllr,)`~ f'<1 lit lit3rifi VA it. l2 Fl", ti i'S
urkers . Tltes~ strc(LSti's u-r i = '_ice-ipled /nou r [lie•JoIti I .thk) h;H I Is-one 1 ~ ecf. u Enthirl :ctluirt of the Er~t ~lui_,~e B rr€/ri l~rser_irclt Iustftutt .
efit design and costing , morbidity and selection , as well as future research findings . In this way, actuaries can help extend access to health care to our country's uninsured .
Nancy F. Nelson is a consulting actuary for Tl linghast in Minneapolis . She specializes in health insurance and has been involved with demonstration programs for the uninsured
W. James MacGinnitle, chairperson of the new Academy Committee on Professionalism, raised the question of whether the problem of nonqualified individuals signing opinions was a major one now , or was apt to be a greater problem in the future . The NAIC representatives responded that it was more of a concern for the future . MacGinnitie stated that his committee would focus on educating actuaries on matters of qualification, standards of practice, and discipline . In the area of discipline, the regulators expressed interest in the suggestion of a uniform code of conduct for the entire profession and in the creation of a joint disciplinary body. They sought assurances that, when they needed to determine whether to file formal disciplinary charges, their informal queries
on specific cases would be welcome by the Academy's Discipline Committee . Academy representatives pressed the NAIC casualty regulators to address some of the ambiguities in proposed changes to the Fire and Casualty Blank slated for 1990 and 1991 . The casualty regulators promised that they would try to be ofassistance . They also agreed to consider an amendment to the Fire and Casualty Blank instructions that would bind actuaries toASB standards.
Other Actuarial Matters Additional issues of concern to actu~ les were discussed, including propo revisions to the standard nonforfelture law. In other action, a proposed guideline (continued facing page)
January 1991 on accelerated benefits, drafted for the Life and Health Actuarial Task Force by a subcommittee of theAcademy's Com, 'ttee on Life Insurance, was adopted J We NAIC for exposure . Work continued on how to handle letters of credit ; and the matter will be discussed at the April meeting of the Life and Health Actuarial Task Force. The Product DevelopmentTask Force recommended the following actuarial document for exposure by its parent, Life Insurance (A) Committee . One report dealt with a joint American Council on Life Insurance / National Association of Life Companies task force's work on reserves for certain life insurance contracts with nonlevel premiums or benefits. On the casualty side, the NAIC Casualty Actuarial Task Force adopted a proposal on retirement coverage under claims -made professional liability contracts , but took no other final action at the December meeting . Reports were received concerning new Insurance Services Office ([ SO) methods for ratemaking , and a description of ISO's activities related to loss - cost development was given to the NAIC task force. Revisions to Schedule P tests were discussed . A working group of regulas, industry and Academy represenives will report back to the task force in April , with suggestions for making the current tests more effective at singling out those companies most in need of strengthening their loss reserves . On loss - reserve discounting, an ongoing agenda Item, casualty task force members stated their desire to review the anticipated second ASB exposure draft on the issue. They hope to discuss the exposure draft at the June meeting of the task force .
Other NAIC News The Blanks Task Force also adopted a change to the Instructions , applicable to all blanks , for a certified public accountant's opinion to accompany each blank. Concerns raised by smaller companies and others not required to file statements with the Securities and Exchange Commission will be examined at the NAIC meeting in June . Outgoing NAIC President Earl R Pomeroy blamed what he called "media
terla" for the public's calling for ediate federal legislative action to cure insurer solvency, He decried efforts to link the insurance industry with the savings and loan debacle . He praised the state commissioners' expertise In insurance regulation as a
major resource for the public ' s protec second annual Robert Dineen Award . tion. This award was established to honor a James Schacht of the Illinois Insur state insurance staff member who has ance Department was awarded the made a significant contribution to the regulation of insurance . a
MEWAs : A Call for Informat : i veLatr~in , of possible fraud hnvr_• spin-red coiinre55i,)11, .11 interest n i-insured Muitip ; e Employer bi'el,t1r0 r~r i Ter irr alts ;ir i17F'L['A.s NIEW1\ is d(-fine cl in Seot ;un :d4'It of-the hniplovec Reii1clilrtil Income Sew urit- Acl (ERISA) as .iil employee benefit plan i 11,11 pi c ,vides wclfire llr-nefits ;to the employees' of ino ,1r rricre 'i71pt,~ycts, aini which' is tir ithl rf`f_~lketivel_ybar,rm fined nor a rural e l eoc petat ve . 0E` 'As'' y
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though ot many y s ate,,.i k11ute rr lc , ccidate then, . 'I'h,'tz 1 .1cti 1 hccii a call for- federal me t ul a iion ,_~ f NTENVAs . Tlie, c~ideriivClumnitt ; conHi-a1lr ,alidWelfare1'1rmiswwoufdhl-o reSpond to rvernweft inr_puirics on ~>cll,laiflal 'I .spt_cis _:< sill ~srult! Mka As . runt pc,r ril~al T~on yin 1 ai iidorru i-ti,ii tin -I :+v'h- .vOold Le opl ;rcci<ited : in particular, plc tscSer1d information rln stair l'cCz ;I L i(1i1 -7n(lenfcri i nc-tlt, ct! lcL} ~, ~_ii ,)1 l)rr Iiitrmm ' . our) resci 1~c.~- . 1 t~k 'Selectio11, and <rrr?llnt of OLH' cxpt rieuees with \E4EWAs . Pleilsr. send vol Ir C,:1171n1e nts to Ass ociate i dilor St€'.ve ^v1 ' 1 in. 11, .!C . Cafe 01 Ifbi- : I Pi~W
AFIR International Colloquium You still have time to register for the 2nd AFIR International Colloquium, which will take place in Brighton, England, April 17-20, 1991 . The 1991 colloquium Is being organizedjointly by the Institute ofActuaries (England) and the Faculty of Actuaries (Scotland) . AFIR, the financial section of the International Actuarial Association, exists to address those financial and investment issues of interest to actuaries, and to act as a link between actuaries and other financial experts around the world who are interested in such Issues.
Colloquium sponsors expect at least eighty scholarly papers to be presented
and discussed during the 1991 AFIR International Colloquium. Papers already accepted cover a range of topics, including yield - curve models , portfolio selection , asset / liability modeling, international diversification , and option pricing . Particular papers describe market conditions in the United Kingdom, the United States , France, the Netherlands , Japan, and Israel . The registration fee of £ 1,219 includes accommodations , all meals, entrance to the many sessions , and four volumes of papers . Anyone wanting to receive more information or a registration form should contact the AFIR Colloquium Secretariat , Institute of Actuaries , Staple Inn Hall, High Holborn , London, WC 1 V 7QJ , United Kingdom . (Telephone ) 44 71 242 ©106 ; (fax) 44 71 405 2482 . A
EA 1 Examination in May 1991 The EA 1 Examination , which is required for persons who want to become enrolled actuaries In the United States , Is scheduled for Monday . May 20, 1991 . Special arrangements will be made for persons observing the Jewish holiday of Shavuot . If you plan to take the exam, please contact Society of Actuaries Registrar Bernard Bartels at (708) 706-3588 . A
The Actuarial Update
A Summary of the NAIC Actuarial Guidelines The National Association of Insurance Commissioners' (NAIC) Life and Health Actuarial (EX5) Task Force is often asked to assis a state insurance department in Interpreting a statute dealing with an actuarial topic . Guidance is especially important in t case of an unusual policy form or a situation that was not contemplated at the time a statute was drafted . To this end, th task force has developed certain actuarial guidelines and will continue to do so as the need arises . The actuarial task force, in developing its interpretation or guidelines, considers the intent of the statute, the reasons for initially adopting the statute, and the current situation It is being applied to . Aguideline is not a statutory revision , but merely a guide to be used in applying a statute to a specific circumstance . By publishing interpretive guidelines for situations that are sufficiently common to all states , the task force hopes to benefit regulators in each state and promote uniformity in regulation-and thereby to benefit everyone . The table of contents for the Actuarial Guidelines Is being printed in this Update for easy reference . Please note that the full text of any one of these guidelines is available upon request from the Academy's Washington office .
ACTUARIAL GUIDELINES TABLE OF CONTENTS
Guideline No . 1
Date Adopted by NAIC
Description Valuation of policies in
Revision of Earlier Guideline
Standard Valuation Law
Dec . '78
Standard Valuation Law
Dec . '78
Standard Nonforfeiture Law for individual Deferred Annuities
which the net premium
exceeds gross premium 2
Valuation of active life
funds held relative to group annuity contracts 3
Definition of the term "maturity value" in the Standard Nonforfeiture Law for individual deferred annuities
Minimum reserves for certain forms of term insurance
Dec . '84
Standard Valuation Law
Acceptable approximations for continuous functions
Dec . '79
Standard Valuation and Nonforfeiture Laws
Interpretation regarding use of single or joint life mortality tables
Dec . '79
Standard Valuation and Nonforfeiture Laws
Calculation of equivalent level amounts
Dec . '79
Standard Valuation and Nonforfeiture Laws
The valuation of individual single premium deferred annuities
Dec . '80
Standard Valuation Law
Form classification of individual single premium annuities for application of the Valu-
Standard Valuation Law and Standard Nonforfeiture Law for Individual Deferred Annuities
Standard Valuation Law
ation and Nonforfeiture Laws
Use of Substandard Annuity Mortality Tables in valuing impaired lives under
structured settlements 9B
Clarification of methods for deferred annuities and structural settlements contracts
Standard Valuation Law
Guideline for interpretation of NAIC Standard Nonforfeature Law for individual deferred annuities
Dec . '81
Standard Nonforfeiture Law for individual Deferred Annuities
Effect of an early election by an insurance company of an operative date under Section 5-C of the Standard Nonforfeiture Law for Life insurance
Standard Nonforfeiture Law
Interpretation regarding valuation and nonforfeiture interest rates
Standard Valuation Law
Guideline concerning the
and Standard Nonforfelture Law for Life Insurance March '85
Standard Valuation Law
reserve valuation method 14
Surveillance procedure regarding the actuarial opinion for life and health insurers
Dec . '85
Instructions for Financial Examiners
Illustrations guideline for variable life insurance model regulation
Variable Life Insurance Model Regulation
Guideline for calculation of commissioners ' reserve valu-
Dec. ' 86
Standard Valuation Law
ation method on select mortality and/or split interest 17
Guideline for calculation of commissioners ' reserve valuation method reserves when death benefits are not level
Dec . '86
Standard Nonforfeiture Law
Guideline for calculation of
Dec . '86
Standard Valuation Law
Dec . '86
NAIC procedure for permitting
commissioners ' reserve valuation
method reserves on semicontinuous, fully continuous or discounted continuous basis 19
Guideline concerning 1980 commissioners ' Standard
same minimum nonforfeiture
Ordinary Mortality Table
standards for men and women
with 10-year select mor -
insured under 1980 CSO and
1980 CET Mortality Tables Model Regulation
Guideline concerning joint life functions for 1980 commissioners' Standard Ordinary Mortality Table
Dec . '86
Standard Valuation Law
Guideline for calculation of CRVM reserves when (b)
Standard Valuation Law
is greater than (a) 22
Interpretation regarding nonforfeiture values for policies with indeterminate premiums
Standard Nonforfeiture Law
Guideline concerning variable
Variable Life Insurance
life insurance separate account investments 24
Guideline for variable life nonforfeiture values
Guideline for calculation of minimum reserves and minimum
Dec . '89
Standard Valuation Law
Standard Valuation Law
Law for Life Insurance and Variable Life Insurance Model Regulation
nonforfeiture values for policies with guaranteed increasing death benefits based on an index 26
Guideline for election of operative dates under Standard Valuation Law and Standard Nonforfeiture Law
Standard Nonforfelture Law
The Actuarial Update
Special Subject Supplement : Annual Reports of Academy Public Issues Committees for the 1989-90 Academy Year Casualty Committees Committee on Property and Liability Issues Robert V. Deutsch , chairperson During the 1989-90 Academy year, the committee's primary activities have related to automobile insurance reform legislation, developments in the regulation of insurance company solvency. federal antitrust legislation, and miscellaneous state issues. In late February/early March the committee prepared a statement on the Fair Automobile Insurance Reform Act of 1990, a bill then under consideration by the New Jersey state legislature . One of the purposes of the bill, which would overhaul the state's auto insurance system, was to reduce the multibillion-dollar deficit of the state's insurance fund . The committee's statement provided important actuarial input into the New Jersey auto situation and pointed out that the bill would rearrange the financing of the system without addressing the current imbalances . Despite the committee's analysis, and that of others, the bill was passed and signed into law . The committee has continued to monitor both National Association of Insurance Commissioners (NAIC) and congressional activity on insurance company insolvencies . After issuing a March report (Failed Promises) on findings to date, the House Energy and Commerce Subcommittee on Oversight and Investigations held additional hearings and began developing legislative recommendations . A bill Is expected to be introduced in Congress in early 1991 . Meanwhile, in June 1990, the NAIC Blanks Committee took action to require loss reserve opinions as part of the 1990 blank . The committee provided input to the Academy during its deliberations with the NAIC Blanks Committee on the definition of a "qualified actuary" for purposes of signing loss reserve opinions .
The committee closely monitored proposed congressional legislation amending the McCarran-Ferguson Act . A bill was reported out by the House Judiciary Committee but failed to reach
a floor vote before Congress recessed at the end of October . Throughout the year, the committee monitored and provided assistance on a number of specific state issues . The committee reviewed a recent law passed in Florida regarding determination of "actuarially sound" rates ; responded to a request from Montana regarding certain actuarial issues involving workers' compensation, and reviewed legislation enacted by Colorado requiring actuarial loss reserve opinions .
The committee is currently working on three statements . One deals with actuarialissues frequently encountered in auto reform legislation . A second statement will discuss residual markets and their effects upon coverage availability, rate levels, and loss reserves for residual markets . The final statement involves the improper actuarial results that may arise from the NAIC Statistical Task Force's work regarding profitability by line by state .
Committee on Property and Liability Financial Reporting David G . Hartman , chairperson In June of 1990, the National Association of Insurance Commissioners (NAIC) adopted a requirement, applicable in all states, for an actuarial opinion on the loss reserves ofvirtually all propertyliability insurance companies, effective with filings of the 1990 annual statements . Previously the opinion was rendered by a loss reserve specialist, and the requirement was discretionary on a state-by-state basis . The NAIC action was in part the result of a statement submitted to the NAIC in May by our committee, recommending this change . An additional catalyst for this significant, positive action was the March release of the congressional report .Failed Promises .
In addition to commenting on "who should sign," the committee's statement to the NAIC addressed 'what should the opinion say ." Most of its recommendations on the latter question were adopted by the NAIC BlanksTask Force in December, including the proposal to change opinion language on reserve adequacy from "good and sufficient" to "reasonable ." During the past year the committee
also completed a survey of state regulatorยง seeking their insights on the more than 150 insurance companies thatwere declared insolvent between 1969 and 1987 . Questions asked dealt with the primary reasons for each insolvency, the presence of a loss reserve opinion, and whether opinions were qualified . A summary of the questionnaires returned shows the principal cause of insolvency during this period was "under-reserving" (mentioned in 58% of the responses) . "Mismanagement" was the second leading cause (mentioned in 41% of the responses) . Regulators could state more than one cause for each insolvency . We suggested that mandatory loss reserve opinions rendered by qualified actuaries may help reduce the incidence of insolvencies caused primarily by under-reserving . A mandatory requirement for an actuarial opinion places an additional burden on the actuarial profession to maintain and improve the quality of opinions rendered by Academy me r bers . To this end, the committee examining opinions rendered on loss reserves in 1985 for large companies that had subsequently experienced significant adverse development through 1988 . The purpose of the study Is to see what can be learned and then passed onto those who sign future opinions . This knowledge will be shared with the Actuarial Standards Board (ASB) for its consideration in drafting standards of practice for rendering casualty loss reserve opinions .
Health Committees Committee on Health Edward J . Wojcik , chairperson During the 1989-90 Academy year, the committee focused on issues related to the uninsured and the costs of providing long-term care . The committee, represented by Gordon Trapnell, testified before Health Subcommittee of the Ho Committee on Ways and Means at a April 3, 1990 hearing on health insurance in the small-group market . In September, committee member Ha (continued overleaf )
January 1991 Sutton represented the committee before the Subcommittee on Commerce, Consumer Protection and Competiveness of the House Committee on ergy and Commerce at a hearing ccess to Health Insurance : Who Is Medically Insurable?" At the April hearing, the committee had been requested to provide one of two lead expert witnesses. At the September hearing , the committee's representative sat on a panel of policy analysts . Following the September Energy and Commerce hearings, the House subcommittee requested that Sutton, on behalf of the Academy's committee, return to Washington to brief subcommittee staff more extensively on insurance underwriting practices and the potential problems associated with limiting these practices .
To round out its activities on the uninsured , the committee is preparing a background paper describing the primary members of this group . The paper may also discuss potential solutions and their pros and cons . With respect to long-term care, the committee finalized an article for Contingencies . The article "Can We Afford Public Financing for Long-Term Care?" appeared in the July issue . Gordon
"pnell was the primary author. _The committee also finalized an outreach paper, "Long-Term Care . . . Issues and Costs, A Nation in Pursuit of Solutions ." This paper includes a projection of how much Americans will be spending on long-term care by the year 2000 and beyond . It enunciates the basic Issues that must be solved for a public long-term program to succeed and suggests some approaches for providing better coverage of long-term care expenses absent any major new public program . The paper is intended for wide distribution in magazines and newspapers and as general background for policy makers .
Committee on Health and Welfare Plans Jeffrey P . Petertil, chairperson Over the past Academy year, the single most important activity of the committee has been its extensive involvement in the development of the Financial Accounting Standards Board's (FASB) posed statement on "Employers' ounting for Postretirement Benefits er Than Pensions ." In public testimony before FASB in November of 1989, the committee raised several important actuarial issues on valuing retiree health liabilities . FASB
11 staff accepted the committee's offer of assistance, and throughout 1990 the committee has worked closely with FASB staff and board members . Issues on which the committee has provided assistance include establishing assumptions, trending, data availability, and determining what constitutes a plan amendment. FASB is expected to issue a final statement In December 1990. The committee also commented on a proposed statement of the Government Accounting Standards Board on postemployment benefits other than pensions . Among other things, the committee' s comments discussed the importance of liability measurement in plan design and funding decisions, and the funding differences between private and public-sector employers . The committee would like to encourage the Internal Revenue Service to define a "qualified actuary" as a member of the Academy for purposes of Internal Revenue Code Section 419 . Toward this end, the committee has prepared a summary of the committee's past work on this issue and forwarded its report and recommendations to the Academy's Qualifications Committee, which has now taken over the project and is expected to expose a draft qualification standard in 1991 .
The committee continues its deliberations on a health database . Discussions to date have uncovered many problems with developing an appropriate database that could be widely available to health actuaries, and there may be little hope of developing such a database in the near, or even fairly distant future . In conjunction with the Academy's Annual Meeting, several committee members met with congressional staff to discuss issues that may come before Congress during 1991 . As a result, the committee may become involved with the federal government In discussions of Multiple Employer Welfare Arrangements (MEWAs) and continuation of coverage under the Consolidated Omnibus Budget Reconciliation Act's provisions . The committee has already begun to provide information to congressional staff on these subjects .
Subcommittee on Liaison with NAIC Accident and Health Insurance Committee (B) William J . Bugg Jr., chairperson The subcommittee continues to work closely with the National Association of Insurance Commissioners' (NAIC) Life
and Health Actuarial (Technical) Task Force on state health issues . During the past year, it prepared a number of reports and responded to the NAIC task force on issues in several areas . The subcommittee drafted a health rate filing guideline for the NAIC in the spring of 1989 . The NAIC modified the draft and, through the Society of Actuaries, Issued an exposure draft . Thirty-two comments were received . At the NAIC's request, the subcommittee summarized the major areas of comment for the October 1989 task force meeting and made recommendations for changes . The NAIC considered changes at its December 1989 meeting, and several NAIC task force members wrote extensive comments themselves . The subcommittee reviewed the NAIC comments and reported back to the NAIC at its March 1990 meeting . The NAIC task force formed a subgroup to consider the Academy's comments, and the Academy committee was given instructions on how to proceed at the June 1990 meeting of the NAIC's Life and Health Actuarial (Technical) Task Force . The subcommittee prepared a report responding to the NAIC's questions and presented it at the task force's September meeting. The subcommittee continues to work on rate-filingguideline issues with the NAIC task force and is preparing another draft of the rate filing guidelines .
In addition, the subcommittee's December 1989 report to the NAIC Life and Health Actuarial (Technical) Task Force discussed the underlying causes for the high cost of group medical conversions and various associated issues . The report pointed out that the existing group conversion model addresses the issue of high cost and provides an approach to controlling the level of premiums of group conversions . The Accident and Health Insurance Committee (B) has formed a working group (Group Health Rate Review Mechanism Working Group) to address perceived problems with ratemaking for small groups . The working group asked the committee to examine proposals for reforming the small group market, including the NAIC Small Group Health Rating Report and the Health Insurance Association ofAmerica Small Group Proposal, A subcommittee report presented at the June 1990 NAIC meeting discussed the problems of consistency between the small group proposals and the individual rate filing guidelines and addressed three questions raised by the NAIC working group : (1) are the recommended steps com-
The Actuarial Update
12 patible with current rate filing guidelines , (2) should there be separate guidelines for small groups, and (3) are there ramifications of these proposals that could affect the individual guidelines? In response to a request from the Life and Health Actuarial Task Force, the subcommittee provided a response to the questions on the appropriateness of the one-year preliminary term reserve method for long-term care insurance . At its September meeting, the Academy Board upgraded the subcommittee to full committee status . The new committee is the Committee on State Health Issues .
Committee on Continuing Care Retirement Communities Alwyn V. Powell , chairperson Over the past year, the committee initiated five projects . At the request of the Actuarial Standards Board (ASB), the committee is revising and reformatting the Continuing Care Retirement Community (CCRC) standard developed in 1987. The updated standard will include the committee's latest opinions on the treatment of fixed assets and take into consideration the American Institute of Certified Public Accountants' (AICPA) statement of position for auditing CCRCs . A preliminary revision was completed in August and forwarded to the Specialty Committee of the ASB . Closely related to the ASB project is the committee's effort to develop a statement designed to help convince the accounting profession to adopt an actuarial approach that would provide more meaningful financial measures for CCRCs . This is in response to AICPA's finalizing an audit guide for CCRCs that is in conflict with actuarial principles . On the regulatory front, the committee is involved in two projects . First, the committee is represented on the NAIC task force that is developing an annual statement form for CCRCs . The latest draft relies on GAAP statements that do not recognize the true actuarial position of a CCRC . The committee is working actively to ensure that the form reflects actuarial reality.
The committee is also developing a statement on a proposed regulation by the New York State Insurance Department on reserve requirements for CCRCs . The regulation appears to be in conflict with actuarial standards of practice and is likely to have a significant impact on future CCRC regulation .
The committee Is also developing a more general statement on CCRC valuation. There are currently at least four different methods in use to value and expense fixed assets in valuations of CCRCs . The committee's statement will discuss the validity of the various approaches . As its final project of the past year, the committee has been working with the financial advisory panel of the American Association of Homes for the Aging on issues related to the financial soundness of CCRCs . The ultimate goal of the project is to develop accreditation standards sometime during 1991 . Harold Barneyis the committee chair for the 1990-91 Academy year .
Committee on Risk Classification Jean M. Wodarczyk, chairperson The committee's primary activity over the past year involved educating various publics on the meaning and importance of risk classification analysis . In 1989, the committee developed a slide-show presentation to explain the basic principles of risk classification to lay audiences, such as state insurance regulators, commissioners, state legislators, and federal policy makers . The slide show was presented to a group of state regulators at the December 1989 NAIC meeting and has been presented to state regulators in Texas (at the request of the regulators) and a number of other groups . Because of the importance of the issue and the success of the show to date, the committee will be expanding its presentation efforts during 1990, and present the show at the New Commissioners School at the College of Insurance in New York, at the Conference of Insurance Legislators, and at educational gatherings of junior actuaries such as the Casual ty Loss Reserve Seminar and the Society of Actuaries meetings . Two and perhaps three training sessions will be conducted to prepare a larger group of actuaries to present the show. Questions and answers on risk classification are being prepared as part of the training materials . As part of the slide-show presentation . the committee has begun to develop case histories that illustrate the points about risk classification . Six case histories are currentlybeing prepared, two of which are examples where states have had to abolish laws shortly after enactment because the laws Ignored risk classification principles . Once
developed, the case histories may be able to serve multiple purposes . Additional projects throughout the year have included monitoring select state health insurance legislation the auto insurance rollback issue . The committee also contributed to a Contingencies point-counterpoint article on the unisex insurance issue .
Life Committees Committee on Life Insurance John J . Palmer , chairperson Over the course of last year, the committee was involved in abroad range of activities at state and federal levels . The committee' s six most significant projects are summarized here . Under the committee's direction, the Academy filed an amicus brief in a Washington State case relating to the insurance department's attempt to regulate life insurance premiums . Under the regulation, life insurers would be required to pay minimum death benefits equal to ten years' premiums plus interest on individual life insurance policies with a level death benefit of less than $25, 000 . The Academy's bt opposed the regulation . In addition, the committee prepared comments on an Illinois Insurance Department interpretation of the Commissioners Annuity Reserve Valuation Method (CARVM) that would require calculations at every future moment, rather than only at year-end points. Although the National Association of Insurance Commissioners (NAIC) has not yet officially taken up the issue, other states are Interested, and the issue is very much alive . The NAIC Life and Health Actuarial Task Force has requested that the committee pursue the "sales illustrations" Issue . This involves both dividend and nonguaranteed element illustrations, and includes the issues of both permissibility and disclosure . In particular, it involves a review of relevant annual statement disclosures . The committee has completed a work plan and appointed a task force to work on this issue .
In response to another request from the NAI C Life and Health Actuarial Ti Force, the committee studied rese and related guidelines for accelerat' benefit riders . The committee reported at the NAIC's September 1990 meetings and presented the written documents to the NAIC'S task force : A
January 1991 proposed actuarial accelerated benefits guideline, a proposed substitute for sections 10 and 11 of a proposed ideline being developed by the NAIC's elerated Benefits W Working Group, and a report explaining the reasons for some of the committee's recommendations. Committee members participated withAmerican Council of Life Insurance groups during discussions of the possibility of actuarial certifications in connection with Securities and Exchange Commission (SEC) approval of mortality and expense guarantee charges for variable contracts . The actuarial certification approach was abandoned, at least temporarily, but may resurface as a result of the SEC's comprehensive review of the 1940 Investment Company Act . The committee monitored activity on numerous other fronts, including : Twotiered annuities (secondary interest guarantees under single-premium deferred annuities) ; Actuarial Guideline XXX (reserving for graded premium whole life policies) ; AIDS reserving; Standard Valuation Law revision : tax legislation and regulation : and zerocash value life insurance (an issue raised in Texas regulation) . Philip K. Polkinghorn is the commit4W chairfor the 1990-91 Academy year .
Committee on Life Insurance Financial Reporting Paul F . Kolkman , chairperson A maj or portion of the committee's work over the past year was related to activities ofthe Actuarial Standards Board (ASB) . Within the previous two years, the committee has developed two actuarial standards of practice at the request of the ASB's Life Committee and has assisted in the development of two others . In 1990, the committee proposed to the ASB that a standard of practice on actuarial reports be developed . In addition, a committee task force revised and reformatted the Financial Reporting Recommendations and interpretations as they pertain to life and accident and health insurance . This project, which Is being done for the ASB through its Life Committee . Is expected to be completed next year . The committee also made a statement ,,~' osing promulgation of a standard 1 estimating and providing for the cost of claims resulting from HIV infection . The ASB withdrew the proposed standard in response to the committee's comments and those of other respon-
dents to the two exposure drafts of the HIV standard who were opposed to it . Instead, the ASB adopted Interpretation 7-D to existing Financial Reporting Recommendation 7, specifying how the financial effects of the HIV epidemic should be taken into account in preparIng a statutory actuarial opinion on policy reserves . Finally, the committee also commented in detail on a proposed statement of position of the American Institute of Certified Public Accountants (AICPA) having to do with financial reporting of debt securities held as assets. The committee criticized theAICPA draft as too narrowly focused ; it failed to address the treatment of liabilities, as well as assets. Subsequently, the AICPAdecided to withdraw the proposed statement and refer the matter to the Financial Accounting Standards Board . Joint Committee
on the Valuation Actuary Walter S. Rugland, chairperson In 1989-90, the committee saw a partial culmination of its work when, at its December 1990 meeting, the National Association of Insurance Commissioners (NAIC) adopted amendments to the model Standard Valuation Law that incorporate the concept of the valuation actuary . In addition to adopting the new model law, the NAIC adopted for exposure a companion model regulation, which is needed to implement the provisions of the Standard Valuation Law . The model regulation includes the major definitions related to the introduction of the valuation actuary concept, including the appointed actuary, the actuarial memorandum, and the statement of opinion on both assets and liabilities . The regulation defines a qualified actuary as a member of the Academy who meets Academy qualification standards and is familiar with the state law . It is anticipated that the model regulation will be adopted by the NAIC during 1991 .
Pension Committees Pension Committee John B . Thompson , chairperson The Pension Committee's long list of major projects continues to be driven largely by Congress and the activity of federal regulators . During the Academy year, the committee undertook two major regulatory projects . In response to proposed regulations under Internal Revenue Code
(IRC) Section 401(a)26, the committee developed and submitted to the Internal Revenue Service (IRS) extensive comments on the proposed participation requirements for qualified pension plans and presented oral testimony at the agency's public hearings on these proposed rules . With the IRS's issuance of proposed regulations under Section 401(a)(4), the committee again submitted written comments to the IRS and presented oral testimony at the agency's public hearings on these voluminous and complicated proposed rules . The committee was also represented at a meeting between the IRS and the actuarial community at which a large number of questions were raise d regarding the application of the proposed 401(a)(4) nondiscrimination rules .
A second major committee activity has been small pension plan audits . Over the past year, the IRS, through its small-plan audit program . has questioned the assumptions actuaries have made in calculating the funding for many smaller defined benefit plans . The committee has expressed its concern through a letter from Academy Executive Vice PresideniJames Murphy to IRS Assistant Commissioner Robert Brauer . through face-to-face meetings and briefings with IRS staff, and by representation at the Phoenix tax court's pretrial hearing on small-plan audit cases . Currently, the committee is developing a statement that addresses its concerns on appropriate assumptions for funding defined benefit plans and on the appropriate regulation of these assumptions from an actuarial perspective. The committee expects to complete a public statement In early 1991 . On the legislative front, the committee has undertaken three projects . Pressure has been building on Capitol Hill to simplify the 1986 IRC, and the Pension Committee, along with many others, has responded to congressional requests for comment. In March the committee submitted a statement to the House Committee on Ways and Means on the impact of the Tax Reform Act of 1986 and sections of the tax code on qualified plans most needing simplification . In addition, the committee was represented in discussions with congressional staff on specific proposals for simplification, and it commented on Senator Pryor's tax simplification bill to the Senate Finance Subcommittee on Private Retirement Plans and Oversight of the Internal Revenue Service .
The Actuarial Update
14 A second legislative activity was the preparation of an analysis of the -Excessive Churning and Speculation Act of 1989" for the Senate Finance Committee . The proposed legislation would have taxed capital gains on assets held by pension funds for less than a full year. The proposed legislation died when Congress adjourned for the year .
The Pension Committee also assisted Representative Visclosky in designing proposed legislation to alter the Omnibus Budget Reconciliation Act of 1987 (OBRA) full funding limitation . The Visciosky bill would have permitted plans to include salary trends in their calculation of liabilities for purposes of computing the full funding limitation . In an effort to strengthen its ability to analyze proposed legislation and regulations, the committee is discussing updating the Academy's 1985 project on pension plan funding . This would be a joint project with the Society of Actuaries' Committee on Pension Research . The updated data would be used to estimate the impact on pension funding of proposed changes in the pension law and related federal regulations .
Committee on Pension Accounting Darrel J . Croot, chairperson The committee's primary project has been responding to the Government Accounting Standards Board's (GASB) proposed draft on accounting for pensions by state and local governmental employers . GASB issued an exposure draft on January 31, 1990. In response, the committee submitted written comments in April and presented oral testimony at public hearings in May. The committee's primary concerns were in the areas of interperiod equity, actuarial value of assets, standards for selecting economic assumptions, and actuarial qualifications . Subsequent to its testimony, the committee has worked closely with GASB staff and board members on proposed language for the standard in a number of areas . in addition, GASB is prepared to reference an Actuarial Standards Board (ASB) standard on the selection of economic assumptions, if the standard is in place before the GASB issues Its final standard .
Committee on Social Insurance Robert J . Myers , chairperson The committee continued to give considerable attention to the matter of measuring the actuarial status of the Social Security system.
The committee collaborated with the Committee on Social Insurance of the Society of Actuaries in preparing a statement on measuring the actuarial status of the Old Age, Survivors and Disability Insurance (OASDI) and Hospital Insurance (HI) trust funds . The joint statement was issued in October 1989 and has been distributed widely .
At the request of the executive committee of the Academy's board of directors, the committee prepared a report on the problems associated with the estimated large growth in the OASDI trust funds in the future . Upon approval by the board, this report was distributed publicly to a large audience at the halfday conference on Social Security Financing held in Washington, D .C . last May. The conference was sponsored jointly by the Academy and the Society of Actuaries . Four members of the committee were speakers at the conference . Extensive news coverage was given to the conference, and the report was widely publicized . Additionally, the committee was designated by the Actuarial Standards Board (ASB) as the assisting committee to study the possibility of establishing actuarial standards for social insurance programs . After discussion with the ASB, It was decided to first develop a standard for the OASDI program . The committee drafted a standard that is now pending before the ASB .
In the forthcoming year, the committee will continue to monitor the situation as to the measurement of long-range actuarial balance, proposed changes in the funding method for the program, as well as consider other issues. Stephen Kellison will chair the committee during the 1990-91 Academy year.
Task Force on Pension Plan Terminations Howard M. Phillips , chairperson The primary activity of the task force this year was the designing of a questionnaire for distribution to enrolled actuaries . The task force was created to study the factors contributing to the termination of defined benefit pension plans . The task force is planning to survey enrolled actuaries regarding their activity in pension plan terminations, including the role played by the actuary in the decision to terminate and decisions regarding follow-on plans . The design of the questionnaire is com-
pleted, and It is scheduled to be mailed to all active enrolled actuaries in December . Plans are currently underway for processing the data.
Task Force on National Retirement Income Policy Kenneth A, Steiner , chairperson During the past year, the task force completed deliberation on the desirability and feasibility of developing a national retirement income policy on behalf of the actuarial profession . The Academy's Board of Directors created this task force to determine whether it would be both desirable and feasible for the Academy to develop a statement on what our nation's retirement income policy should be . After lengthy deliberation, the task force recommended that the Academy not develop a national retirement policy statement, but rather develop a statement covering the profession's concerns regarding current policy and the issues that should be addressed in the near future . The task force agreed that any statement of a national retirement income policy should address the full range of retirement issues, including the r and weight to be given Social Secu cash benefits, employer-sponsor pensions, Medicare, employer-sponsored retiree medical benefits, and longterm care . In addition, such a statement should make specific proposals about how each type of benefit should be delivered and who should pay. Finally, the statement should address why the specific proposals are in the best interest of the country.
Such an undertaking would be a very major effort, and the task force recognized that many choices among policy alternatives would be a matter of social preference and other factors beyond the scope of actuarial science . Thus, the task force concluded that a statement taking strong positions would be very divisive, while a statement that avoided legitimate differences of opinion would likely be so bland as not to be worth the considerable effort . The task force, then, recommended that the Academy consider developing a statement of Issues and concerns . Such a statement would accomplish many of the same objectives as a national retirement income policy, stag ment while avoiding the major itfa In addition, such a statement would much easier to develop, could draw upon existingAcademy committees and, once completed, could be used to better coordinate future committee efforts . A
Professional and Administrative Committees Wdget and Finance Committee mas D . Levy, treasurer During the past year, the committee monitored the Academy's financial position . In particular, the net costs of Contingencies, the Actuarial Standards Board, and the expanded government relations program were reviewed . The committee also considered the results of the Academy's annual audit and reported them to the Academy Board of Directors . The committee made financial projections for the 199091 Academy year, and, on the basis of the projections, the committee recommended to the board a tentative budget and the dues level for 1990-91 . The committee continued to oversee the Academy's investment program and administration of the Academy's dues waiver rules . Finally, the committee reviewed the allocation of management responsibilities within the Academy .
Committee on Qualifications James F . Reiskytl, chairperson #1J June 1989, the Academy Board of ectors adopted a new General alification Standard for Academy members making public statements of actuarial opinion-and new continuing education requirements relating to qualification-which became effective January 1, 1990 . During the pastyear, the committee considered members' comments on the new General Qualificatton Standard and determined that clarifying changes to the "alternative education provision" were necessary . Other clarifications related to new applications and new practice areas were also made to the General Qualification Standard .
Several articles in The Actuarial Update by Gary Simms, Academy counsel, explained the amended qualifications standards and the new continuing education requirements . In particular, a question-and-answer piece on the new continuing education requirements appeared in the March 1990 Update based on members' most frequently asked questions pursuant to the Academy's adoption of new continuing Aication requirements related to the WGeneral Qualification Standard . en in June, the National Association of Insurance Commissioners (NA1C) adopted changes to the Fire and Casualty Blank instructions to require the statement of opinion on loss re-
serves to be signed by a qualified actuary. A qualified actuary was defined as a member of the Casualty Actuarial Society, or a member of the Academy who is approved by the Academy's Casualty Practice Council . Amendments to clarify the Academy's qualification standards were adopted on a temporary basis by the Academy's Executive Committee, given the practice council's immediate need, and exposed to the members in September . Comments received will be considered before these specific qualification standards are permanently adopted . Also during 1990, the committee reviewed all the Actuarial Standards Board's standards of practice and determined that few additional qualification requirements are now needed . The committee has completed a draft of a specific qualification standard for actuaries signing statements of opinion related to health and welfare plans . It will be submitted to the Academy Board for review in early 1991, before exposure to the membership . Work is also underway on qualification standards for other practice areas such as employee benefits . John Booth is the chairperson for 1990-91 .
Committee on Publications Roland E, King , chairperson Contingencies magazine continued its initial success by winning another award . The magazine won the Golden Circle award for editorial content and design . Conttngenctests earning enough advertising revenue to cover the cost of production; so the only financial cost to the Academy is the cost of staff salaries . Contingencies should be approved shortly for second class mailing privileges, a major hurdle for a new trade magazine to overcome . This should also keep postal costs from rising, despite the scheduled rate increase .
Advertising interest continues to grow, and our advertising representative reports that several advertisers have expressed a preference for Contingencies because its sophisticated content affords an appropriate editorial showcase for their advertising . The May/ June issue contained twenty-seven pages of advertising . There is no shortage of editorial material . However, an article is planned for The Actuarial Update encouraging more actuaries (who may be Journeyman writers) to submit articles . Much
of what is received now Is from senior actuaries and consultants . Contingencies will shortly submit the editorial calendar for next year, and the rate card will reflect a 5% increase, based upon advice from Contingencies' advertising representative, Judy Solomon . Magazine production is running more smoothly now that the process has become slightly more routine . The smoothing of the process has also been helped by the hiring of an editorial assistant . A new slate of editors was found for the The Actuarial Update. Toni Mulder is the new editor, and associate editors are Barry Watson (pensions), Steve Meskin (health), and Gary Lake (life) .
Task Force on Actuarial Public Service Dwight K. Bartlett , chairperson The task force met earlier in the year and scheduled another meeting at the time of the Academy's 1990 Annual Meeting in Washington, D .C . The task force's efforts during the year have been focused in three general areas . First, the task force has cooperated with the Academy's editorial staff, encouraging them to publish a series of articles and interviews placing public service for actuaries in as favorable a light as possible . Articles published or planned Include : February 1990 Update article on the work of the actuaries at the Health Care Financing Administration ; aJune 1990 Update interview with Toni Hustead, former chief actuary, Department of Defense ; and an upcoming Update interview with James Swenson of the Oregon state insurance office.
The task force has considered how it might support the efforts of the Chief Actuaries in Federal Service Coordinating Group to achieve special pay scales for actuaries . The coordinating group has already been successful in achieving a special pay scale for actuarial positions in the intermediate grades . The coordinating group thinks that a special pay scale up through grade 15 is needed for the government to recruit and retain more senior actuaries . How and when to make such an effort will be discussed at the task force's next meeting . in addition, we worked with the central office of the National Association of Insurance Commissioners in Kansas City in conducting a survey of state insurance departments concerning their need for actuarial staff.
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Driving Home the Truth about Prop 103 by Ken Krehblel When California voters passed Proposition 103, they were expecting a quick fix to rapidly rising auto insurance costs . Instead of the promised 20% instant rollback in rates, however, they got a law that cannot deliver what It promised . To offer an actuarial perspective on the issue of auto insurance rates, Academy member Frederick Kilbourne made media appearances in California and Arizona as part of this year's Forecast 2000 campaign, the actuarial profession's effort to address publicly the challenges society will face in the twenty-first century . Kilbourne, an independent actuary based in California, addressed broadcast and print media in San Diego, Los Angeles . San Francisco, and Phoenix from October 29 to November 1 . In San Diego, Kilbourne appeared on radio station KSON and on ABC television affiliate WGTV . Channel 10. He was also interviewed by a reporter from the San Diego Union . Los Angeles engagements included another radio interview and meeting with the Journal of Commerce. In San Francisco Kilbourne made two radio appearances and one more for television .
The Phoenix leg of the trip came just five days before voters soundly defeated Proposition 201, an auto insurance measure on the election-day ballot . A reporterfrom the ArizonaRepublicspoke with Kilbourne about California's Proposition 103 and the issue of highpriced auto insurance premiums . Kilbourne's message to the media was that Proposition 103 does nothing to address the underlying costs of auto insurance premiums, but instead relies on promising premium cuts to gain voter support. Two years after voters narrowly passed Proposition 103 in California, the promised rate rollbacks still haven't gone into effect because, if theyweretogo into effect, there wouldn't be enough money to cover the cost of auto insurance claims . indeed, the law, in part, has been ruled unconstitutional . "The promised cuts far exceed profit margins in auto insurance premiums," Kilbourne said, "meaning It would be necessary to confiscate insurance company stockholder money in order to make up the difference ." Kilbourne says it is a misconception that insurance companies are rolling in
The Actuarial Update excess profits . For example, auto insurers writing business in California last year, on the average , earned well under a nickel for each dollar of premium: a 5 % profit margin simply will not sustain a premium of 20% or more . A study by the California Department of insurance stated that between 1985 and 1989, insurance companies in the state, after taxes, actually lost 1% of every premium dollar collected . Kilbourne said the framers of Proposition 103 should have known that if the legislation were adopted, it would mean insurers writing California coverage would lose money. The California Supreme Court saw that Proposition 103 was unconstitutional In this respect, and Kilbourne says, "It doesn't take an actuary to see that It Is unsustainable ." The causes of the high rates can be attributed to real costs that are not going to go away, according to Kilbourne . They include skyrocketing health care costs, which drive up auto insurance company claims ; rising labor costs for automobile repair ; and escalating liti-
ANNUAL REPORTS (continued from page 15)
Committee on Discipline John A. Fibiger, chairperson Discipline Committee actions for the 1989-90 Academy year were reported in the August 1990 Actuarial Update. As of June 1990, the committee had fourteen cases . Three involved allegations of actuarial error in the insolvencies of insurance companies . Another involved an allegation of fraud by an Academy member working for a real-estate investment company . Several pending disciplinary cases seemed to involve pension practitioners' failure to provide clients with timely financial reports and 5500 forms . One employer of a pension actuary filed a complaint alleging that the actuary had submitted false reports to the Internal Revenue Service . The Discipline Committee also reviewed cases in which actuaries' qualifications to undertake certain assignments had been questioned . The issue of whether or not an actuary had complied with the Academy's qualification standards for signing loss reserve opinions was raised in five separate cases . (En each of these cases, it was determined that the individual signing the loss reserve opinion was qualified to
gation for injuries claims . These costs, as they spiral, are passed along to insurers, with the result being higher auto insurance rates for all driv ~ Because Proposition 103 did nothA lower the costs directly, these cosmos" remain the underlying causes of high insurance rates .
Kilbourne also addressed risk classification . He said . "Actuarial science and competitive pressure combine to compel insurance companies to do the best job possible in separating low-risk drivers from high-risk drivers for pricing purposes . Age, sex, driving record and other variables have been found important in this separation process." In his media appearances, Kilbourne emphasized that if sound actuarial principles had been applied and more attention given to risk classification, some of the problems Inherent In Proposition 103 may have been avoided .
Krehbiel is public relations specialistfor the Academy .
do so .) A number of other cases were examined and closed over the tourthe year . Additional reports on dl plinary activity are provided to readers of The Actuarial Update twice a year .
Task Force on Continuing Education Recognition and Requirements Daniel J . McCarthy, chairperson The task force worked during 1990 to finalize a proposal that would expand the coverage of continuing education requirements to a broader segment of the Academy's membership . Current requirements for continuing education apply to the Specific Qualification Standards, at present consisting of the three NAIC blanks-opinion standards . The task force intends to recommend expansion of the requirement for a minimum number of hours of continued study to all public statements of actuarial opinion . The Academy Board of Directors has endorsed the concept of expanding requirements for continuing educatio.0 a broader segment of the members The task force will be submitting a specific plan to the board early in 1991 and anticipates circulating an exposure draft of the proposal to the membership in the first half of 1991 . A