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AMERICAN ACADEMY OF ACTUARIES VOLUME 24 NUMBER 1 JANUARY 1995

THIS MONTH A Valedictory

Academy Group Delivers Health Risk-Based Capital Formula to NAIL

Letters to the Editor

4 From Hill to Academy 5 Academy, NAIC Leaders Meet Is

From the ABCD 7 Capitol Views

7 Academy Group Studies Medical Savings Accounts

ENCLOSURES Included with this month's issue ofThe Actuarial Update are the following: In Search Of ASB Boxscore 1995 Yearbook Robert J . Myers Public Service Award Reply Card

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THIRTY

3(a) YEARS

By Jeffrey Speicher T he Academy Health Organizations Risk-Based Capital Task Force has delivered its new risk-based capital formula for health organizations to the National Association of Insurance Commissioners (NAIC) . The model was released on December 5 at an NAIC meeting session in New Orleans . On presenting the formula to the regulators, task force chairperson Bill Bluhm called it "the culmination of a year of intensive effort by the actuarial profession, working in close cooperation with the NAIC ." Bluhm emphasized that the project required the talents of thirty-seven Academy members and represents more than 14,000 volunteer hours .

The new formula modifies the existing risk-based capital formula for life and health insurers and takes into account several factors in determining the solvency of health organizations . It will be used in setting risk-based capital requirements for a wide variety of health organizations , including insurance companies, health maintenance organizations, Blue Cross/Blue Shield associations, and any new hybrid entity that might emerge as a result of health insurance reform .

The formula was developed at the request of the NAIC's Health Organizations Risk Based Capital Working Group, chaired by Utah Insurance Commissioner Robert Wilcox. The group asked the Academy's State Health Committee "to provide technical and unbiased support" in developing the formula.

In accepting the formula, Wilcox praised the Academy effort . "The NAIC and the industry owe a great deal to the Academy and the actuarial profession," he said . "We gave them an exceptionally difficult assignment, and they have delivered an invaluable final product . The actuaries have sketched the road map . Now it is up to us as regulators to kick the tires, fine-tune the engine, and get this health risk-based vehicle on the road." The NAIC's working group will draft its own risk-based capital proposal based on the Academy's recommendations and technical research . Wilcox noted that the working group would continue to rely on assistance from the Academy task force as it converted the model into workable regulations . Risk-based capital is a measure of the adequacy of the capital and surplus that any prudent insurer will hold of its own accord in order to conduct business and remain solvent . It recContinued on page 5

ROBERT J. MYERS PUBIJC SBW1CE AWAIT The Academy Committee on Actuarial Public Service is now accepting nominations for the first Robert J . Myers Public Service Award . The award will be presented to an actuary who has made an outstanding contribution to the common good through service to government or other organizations in the public sphere . In addition to honoring an individual actuary, the Myers award also will call attention to the significant benefits the general public receives from the work of the actuarial profession . The award is named for Robert J . Myers who as chief actuary of the Social Security Administration from 1947-70 was instrumental in the design and funding of the U . S . Social Security system . Although political pressure often conflicted with his professional responsibilities, Myers never veered from the path of professional integrity . A postal reply card for nominations is included with this month's Actuarial Update; the deadline for nominations is March 1 . The award medallion will be presented at the Academy Annual Meeting in October .


AMERICAN ACADEMY OF ACTUARIES President Charles A . Bryan

A

valedictory

President-Elect Jack M . Turnquist

Parting Advice: Preserve Academy Objectivity

Vice Presidents John M . Bertko Howard Fluhr David P . Flynn Paul F . Kolkman Charles Barry H . Watson Secretary-Treasurer James R . Swenson

EXECUTIVE OFFICE The American Academy of Actuaries 1100 Seventeenth Street, NW 7th Floor Washington , DC 20036 (202) 223-8196 Fax : (202) 872-1948

MEMBERSHIP ADMINISTRATION Woodtield Corporate Center 475 N . Martingale Road Schaumburg , 1 60173-2226

(708) 706-3513

THE ACTUARIAL UPDATE Committee on Publications Chairperson E . Toni Mulder Editor Adam Reese Associate Editors William Carroll Ronald Gebhardtsbauer Patrick J . Grannan Managing Editor Jeffrey Speicher Contributing Editor Ken Krehbiel Production Manager Renee Saunders

statements of tact and opinion in this publication , including editorials and letters to the editor, are made an the responsibility of the authors alone and do not necessarily imply or represent the position at the American Academy of Actuaries , the editors, or the memdors of the Academy .

By James J . Murphy

T his holiday season has been a time of special reflection for me : At the end of December, I completed my service as Academy executive vice president. I will always treasure the warm support that I received from our members during my 6-year tenure . And I will always be grateful to have had this unique opportunity to serve our profession . As I wind up my work here and look forward to the next phase of my career, I am proud of what the organization and its members have accomplished together over the past 6 years . The Academy's role and reputation have been enormously enhanced ; our profession's visibility and prestige, especially among public policy makers, is greater than at any time in its history. While the Academy fulfills several key functions, its most visible role is to serve as the profession's link to public policy makers . Six years ago, very few people in Washington knew what the Academy had to offer . Today, we're one of the most respected purveyors of technical information to government decision makers . Thanks to the contacts nurtured by our government information department, we enjoy fruitful relationships with federal regulators and with influential congressional staff members . We all saw evidence of this new influence during the protracted debate on health care reform, when actuaries were among the few outside groups called on to contribute to the process as a source of impartial i expertise . Our relationship with state regulators through the National Association of Insurance Corn-

2 The Actuarial Update ∎ January 1995

missioners is also a much closer one than in the past . Top leaders of the NAIC meet regularly with the Academy leadership, and regulators have recently sought Academy assistance on a number of specific projects, including development of a risk-based capital formula for health insurers and an ASB standard of practice to support the actuary' s role in drafting life insurance sales illustrations . Among the myriad trade and professional groups in Washington, the Academy is virtually unique . We do not represent a large voting bloc, nor do we have political action committee with campaign contributions to distribute . Yet we are viewed as an organization that Congress and regulators need to consult on many key issues . Not because policy makers expect to gain political advantage , but because they know the Academy is the source of the unbiased actuarial information they need to craft sound policy . Policy makers understand that when actuaries speak through the Academy they are dispensing impartial professional advice , not the point of view of any particular trade group or company. Our stockin-trade is credibility. Our monumental effort on health care is a good example of why objectivity is so important . Members of the Academy work groups represented every conceivable economic and commercial interest and point of view . Yet their work yielded objective analyses that impressed members on both sides of the aisle, many of whom were made aware of the profession's expertise for the first time . Through the health care project, the profession gained

entree to members who have since consulted us on other, unrelated issues . This ripple effect is essential to the Academy's effectiveness . Without reputation for impartiality, doo would be closed to us forever . This status is hard-earned and very fragile. It has taken years of effort to achieve, but it can collapse like a house of cards with just a little ill wind . Members who speak on behalf of the Academy must always have this reputation in mind. If our mem bers and leaders ever begin to take a narrow view of why the Academy advises policy makers, if they begin to use the Academy to promote the interests of their company or clients, the Academy quickly will be perceived as just another interest group among many others . And as a mere interest group, no one will listen to us . It's a fact of political life that interest groups get a hearing only because they have money or votes to pass around . To my successor and the future leaders of the Academy, I offer my best wishes and this advi Maintain at all costs the Aca my's reputation for impartiality and objectivity. The Academy's effectiveness depends on it . And an effective Academy, trusted and respected by legislators and regulators, is vital to the healthy future of our profession .

Murphy served as Academy executive vice president from 1988-94 .

The Update welcomes letters from its readers . Letters for publication should be submitted to "Letters to the Editor," and must include the writer's name, address, and telephone number Letters may be edited style and space requirements .


lellors TO THE EDITOR

*ASDI Woes for Boomers? S ince last April when the board of trustees of the Federal OldAge and Survivors Insurance and Disability Insurance (OASDI) Trust Funds issued its 1994 annual report, I have expected to read at least some discussion of the longrange actuarial status of OASDI in this publication . To date, I'm surprised by The Update's silence on this subject.

The 1994 annual report should be of particular interest to actuaries because the long-range actuarial deficit of 2 .13% of taxable payroll estimated under the intermediate (best estimate) set of assumptions now exceeds the long-range deficit in existence just prior to the 1983 amendments to the program (2 .09%) . The long-range deficit represents the immediate increase in the

mate assumptions, the program's tax rate will have to be increased by 4 .1 % of taxable payroll in 2030 (or an increase of about 33% over the current rate of 12 .4%) in order to pay anticipated benefits and expenses in that year. Undoubtedly, there will be much discussion of this problem in the years to come, and some action will likely take place prior to 2030 . The critical question, however, is when should appropriate action take place? 2029? 2020? 2010? Or now? How did this significant deterioration in the program's longrange financial status occur in just 11 years? Mostly because of changes in assumptions and methods, but also because of what Social Security actuaries refer to as the "change in the valuation period." Regardless of the reasons, it is important to note that the deterioration of the program's long-range financial status has had no impact on the program's tax rate . The reason for this is that there currently exist no mechanisms (such as exist for most actuarially financed programs) for automatically adjusting the tax rate for changes in assumptions, methods, program provisions, or deviations from assumed experience.

mbined employer, employee rate that would restore the 7 program to "long-range actuarial balance", i .e. an increase of about 17% over the current rate of 12 .40% . This is big news, folks! The If Congress had adopted an long-range actuarial deficit is now 1 actuarial valuation process for larger than the deficit solved by determining the tax rate for 1983 the fabled 1983 amendments to and later years, the tax rate schedthe program-amendments that ule anticipated under the 1983 were designed at the time to keep amendments wouldn't have been the program solvent for at least necessarily different, but the subsequent changes in assumptions 75 years . With the 1983 amendments, Congress fashioned a and methods would have prosolution to the long-range financduced automatic tax increases ing problem that anticipated after 1983 (or perhaps benefit promises would have been advance funding of baby boomer retirement benefits with a tax rate reduced) . The program would currently be a lot closer to being designed to be level after 1989 . Actuarial projections in 1983 in long-range actuarial balance, and the advance funding of baby under best-estimate assumptions showed OASDI trust fund assets boomer retirement benefits anticreaching about $20 trillion in ipated by Congress would still be 1983 dollars in 2045 and trust very much a reality . With period actuarial valuations, long range fund solvency until at least 2060 .

By comparison, 1994 best-estiactuarial projections show mum etum trust fund accumulaf about S3 trillion in 1994 Ino , rs in 2020 and trust fund insolvency in 2029 . If no action is taken before 2030 and experience follows the 1994 best-esti-

financing of the program would be addressed at each valuation on a gradual basis rather than infrequently in a crisis mode . Actuaries should be aware that the OASDI board of trustees has recommended an extensive review of Social Security financ-

ing issues with the goal of restoring the long-range actuarial . balance of OASDI . I encourage actuaries to actively participate in this process . If you have thoughts on OASDI financing issues (and particularly, if you wish to endorse the use of actuarial valuation solutions), I encourage you to communicate your thoughts to members of the Advisory Council on Social Security and to members of the Academy's Committee on Social Insurance . Kenneth A. Steiner Wellesley, Massachusetts

The Update thanks Mr. Steiner for presenting his views and encourages interested actuaries to respond. Are you reading, Bob Myers?

1995 ACADEMY YEARBOOK This month's mailing of The Actuarial Update includes the 1995 Academy Yearbook . The yearbook offers a comprehensive listing of Academy leadership and staff, practice council and committee members, Academy bylaws and history, and descriptions of the work of the Actuarial Standards Board and the Actuarial Board for Counseling and Discipline . This year's edition also features a section on the Academy's comprehensive 1995-2000 Strategic Plan .

The Actuarial Update ∎ January 1995 3


From Capitol Hill to the Academy : A Conversation with Jean Rosales In late November the Academy welcomed a new member to its staff : assistant director of government information Jean Rosales. Rosales is an economist by training, with a Ph.D, from the University of Texas. She has spent most of her career on Capitol Hill, most recently on the staff of the Commerce Subcommittee of the House Energy and Commerce Committee..te She brings to the Academy an intimate knowledge of insurance economics and the legislative process. The Update recently spoke with Rosales about her experience and plans .

One of the things that I've done in my professional life is be a translator : I speak economics and statistics as well as English, and now I ' ll learn to speak actuary

UPDATE : Jean, could you briefly tell us about your background on the Hill? ROSALES : I came to Washington 8 years ago from a teaching post at Lehigh University in Pennsylvania . My first position on the Hill was as a legislative assistant in a congressional office, where I handled all sorts of economic issues . I then moved to the Congressional Research Service to work as an economist specializing in the insurance industry. At that time members were concerned that no one at CRS was familiar with the nitty-gritty details of insurance issues . So that was my assignment . I had the luxury of spending 40 hours a week doing nothing but insurance policy analysis . I got to learn it at my own speed, and to my surprise became fascinated by many aspects of the field . After 3 years with CRS, the Commerce Subcommittee of the House Energy and Commerce invited me to come aboard a professional staff member specializing in insurance issues. UPDATE : What were your duties at the Commerce Subcommittee? ROSALES : Again, because of my background in economics, I handled the financial aspect of insurance issues . The health care reform debate was a very interesting experience because I was one of the few Hill staffers with knowledge of the technical insurance aspects of the issue . When our committee was drafting the so-called Gephardt substitute bill, which attempted to forge a workable modification of the Clinton

4 The Actuarial Update ∎ January 1995

plan, a lot of the issues that are most important to actuaries were all mine . It was up to me to craft the provisions on guaranty funds and solvency.

Jean Rosales

UPDATE: Did you have the technical knowledge you needed to write those provisions?

ROSALES : Well, on a couple of occasions, I got into a total panic and called people over here at the Academy to say, "I don't know what I'm doing . Would you help?" The Academy was extremely helpful in reviewing my work, and the bill was much better because of the Academy's input . The solvency section in the Gephardt bill was the most comprehensive of treatment of the issue in any bill before Congress last year. UPDATE: So as a congressional staffer, you and your colleagues were aware of the Academy and turned to it for the actuarial expertise you needed .

ROSALES : Yes. The Academy is one of the few groups that is perceived on the Hill as having an advisory rather than a lobbying role. My colleagues and I alway knew that we could trust th Academy for honest, objective analysis and not be concerned that we were getting half the story. During my service I got good advice from actuaries on a number of issues-health care, redlining, and natural disaster insurance, to name three . UPDATE : At the Academy you will now he the staff liaison to the Life Practice Council . A large part of your job will be to deal with state issues through the NAIC . Your previous employer -Rep . John Dingell's Energy and Commerce Committee-was notorious for its hostility to state insurance regulation . How do you see the process of state regulation and the Academy's contributions to the NAIC's efforts? ROSALES : Well, let me say first that I never worked directly f Chairman Dingell . I did i> advise him . And I certain 0y, wasn't the one who came up with his nasty comments about state insurance regulators . On the subcommittee, I always had a good relationship with the regulators whom we worked with, and I have no doubt that the same will be true on my new job .

My first day at the Academy was spent at the NAIC meeting in New Orleans . It was interesting to see that the regulators realize they need advice and technical expertise . The NAIL had a very constructive experience with the Academy task force that put together the health risk-based capital formula, and many regulators would like to see that success replicated in other areas . Again, the Academy is a valuable source because it is not a lobbying group . By collaborating with the actuarial profession through the Academy, the commissio s can get the technical expe that's important to them wi being open to charges that they re pets of the industry . In the future I think we'll see more cooperative efforts with the


NAIC in the life , casualty, and health practice areas . UPDATE : How do you see your Dole here at the Academy? ROSALES : I see a couple of different roles . One of them is facilitating communications between actuaries and policy makers at both the federal and state level . I also would like to facilitate communications with other professional and nonindustry groups . For instance, we were approached at the meeting in New Orleans by consumer groups who said they couldn't afford actuarial work but needed some assistance . I can certainly see where it might be appropriate to establish a liaison with consumer organizations to help them out on issues that are important to them . Part of my job along with Gary Hendricks and the rest of the government information departmentis to make sure people are talking to each other and working with each other . I've always joked that one of the things that I've done in

y professional life is he a transtor : I speak economics and statistics as well as English, and now I'll learn to speak actuary so that I can translate actuaries' analyses into the language of policy makers .

RISK-BASED CAPITAL, continued from page 5 ognizes and takes into account the ongoing types of business of an insurer and hence the ability of the insurer to respond to trends while remaining viable within its established lines and markets. Risk-based capital is a number to which actual capital and surplus are compared . Under the formula, each company has a unique risk-based capital number based on its own risk profile . Risk-based formulas consider the four classes of risk defined by the Society of Actuaries : asset values, pricing and obligation risks, cash-flow risks, and business risks . A risk-based capital level is then established at a level dependent upon several financial measures, such as premiums, assets, or liabilities . The formula recommends use of a consistent riskbased capital measure applicable for the wide variety of organizations that provide health coverage .

The Academy was charged with identifying risks that health organizations encounter and recommending a risk-based capital formula based on modeling and research that reflect those risks .

The NAIC has responsibility for establishing solvency standards for health insurers, including organizations that provide health coverage . Currently, the NAIC has an HMO model act, which establishes minimum standards, and a life and health risk-based capital formula, which focuses primarily on life insurers . However, the life/health formula does not take into account the wide variety of risks associated with providing health care coverage .

in developing the formula, the Academy first examined the existing risk-based capital formula, then defined changes needed to address the risks associated with health insurance and health organizations . Specific factors are taken into account to determine the relative risk-based capital required for different risks . The Academy's report recommended modifications to the existing formula to take into account the growing use of managed care, new and complex reinsurance structures, and existing premium and valuation regulations . With a few exceptions, the Academy's report does not recommend an absolute level of risk-based capital to the NAIC for health organizations . ∎

UPDATE : How do you view the Academy's role with public policy makers?

Academy, NAIC Leaders Meet

ROSALES : I'd compare the Academy to one of my previous employers , the Congressional Research Service . It ' s a source that congressional staff, state regulators, and other policy makers can turn to for specific advice and background information in a very important and specialized area . The Academy offers what policy makers need -the expertise of the actuarial profession-but it is not as well known as it should and could be. The health care debate brought greater attention to the demy and the profession, so aye a good base to build on. of my goals at the Academy e to make sure that all policy makers know what the Academy and the actuarial profession have to offer . ∎

successful venture into health risk - based capital and a possible look at genetic testing were among the Academy projects discussed at a December 5 meeting of Academy and National Association of Insurance Commissioners (NAIC) leaders in New Orleans. The semiannual meeting of insurance regulators and leaders of the actuarial profession focused on current and future collaborations between the Academy and the NAIC. Insurance regulators from eleven states participated in the meeting, including three insurance commissioners who are actuaries : Dwight Bartlett of Maryland, Terri Vaughan of Iowa, and Robert Wilcox of

Utah . Representatives of the profession included Academy President-elect Jack Turnquist, Past President David Hartman, Vice President Barry Watson, incoming Actuarial Standards Board (ASB) Chairperson Gary Corbett, and Actuarial Board for Counseling and Discipline (ABCD) Vice Chair Daphne Bartlett.

Among the issues discussed :

Another member of the actuarial profession has joined the ranks of state insurance commissioners. Iowa's new commissioner is Terri Vaughan, an associate of both the Casualty Actuarial Society and the Society of Actuaries . Vaughan comes to the Iowa post from Drake University, where she was director of the Insurance Center and associate professor of insurance . Before joining Drake, Vaughan was a consultant for Tillinghast/Towers Perrin in New York and taught at Temple University and the City University of

New York . Risk- Based Capital-Wilcox reported that the Academy's Health Organization Risk Based Capital (HORBC) Task Force has completed its work . (See page 1 .) He suggested that the advisory function for life riskbased capital also be given to the Academy and that the group Continued on page 8

The Actuarial Update -January 1995

5


FROM THE

ABCD Incidental Actuarial Calculations ∎ ∎ s a professional schooled in mathematics and the basic rudiments of actuarial science, an actuary may be called upon from time to time to do calculations for projects outside his or her field of specialty or training . In such cases the actuary may sense a dilemma, knowing that Precept 3 of the Code of Professional Conduct of the U .S .-

AFTER THE BEEP, TALK TO THE VEEP Academy members with ideas, insights, or inquiries may , call the Academy and express themselves directly to those in charge: our vice presidents . Academy vice presidents have broad responsibility for the activities of the practice councils and the authority to get things done . So to obtain a definitive answer to your question, or to volunteer your expertise for a practice council

project, leave a message in a vice president's voicemail box . Just call the Academy at (202) 223-8196 and ask for a vice president's extension number (below). A message for extension 300 will reach all vice presidents' voice mail boxes . Casualty Practice Council ( ext . 250) Dave Flynn, vice president Health Practice Council ( ext . 251) John Bertko, vice president Life Practice Council ( ext . 252) Paul Kolkman, vice president Pension Practice Council ( ext . 253) Howard Fluhr, vice president Council on Professionalism ( ext .254) Barry Watson, vice president Or, you could go straight to the top by calling Academy President Chuck Bryan .(ext : 255) .

6 The Actuarial Update ∎ January 1995

based organizations with actuaries as members specifically provides that: "An actuary shall perform professional services only when the actuary is qualified to do so and meets applicable qualification standards ." The actuary may feel that he or she is faced with the choice of either : 0 refusing an employer ' s request and delegating the job to someone else in the company who may be less qualified but not subject to a professional conduct code requiring qualification, or 0 complying with the request and risking a violation of the applicable code of conduct .

One example of such a situaI tion might be a casualty actuary who is asked to do a calculation for management to roughly approximate pension contributions for budgetary purposes . Another would be a life actuary who is asked to evaluate reserves set by the employer's workers' compensation carrier for retrospective rating purposes .

Annotation 3-1 of the Code clearly states that the qualificai tion standards in the jurisdiction in which the actuary renders professional services determines whether the actuary is qualified to perform such work . The qualification standards promulgated by the American Academy of Actuaries apply for practice in the United States and the eligibility conditions promulgated by the Canadian Institute of Actuaries apply to practice in Canada . In the United States, at least, the promulgated qualification standards apply only to public statements of actuarial opinion . Presumably, a purely incidental actuarial calculation of the type described above would not in itself be a violation of Precept 3, provided its use was restricted to the intended purpose . Members practicing in Canada are advised to acquaint themselves with the eligibility provisions of the CIA by laws which are less specific as to qualifications for providing specific services.

The actuary doing such calculations would be well advised to inform management of his or her limited expertise and the need to restrict the use of the calculations accordingly . It is not clear whether incidental calculations of the form described here are professional services . Presumably they could be construed as professional services if either the actuary or the user of the calculation considered them to be so . Whether or not they are professional services depends on the facts of each circumstance . While not subject to Precept 3 unless used in a public statement of actuarial opinion, the actuary must remember that he or she is still subject to the provisions Precept 2 when making such c culations . Precept 2 requires that an actuary shall perform professional services with integrity, skill, and care . This suggests that at the very least , the actuary should take steps to become reasonably familiar with the type of calculation he or she is asked to perform .

This article is one of a series written by the Actuarial Board for Counseling and Discipline (ABCD) to aid actuaries in complying with codes of professional conduct of US-based organizations. It is not necessarily based on inquires or requests for guidance received by the ABCD or on cases before the body, although such events may provide a source for the subject matter. These articles are advisory in nature. The applicability of professional standards to specific situations only be determined from the f associated with such situation Actuaries are encouraged to suggest topics for future articles.


ca pitol VIEWS

afficials from the Treasury Department and the IRS are still pondering how to implement a provision of the recently approved General Agreement on Tariffs and Trade (GATT) that prescribes a mortality table used to determine current liability . The provision states that the mortality table should be based on the 1983 Group Annuity Mortality Table (GAM '83) . The Academy's Pension Committee will . be in communication with IRS and Treasury officials as they continue to formulate guidance . Underfunding of single-employer pension plans insured by the PBGC grew to an estimated $71 billion in 1993, up from $53 billion in 1992, according to Labor Secretary Robert Reich . However, Reich predicts that the PBGC reforms included in the GATT accord will reduce the undernding by more than two-thirds 'er 15 years.

The Department of Labor has announced that it will soon undertake a national pension education program aimed at drawing the attention of American workers to the importance of taking personal responsibility for their retirement security . The NAIC's work group on health insurance regulations has approved a number of amendments to the NAIC's small group model act . Revisions would : change the definition of small group to include self-employed individuals (current NAIC models define a small group as having from three to twenty-five employees) ; require adjusted community rating for the small group market-replacing the model's current experience rating with bands limiting increases ; ire insurers to offer all prodon a guaranteed issue/renewbasis to small groups and aiduals; generally limit preexisting condition exclusions to 6 months for conditions identified in the preceding 3 months ; and,

prohibit small group insurers from selling stop loss, catastrophic, or reinsurance coverage to small groups otherwise covered by the act. The NAIC is expected to formally adopt the recommendations at its March meeting . In December, the United States Supreme Court heard arguments in a case concerning whether national banks are permitted by federal law to act as an agent in the sale of annuities (NationsBank of North Carolina v. VALIC) . The banking industry is appealing a ruling by the Fifth Circuit U .S . Court of Appeals, which held that national banks' ability to sell annuities is limited by the National Bank Act. The act prohibits banks in towns of more than 5,000 residents from selling

insurance. The Academy submitted an amicus curiae brief, requesting that the Court affirm the appeals court decision that annuities constitute insurance . The Supreme Court is expected to make a ruling on this case as early as February. A determination by the Court that annuities are not insurance could call into question states' authority to regulate annuities . Furthermore, a finding that annuities are not insurance could diminish the perceived need for actuaries to participate in the development of annuity products . Texas Insurance Commissioner (and Academy member) J . Robert Hunter has resigned, citing family reasons, not the November election of Republican George W . Bush as governor. ∎

Academy Group Studies Medical Savings Accounts By Michael Anzick T he November midterm elections augur great changes in Washington's public policy agenda, with a Republicanled 104th Congress sure to try bold new domestic policy measures . The Academy, which has long had close working relationships with both Republican and Democratic legislators, is well-positioned to offer the profession's expertise to the new majority . In fact the Health Practice Council has already begun to analyze an idea that will feature prominently in Republican health care reform proposals : medical savings accounts . Medical savings accounts (MSAs) are personal savings accounts for uninsured individual and family medical expenses . Under most MSA proposals, employers would no longer purchase traditional low-deductible policies for their employees, but instead would pay the premiums for a lower-cost high-deductible

catastrophic policy . Employers would then deposit a set amount, which would include the net premium savings, into individual employee medical savings accounts . The money in the accounts would be used for medical expenses up to the deductible threshold of the catastrophic plan . Advocates contend that MSAs would give consumers an incentive to hold down health care spending by allowing them to retain and roll over the unspent portion of the account, depending on the final clarification of MSAs' tax status . MSAs also would preserve a more prominent role for indemnity insurance and the fee-for-service system in health care, unlike single payer proposals and managed competition proposals . Critics point out that while MSAs might make sense for the young and healthy, a systern based on MSAs would not be adequate for the elderly and chronically ill . Continued on page 8 The Actuarial Update ∎ January 1995 7


ACADEMY/NAIC, continued from page 5 formed should follow the same operating model as the HORBC Task Force . In general discussion, it was agreed that Academy groups of this type should include non-Academy members with necessary and useful expertise, but that the professional objectivity of Academy groups should be scrupulously maintained. "We must be careful to protect the Academy's reputation as a nonpartisan group that represents expertise, not interests," said Wilcox. Redlining and Risk Classification-Wilcox stressed that risk classification was primarily an underwriting, not a social issue . lie announced that in the near future the NAIC Genetic Testing Working Group would be requesting assistance from the Academy Life Practice Council . Corbett urged that the request to the Academy be narrowly drafted so as to avoid political issues . It was generally agreed that the need for risk classification should be more forcefully articulated and that policy makers need to he educated on the financial implications of overriding risk classification for social policy reasons . Life Sales IllustrationsWilcox noted that the NAIC has asked the ASB to develop a rela- 1

tivcly tight standard for sales illustrations . Corbett, speaking for the ASB, reported that the drafting committee was working with exceptional speed and was completing a second draft . He emphasized that due process was not being sidestepped, and that the views of all interested parties would be heard . Model Nonforfeiture LawCommissioner Bartlett reported that the NAIC Life and Health Actuarial Task Force has revised the Deferred Annuity Nonforfeiture Model Law and will be forwarding it to the (A) Committee with a recommendation for an additional exposure period . The task force has suspended attempts to rewrite the Life Nonforfeiture Model Law until March, at which time it may request Academy assistance .

Guaranty Funds-Commissioners Wilcox and Bartlett agreed to draft a request to the NAIC leadership to include this issue in the 1995 charges . Bartlett suggested that the Academy would be the appropriate source for information on funding mechanisms for guaranty funds . Life & Health Actuarial Task Force-Commissioner Bartlett reported that the task force had voted to recommend that it be divided into separate life and health task forces . [This proposal

N®ICAL , continued from page?

DID YOU SEE? It was hard to miss the Wall Street Journal's page-one, above-the-fold article on December 5, 1994 . The article spotlights Academy member Michael Gulotta under the headline, "A Guy Who Counts." Although the feature focuses exclusively on Gulotta, it did a great job of emphasizing that actuaries are moving into exciting nontraditional roles in a wide range of businesses . The article is a giant step in dispelling the negative stereotype of actuarial work (and actuaries) as boring . A real make-photocopies-for-the-wholeoffice kind of piece . The feature was months in the making, and Academy staff worked extensively with reporter Lee Berton as he was preparing the story, providing him with general background on the profession as well as the names of several other actuaries who have risen to the top of major companies or whose work transcends the mundane .

8 The Actuarial Update ∎ January 1995

The Academy work group was formed last fall, after the Health Practice Council identified MSAs as one of its key issues for 199495 . The group has been extraordinarily productive, having held two full-day meetings and numerous conference calls before December 1 . The work group will issue two reports, the first planned for release in midFebruary . The February report will examine how MSAs would work under current market conditions, including the impact of high-deductible health insurance, the tax implications of MSAs, and the potential effect of restrictions on accounts . The second report, due later in the spring, will focus on specific proposals

was later approved by the NAIC .] Casualty Actuarial Task Force-The Casualty Actuarial Task Force expects to issue a new note on asbestosis and environ mental exposure . The committee also heard reports on the activities of the following bodies : Academy Council on Professionalism-Academy Vice President Barry Watson reported that the council has formed a task force to review actuarial opinions rendered on behalf of companies that later fail . He also suggested that a need exists for continuing education among state regulators and government employees .

Actuarial Standards Board Corbett reported that draft standards of practice on the following subjects were in the process of exposure : 1) Economic assumptions for pension plans ; 2) expense provisions in property/casualty rate making ; and, 3) profit and contingency provisions in property/casualty ratemaking . Actuarial Board for Counseling and Discipline-Daph no Bartlett described the fimctior

the ABCD . Maryland Commissioner Dwight Bartlett suggested that the ABCD consider reviewing the performance of actuaries affiliated with failed or failing companies . ∎

that will he introduced in the 104th Congress. The work group's members are Ed Hustead of Hay Huggins, chair ; Peter Hendee of Odell & Associates ; Guy King of Ernst & Young ; Mark Litow of Milliman & Robertson ; Gerry Shea of Blue Cross/Blue Shield ; Harry Sutton of Allianz Life Insurance ; and George Wagoner of William M . Mercer . In addition, the work group has consulted with policy analysts from federal agencies including the Treasury Department, the Department of Labor, and the Congressional Bu Office.

Anzick is health policy analyst for the Academy's government information department.


January 1995 Actuarial Update