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;etlc tuarial Upda te VOLUME 16 NUMBER 7

JULY 1987

AMERICAN ACADEMY OF ACTUARIES

Academy Briefs HHS on CCRCs In this issue

2

from a Guest President

3

Legal Lines

4

Academy and AICPA Develop Standard Pension Audit

Confirmation Letter

6

Staffer Achieves Life Master

6

War Stories Hewitt ( center, with glasses ) responds to questions from task force members about the CCRC standards of practice just issued by the IASB .

6

Checklist of Academy Statements , May 1987

Enclosures Included in this month's issue of The Update are the following : • Government Relations Watch • IASB Boxscore • In Search Of . . . • Actuarial Standards of Practice Relating to Continuing Care Retirement Communities • Recommendations for Actuarial Communications Related to Statements of

Financial Accounting Standards Nos . 87 and 88 • Exposure Draft: Recommendations for Measuring Pension Obligations

by Christine Nickerson David L . Hewitt, a member of the Academy's Committee on Continuing Care Retirement Communities (CCRCs(, met with the Task Force on Long-Term Health Care Policies on June 11 to describe the Academy's new actuarial standards of practice relating to CCRCs . The eighteen-member task force was established under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and is charged with evaluating-current private options for financing and delivering long-term health care . The task force will submit a report to Health and Human Services Secretary Bowen and Congress by August 1, 1987 .

The report will include recommendations relating to consumer education and protection, plan development and design, standards of coverage, adequacy of reserves, data needs, and pricing . The task force hopes these recommendations will be of use to state regulators, the insurance industry, and consumers .

One of the long-term care options considered by the task force is CCRCs. The task force noted that a well-run CCRC can offer security to its residents and a broad range of health care services managed in an effective and less costly manner. In examining CCRCs, however, the task force expressed concern that most states do not require reserves, and the insurance commissioner generally has no regulatory authority over the funding . An elderly person could have difficulty investigating the long-term financial condition of a CCRC . To address this problem, the task force plans to recommend in its final report that states enact legislation to assure appropriate actuarial and finan-

(continued on page 2)

AAA and AICPA Develop Standard Confirmation Letter for Pension Audits . Letter reprinted on pages 4 and 5 .


2

The Actuarial Update

7of 777-ics"I'm President Preston C . Bassett President-Elect John A . Fibiger Vice Presidents Edward H. Friend

Harold G . Ingraham

Committees on Public Issues-Employee Benefits and Social Insurance

Burton D . Jay Committees on Accreditation, Qualification and Communication W. James MacGinnitie Committees on Public Issues-Insurance Mavis A. Walters Committees on Accounting and Financial Reporting Secretary Robert H . Dobson Treasurer Daniel J . McCarthy Executive Director Stephen G . Kellison Executive Office

1720 I Street, N.W. 7th Floor Washington . D .C . 20006 (202) 223-8196 Membership Administration 500 Park Boulevard Itasca, Illinois 60143 (312) 773-4204

Chairperson Committee on Publications Carl R . Ohman Editor Charles Barry H . Watson Associate Editor Warren P. Cooper Managing Editor Erich Parker Contributing Editor George Soules Production Manager M . Kathleen Crawford American Academy of Actuaries 17201 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.

The Actuary of the Future For the past several years, the Society of Actuaries' Committee on Planning has been addressing the issue of the extent to which the changing environment of the business world in which actuaries are employed, as well as other social and economic changes, is shifting the emphasis on the skills necessary to become a successful actuary in the future . There is strong evidence that there already is a declining need for actuarial skills in certain areas of traditional actuarial practice, but there is also an opportunity to broaden the scope of our professional activity to use more fully the unique education and training of an actuary. The traditional mathematical core of the profession relates to dealing with the financial implications of future contingent events, often within a business environment . An integral part of the core also involves an understanding of our regulatory, legal, and demographic environment. What has made actuaries unique in the past is our ability to analyze and manage the various risk contingencies that underlie financial security programs . The organizations providing financial security programs (insurers, governments) and those who assist or monitor such organizations (consultants, regulators) will always be the primary employers of actuaries . The users of such programs (corporations, individuals) will be secondary employers of actuaries. The way we define this core and the services and industries that it should accommodate inevitably circumscribes our recruiting, education, and training of actuaries . Particularly in the recruiting area, there is a mounting concern that we are placing too much emphasis on the mathematical content of the examinations, discouraging certain desirable individuals from entry into our profession who are more business and

management oriented . And yet, it appears that these may be more of the kinds of individuals we need in order maintain a strong, healthy professio in the future . We need to enhance the appeal of the actuarial profession to a broader group of prospects . To assure a continuing supply of high-quality thinkers and leaders, we need to recruit individuals with more diverse educational backgrounds, including liberal arts and business management graduates, as well as those scientific disciplines .

Fbr many years, the two primary areas of interest and employment of members of the Society of Actuaries have been life insurance and defined benefit pension plans . Both of these areas are currently experiencing some degree of stagnation and/or shrinkage due to various environmental factors, and reduced demand for actuarial services can be reasonably expected in the foreseeable future . A plan to expand the scope of our profession is needed-to foster additional demand for the services of actuaries, to attract a broader cross-section of future actuaries, and to advance the interests of our membership . Part of the solution depends on esta l lishing a more vigorous education an research effort by actuaries in areas involving new methodologies for analyzing and controlling a broader range of risks . For example : (1) exposure of assets and liabilities to interest rate and currency risks ; (2) the impact of AIDS on insurers and society; (3) delivery of

(continued on page 6)

AAA BRIEFS HHS (contiriuedfrorn page 1)

cial planning to cover the long-term care costs of residents . As a means of accomplishing this objective, the task force will recommend use of the actuarial standards of practice established by the Academy. Members of the task force were interested to hear Hewitt's description of the Academy's standards . As was described to the group, the new standards address developing and pricing

contracts, projecting future cash flows, projecting changes in the future po lation of residents and estimating t future needs for health-care beds, prtl' paring an actuarial balance sheet, assisting in plan design' and financial management, and participating in feasibility studies . Q


July 1987 .

The Update welcomes letters from ders. Letters for publication must du7 de' writer's name, address, and telephone number, and should be dearly marked as Letters to the Editor submissions. Letters may be edited for style and space requirements .

Legal Lines by Gary D . Simms

The Legal Profession Takes a Stand on "Tort Reform" The House of Delegates of the American Bar Association (ABA), the key decisionmaking entity for the largest professional association of attorneys in the United States, has adopted the recommendations of its Action Commission to Improve the Tort Liability System . The Action Commission, chaired by Robert McKay, former Dean of the New York University Law School, submitted a report which its chairman called "a reaffirmation of the tort liability system, which is basically sound ." Proposals •ed included :

3

(1) A rejection of a call to impose limits on damages awarded for "pain and suffering ." Such limits have been a centerpiece of the insurance industry's thrust for tort reform, but were rejected by the ABA. As a substitute, the policy recommendation adopted calls for increased use of remititur and additur, judicial actions that can increase or decrease jury awards deemed excessive or insufficient . (2) Acknowledgement of the need to limit punitive damages to cases in which the defendant's conduct indicates "substantially greater indifference to the safety of others than ordinary negligence ." Again, the insurance industry proponents of tort reform seek abolition of such damages, which often greatly exceed the actual damages a plaintiff has suffered .

(3) A modification of the doctrine of joint and several liability. so that those who are responsible for a minor portion of damages cannot be saddled with the total award . This, too, is a compromise between the status quo and the position of tort reform advocates .seeking the total repeal of the legal doctrine .

The House of Delegates ' action in approving the recommendations was not without its critics . Many argued that there was no real evidence of the need for tort reform , and that by adopting these proposals they were giving implicit support to the insurance industry's arguments . Others argued that the ABA should study the liability insurance industry itself, to better understand how that industry affects the tort system ; and if, indeed , it does have a measurable effect on the system , how the industry should be improved . A proposal to establish a study commission for this purpose was also adopted by the House of Delegates. These proposals , of course , will not have a direct or immediate impact on the tort system , since such changes can only be accomplished through state legislative action. Nevertheless , it appears that the legal profession is feeling the heat generated by the insurance industry proponents for tort reform ; the lawyers are fighting at least a rear-guard action to prevent the imposition ofwhat they perceive to be more severe and harsh "remedies" for the tort system as it exists today. (continued on page 6)

THE UEE 'SPAN OF Re AVERAGE WKLTe WOMAN ?

APEW 140MEM WITR,,W ACTUARY

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TWMTY OR TWRT'1( Minis TO ---


6 FROM A GUEST PRESIDENT (continued from page 2)

health care and its costs, relative to retired people ; and (4) proper present value techniques for interest-contingent cash flow streams consistent with the theory of finance . Another part of the solution relates to outward growth of actuarial activity through the investment route, long established as a route for actuaries in the United Kingdom and Australia . As pointed out tome by Jim Anderson, while the actuary in North America has long been regarded as the "steward" protecting the financial soundness of insurance and pension programs, that stewardship has been incomplete because actuaries have too seldom been involved with the appropriateness and adequacy of the assets supporting those programs . Excellent future opportunities exist for investment-trained actuaries within the financial services industry. In this regard, it is encouraging to note that a new investment track of Fellowship is being planned by the Society's E&E Committee within the next few years. Much of the syllabus needed for this new track will be developed by the Investment Section now being formed. Times are changing, and our profession must respond to the environmental changes taking place all around us . If we don't, I fear that other professions will not only get further into the broader areas that we might serve in the future, but will take over our current role as well . Over the long haul, actuaries will thrive and prosper as a profession only if they fill a real need in the eyes of consumers, employers, and regulators . Ingraham is president of the Society of Actuaries .

LEGAL LINES (continued from page 3) Further, the action demonstrates that the tort system today is one that has developed over decades, if not centuries, and that changes in the system come gradually and incrementally . For those who prefer changes to the tort system, the action of the legal profession holds out some hope for gradual change . Fbr those who favor more extreme measures, the action of the House of Delegates must be disappointing . But those same individuals probably never expected much from the legal profession in the first place . A

The Actuarial Update

Staffer Achieves Life Master The game of bridge is very popular with a lot of actuaries, and for good reason . Actuaries tend to make super bridge players, Well, bridge-playing actuaries who visit the Academy's Washington office can compare notes with staffer Rita Marciniak. Just last month she achieved the rank of Life Master, the highest rank awarded by the American Contract Bridge League . This represents long years of duplicate bridge and tournament play, When asked to comment on her achievement, Rita responded : "Now I can relax and start playing for fun again ." Congratulations, Rital A

War Stories More on Who We Are I was amused by the column entitled "What Is An Actuary?" (February 1987) . It brings to mind an occasion in the past when two persons interceded on my behalf when I was asked what an actuary does . One person explained that an actuary counts dead bodies, while t other suggested that an actuary para chutes behind enemy lines and blows up bridges .

I'll wager that the parties proffering these far-fetched definitions were really thinking of the words mortuary and mercenary . Alan Findelstein

Checklist of Academy Statements May 1987 Copies are available from the Washington office . TO : Delaware Insurance Department, May 15, 1987 . RE : Casualty loss reserve opinions . BACKGROUND : This statement was submitted in response to a proposed regulation on audits. TO : American Institute of Certified Public Accountants, May 18, 1987 . RE : Revised standard confirmation letter . BACKGROUND : The revised standard confirmation letter was developed by a joint Academy/AICPA task force . (It is reprinted in its entirety in this issue of The Update.)

TO : Senate Finance Committee, May 26, 1987 . RE : Catastrophic health insurance. BACKGROUND : These comments were submitted to members of the Senate Finance Committee . (Identical to comments dated April 17, 1987 .) TO : House Subcommittee on Health and the Environment of the Committee on Energy and Commerce, May 28, 1987 . RE : Catastrophic health insurance . BACKGROUND : These comments were submitted to the House Subcommittee on Health and the Environment for the hearing record . (Identical to comments dated April 17, 1987 .) TO : General distribution to a varnj of audiences, May 31, 1987 . RE : Risk classification . BACKGROUND : This statement Is a white paper on the subject of risk classification and AIDS . A


The Actuarial Update

Academy and AICPA Develop Standard Pension Audit Confirmation Letter The American Institute of Certified Public Accountants ' (AICPA) Technical Information Services Division has just published a revised standard confirmation letter for use by auditors reviewing pension plans . The revised letter was developed by a special task force under the joint auspices of the Academy 's Committee on Relations with Accountants and the Aâ‚ŹCPA ' s Relations with Actuaries Committee . These groups have been at work for over a year, aiming to improve the working relations between the two professions by reducing or eliminating the diversity that exists In requests for information by auditors . The standard confirmation letter is intended to reduce friction , which arises at times between professionals , when the auditor is relatively unfamiliar with the role of the pension actuary. It consists of a series of questions that the auditor is to pose to the actuary, eliciting information the auditor believes is necessary to accomplish the audit task . The actuarial members of the joint task force were successful in reducing the initial requests proposed by the auditors . The revised letter incorporates information required to satisfy SAS 11 requirements , census data needs, and other matters routinely requested by auditors from actuaries . -

The new standard confirmation letter is reprinted here in its entirety.

Standard Confirmation Letter for Auditors Reviewing Pension Plans In connection with the examination of our financial statements for the period ending (fiscal year end) by our independent accountants (name, address), please furnish them the information described below as it pertains to the XYZ Pension Plan, which is a defined benefit plan . For your convenience in response to those requests . you may supply pertinent sections, properly signed and dated, of your actuarial report, or pension expense report, if they are available and if they contain the requested information .

A. Please provide a brief description of the following : 1 . The employee group covered . 2 . The benefit provisions of the plan used in the calculation of the net periodic pension cost for the period and of the accumulated benefit obligation and the projected benefit obligation at the end of the period . Please identify any such benefit provisions that had not taken effect in the year. Please also provide the date of the most recent plan amendment included in your calculation . Please identify any participants or benefits excluded from the calculations, such as benefits guaranteed under an insurance or annuity contract.

3 . The plan sponsor's funding policy for the plan . 4 . Any significant liabilities other than for benefits such as for legal or accounting fees .

5 . The method and the amortization period, if any, used for the following : a . Calculation of a market-related value of plan assets, if different from the fair value . b. Amortization of any transition asset or obligation . c . Amortization of unrecognized prior service cost . d . Amortization of unrecognized net gain or loss .

6 . Any substantive commitment for benefits that exceed the benefits defined by the written plan and which is included in the calculations . 7 . Determination of the value of anyinsurance or annuity contracts included in the assets . 8 . Nature and effect of significant plan amendments and other significant matters affecting comparability of

net periodic pension cost, funded status, and other information for the current period with that for the prior period . 9 . The following information relating to the employee census data used in calculating the benefit obligations and pension cost : a. The source and nature of the data is and the date as of which the census data was collected is b . The following information concerning partic pants : Participants

Number of Compensation Persons (if applicable)

Currently receiving payments

Active with vested benefits Terminated with deferred vested benefits Active without vested benefits Other (describe) Note : If information is not available for all the above categories, please indicate the categories that have been grouped and describe any group or groups of participants excluded from the above information. c . Information for the following individuals contained in the census : Partlelpant's Name and Number

Date Age or Hired Birth or Years Date Sex Salary of Service

(Note to auditor : The auditor should select Information from employer records to compare with the census data used by the actuary. In addition, the auditor may wish to have the actuary select certain census data from his files to compare with the employer's records . I B . Please provide the following information on the net pel odic pension cost for the period ending on 1 . Service cost 2 . Interest cost 3 . Actual return on assets (continued overleaf)


5

July 19 . 87

9 . The above amount of the projected benefit obligation is measured based on the following assumptions : Weighted-average discount rate % Weighted-average rate of compensation

4 . Other components

a . Net asset gain or (loss) during the period deferred for later recognition b . Amortization of net loss or (gain) from earlier periods

46

increase % Please provide a brief description of the other assumptions used in the measurement .

c . Amortization of unrecognized prior service cost d . Amortization of the remaining unrecognized net obligation or (asset) existing at the date of the initial application of FASB Statement No . 87transition obligation or (asset) $

10 . The calculation of the items shown in C 1 . to C8 . is based on the following :

Asset information at Census data at

e . Net total of components (a+b+c+d) 5 . Net periodic pension cost : (1 +2-3+4 .e)

Measurement date (must be not more than three months before the current fiscal year end)

$

Please describe any adjustments made to project the census data forwarded to the measurement date or to project the results calculated at an earlier date to those shown in C 1 . to C8 .

6 . The above measure of the net periodic pension cost is based on the following assumptions : Weighted-average discount rate % Weighted-average rate of compensation increase % Weighted-average expected long-term rate

11 . Please describe any significant events noted subsequent to the current year's measurement date and as of the date of your reply to this request and the effects of those events, such as a large plant closing, which could materially affect the amounts shown in C1 . to C8 .

of return on plan assets % Please describe the basis on which the above rates were selected and whether the basis is consistent with the prior period .

Please briefly describe the other assumptions used in the above measurement . 7 . The calculations of the items shown in 131 . to B5. are based on the following:

Asset information at Census data at Measurement date (must be not more than three months before the end of the last fiscal year) Please describe any adjustments made to project the census data forward to the measurement date or to project the results calculated at an earlier date to those shown in B1 . to B5 .

D . Please provide an analysis for the period showing beginning amounts, additions, reductions, and ending amounts of the 1 . Projected benefit obligations 2 . Unrecognized prior service cost, and 3 . Unrecognized net loss (gain), and

4 . Net transition obligation (asset) . E . Please provide our Independent accountants with descriptions and the amounts of gains and losses from settlements, curtailments or termination benefits during the year, such as :

1 . Purchases of annuity contracts ; 2 . Lump-sum cash payments to plan participants ; 3 . Other irrevocable actions that relieved the company or the plan of primary responsibility for the pension obligation, and eliminates significant risks related to the obligation and assets ; 4 . Any events that significantly reduced the expected years of future service of employees ; 5 . Any events that eliminated for a significant number of employees the accrual of defined benefits for some or all of their future service ; or 6 . Any special or contractual termination benefits offered to employees.

C. Please provide the following information on the benefit obligations for disclosure in the financial statements for the period ending Estimated 1 . Pension Benefit Obligation a. Accumulated benefit obligation -vested -non-vested -total

$

b . Additional benefits based on estimated future salary levels c . Projected benefit obligation (i + ii) 2 . Fair Value of Plan Assets 3 . Unfunded Projected Benefit Obligation : (1 .c-2)

4. 5. 6. 7. 8.

Unrecognized Prior Service Cost Unrecognized Net Loss or (Gain) Unrecognized Net Transition Liability or (Asset) Additional Liability Accrued or (prepaid) pension cost in the company financial statements (3-4-5-6+7) $

F.

Was all of the information above determined in accordance with FASB Statements No . 87 and 88 (including FASB's Guides to Implementation of Statements 87 and 88 and the American Academy of Actuaries "An Actuary's Guide to Compliance with Statement of Financial Accounting Standards No . 87") to the best of your knowledge? If not, please describe any differences .

G . Describe the nature of your relationship, if any, with the plan or the plan sponsor that may impair or appear to impair the objectivity of your work . Very truly yours,

July 1987 Actuarial Update  

• Exposure Draft: Recommendations for Measuring Pension Obligations AMERICANACADEMY OF ACTUARIES In t The report will include recommen- dati...

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