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AMERICAN ACADEMY OF ACTUARIES VOLUME 23 NUMBER 1 JANUARY1994

THIS MONTH From the Executive Vice President

Letters to the Editor 3 Qualification Standards, Step-by-Step ~\

4

NAIC Adopts P/C RBC Model Law

6 Public Relations Watch 6 Academy Seeks Health Care Assumptions 7 Capitol Views Academy, SOA Form Health Care Task Force

ENCLOSURES Included with this month's issue of The Actuarial Update are the following: In Search Of ASB Boxscore 1994 Yearbook Tab f Contents for Binders

Actuaries' Pricing Advice Yields Mental Health Benefit Changes By Jeffrey Speicher E xpert advice from a group that included three Academy members resulted in modifications to the mental health benefits offered in the Clinton administration's health care reform package . The final legislative proposal, introduced in the House as the Health Security Act, proposes more limited coverage of mental health and substance abuse treatments than President Clinton had originally announced . The cost and benefit design for mental health coverage has been a particularly controversial aspect of the Clinton plan . In formulating its health care package, the administration established a mental health budget of $241 per person, per year to cover mental illness and substance abuse benefits . This figure includes coverage for the severely mentally ill and persons currently uninsured, as well as for individuals who now enjoy health insurance coverage . However, the mental health benefits proposed by President Clinton in the legislation unveiled on October 28 did not meet the administration's own budgetary goals . Government actuaries estimated the benefits' cost would exceed $350 per

American, per year . Ken Thorpe, deputy assistant secretary in the Office of Health Policy of the Department of Health and Human Services, requested help in developing a mental health benefit package that would be within the administration's cost limits. Responding to this need for expert assessment, Guy King, chief actuary of the Health Care Financing Administration, asked Academy member Ron Bachman to assemble an advisory group of actuaries, benefit consultants,

and corporate benefit managers . The group, which also included Academy members Julia Philips and Ken Porter, was asked to suggest alternate plan designs that would meet the $241 cost target . To meet the cost target, benefit reductions were of course inevitable . However, the expert group generated ideas that permitted certain key benefits to be retained. In addition to cost issues, the group also examined alternatives to provisions that limited the flexibility of separate segments of the proposed plan. One of the group's most important recommendations, a proposal to permit benefit substitution, was adopted by the administration . This substitution provision allows patients to give up days of inpatient care in favor of outpatient psychotherapy sessions or alternative hospital care. The substitution approach permits the Clinton plan to offer more mental health benefits and gives it the same flexibility found in managed care plans on the market today. Academy members Bachman, Philips, and Porter have continued to provide actuarial advice to Continued on page 6

1994 ACADEMY YEARBOOK The 1994 Academy Yearbook is enclosed with this issue of The Actuarial Update. The yearbook is a handy reference guide to the work of the Academy, featuring a complete listing of the Academy's leadership and staff, practice council and committee members, a brief account of the history of the Academy, its bylaws, and descriptions of the work of the Actuarial Standards Board and the Actuarial Board for Counseling and Discipline . We hope you will find it useful .


AMERICAN ACADEMY OF ACTUARIES President David G . Hartman

FROM THE

executive nice

President-Elect Charles A. Bryan

president

1993: A Banner Year for Actuarial Visibility

Vice Presidents Howard J . Bolnick Howard Fluhr Paul F . Kolkman Stephen P. Lowe Jack M . Turnquist

By James J. Murphy, MAAA

Secretary-Treasurer James R . Swenson Executive Vice President James J . Murphy

EXECUTIVE OFFICE The American Academy of Actuaries 1720 I Street, NW 7th Floor Washington, DC 20006 (202) 223-8196 Fax: (202) 872-1948

MEMBERSHIP ADMINISTRATION Woodfield Corporate Center 475 N . Martingale Road Schaumburg, IL 60173-2226 (708) 706-3513

THE ACTUARIAL UPDATE Committee on Publications Chairman E. Tan! Mulder Editor Adam Reese Executive Editor Erich Parker Associate Editors William Carroll Ronald Gebhardtsbauer Patrick J . Grannan Managing Editor Jeffrey Speicher Contributing Editor Ken Krehbiel Production Manager

Renee Cox

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.

2

L ast January on this page I made a modest prediction . I wrote that the voice of the actuarial profession would become more influential in Washington as the new administration focused our nation's policy debate on domestic issues . While I claim no special powers of prognostication, it is satisfying to report that this prediction has come true beyond my wildest expectations . In 1993, the actuarial profession attained an unprecedented level of recognition for its unbiased contributions to the crafting of public policy. Of course the most visible issue on the national agenda is health care reform, and it is here that actuaries have made their most significant contribution . Some call President Clinton's proposed Health Security Act the most far-reaching piece of social legislation since the New Deal. In Congress, both Republican and Democratic members have offered numerous modifications and counterproposals . In fact, Capitol Hill is virtually swamped with competing plans, each with differing features often based on contradictory data. From the very beginning of the process, the Academy has been the active representative of the profession and its expertise . The Academy was the only organization invited by the administration's task force to discussions on the best methods and tools to use in health care costs estimation . We have responded to requests for technical assistance from the Congressional Budget Office, the Congressional Research Service, as well as the administration . We have arranged meetings of actuaries and policy makers on such

The Actuarial Update ∎ January 1994

diverse issues as health risk adjustment and continuing care for the elderly. As the intense process of legislative review continues, the Health Practice Council has formed fourteen work groups to examine the actuarial implications of the complete range of issues involved in the president's plan . Their reports will be completed soon and will be distributed widely-especially on Capitol Hill to appropriate congressional committees . Several subcommittee staffers-the men and women who will actually draft the detailed final legislation-have already approached the Academy seeking our advice on several technical aspects of the proposal . The profession can be proud of the very public recognition that actuaries are receiving for providing objective analysis to policy makers . And we members can be equally proud of the way our Academy is fulfilling its mission as the public policy voice of the profession . At least in Washington, the initials MAAA no longer make policy makers think of the automobile club! And it would help if more of us would use those initials after our names as prominently as we display our other professional affiliations . But what does this new public visibility mean to the profession as a whole and its future? Two things, I think. One, we can be satisfied as actuaries and as Americans that we have done our utmost to ensure that sound actuarial thinking has gone into whatever plan is ultimately adopted . Whether or not the political process yields a good plan, at least we as a profession have aggressively pursued the opportunity to offer our valuable

expertise . Lawmakers will not be able to claim ignorance of actuarial implications of t o policy choices. Second, and on a more parochial level, I see our efforts in health care reform as a direct tiein to the profession's "Ask an Actuary" campaign . In recent months, actuaries have garnered respectful attention in the nation's most influential media outlets, not to mention the unprecedented (if somewhat misleading) acknowledgement of the profession's role by President Clinton in his address to Congress last September . This focus will help us ensure that as the insurance, financial service, pension, and health care industries evolve, actuaries and our problem-solving talents do not go unnoticed . We have long promoted to business and government leaders the nontraditional applications of our skills. Our valuable contributions to the complex project of comprehensive health care ref serve as a demonstration of expertise and will focus attention on the adaptability of our skills to a broad array of policy and financial questions . This can only help individual actuaries and the profession as we move into an intensely competitive global economy. (You can be certain that the Academy's public relations department and the profession's Forecast 2000 campaign will make sure that the trade and popular press make the connection!) As the debate on health care heats up in 1994, other issues such as retirement security and insurer solvency will still be important on the public stage. Of course the Academy has not neglected its work on those issues of concern to our members, even as we answered the political imperative to focus on the push for health care reform . Nineteen ninety-four will see continued Academy efforts in the fields of pensions, insurer solvency, workers' compensation . Th prominence we enjoy as a result of our health care successes in 1993 will help us enormously in our mission to represent all practice areas as the public policy voice of the profession. ∎


letters TO THE EDITOR

Actuarial Unity Not Bush League Matter Brierley's call for a unified voice for the profession in his October Update editorial really hit home for me . In my home town with a population of 30,000, we have no fewer than four different Little League

Jun

baseball programs for our children . On three occasions a group of parents who felt that the league had been neglecting an important aspect of the game for their children stormed off and formed a new league . Now, kids who live next door to each other don't get to play together. In competitions with out-of-town leagues we don't stand a chance because our players are divided . The township won't build a baseball complex until the leagues stop arguing over field availability. The four leagues have discussions every year about joining

forces, but disagreements regarding such issues as the content of the rule and the makeup of the board of directors have precluded any chance of merger . The actuarial profession would be greatly served by following Jim Brierley's advice to work toward a single voice. It's time we stopped behaving like a bunch of fathers who forget that the whole idea is for the kids to play the game . Lawrence J . Zeller Bound Brook, New jersey

The Update welcomes

letters from its readers . Letters for publication should be Submitted to "Letters to the Editor," and

Qualification Standards, Step-by-Step A Reminder from the Academy Committee on Qualifications is that time of year again! If you intend to sign an insurer's actuarial opinion letter this ear-end, whether for a life and health, a fire and casualty, or a hospital/medical service corporation, it would be wise to review the qualifications required of signatories. All you need to know about these requirements is already on your bookshelf. Precept 3 of the Code of Professional Conduct, found on page forty of the 1994 Academy Yearbook, states that you must satisfy the Qualification Standards . These are found in the familiar, gray-green ASB binders with the 5 x 8 pamphlets in them . In Binder Number 2, under the "AAA Professional Standards" tab, you will find the pamphlet entitled "Qualification Standards for Public Statements of Actuarial Opinion ." The most recent version of the standard is dated January 19, 1993, but the relevant information is essentially unchanged from the 1991 version . (These requirements took e ct in 1990 .) n page eight of the pamp et, look at point 4 . Have you acquired the necessary 24 hours of continuing education credits over the past 2 years? Not sure? Let's check the rules . Point 5 states that at least

12 of the 24 hours must come from Organized Activities . Are you uncertain as to what they are? They are defined in point 2, which also describes Other Activities ; you might need them as well . Note also that no matter whether Organized or Other, activities must be relevant . Not sure what's relevant? Go forward to page ten and check the Topics column for whatever statement of opinion you intend to render . Who's responsible for checking whether you've met the requirements? You are (see point 7 on page nine ) . Have you checked yet to see whether you're in compliance? If yes, you're done . If you haven't, the helpful score sheet on page eleven might prove useful . Final question : Assume that you check it out and find that you don't have the credit hours . Now what? Who are you going to get to sign that opinion?

requirements-apply not only to Annual Statement opinions, but to any Public Statement of Actuarial Opinion . (Public statements are defined on page three .) O For statements of opinion other than the annual statement opinions discussed above, the test of relevance for continuing education is less specific, but still important .

The Academy Committee on Qualifications is chaired by Barry Watson .

must include the writer's name , address, and telephone number. _ Letters maybe edited for style and spacee requirements .

To conclude, a few thoughts : LJ The Qualification Standards govern three broad areas-basic education, continuing education, and experience . This note focuses on continuing education, but don't forget the other two . You need to meet all three requirements . O The standards-and in particular the continuing education

The Actuarial Update -January 1994 3


NAIC Adopts Property/Casualty Risk-Based Capital Model Law By David Bryant nsurance regulators capped a long implementation process by voting final approval of the Property/Casualty Risk-Based Capital (RBC) for Insurers Formula and Model Act at the December 5-8 meeting of the National Association of Insurance Commissioners (NAIC) in Honolulu. As part of the new model law, the commissioners decided to combine plc, life, and eventually health insurers into a unified Risk-Based Capital for Insurers Model Act . Despite the model act's adoption, the NAIC continues to consider other alternatives to the risk-based capital formula. After much discussion, the commissioners agreed on the need for consistent NAIC support for the risk-based capital approach . Virginia Insurance Commissioner

I

Steven Foster acknowledged that refinements to the model act and the formula as solvency tools would be evaluated by the NAIC, but that such efforts should not be mistaken as a quest for alternatives to the formula . No Accreditation Change In adopting the life risk-based capital formula, the NAIC amended the existing life model. This amended version was referred to the (EX) Committee on Financial Regulation Standards and Accreditation (FRSAC) for review . The property/casualty RBC model law was also adopted without immediately being included in the accreditation standards . Thus, the risk-based capital formulas are not currently part of the accreditation standards . A new Risk- Based Capital Task Force will be created in 1994 to oversee the continuing work of the three RBC working groups . Other Model Laws Adopted

PRACTICE NOTES FOR APPOINTED ACTUARIES The Standard Valuation . Law, as amended in 1990 , and the 1991 NAIC Model Regulation detail the legal requirements of cash -flow testing . Professional requirements are outlined in actuarial standards of practice . -However, actuaries may have questions about. current practices in certain specific situations not dealt with by these documents . To meet the need for moredetailed background information, a-working group of Academy members has developed practice notes for 1993 . These notes are not meant to have the force of a regulation or an actuarial standard of practice . They are informal in tone, and most are written in a' question - and-answer format . Practice notes are not meant to be prescriptive : Where more than one way to do things is acceptable , these notes point out some options . The notes present possible ways of handling certain aspects of cash - flow testing , and actuaries are free to deviate from the methods described . The 1993 practice notes are not identical to the notes issued in 1992 ; many have been revised and amplified . To obtain copies of the 1993 practice notes for appointed actuaries , contact Cheryl Ayanian at the Academy office .

4 The Actuarial Update ∎ January 1994

While several other models also were adopted during the executive committee/plenary session, none was added to the accreditation standards . It would seem that the NAIC is responding to certain legislative critics who argue that its accreditation standards are often developed too rapidly to allow newly accredited states to assess the standards and incorporate them into the accreditation process. The model acts the NAIC adopted are : a revised Consumer Credit Insurance Model Act ; the Fronting Disclosure and Regulation Model Act (with minor amendments to broaden the exemption for captives) ; and the Reinsurance Assumption Model Act (as amended to take effect over 25 months, thus giving policyholders at least two annual premium periods to take note of transfers before being deemed to have consented) .

Academy Leaders Meet with NAIC On December 5, the N Academy/Actuarial Standa s Board Joint Committee on Standards and Related Matters met to discuss the three organizations' increasing number of common concerns . John Montgomery of the California Insurance Department, chairperson of the joint committee, revived an issue first raised at the August 1993 meeting of NAIC and Academy leadership : the establishment of a separate health actuarial task force . The joint committee discussed the proposal in the context of the current intense focus on health care issues at all levels - local, state and federal . The committee reached a general agreement that creation of a separate task force is warranted . While no official action was taken, Montgomery stated that such a recommendation would be made to the Executive (EX) Committee. Jack Turnquist, representin the Actuarial Standards B (ASB), discussed the devel ment of the Opinion Review Project, which would establish a professional/regulatory review committee to evaluate the actuarial opinions of insurance companies that have become insolvent or identified as "troubled" companies. Academy Executive Vice President Jim Murphy reiterated the three goals inherent in this project : 1) providing technical assistance to regulators in fulfilling the needs relative to actuarial assurance ; 2) providing information relating to standards to the ASB ; and 3) determining referral of cases to the Actuarial Board for Counseling and Discipline . The joint committee also discussed an addition to the Academy's 1992 insurer solvency proposals . The addendum, in the form of a memorandum from the Academy Secretary-Treasurer James Swenson, outlined a proposed Surplus Adequacy Re to be prepared by a quall actuary and required from e insurers . This plan would require coordination with the NAIC Financial Analysis Division , and some regulators expressed concern that these new


tools should not be developed in lieu of existing restrictions or the intent to eliminate contional formula reserves. Murphy was quick to disabuse regulators of these concerns . The essential need for dialogue between the ASB and regulators was also discussed . Larry Gorski of the Illinois Insurance Department detailed two problems noted by his department, in the areas of reliance and interim results. He expressed his department's preference that asset adequacy analyses, and perhaps opinions, take into account interim results , if appropriate . Finally, a general wrap-up discussion was held on further coordination of activities among the NAIC, the Academy, and the ASB . Academy President David Hartman gave a brief status report on joint leadership initiatives to date. Hartman sought to clarify that the leadership meetings were not meant to preempt the role of the joint committee . Rather, the meetings enable the aria] profession's leaders to rdinate with NAIC leadership and staff as they plan 1994 goals, thus assuring that all the NAIC's 1994 priority objectives receive consideration and support from the appropriate Academy committees and task forces. Summary of Actuarial Activities The Life and Health Actuarial (Technical) Task Force, meeting December 2-4, made several recommendations to its parent committees, the Life Insurance (A) Committee and the Accident and Health (B) Committee . The L&HATF recommended: U Combining two Standard Valuation Law (SVL) projects relating to possible revisions of the SVL and the Actuarial Opinion and Memorandum Model Regulation encompassing both life and health insurance issues . The t c force further recommended nating this project a num-one priority. O Deleting long-range issues relating to the valuation actuary concept from the current agenda. L&HATF will continue to monitor work being done by the SOA

Dynamic Solvency Task Force . 0 Exposing revised drafts of proposed amendments to the "Standard Nonforfeiture Law for Life Insurance" and the "Standard Nonforfeiture Law for Deferred Annuities," with adoption proposed for June . Q Exposing a revised draft of a proposed new model regulation entitled "Valuation of Life Insurance Policies-Special Rules," also for June adoption . The Life Disclosure Working Group of the Life Insurance (A) Committee exposed for comment a draft Life Insurance Illustrations Model Act . The working group reconsidered its earlier decision, made at a November meeting, not to include annuities under the model act. Instead, clarifying language has been added so that only one act would be needed to cover both life insurance and annuities. The initial regulation would be specific to life insurance . However, if an additional charge is given to the working group later, an annuity regulation could be developed . The working group made several changes to the existing draft model law . Specifically, the working group : O Modified Section 3 (Authority to Promulgate Regulations) to incorporate broad authorizing language instead of the list of specific items to be addressed . However, the list of items to use in developing standards (November draft) was retained as a drafting note in Section 3 ; O Modified Section 4 (Penalties) to clarify a provision that would allow commissioners to require that insurers illustrating "benefits that are not supportable when presented" to pay benefits based on their illustrations ; and O Modified Section 5 (Separability) to delete the section creating a private cause of action, which was deemed to be a major departure from NAIC policy.

tives had assured regulators that companion standards could be placed on a fast track and finished within 12 months of completion of the model regulation . A draft model regulation is planned for exposure in June . (Comments on the draft model act should be directed to Carolyn Johnson at the NAIC in Kansas City .) Blanks Task Force : The task force met on December 7 and discussed several items deferred from its October meeting . Specifically, the task force : 0 Adopted a proposal to require life actuarial opinions (this requirement also provides for CPAs to apply auditing procedures to the Supplemental Schedule of Assets and Liabilities, a new supplemental schedule) ; 0 Rejected proposed changes in the due date of the Management's Discussion and Analysis and the Accident and Health Policy Experience Exhibit from April 1 to March 1 ; O Added a definition of Tabular Discount to Note to Financial Statements (the Casualty Actuarial Task Force will develop a transition rule by March for those insurers who opt to change accounting methods as a result of this action) ; Š Modified the Annual Statement to implement the P/C RiskBased Capital Formula ; and O Deferred until March the expansion of the 2-year line of business to 10 years . At its October meeting the task force approved a change in the annual statement instructions, language that establishes procedures an appointed actuary must follow if the actuarial opinion submitted was determined to be erroneous as a result of reliance on data that, as of the balance sheet date, were factually incorrect . (Specific instruction language is available from the Academy in Practice Note 199312, "Notification of Reserve Misstatement.")

The American Council of Life Insurers and several consumer advocacy organizations raised objections to one or more of Bryant is assistant director of these modifications . During eargovernment information for the lier discussions, ASB representa- i Academy.

1994 CALENDAR . Enrolled Actuaries Meeting March 7-9 . National Association of . Insurance . Commissioners . Spring Meeting . March fr$ Actuarial Boardfor Counseling and Discipline Meeting March 1 0

Joint Executive Committee Meeting March 21 Society of Actuaries . Spring Meeting with AFIR Colloquium

April 20-22 Actuarial Standards

Board Meeting April 27-28 Casualty Actuarial Society Spring Meeting May 15-18 Society of Actuaries Spring. Meeting , (Financial Reporting Investment) May 26-27 National Association of Insurance -,Commissioners. Summer Meeting June 12-15 Society of Actuaries Spring Meeting (Pension , Health)

June 15-17 Actuarial Standards Board Meeting July 19-20<

The Actuarial Update â&#x2C6;&#x17D; January 1994 5


Academy Work Group Seeks Access to Clinton Health Care Assumptions

ISSUE PAPERS . ON THE WAY The Academy Health Practice Council's health care reform work groups are now putting the finishing touches on their Issue papers. Each issue paper will examine a single aspect of President Clinton's Health Security Act, which is now before Congress. Upon completion, the papers will be distributed to the appropriate congressional committees to fulfill the need for detailed actuarial analysis of . the components of the health we ~reform , : packager A complete list of titles will be published soon, and of course the issue : papers will be available to all Academy members.

he Academy Health Practice Council's Cost Estimate Work Group has requested the Clinton administration to release the methodology and assumptions used to arrive at the cost estimations of the administration's Health Security Act . Academy Vice President Howard Bolnick , chair of the work group , made the request in a December 17 letter to Ken Thorpe, deputy assistant secretary in the Office of Health Policy of the U .S . Department of Health

public relations WATCH

Actuaries Speak to NCSL Workforce 2000 T hanks to three Academy members, National Conference of State Legislatures (NCSL) members are now better informed about health care reform, workers' compensation, and pensions and retirement. For the first time ever, actuaries were invited to address an NCSL meeting, December 16 and 17 in Monterey, Calif. The appearances were part of Forecast 2000, the public relations program of the actuarial profession in North America . Julia Philips and Susan Witcraft, both consulting actuaries for Milliman & Robertson in Minneapolis, and Larry Zimpleman, second vice president of pension operations for the Principal Financial Group in Des Moines, spoke at the NCSL seminar on labor issues, "Coping with the Changing American Workplace." Meeting attendees included state legislators, labor industry

6 The Actuarial Update ∎ January 1994

and Human Services . Bolnick asked Thorpe to provide the estimation methodology and underlying assumptions used to generate the cost estimates to the Academy work group, which then would use several sets of alternative assumptions to test the estimates' accuracy. Bolnick also offered to meet with actuaries from the Health Care Financing Administration and other appropriate administration analysts to discuss the methodology and assumptions . In his letter, Bolnick referred

representatives, corporate managers, and labor agency and economic development staff . Philips and Witcraft addressed a general session of the meeting's largest audience . Philips, a health actuary, explained some of the trade-offs and the expected cost consequences of those trade-offs when health care reform is enacted . Witcraft, who works extensively on workers' compensation issues, spoke about the workers' compensation system in general and how it is likely to be affected by health care reform . Zimpleman presented a workshop on pensions and retirement that was attended almost exclusively by state legislators and pension plan administrators . He spoke about the Academy's March 1993 report on the decline of defined benefit pension plans, as well as some of the pension issues facing today's employers and employees, and how they're affecting public policy makers at the state level . The seminar on labor issues was one of several the NCSL sponsors each year in addition to its annual meeting, which attracts some 6,000 attendees . Meeting director Brenda Trolin expressed interest in having an actuary speak or involving the actuarial profession in some way at the group's annual meeting this year . ∎

to skepticism that exists within the actuarial profession about the "validity and integrity of administration's cost estimate He urged the administration to demonstrate its openness by allowing the Academy work group to perform an impartial review. Whether or not the Clinton administration complies with the Academy's request, the Cost Estimate Work Group, one of fourteen such groups formed by the Health Practice Council to analyze elements of the president's health care reform package, will proceed with its task of assessing the administration's estimates . As The Actuarial Update goes to press, Thorpe had not yet responded to the Academy's request. ∎

MENTAL HEALTH CHANCES, continued from page I the administration at vari times in the process of craft the health care proposal . Currently, Bachman and Porter are members of the Academy Work Group on Mental Health, which is reviewing mental health benefit pricing and the final legislative language of the health care proposal as it prepares an issue paper for presentation to the appropriate congressional committees. In an interview with The Actuarial Update, Bachman stressed that his group had not advocated any particular benefits be included in the administration's package, but instead had offered expert pricing advice without taking specific policy positions . "The Academy support function has been to provide advice so that the health insurance premiums associated with any administration proposal accurately reflect expected costs," he said . Bachman paid special trib e to Guy King and the HCFA arial staff saying, "The gove ment actuaries have displayed unquestioned integrity and honesty during a process that involves enormous pressure from special interest groups ." ∎


Capitol The Clinton administration's health reform plan passed its first comprehensive cost analysis when the private health care consulting firm Lewin-VHI released its study on December 8 . The report concluded that although the administration's cost estimates are over optimistic, the proposed funding system is basically sound . In addition to its broad finding that the "financing structure works," the study concluded that health insurance premiums under the president's plan would be about 17% higher than the administration estimated . The study also predicted that by 1998 employers (primarily small firms that do not now insure their workers) would pay a net of $28 .9 billion more for health care than under current law because of the employer mandate, but that households would a net $26 .5 billion less ause the government and employers would pay for much more of their costs . Eventually, according to the study, the plan's cost controls would slow the growth of health spending . However, the Lewin-VHI study found that instead of the the administration's projected deficit reduction of $58 billion over the 1995-2000 period, savings will equal only $25 billion . The House Energy and Commerce Committee report on the Health Security Act is due by March 25, according to committee sources . Committee chair Rep . John Dingell (D-Mich .) also has set a March 4 deadline for all subcommittee reports . The Energy and Commerce Committee has jurisdiction over health insurer solvency provisions, among other aspects of the legislation. There is no word on deadlines in the other House committees considering resident's proposal, the Ways Means Committee and the ET ucation and Labor Committee . A tax on property and casualty insurers to fund hazardous waste cleanups has been endorsed by a White House-led interagency

group working on new Superfund legislation . The proposed $500 million per year tax is part of a compromise that appears to resolve differences within the administration over rewriting the Superfund law. The Treasury Department and the Environmental Protection Agency had been in disagreement for months over revising the 1980 law, which governs the cleanup of abandoned hazardous-waste sites . Foremost, the two agencies had been at odds over how to handle the retroactive liability for waste deposited at sites before 1980. At present, businesses are held liable for cleanup of hazardous waste dumped before passage of the Superfund law, even if it was legal to dump the waste at the time . Under the compromise plan, businesses would still be held liable for some of the costs associated with cleaning up pre-1980 hazardous-waste sites . However, the majority of the costs (between 50 and 80 percent) would be paid for by the new $500 million fund . Under the new proposal, polluting companies will have the option either to accept a fixed percentage from the fund (if they agree not to sue their insurance company), or to reject the offer and challenge the insurance company in the courts . The proposal is expected to be presented to the president soon, with an outline of the plan ready by mid-January, and detailed legislation introduced to Congress in February. Providers of Medicare supplemental insurance policies in Connecticut will be allowed to limit coverage based on preexisting conditions under legislation that took effect on January 1 . The law (H . 9001), which was passed by the state legislature in October and permitted by Gov . Lowell Weicker to become law without his signature, amends legislation adopted earlier in the year . The earlier law made several changes in the statute governing the issuance of Medigap policies, including the prohibition of the preexisting condition clause and the mandate that insurers base prices on a community-rated basis . The new law restores use of the preexisting condition clause .

It allows providers to exclude benefits for losses incurred within 6 months from the effective date of coverage for policies issued after January 1 . While Gov . Weicker said the new law represents an improvement, he noted that H . 9001 fails to address other flaws such as "the impairment inherent in mandating community rating for existing contracts ." Weicker said he would seek legislation addressing the communityrating mandate during the 1994 legislative session . The IRS issued final regulations (TD 8499) stipulating that the differential earnings rate and the recomputed differential earnings rate, which are used in determinContinued on next page

COURT EXPANDS FEDERAL FIDUCIARY ROLE A 1992 Second : Circuit Court ruling that extended the reach of federal fiduciary provisions to insurance company general accounts was upheld by the U.S. Supreme Court on December 13 . In John Hancock Mutual Life .Insurance Co. v. Harris Trust and Savings Bank, the high court held by a 6-3 vote that John Hancock is a . fiduciary with respect to its management of a participating group annuity under which Sperry Rand Corporation Retirement Plan purcleased deferred annuities for Its employees. The Supreme Court rejected the Department of Labor's view that general account assets are not plan assets . Writing her first majority opinion for the court, Justice Ruth Bader Ginsburg said the US. Senate specifically rejected . a proposal that would have exempted all general account assets from the reach of fiduciary rules . Ginsburg explained that Congress enacted an exclusion instead, and did not. intend to shield a plan's deposit solely because they were placed in an Insurers general " account. ; That provision, Section 402(b)(2), excludes from plan assets a guaranteed benefit policy defined as an insurance policy orr contract "to the extent that [it] provides for benefits the amount of which is guaranteed by the insurer ."

The Supreme Court rejected a Hancock argument that Congress intended to yield the primary responsibility for regulation of the insurance industry to the states . "We are satisfied ," wrote Ginsburg , "that Congress did not order the unqualified deferral to state law that Hancock both advocates and attributes to the federal lawmakers . Instead, we held, ERISA leaves room for complementary or dual federal and state regulation, and calls for federal supremacy when the two regimes cannot be harmonized or accommodated ." The Supreme Court added that Congress has the authority to rewrite the law, and that the Labor Department " can provide administrative relief to facilitate insurers ' compliance with the law ; thereby reducing . the disruption it forecasts.

The Actuarial Update â&#x2C6;&#x17D; January 1994 7


Academy and SOA Form Joint Health Communication Task Force arton Clennon, an actuary from Wenatchee, Washington, has been appointed to chair a Joint Task Force of the Academy and Society of Actuaries on Health Care Reform Communication . The new joint task force was established by the health practice leaders of both organizations, Academy Vice President Howard

Bolnick and SOA Vice President Sam Gutterman . The task force will coordinate the Academy's and the SOA's efforts to communicate the profession's role in the process of health care reform. The health care debate is the most highly visible public policy arena for the actuarial profession today. Academy and SOA leaders believe it is imperative to

ACTUARIAL BUYING POWER Contingencies needs Information about your buying habits-and no, we don't want to know your favorite brand of Scotch . Rather, we'd like to know what work-related purchases you influence . Just fill out the form

below, using the graded scale indicated in the column heads . We've listed the major categories of business purchases, but feel free to mention products that don't fit one of these groups . The information you send us will help us plan Contingencies' advertising strategy for 1994 . All information will be kept entirely confidential , of course, and will not be released to any other source . As an incentive to our loyal readers, all entries will be entered in a drawing for a $100 GIFT CERTIFICATE redeemable at the sporting goods store

of your choice ! So please be sure to print your name and address on your entry form . Entries must be received via tax or mail by February 15 for the drawing on February 18 . Mail your entry form to : Contingencies, 1720 I Street NW, 7th Floor, Washington, DC 20006, or fax it to : (202) 872-1948, attn : Contingencies.

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convey an accurate message about the profession's role . B policy makers and the ge public need to know that actuaries provide valuable objective analysis of the cost implications of policy makers' decisions . In developing a communication strategy for the Academy and the SOA, the task force will ensure that this message comes through loud and clear . The task force also will combat the false impression, which sometimes creeps into media accounts, that actuaries are biased in favor of certain policy outcomes . Task Force Chairperson Clennon is not himself a health actuary, but comes to the job with a desire to help the Academy and the SOA inform the public about the profession's significant contribution to health care reform. The joint task force welcomes the ideas and suggestions of all Academy members to help it accomplish that goal . â&#x2C6;&#x17D;

0 CAPITOL, continuedfrom previous page ing the deduction for policyholder dividends of a mutual life insurance company, cannot be negative . The regulations, which are under Section 809 of the Internal Revenue Code, became effective December 10, 1993, and will be effective for taxable years after December 31, 1986 . Section 809(a) of the Internal Revenue Code states that for mutual life insurance companies, the amount of the deduction allowable under Section 808 for policyholder dividends is reduced (but not below zero) by the differential earnings amount, i .e ., the portion of the policyholder's dividends that are deemed to be a distribution of a mutual company's profits to policyholders in their capacity as owners of the company.

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For more information on the legislative and regulatory actions addressed above, contact David Rivera of the Academy government information department.


January 1994 Actuarial Update