e ial Upda e •Actuaf t
VOLUME 16 NUMBER 6
In this issue
AMERICAN ACADEMY OF ACTUARIES JUNE 1987
AAA Responds to FASB Accounting Standards Proposal by George Soules
2 From the President-Elect
3 Letters. to the Editor
Checklist of Academy 4 Statements
Academy Proposed Bylaws 4 Adopted
5 Winning in the Public Eye
Enclosures Included in this month's issue of The Update are the following : • Government Relations Watch with Special State Supplement : Legislation and Regulation Concerning Continuing Care Retirement Communities • IASB Boxscore • In Search of . . .
In a report roundly critical of the new Financial Accounting Standards Board (FASB) proposal to amend the accounting standards for Universal life-type insurance contracts, the Committee on Life Insurance Financial Reporting of the American Academy of Actuaries responded in part :
"While we recognize the need for authoritative guidance in the accounting for certain long-duration insurance contracts, we take strong [emphasis added] exception to the proposed accounting standards and firmly oppose the adoption of the exposure draft in its current form ." The FASB proposal would amend FAS 60 (which establishes accounting standards for the insurance industry) to require that realized gains and losses on the sale of investments be reported on a pre-tax basis as a component of operating income . If adopted, the FASB proposal, called "Accounting and Reporting by Insurance Enterprises for Certain Long-duration Insurance Contracts and for Realized Gains and Losses from the Sale of Investments," would be effective for financial statements issued after December 15, 1988 . In such case, retroactive restatement of previously issued financial statements would be required .
Bad Premise The Committee on Life Insurance Financial Reporting found fault with the premise, perspective, and anticipated results of the FASB exposure draft . The committee cited the "false premise" upon which the exposure draft rests : that there has been a fundamental change in the life insurance business since FAS 60 was adopted, and that universal life insurance contracts encompass different "risks and benefits" than do traditional life insurance contracts . "We firmly maintain that universal life and traditional life have far more similarities than differences," reads the Committee's report, which goes on to
explain that the long-term risks of mortality, interest, lapse, and expense are the same for universal life as for traditional life, and that the underlying risks, markets, and policyholders have not changed even though the mechanics of operating a universal life contract may differ . "Such differences are not financially significant to the insurer," the committee argues, adding : "We strongly disagree with the premise of the exposure draft that a new, distinct accounting model is needed for universal life ." Wrong Perspective In opposing the creation of a separate accounting method for universal type insurance, the committee asserts that at the heart of a life insurance enterprise is the concept of aggregate pooling, and that at this level, "universal life and traditional life are economically and conceptually identical ." FASB's perspective is flawed because it accords "undue significance" to the design differences of the two insurance models, the report states . Although the flexibility of a universal life policy is important from a marketing perspective, the committee allows, this "contract flexibility has no economic difference for GAAP financial reporting purposes . (continued on page 5)
Certifications for Schedule B by Jack M . Turnquist In the last several years there has been a significant amount of discussion and controversy surrounding what is described as "third party certifications" and of the questionable practices of certain enrolled actuaries engaged in this activity, This has led a number of the members of the Academy to suggest that additional standards of conduct and/or practice need be promulgated to address specifically these activities .
(continued on page 3)
The Actuarial Update
President Preston C . Bassett President-Elect John A . Fibiger Vice Presidents Edward H. Friend 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 1 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 1720 I Street, N .W. 7th Floor Washington, D.C . 20006 Statements of fact and opinion in this publication, including editorials and letters to the editor, are made an 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.
A Blizzard of Mail It was a Monday morning in January, a day when I had not expected to be in my office because a major blizzard had been forecast for Boston, and our company usually closes on a day when travel is virtually impossible. However, the storm track had changed from the original forecasts, and Cape Cod bore the brunt of our storm, while Boston experienced only minor inconvenience from light snow. I had commented on leaving home that morning that in one sense, actuaries are luckier than meteorologists . If we make a forecast in error, it is done relatively privately, is not broadcast over television, and doesn't immediately involve matters of life and death . There is a certain irony there, though, since matters of life and death and the calculations derived from them do fall into the actuary's world . However, we have reduced them to probabilities and mathematical abstractions applying to an anonymous group, far removed from the real threat ofbeing buried in a snowdrift if a blizzard comes . Monday morning brings a heavy volume of mail, and this was no exception . Some mail is handled routinely by my secretary, with general guidelines for what I review personally, what can be referred to someone else, what I can set aside to read later, and what, of course, goes in the "circular file ." This approach normally produces a relatively small amount of mail requiring my immediate attention, but this Monday's mail seemed giant in scope. Reviewing my mountainous in-basket, I found that nearly all of it related to my involvement in actuarial activities . Without my actuarial work, there would have been virtually no mail that day, and I commented to my secretary that it seemed that the actuarial profession was singlehandedly trying to make up for any shortfalls in sales that paper companies might have been experiencing elsewhere . Most of the actuarial mail arrived in thick packets; the only "light" mail was a postcard reminder that this edi-
torial for the June issue of The Actuarial Update was due . As I continued through the material, my initial feelin of frustration at the volume of co munication became something jus short of amazement at the many and varied activities being carried on in support of the profession as a whole by its members . Let me just cite some of the material in that blizzard of mail. There were draft minutes of the December meeting of the Council of Presidents (COP) of the several North American actuarial organizations sent for my review and editing . There was a mailing from the Interim Actuarial Standards Board (IASB), which included minutes of the last meeting and extensive material about the ongoing work of the IASB as it begins to develop 'standards, so necessary as a foundation of any profession, The next item was from the public affairs specialist in the Academy office who had sent me a working draft of the 1987 Issues Digest. Just as standards deal with the actuarial profession's responsibilities within the profession, the Issues Digest summarizes those current areas of federal and state legislation and regulation in which actin aries have an impact. The in-basket wa still packed when I came to a memo with supporting material fora meeting called to ascertain whether or not the time was right to revisit the issue of reorganization of the profession . The material covered past attempts to consolidate the profession almost ten years ago . Then there were minutes and supporting documents from the committee dealing with the centennial celebration of the actuarial profession in North America. This meeting will be held in Washington in June 1989, and planning for it is well underway. Adding to the pile were the files relating to the next meeting of the Academy's Executive Committee, which always has extensive material sent out in advance to be sure that the committee's discussions proceed with a common knowledge base . The Nominating Committee for the officers of the Academy was reporting the result of the first ballot for the leaders of the Academy, along with a request to return the list with my selection for consideration for election of top Academy officers this fall .
Are we trying to do too much ? Is thi just professional busy work? Afte reflection, I don't believe so for a minute. Should the profession eliminate its attempts to provide professionalism (continued on page 4)
Letters to the Editor Need Help, Too I have just read Michael A . Walters' guest column in the April 1987 issue . As chairman of the publicity committee of the Conference of Actuaries in Public Practice, I appreciate his interest in public relations . His remarks about assuring that we have the necessary staff and resources refer, I believe, to the committees of the five actuarial organizations and not to the joint committee on public relations, which is already well staffed . Walters referred implicitly and parenthetically to five organizations, but then specifically mentioned only four with interests in publicity. Since it's obvious from our organization's name that we have not only an interest but a vital one, I have no reason to believe his failure to mention the Conference was deliberate .
THIRD PARTY CERTIFICATIONS (continued from page 1) Background The provisions of ERISA require that the sponsor or administrator of a defined benefit plan engage an enrolled actuary who shall be responsible for the preparation of certain actuarial materials to be incorporated in Schedule B of the Annual Report Fbrm 5500 . A number of firms providing plan administration functions on behalf of the plan sponsor do not have enrolled actuaries on staff and have made arrangements with an enrolled actuary to provide the required certification on the Schedule B to be attached to the sponsor's Form 5500 . These certifica-
WIZARD OF ID
My purpose in writing is to make sure it's understood that we also need help on our committee . In fact, since we like to have representation from all actuarial practice fields, let me mention that I've been trying, without success, to recruit at least one member from Walters' own field-a casualty actuary . Perhaps he can help . Joseph E . Dean Washington, DC
The Update welcomes letters from readers. Letters for publication must include the writer's name , address, and telephone number, and should be clearly marked as Letters to the Editor submissions. Letters may be edited for style and space requirements .
tions are referred to as third party certifications . Frequently, the plan administration firm will perform the necessary data gathering, run the actuarial valuations, and complete the Schedule B for review and certification by the enrolled actuary. The degree of supervision, review, and responsibility by the enrolled actuary varies considerably in actual practice . The identity of and relationship of the enrolled actuary to the plan administration firm may or may not be known to the plan sponsor.
Questionable Practices Third party certifications can and do provide a beneficial and cost efficient service for plan sponsors when handled
in a professional manner . Unfortunately, practices by a limited number of enrolled actuaries have caused concern . In certain cases, this includes the provision by mail of signed Schedule Bs without the enrolled actuary having reviewed adequately the plan document, the plan data, or the methodology, assumptions, or results of the actuarial valuations in support of the Schedule B . These certifications are often made after the plan sponsor has reviewed and signed the annual report form and, frequently, without the knowledge or consent of the plan sponsor . In the extreme reported cases, the enrolled actuary has provided the plan administration firm with blank, pre-signed Schedule Bs . The other problems identified have tended to focus on disclosure, documentation, reliance, and the overall professional standards followed in providing actuarial reports or required actuarial documents . Adequacy of Academy Standards In August of last year, the Academy Committee on Guides to Professional Conduct met to discuss, among other items, whether the current Guides to Professional Conduct and Interpretative Opinions are adequate to address the perceived abuses in certain third party certifications . No one section of the Guides and Opinions addresses specifically the conduct and practice relating to the performance of the functions of an enrolled actuary, and it was not felt necessary to develop such a separate section . The basic structure of the Guides and Opinions is intended to be generic in nature and to provide guidance applicable to actuaries in all of their activities, regardless of specific disciplines or activities . It is this characteristic of the design of the Guides and Opinions that
BY BRANT PARKER & JOHNNY HART
The Actuarial Update But they can be expensive . Never hand out printed materials during the speech-wait until you are finished so .that listeners will not be distracted . Posters. Inexpensive . You will probably need an easel to display them . Keep them at a size that makes them easily transportable as an airplane carry-on item. A good size is 2 feet by 11/2 feet . Flip Charts. Inexpensive . Print your points neatly on poster boards ; good for small groups . When using slides or posters, make sure that the print is large and legible . The people farthest back in the audience should be able to read them without difficulty.
Limit each slide or poster to one main point, which should be put into a short phrase . To use Social Security, as an example, if you're making the point that benefits might have to be reduced to help keep the system solvent, your AVA need only read : Reduce Benefits . The simpler the message, the more easily it can be remembered . If you try to punctuate every detail with a slide or poster, you'll spend too much time with them and ruin the pace of your speech . Arrange your posters or slides in sequence, and practice using them . Move only to the next one when you've reached that point in your speech . If you are using posters, put the one you used last neatly out of sight. Be prepared for foul-ups . If a breeze should blow a poster from the stand or a slide should appear up-side down, don't call more attention to the mishap by saying, "Oh, I'm so sorry, I was sure all the slides were right side up!" Calmly correct the mistake without comment, or with a brief, humorous ad-lib, and continue .
Practice , Practice! Rehearse your speech in front of a mirror with your visual aids, and before friends and associates . Commit your opening and closing to memory. When you are practicing, be sure to keep the following in mind : Good Eye Contact. Continually scan the audience, stopping once in awhile to direct your eyes and conversation to an individual . Although you will be speaking to a group, imagine that you are speaking to one person . Eye contact promotes a sense of conviction and a desire to communicate . Be expressive .
Gestures . They animate your speech and help burn off excess nervous energy .
Practice gesturing smoothly, naturally, with your weight evenly distributed . Speaking from a Manuscript or Notes . Read from a manuscript only as a last resort. If you must do so, practice to develop a spontaneous feel . Delivery is extremely important in the effectiveness of the message-inject a personable and natural character into your words . Notes help you remember where you are and where you're going . Practice glancing at them unobtrusively. When finished with a card, place it face down on the lectern or put it on the bottom of the stack in your hands . Vocal Quality. You are, of course, somewhat limited by nature regarding the color ofyour voice, but you can make it more pleasent sounding through concious effort . Listen to yourself on a tape recorder. Do you speak clearly? Do you enunciate and articulate? Is your voice nasal, or breathy? Most areas you would like to improve can be, if in your daily conversation you practice changing for the better. The improvements will soon become natural . You don't want to force your voice into an unnatural sound, but a little conscious effort can improve it .
Questions and Answers Before a Live Audience "I was gratified to be able to answer promptly. I said, 'I don't know.''" -Mark Twain
ucer may announce the Q & A, or you may. Sometimes the first question is a little slow in coming . You may want to "plant" the first questions : as prearranged, someone you know in the audience asks the first questions to get the ball rolling. Identify questioners with precision, Identify them by name whenever possible ; this will provide a more comfortable atmosphere and says that you know and are known by some people in the audience . If you don't know a questioner's name, identify him as "the gentleman in the blue suit" or her as "the woman in the green dress ." Don't point . You shouldn't have to if your eyes meet with those of the questioner and you nod in that direction . If a question is asked too softly for everyone in the room to hear, repeat it . You might be asked questions you don't know the answers to . If so, state simply that the question lies outside your field of expertise . No one can reasonably expect you to know every aspect of the topic . Keep the Q & A to ten or fifteen minutes . Near the end, tell the audience that you have time for one more question . Then, close with appropriate remarks thank the audience or tell them you look; go forward to more debate on the topic .
Remember : Let your audience know in advance that you will devote some portion of your talk to Q & A, giving them plenty of time to formulate thoughtful questions .
You may want to engage the audience in a question and answer period after your talk . The Q & A allows members of the audience to focus-in on areas of particular interest to them . It is also a golden opportunity for you, the speaker, to demonstrate your knowledge and ability to think on your feet, thereby reinforcing credibility. (By the same token, you must be well-versed to avoid falling on your face!)
Members of the audience should be informed in advance that there will be a Q & A period, giving them a chance to prepare meaningful questions . Find out all you can about your audience : Will it comprise mostly men, women, young, old, high-income, lowincome . . . ? Knowing even the basic demographic features of your audience helps you to tailor your speech to the group and can better prepare you for the types of questions likely to be asked . After you have concluded your speech, acknowledge the applause . As may have been arranged previously, your introd-
Next month : Techniques to Persuade the Hard-to-Win-Over Listener.
permits a workable and viable body of standards of professional conduct . Based upon this review and discussion of the various abuses and shortcomings cited, it was the consensus of the committee that the current Guides and Opinions taken together with the relevant pension plan Recommendations and Interpretations provide adequate guidance to the member when acting in the capacity of an enrolled actuary in certifying on Schedule B . It was the view of the committee that a member who was engaged in any of the abuses noted above would be guilty of professional misconduct .
The Continuing Problem While it was the consensus of the committee that the standards of conduct and practice of the Academy are adequate to govern members while acting in the capacity of enrolled actuaries, not all enrolled actuaries are members of the Academy or of professional actuarial organizations with comparable standards of conduct and practice . Unfortunately, unprofessional conduct by any actuary, enrolled or not, and whether or not a member of the Academy, tends to diminish the stature of the actuarial profession in the eyes of the public and regulators . No action by the Academy can govern or enforce the conduct of non-members . Consequently, it is in the interest of the Academy and each of the United States actuarial bodies to suggest any procedures or actions that might assist in stemming or reducing abuses . A Proposed Remedy (And Perhaps a Cure)
It would appear appropriate for the profession to direct its efforts to the legislative and regulatory environments that created and are responsible for the supervision of the enrolled actuary . The federal regulations that govern the requirements, conduct, and work of enrolled actuaries lack the depth of standards of conduct and practice in the professional sense . It is unlikely that the efforts of the actuarial profession would ever result in meaningful revised legislation that would address the problems adequately. Because the Joint Board for the Enrollment of Actuaries is ultimately responsible for the enforcement of regulations and the administration of discipline, the most immediate approach would appear to be to suggest that the Joint Board's current regulations and the instructions to the Schedule B be amplified to define more clearly
The Actuarial Update
Checklist of Academy Statements April 1987 Copies are available from the Washington office . TO : Subcommittee on Oversight of the House Committee on Ways and Means, April 9, 1987. Re : Pension plan funding and variable rate premium proposals . Background : This statement was submitted as part of testimony at a public hear ing . TO : The Honorable Leon E. Panetta, April 14, 1987. Re : Legislative proposal to Increase access to the U .S . Tax Court. Background : This letter addressed proposed legislation that would permit certified public accountants and enrolled agents to practice before the U .S. Tax Court. TO : Subcommittee on Health of the House Ways and Means Committee, April 17, 1987 : Re : Catastrophic health insurance . Background : This statement was submitted for the hearing record. TO : Subcommittee on Health of the House Ways and Means Committee, April 21, 1987 . Re : Longterm care insurance . Background : This statement was submitted for the hearing record .
the acceptable practices by enrolled actuaries . Early last year, after discussions among the various actuarial organizations, the Conference of Actuaries in Public Practice suggested to the Joint Board an addition to regulations and revisions to Schedule B (Form 5500) and its instructions . These revisions were designed to amplify the requirements for the standards of work and disclosure of relationships and reliances placed upon the enrolled actuary in completing Schedule B . These proposed revisions were submitted to the Joint Board for the Enrollment of Actuaries for consideration . Action of the Joint Board is pending . but expected.
Turnqutst chairs the Committee on Guides to Professional Conduct .
FROM THE PRESIDENT-ELECT (continued from page 2) through development of standards practice? Should the profession ignore the public issues of the day, even though actuaries are often better equipped than most others to handle the financial implications of current issues? Should we stop coordinating with the other professional bodies? Should we conclude that it is futile to try to review whether the coordination of the governance of the profession through the COP Is still the best way to go? And with all that is going on in our world, a thoughtful selection of the leadership to carry on the work of the Academy Is needed for balance among the various professional disciplines, as well as a review of who has shown interest, commitment, and willingness to work in the past.
My mail that day touched on but a few of the Academy's many programs and activities ; it served to point up, however . the breadth of the Academy efforts on behalf of the members of the actuarial profession to reach the many and varied publics we serve . We may not receive that much television exposure, and our results may be longer-term in natur but the job we do is a vital compone to making sure that people are "safe and sound ." I am pleased to have the opportunity to serve my profession through the Academy, and proud to be associated with such a dedicated group of professionals . A
Academy Proposed Bylaws Adopted The Academy membership has overwhelmingly adopted the two proposed bylaw amendments recently considered . On the issue of whether to provide the Board of Directors with authority to establish classes of members eligible for dues waiver, the vote in favor was 2,716 to 429 . On the issue of whether to eliminate references to gender in the bylaws, the vote in favor was 2,587 to 545 . The Board of Directors will adopt classifications of members eligible for waiver of dues ; it is expected that information relevant to waivers will accompany dues notices in late 1987 for the 1988 calendar year.
Winning in the Public Eye The following is the second installment from "Winning in the Public Eye : A Media Primer for Actuaries," a handbook for ttercommunication written and illustrated by Academy Director ofPublicInformation ErichParker. The bookletis available Without chargefrom the Academy office .
The Body of the Speechcontinued Interesting . Evoke images whenever possible . Don't speak in abstracts ; use words that conjure definite images in the minds of your listeners . "Red and yellow" has more impact than "various colors ." Logically Developed . If your listeners can't follow your reasoning, they won't accept your conclusions . It helps to organize your supporting facts and to use words clearly and effectively.
State it Simply "The function of language is twofold : to communicate and to give information ." Aldous Huxley Common mistakes of untrained writers and speakers are padding and puffery . Padding is saying something in five sentences that could be said in three . Puffery means using a big word when a mall one could have been used . Lanage Is most effective when it is direct and easily grasped . You will probably want to speak for fifteen or twenty minutes, and that is not much time to convince someone of something. You haven't the luxury of long-term, repeated exposure . Your language must be direct and simple if there is any hope that your message will be remembered.
A word about occupational jargon and technical language : as a rule, don't use it. Consider the following example of technical jargon from an actual new car brochure : "The crush behavior was optimally synchronized with the response time lag of the front automatic seat belts . By means of the structurally programmed bailey in the retardation curve for the front part, the motion sequence of the passengers during an accident has been exactly adapted to the retardation action and effectiveness of the seat belts ." How's that again? What the brochure could have said was : "by measuring what happens to someone in a crash, we've een able to make seat belts that provide aximum protection in the event of an accident ." Concise and understandable . In short, edit out every word and phrase that doesn't add to your presen-
tation . The purpose of language is to communicate -don't let too many words get in the way.
The Conclusion The conclusion ties it all together. Its objective is to summarize the main point and stimulate the desired audience response, which may be to fight for a cause, or just think about something . An inspirational quote, a challenge, or a solution to a problem may be given . State your main point again, and close on an up-beat, positive note .
An Aside on Audio-Visual Aids (AVA) Before a live audience, you are the main audio-visual aid . The minute you appear on stage everyone in the audience is forming impressions of you that will affect receptiveness to your message. You send out signals about yourself with your dress, voice, manner of speech, eye contact, and body language .
AAA RESPONDS (continued from page 1) The role of the "account balance" in the FASB proposal is overstated, the report continues . "There is no compelling reason why profits should emerge to the insurer differently for a traditional or a UL (universal life) product simply because the UL product has a more easily identified account balance ." The committee labels "false" the FASB proposal's assertion that traditional life insurance policyholders are informed only of"favorable" financial information regarding their accounts, and that individual account balances are not strictly maintained. Moreover, the report criticizes FASB's proposal for its inconsistency in mixing Individual and book of business accounts . "Adoption of a single perspective from both sides of the balance sheet is an essential element of the conceptual framework of a suitable life insurance accounting model ." Poor Result
Should the exposure draft be imple-
You will not, therefore, gain credibility speaking to a roomful of dark-suited executives if you are wearing casual clothes . Dress conservatively, but smartly. You want to create an air of authority and confidence. Stand tall, move with assurance . In addition to yourself, there are other visual aids you might use to illustrate and to animate your speech . Some of the most common and most effective are : Slides . Colorful but not inexpensive if any substantial amount of artwork or computer graphics are involved . Slides allow you to change scenes merely by pressing a remote control . However, they have to be shown in darkened room, which means you won't be seen . Slide projections also seem prone to malfunction, and one or two slides always end up up-side down! Pamphlets . Good because they give your audience something to reinforce your message after the speech is over . (continued overleaf)
mented, the report warns of "financial statements which will be difficult, if not impossible, to interpret, compare, and explain in a meaningful manner ." The committee found "paradoxical" the juxtaposition of FAS 60 and the exposure draft, asserting that, "one is income statement oriented, the other is balance sheet oriented . One follows the fundamentals of insurance economics, the other tends to ignore the unique nature of life insurance in favor of conformity with rules from other industries which have questionable application to the insurance industry" And finally, "one requires actuarial assumptions to contain elements of conservatism, the other specifically prohibits any such elements of conservatism ."
Apubiichearing on the issues involved in the FASB proposal is scheduled for June 22-23 . Copies of the committee's March 31, 1987 comments on the exposure draft are availablefrom theAcademy's Washington office.