Page 1


tlc~,uarial Upda te




Close Up on John A. Fibiger In this issue 2

from the President


Letters to the Editor Checklist of Academy


StatementsSeptember 1987


Candidates Respond to The Update


Fax Fact


Board of Directors


9 Committee Roster


Retiring Members of the Board of Directors

Academy Alert 1 O Subscription Reminder Property/Liability



Insurance industry Underwriting Cycle

11 FYI

12 Radio Roundup

Enclosures Included in this month's issue of The Update are the following : • Government Relations Watch • In Search Of . . .

• IASB Boxscore

The Update recently caught up with newly-eiectedAcademy PresidentJohn A . Fibiger and posed to him several questions ofprofessional andpersonal interest. Fibiger is president of The New England Mutual Life Insurance Companies. Before joining The New England, he served as vice president of Bankers Life of Nebraska . He is a fellow of the Society of Actuaries and a member of the Council of the International Actuarial Association . A specialist in Social Security and life insurance issues, Fibiger has appeared on several television programs to discuss these topics . Born in Copenhagen, Denmark, he currently resides in Weston, Massachussetts , with his wife, Barbara , and their two children . The Update : As you prepare to assume your duties as president of the Academy, which issues or programs do you plan to give your immediate attention? Fibiger: Anyone assuming a leadership role gets to the fact that many issues requiring immediate attention arise from events already underway. Current staffing issues include the recent decision by the Board of Directors to hire a Director

of Government Relations, and the need to review staffing in the Washington Office in view of the resignation of the Director of Administration, effective January 1988. Already underway are groups working on the creation of an Actuarial Standards Board (ASB), a proposed actuarial magazine, a joint effort by all of the actuarial bodies to look at the organization of the profession, as well as a newly created task force whose charge it is to look at the input the actuarial profession should be making to the national debate on health care. This task force report will undoubtedly lead to a review of the extent to which the Academyshould be reactive or proactive in this and many other areas. I don't forsee a dull year, by any means . The Update : To what extent do you foresee the expected establishment of the ASB helping the image of the profession? Fibiger : I believe the ASB will provide a significant improvement in the image of the actuarial profession in the long run, although we maybeslightlydisappointed with its impact in the short run . The

(continued on page 10)

The Actuarial Update


American Academy of Actuaries 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 O ffice 1720 I Street , N.W. 7th Floor Washington , D.C. 20006 (202) 223-8196 FAX (202) 872-1948 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 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.

John A . Fibiger

Actuaries in a Rapidly Changing World Authors of novels sometimes say that once they start a novel the characters in the book seem to take on a life of their own, and the plot turns out much differently than the author had intended when the book was first outlined. When I was first asked to author this editorial, it seemed logical to focus on the coming year for the Academy, and I began to develop an outline of the issues to be considered, However, I started the outline over the Atlantic Ocean on a plane coming back from a meeting of the Council of the International Actuarial Association (IAA) in Brussels, and instead of making notes about the year ahead, thoughts about the meeting I had just gone to kept crowding in. In addition to the routine business of the IAA Council, there were two special topics on the agenda: a report on plans for the International Congress in Helsinki next July, and a proposal that a new financial section similar to ASTIN (Actuarial Studies in Non-Life) be created under the auspices of the IAA . These topics, and the balance of the content of the meeting inescapably led to thoughts on how small the world has become and how many common problems actuaries throughout the world face . With a transatlantic trip from Boston taking under seven hours instead of the week of not too long ago, the world does indeed seem small. Coupled with the wonderful invention of the "nothing to declare" line so one can avoid waiting to go through Customs, a business trip such as I took hardly seems like a trip to another country. In fact, in the Brussels Airport there are a number of advertising signs, mostly for software, that appear only in English . You have little sense that you have landed in a foreign country, especially one with two languages, neither ofwhich is English . On the plane going over, I read about a rumored tightening of credit by a central bank and the concern of U.S . investors as to its impact on the values of their bond portfolios . The bank was not the U .S . Federal Reserve, as one might expect, but rather the Japanese central bank. My sense of one-worldness was heightened at a meet-

ing of English-speaking actuaries which preceded the council meeting. The main concern ofactuaries in several otherca tries when I reported about our propos Actuarial Standards Board was that it not create standards like those of the Financial Accounting Standards Board, which apply worldwide to statements of multi-national companies . Like so many others, they are having a difficult time coping with the application of FAS 87 to the reporting of pension liabilities for multi-national corporations . At the same time, we still have a long way to go to eliminate all barriers : one actuary from a British Commonwealth country who crossed the English Channel with an actuarial friend of his from Britain was not allowed to enter France and was sent back on the boat to Dover to find another way to get to Belgium . He did not have a French visa, now needed for everyone outside the Common Market, and so could not even enter France to accompany his British friend, who was driving across France on his way to Brussels. The meetings certainly produced feelings that actuaries all over the world are dealing with similar problems . When we discusssed the Helsinki meeting plans, we contemplated a special session on AIDS, which is no respector of national boundaries in its worldwide spread a~yj.,, its implications for insurers . Agreeme was reached to recommend the creatio of a financial section of the IAA, and in preparation for the decision to be made in Helsinki, a task force was assigned to work out the details of how this section would operate in practice . A year or two of effort had already gone into the proposal, and the striking thing was the extent to which actuaries in every country are participating more and more in all financial arrangements of insurers and pension plans, not just in valuing the liabilities.

Another common concern was the extent of government involvement in our world, both through regulation and the power to set tax rates and formulas for taxable income . One actuary said after listening to the discussion that it seemed as though people from governments around the world met to share ideas on taxes and regulations, and when they did they would adopt the most unfavorable from each country from an actuarial standpoint to propose to their own legislators and regulators. Language differences were not a problem, since simultaneous interpretation was provided at the Council session, and our hosts very gr ciously conducted almost all of the r marks at the social functions in Englis In my spare time in Brussels , I watched the Ryder Cup golf matches played in (continued on page 7)

November 1987

Letters to the Editor Aft

hain Letter-Chain Mail


Checklist of Academy Statements September 1987 Copies are available from the Washington office .

I can`` admire the craftsmanship that goes into the construction of a chain, even if I abhor its use to shackle a political prisoner. I have similar feelings towards the publications of the Interim Actuarial Standards Board (IASBI . Some of them are worthy additions to actuarial literature and would be welcomed if intended for educational purposes only. Their purpose, however, is not to educate but to regulate ; they will inhibit innovation and condemn the profession to petty bureaucratic strangulation . Academy Executive Director Stephen G . Kellison claims that they hold us to our very best . I find this ironic since the IASB was created with deliberate disregard, not merely of our best, but of the general rules that then applied . TheAcademy has a requirement that non-urgent public statements be exposed to its membership comment before their publication . This requirement was blatantly ignored by the Academy when it brainwashed the profession with slick sideshows by peripatetic preachers asserting the need for the IASB . The IASB

TO: NAIC Life and Health Actuarial (EX5) Task Force, September 10, 1987 . RE : Health insurance reserve standards . BACKGROUND : This report concerns the development of health insurance reserve standards by the NAIC . It incorporates comments received on the March 24, 1987 draft . TO : NAIC Medicare Supplement Working Group, September 11, 1987 . RE: Medicare supplement insurance . BACKGROUND : These comments refer to the NAIC draft model regulation to implement the NAIC Medicare Supplement Insurance Minimum Standards Model Act .

TO : General distribution to a variety of audiences, September 22 . 1987 . RE : AIDS and life insurance company solvency . BACKGROUND : This report discusses the possible impact ofAIDS on the solvencyof life insurance companies . TO : NAIC Life and Health Actuarial (EX5) Task Force, September 28, 1987 . RE : NAIC Universal Life Model Regulation . BACKGROUND : This report supplements the preliminary report submitted on June 12, 1987 (see statement 1987-23) .

presents a limited number of actuarial dies. Cronyism is not my idea of holdmg ourselves to our best . I doubt that the American Medical Association has standards dictating the exact procedures to be used by its members in every type of diagnosis or operation . I do not think that doctors would be sued less often if it did . On the contrary, I think more lawsuits would result . The same will be true of our profession if the JASB is allowed to continue its work . The IASB will gleefully shackel us with its regulations if we show our customary apathy. Therefore, I call on every actuary who wants the profession to grow through Innovation to respond to every IASB publication with the message-however good the actuarial material (and some of it is appalling!)-the right place for it is In the education, not the regulation, of the profession .

Otherwise, you have nothing to gain but your chains. Jan R. Harrington New York, New York

The Update welcomes letters from readers . Letters for publication must include the writer's name, address, Alkarrd telephone number, and should 4we clearly marked as Letters to the Editor submissions . Letters may be edited for style and space requiremerits,

.510 "Dole-who needs him? Kemp-forget it! Bush-are you kidding? Dukakis gimme a break! Babbitt- who? Biden---no way! Haig-don't make me laugh!" Drawing by Stevenson ; 速 1987, The New Yorker Magazine, Inc .


The Actuarial Update

. 1988 Presidential Candidates Respond to The Update The ranks of Presidential candidates have thinned somewhat since last July when The Actuarial Update decided to pose five questions concerning actuarial issues to each of the White House hopefuls . As to be expected, not every candidate responded. In some Instances, this was understandable. Gary Hart dropped out too soon to make the mailing list . George Bush wanted to wait until after his candidacy was officially announced . Joe Biden would have responded, his aides claimed, if not for being deluged with more pressing questions . 7b be .fair, the actuarial queries were sent out relatively early in the campaign, before some candidates had announced and before many organizations were in full swing . At presstime, the following had either withdrawn from the race or had not responded : Babbitt, Dukakis, Gephardt, Haig, Jackson, Laxalt, Robertson, and Schroeder. The remainder of the candidates, Messrs . Dole, DuPont, Gore, Kemp, and Simon provided answers In full, or in part, as follows . The Update: It is generally recognized that the spread of AIDS has a terrible potential for claims under life and health insurance . Nevertheless, some states have already banned the use of diagnostic tests that reveal the presence of AIDS antibodies in applicants for insurance . Insurers argue that unless they can refuse coverage for those testing positive, the risk classification system breaks down, and the healthy will have to pay the costs associated with those at highest risk . Should insurers be permitted to use medically authenticated AIDS-testing in underwriting for medical insurance? Life insurance?

Robert Dole : I have been a leading proponent of a Presidential commission on Acquired Immune Deficiency Syndrome (AIDS) to address that crisis, believing that a balance should be followed to both help those stricken with the disease and to protect those not infected. Albert Gore : Life insurance underwriters rely heavily on statistical data Indicating the risks faced by various individuals . Individuals must present detailed health records in order to purchase life insurance. I think it is entirely appropriate that such records include information about AIDS . This disease will seriously affect the assessment of the risk involved In selling a policy. To require insurers to blind themselves to critical health data would be to disregard the basis of suc-

cessful underwriting in the life insurance field-careful analysis of risk . The case for AIDS testing is much less compelling when it concerns health insurance . There is a general need for individuals to have health insurance, since health care providers have been dangerously burdened by providing care for uninsured and underinsured Americans . Moreover, health insurers typically do not require medical tests before selling insurance to an applicant . It would be unfair and counter-productive to make AIDS a special case, and I do not support AIDS testing as a prerequisite to the purchase of health insurance . Jack Kemp : I believe insurance companies should be able to require an AIDS test for potential health and life insurance policyholders, just as companies are able to ask for other health-related information on known prior health problems, whether the policyholder smokes, and family health history . All of these factors help determine level of risk in writing a policy.

Senator Pa ul Simon Paul Simon : We do not know how much this disease will ultimately cost our society. In terms of federal policy, I do not think we should be sending the signal to the insurance industry that it can escape financial liability for this disease . However, insurers' Interest in protecting the risk classification system is a Iigitimate concern .

Neither the taxpayer nor the federal government can be expected to assume all of the cost. Clearly we need a partnership and

a balance in this-perhaps screening life insurance policies, or perhaps imp menting some sort of catastrophic type trigger that would limit, but not preclude, private insurance coverage . We can explore possible distinctions between group and individual policies, but we simply cannot confront this disease without the assistance of the private sector. Furthermore . I think we need to be careful to assure counseling with testing, and we must think through what is done with the results of any testing that may occur for insurance purposes. The Update : We have all been made aware of our reliance on the property casualty insurance system in recent years, as the industry's economic cycle resulted in escalating costs and limits on coverages . Some believe that the insurance industry's exemption from antitrust laws is a root cause of the problem . Others have argued that continued reliance on state regulation cannot be supported in this modem era. Should the insurance industrybe subject to anti-trust laws? What is the appropriate role of the federal government in regulating the Insurance industry? Gore : [ oppose current attempts to r peal or drastically modify the McCarra Ferguson Act, the law that leaves regulation of the insurance industry to the states . While I believe there is a problem with the availability and cost of certain lines of insurance. I do not see federal regulation of this industry as a solution . Some would argue that McCarranFerguson exempts the insurance industry from anti-trust regulation and this contributes to the current problems of the insurance industry . However, I believe that state regulation is adequately protecting us from any anti-competitive behaviour on the part of the insurance industry. Moreover, McCarran-Ferguson only exempts insurance from federal antitrust provisions to the extent that state regulation is present. I believe we must be wary of sweeping federal insurance reform proposals . Small insurance companies especially need adequate methods of data collection and anysuccessful reform proposal must take this into account.

In sum, I believe that the insurance industry is sufficiently regulated by the states, with the federal government providing standards if the states default The appropriate federal role is to assu that insurance is available to all wh need to purchase it and that the insurance industry continues to be a vibrant, competitive industry. The best means by which to do this is to continue an active


November 1987

congressional oversight of the industry hile leaving primary regulatory authorto the states. emp : I believe states should have the primary role in regulating the insurance industry. I support reform of our tort

Representative Jack Kemp

•ws to help make insurance more affordable . [ believe we need to return to a fault-based standard for liability, eliminate joint and several liability in cases where defendants have not acted in concert, and limit pain and suffering awards to reasonable amounts .

ranted in 1945, it can no longer be defended in its present form in 1987 . While I do not favorr federal regulation of the insurance industry I do think that the collection of insurance-related data at the federal level does make sense . The establishment of such a system would provide officials at all levels of government with a pool of objective information upon which policy decisions could be based. The Update : In recent years, Congress has repeatedly changed the rules for pension plans . The tax rules on funding such plans, as well as other employee benefit plans, seem to be in a constant state of flux . The billions of dollars invested on a non-taxable basis in employee benefit plans are viewed by some as a natural source of revenue in times of budget deficits. On the other hand, many believe that money does not escape taxation, but is merely deferred, making it possible for millions ofAmericans to have a comfortable retirement Income . What is your view on the tax status of employee benefits? How can the long-term security of employee benefits plans be assured?

Dole : I was a principal sponsor of private pension reform legislation enacted in 1984 to improve the treatment of homemakers and employees who work intermittently because of family responsibilities .

Simon : The anti-trust exemption contained in the McCarran-Frguson Act should be modified along the lines suggested by the National Commission for the Review of Antitrust Laws and Procedures in 1979 . The commission recommended that the exemption be repeated and that legislation affirming the lawfulness of a limited number of essential collective activities be adopted in its place . I introduced bills In the 99th and 100th Congresses based on these recommendations . Those bills--and another bill (5 .1299) I recentlyco-sponsoredwith Senators Biden, Kennedy, and Metzenbaum-would allow the industry to continue the joint activities needed to provide it with the sound actuarial data required for setting rates .

Gore : I do not support additional taxes . [n particular, [ am concerned that taxing health benefits could reduce coverage among low and middle-income workers and workers from areas with higher health coverage costs . Similarly, taxation of life insurance programs for low and middle-income workers . At a time when 37 million Americans have little or no health insurance, I believe we must carefully avoid exacerbating this problem. Kemp ; I strongly support the current tax incentives that enable employees to enjoy a wide range of benefits. These benefits help millions of Americans enjoy access to health care, life insurance, and a pension to boost their standard of living during the retirement years . Simon : In 1986, I was one of three senators to vote against the Tax Reform Act . I did so in large part because of the damage and confusion it created for pensions and other employee benefits .

0 The McCarran-Ferguson Act was ssed by a Congress preoccupied with winning World War II in the wake of a Supreme Court decision that jeopardized the authority of the states to regulate the insurance industry. While a broad antitrust exemption may have been war-

The federal government should be doing what it can to encourage workers to maintain adequate health and retirement plans. The tax code has been effective in providing such incentives . I believe we should strengthen, not retreat from, these incentives. In addition to providing fair

tax treatment for employee benefits, it is important to create a stable tax environment for them to grow. We should not tinker with the tax code year in and year out. The expense and uncertainty associated with these constant changes only lessens the amount of savings that can be devoted to the pensions . [ recognize that the deficit is our number one economic problem. Revenues must be a part of any sensible deficit reduction package . At an annual cost of $60 billion, the preferential treatment accorded qualified pension plan accounts for the largest annual revenue loss of all the preferences in the individual income tax structure . This is too big to be ignored . However, there are many sources of revenues that should be exhausted before we turn to pensions. Any proposals to change the tax treatment of pensions and employee benefits should be aimed at targeting the tax benefits to those most in need of them . No one should be allowed to shelter large amounts of income by channeling that income through pensions or employee benefits. Beyond this type of change, strengthening the commitment to private pensions will be the hallmark of the Simon Administration .

The Update : Many believe that the Social Security system is adequately financed, at least until the current baby-boom generation reaches retirement age . Yet, many have pointed out that the current tax levels to support the system now exceed income tax for a large portion of American workers, leading some to argue that the system as currently constituted is essentially an income transfer between the younger generations and retirees . Is there a real issue of

Senator Bob Dole

The Actuarial Update


generational fairness in the system? Should younger workers have the opportunity to "opt out" of the system and save for their own retirements?

investment, and increase productivity of American enterprise . Is It a good idea to protect the retirement of today's fifty and sixty year olds and to offer today's young people a chance to save for their own retirement? People are telling me I'm right on the mark with that idea . Gore : In 1983, I supported legislationthe so-called Social Security "bailout"that stabilized the system when it had been edging toward insolvency The success of this legislation is well-known . indeed, the program is not only solvent, but is now running large surpluses. The refinancing of the Social Security program did a great deal to strengthen public confidence in the system . We have a sound system, and I will take whatever steps are necessary to keep it solvent and ensure that the generational impact is not broken . The President can play an important role in this process, by encouraging the understanding that Social Security does not benefit a handful of Americans at the expense of its many contributors, but rather that the program seeks to ensure some income support to all Americans .

Pete DuPont

Dole : As chairman of the Senate Finance Committee, I introduced and shepherded to enactment the 1983 bi-partisan plan that rescued the Social Security System from financial insolvency. Pete DuPont: When President Reagan first proposed SDI, it was labeled "Star Wars" and derided by the press . That's what happens when you are ahead of your time . Some of that same skepticism has been focused lately on an idea whose time is just now arriving : the need to think about Social Security and how we, as a nation, are going to provide an equitable retirement for today's working generation when they retire tomorrow. Retirees today are supported by today's workers . Today there are three workers for every retiree, but that situation will change when the baby boom arrives. Then we will have no choice but to double Social Security taxes or cut Social Security benefits . We can avoid this dark future with an idea I think is a real winner . It's called the Financial Security Program. The Financial Security Program would strengthen and protect our present Social Security system. It would allow individuals to save for their own retirement by making contributions into Financial Security Accounts-contributions that would be matched by dollar-for-dollar tax credits . In so doing, it would create a huge pool of new savings, stimulate new

Kemp : I reject the idea that there is an intergenerational conflict over Social Security and that workers resent helping their parents and grandparents after all the financial assistance that has flowed to them . Both retirees and workers regard Social Security as the cornerstone for retirement income, and I am committed to maintaining a healthy, stable Social Security trust fund that will help meet the retirement needs of future generations . I believe we can increase support for the system among workers by repealing the scheduled 1988-1990 payroll tax Increases as long as actuaries confirm, as it now appears, that the surplus in the trust fund will meet benefit needs . This action will make it easier for young people to save privately for retirement and raise children, which would strengthen the Social Security system . Simon : The federal government should look at ways to improve the parts of Social Security particularly Medicare . Onbalance, however, Social Security is a good investment and protection for the people of this countryy including young people . There are some widely held myths about Social Security. Some young people believe it will not be there when it is their turn to retire . Another assumption is that much of Social Security money goes for welfare and administrative costs .

While It may be true that a few might obtain a better return through prudent or lucky investments, that is not true for most people. The Social Security system is designed to provide the maximum number of workers with the maximum amount of protection possible .

Barring a serious inflation problem, the Social Security retirement fund will be in even better shape later on that it now. Workers' money is safe .

Most people who advocate the "let-meinvest-my-money-my-way" theory ignore the disability coverage they receive through Social Security. Comparable benefits are not available from a local insurance agent. Furthermore, private coverage would be extremely expensive . Of every dollar paid into Social Security, 98 .8 cents reaches Social Security recipients. The Social Security fund is one of the most efficiently run government operations . The Update : As our population ages . the issue of how to pay for long-term care is increasinglybecoming the subject of public debate . Recent changes in Medicare have dealt only with acute care, leaving largely untouched the much greater issue of long-term chronic care for the infirm and elderly. How would society structure and pay for a program of comprehensive long-term care for the chronicallyill? What is the role of government in the process? What should be the role of the insurance industry?

Dole : As early as 1979, [ sponsored a bill to expand Medicare health coverage to include catastrophic Illness , and in th current Congress, I have introduced an cosponsored measures that will dramatically limit out-of-pocket costs for most services for the elderly . I have also urged the Congress to examine ways to address the ever-increasing need for long-term care for the elderly, while supporting responsible efforts to keep costs under control and health care affordable for the


November 1987

elderly and all Americans . The most positive thing one can say ut current U .S . long-term care policy is that we finally appear ready to establish one . It Is a national disgrace that older Americans must live in fear of becoming a burden on their families or forced to enter a nursing home and face impoverishing a spouse for their care. The current system is impossibly and unneccesarily complex. Those in need of long-term care must struggle through a patchwork of over eighty federal programs . We have wrongly limited our programs to the two endpoints of the health care continuum : acute and preventive care. If we were to meet the challenge of longterm care, we must make available the full range of services inbetween . These services should include in-home assistance, community-based services, specialized housing, and high quality institutional care . Providing a full continuum of care will enable an individual to carry on a productive life outside an institution for as long as possible . These options are not only more humane, but also more cost-effective . [ believe we can put in place a comprehensive long-term care policy that will provide quality care without resorting to

standardized national health care sysm that resembles that of Britain or anada. As President, I would develop


initiatives that make it easier for individuals to save money in anticipation of long-term care needs . In addition, I would develop methods to reduce medical costs . For example, by refusing to pay for routine chest x-rays, we could save $2 billion a year, enough to pay the entire national bill for out-of-pocket hospital expenses for people 65 and older.

Paying for long-term care is just one of the problems an aging population must face . These problems are not insurmountable . They can be anticipated and solved . More importantly, they must be if we as a nation are to avoid the spectacle of our elderly population struggling to live without critical long-term care . [ also support incentives to encourage people to purchase long-term care policies . I believe Congress should examine various options, Includingg full deductibility for long-term care premiums without regard to the cap on medical expense deductions, permitting the tax-free use of retirement savings such as IRAs and Keoghs to purchase long-term policies, and allowing owners of life insurance

licies to use the inside cash build-up m these policies to purchase long'~erm policies tax-free . W Kemp : I believe that insurance, private savings, and government assistance all should play a role in helping Americans meet their long-term care needs . While

many Americans currently rely heavily upon savings and the Medicaid program to meet long-term care costs, I strongly support expanding the availability of affordable long-term insurance. States should be encouraged to develop a framework for long-term insurance similar to the model legislation proposed by the National Association of Insurance Commissioners . This legislation sets certain minimum standards for policy coverage while protecting consumers from inadequate coverage and sales abuse .

I also support incentives to encourage people to purchase long-term care policies . I believe Congress should examine various options, including full deductibility for long-term care premiums without regard to the cap on medical expense deductions, permitting the tax-free use of retirement savings such as IRAs and Keoghs to purchase long-term care policies . and allowing owners of life insurance policies to use the inside cash buildup from those policies to purchase long-term care policies tax-free . Simon : Financing the tong-term health program does not come easily in the face of record budget deficits . As we redefine our national priorities, it is important that we address this concern . I intend to make long-term care a priority in my campaign and in my Administration. I pledge to propose a comprehensive

FROM THE PRESIDENT (con.tinuedfrom page 2) Columbus . Ohio with several actuaries from around the world. Many were delighted to watch the first European team victory on a North American golf course in many years . This happened the day after I read that our bond market is now dependent on Japanese central bank decisions . These two developments pointed out so clearly to me that ours is a shrinking and a changing world . We are no longer an island unto ourselves and the dominant position that the United States has long enjoyed in so many areas no longer exists . Our leaders and our institutions in this country must come to terms with the world as it is, not the world as it was, or the world they might like to be. So must we. The implications for actuaries? Actuaries can no longer presume that the world in which they operate will remain unchanged nor can they always be assured of preeminence in matters that many of us might feel are exclusively actuarial. Just as it now applies to the United States, nobody can provide us with a guarantee of our future . Two examples from my mail this week alonecasualtyloss reserve opinions would have become the responsibility of a company's

long-term social insurance program within the first sixty days of my Presidency. By failing to provide such assistance, we impose huge financial, physical, and social burdens on many families. By the year 2000, 20% of our population will be sixtyfive or older, and six million people will be over eighty-five years old . It is important that every citizen has quality medical care . I am a cosponsor of Senator Kennedy's bill (S . 1346), which would require employers to provide health care for the thirty- seven million Americans not covered by health insurance . I also support a proposal to expand the Medicare program to include insurance for catastrophic illness . A small part of the answer can be encouraging private action such as medical Individual Retirement Accounts . The average age of a woman entering a nursing home is 84, and yet we force older Americans to withdraw from their Individual Retirement Accounts at the age of seventyyears andsixmonths . This makes no sense . In addition, we need to educate young people about the importance of planning for their own retirement .

It is time to take a closer look at our present system and consider alternatives to increase the availability of quality, affordable health care for all Americans .

auditors in Delaware without intervention by the Academy, and draft legislation for the creation of a comprehensive health insurance pool in the District of Columbia included provision that one of the nine board members of the pool be a MAAA, only because another Academy member was alert . Although my trip was not that of a tourist, my traveling was most educational . I returned even more convinced of the need for actuaries to be aware of and responsive to change in our world, and of the need for an organization like the Academy to represent the profession on so many public issues where we will become involved, whether we know it at the time or not. Look for two more editorials from Fibtger during the course of his presidency.

Fax Fact Once again, we are drawing your attention to the addition to our masthead of a facsimile number . Take note . Your facsimile machine can now talk to our facsimile machine with this number : 202-8721948 .

The Actuarial Update


American Academy of Actuaries 1987-1988

Board of Directors

John A. Fibiger President

W. James MacGinnitie President-Elect

Phillip N. Ben-Zvi Vice President

Burton D . Jay Vice President

Joseph J . Stahl, II Vice President

Mavis A . Walters Vice President

Virgll D . Wagner Secretary

Daniel J . McCarthy Treasurer

Bartley L. Munson Past President

Allan D. Affleck

Lawrence N . Bader

Robert J. Callahan

Darrel J . Croot

Charles E . Farr

Wayne H . Fisher

David P Flynri

Michael Fusco

Harry D. Garber

Harper L. Garrett, Jc

Ardian C . Gill

Carlton W. He i -,in

LeRoy J . Simon

Richard H. Snader

William T. Tozer

Thomas D. Levy

Norman S .



C. Rippe

November 1987


Committee Roster The Academy committees and their chairpersons are set forth below The full composition of these committees will appear in e 1988 Yearbook. SIDENTIAL COMMITTEES Nominating Committee Bartley L. Munson Committee on Discipline Harry D. Garber

Task Force on the Actuarial Magazine Harold J. Brownlee

Committee on Life Insurance John J. Palmer

Task Force on Continuing Education Recognition

Universal Life Task Force Douglas C. Doll

Daphne D. Bartlett

Committee on Property and Liability Issues Albert J . Beer

Committee on Planning W. James MacGinnitie

Task Force on Continuing Education for Enrolled Actuaries Charles E . Farr

Admissions Committee James J. Murphy Note : Reports to Secretary


Budget and Finance Committee Daniel J . McCarthy Note ; Reports to Treasurer Interim Actuarial Standards Board Ronald L . Bornhuetter Casualty Committee of the IASB Charles A. Bryan Health Committee of the IASB Ronald M. Wolf

Life Committee of the IASB Harold G. Ingraham, Jr. 0 Subcommittee on Dividends and Other NonGuaranteed Elements William T. Tozer Pension Committee of the IASB Richard G. Roeder Specialty Committee of the IASB Jarvis Farley

Committee on Life Insurance Financial Reporting Edward S. Silins

Committee on Risk Classification Chester Lewandowski Committee on Continuing Care Retirement Communities Alwyn V Powell Task Force on Casualty Loss Reserve Opinions Warren P. Cooper

Committee on Property and Liability Insurance Financial Reporting Stephen P. Lowe


Committee on Pension Accounting Harper L. Garrett, Jr.

Pension Committee Larry D . Zimpleman

Committee on Relations with Accountants A. Norman Crowder, III

Committee on Health and Welfare Plans


Task Force on Non -Discrimination Rules Richard Ostuw Committee on Services to Enrolled Actuaries Kathleen S . Elder

Committee on Health Robert H. Dobson Task Force on National Health Care Issues Bartley L . Munson

Thomas G. Nelson

Committee on Social Insurance Robert J . Myers

Retiring Members of the Board of Directors

Editorial Advisory Committee M. Stanley Hughey M . Stanley Hughey Past President

Standards Organizing Committee John H . Harding COMMITTEES ON ACCREDITATION, QUALIFICATION AND COMMUNICATION Committee on Guides to Professional Conduct Harold J. Brownlee Committee on Qualifications James R Reiskytl

Edward H . Friend Vice President

Robert H . Dobson Secretary

Robert A . Anker

Linda L . Bell

Myles M. Gray

Thomas M . Malloy

Stewart G. Nagler

LeRoy B . Parks, Jr.

Committee on Liaison with NAIC Burton D . Jay AM6 blie Relations Committee V,ce F. Vane Committee on Publications Carl R Ohman

The Actuarial Update


CLOSE-UP ON JOHN A. FIBIGER (continued from page 1) performance of members of this profession after the standards are created will be a key to improving the image . If actuaries abide by the standards, if we uphold them through appropriate discipline procedures, and if other professions can turn to us and see a viable set of standards, then our image should improve greatly . Looking backward, I can certainly testify as to the harm it did the actuarial community not to have standards for methods of pension plans valuation when the Financial Accounting Standards Board was doing the research that led up to FAS 87 .

The Update : What specific changes in the profession would you like to set in motion in the coming year? Fibiger: I would like to see the profession move more toward accepting responsibility as professionals, as a source that serves the public, not just the employer of the actuary, and that can be publicly relied upon for statement on sales projections and solvency of insurers and pension plans . We should be an objective source of facts in public debates on issues that involve contingencies that actuaries are trained to deal with . I also hope that we can begin to move toward a more easily explainable structure of the actuarial organizations we have and what their duties are. To an outsider, the justification for the number and roles of the various actuarial organizations must certainly seem less than logical. To many in the profession, the reasons are more historical than rational . In the United States, the Academy was created with an external focus in mind, while other actuarial organizations have more of a professional than a public scope . [t is important for the good of the profession that we have a common agreement on the roles of the respective organizations and that we can communicate those roles to the public. The Update: How can individual actuarries help to accomplish these goals? In this regard, how accessible will you be to your new constituency? Fibiger: My schedule, even without the extra demands of an actuarial leadership role, is a busy one . I will try to be as accessible as possible , particularly by phone and mail. Turning to the goals, I hope that actuaries will begin more and more to think of themselves as professionals with standards of practice, the valuation actuary, and so on, coming into focus . As far as reviewing the organization of the profession. I hope that

people will let me know what they are looking for from their professional organizations and how the profession can best organize itself to serve their needs as well as those of the public . The Update : From beginning actuary to president of a life insurance company like The New England-what were some of the steps along the way? P'ibiger : When I got my FSA in 1959, 1 truly was a beginning actuary, since almost all my prior experience has been with computers . Almost miraculously, as a draftee in the Army, I was actually given duties that made use of my prior experience . Three years after I started my permanent job in Nebraska following separation from the Army, I became head of the actuarial department of my relatively small company as the result of a retirement, a transfer, and then a disabling illness to my boss . I was only thirty years old with about three years of actuarial experience and, in retrospect, I truly admire the courage it took for the company to let me run the actuarial department. After several years in that position . I became head of the company's group department, which had been experiencing profit problems . Three years later I moved to The New England to handle the company's group operations . When a new company president was named . I took his prior place as head of home office administration, which was my responsibility until I became president of The New England in 1981 . The Update : Do you have any regrets about how your career has evolved? Fibiger: Given my career advancement beyond what I could have possibly imagined when I wrote part 1, it is very hard to have many regrets about my career . I believe the only one is that with the time taken up by my management responsibilities, it is virtually impossible not to see my professional skills diminish in a rapidly changing world .

The Update : If you could choose a profession over again-what would it be?

Fibiger : I don't believe [ have ever met anyone in another learned profession with whom [ would trade places . My ~'~''~ has sometimes commented that I real!" have the soul of a cab driver, but any urges along that line are well satisfied by commuting to and from work in Boston, which gives me all the excitement I need at the wheel .

The Update: To what extent have your personal values (religious, family, etc .) affected or contributed to your professional success? Fibiger : It's hard to say. Most people I know don't leave their personal characteristics at home and adopt another set for the office . So, I support the idea that there has to be a connection between personal values and success . One very happy thing about an actuarial career is that I have never had to compromise any personal values to achieve personal success ; that is a wonderful thing to be able to say to your children and also to anyone contemplating an actuarial career. The Update: There is a lot of talk today about ethics in government and business . [s that an area that actuaries, in particular, need to address? Fibiger : I don't know that actuaries ha v any special expertise in ethics, althou it certainly can set an example if we our work professionally with the highest integrity. The opportunity does arise for the actuarial profession to be the "conscience" of a business that depends on taking present dollars, holding them, investing them, and then having them available at sometime in the future when they are needed . To illustrate prospective results responsibly, and to be sure that reasonable provision is made for contingencies so that the money is there when needed depends on professional work by actuaries, and that certainly is the way ethical competition among insurers must be conducted.

The Update : When the workday is over, how do you like to relax? Fibiger: I find that playing the piano . which I am fortunate enough to be able

Academy Alert Subscription Reminder Last month's Actuarial Update included an invitation to subscribe to the Academy Alert service . The article describing this service was accompanied by a yellow card, which should be completed to start or renew your subscription . A one-year subscription is available at a cost of $15 .00 per topic. Please send your order form and a check for total payment (made out to the American Academy of Actuaries) to the Academy' s Washington office in an envelope marked "Academy Alert ." This subscription runs for calendar year 1988.

November 1987

to do by ear. is a great relaxation for me . . Also, even though my job involves a lot of W ~reling, I still enjoy personal traveling y much . We have a summer home in New Hampshire that is a wonderful place to relax . Happily, I am able to forget about the office quickly when I get there, and it's only a couple of hours from Boston . The Update : What is your all-time favorite movie? Fibiger: I am tempted to respond with that old actuarial favorite "Mary Poppins," which contains the best song ever written about compound interest"When You Put Tuppence in the Bank ." However. if I had to pick, it would be "Casablanca" for a drama, and "Singing in the Rain" for a musical. As I think about them, all three movies I mentioned involve people fighting against the "establishment," which may not be right for me since I seem to have become a member of the "establishment." However, I take some comfort in my belief that both


companies and individuals who think they are well established need to keep reviewing why they got there and how they can stay there . Actuaries have an important role to play in this regard for their companies, and the same need to review and renew should hold true for their professional career as well .

The Update : If you had to give a young actuary just starting out some advice, what would it be? Fibiger : The advice might depend on who the young actuary was and what his or her goals were . In general, I suppose, I would say: Do your work as well as you can, learn to use your technical background to explain what you are doing to help people understand it, and be sure that you try to learn why people react as they do and what motivates their actions, and responses . And, don't ever stop being curious about things you don't know

The Update : In a couple of years we will be celebrating the centennial of the ac-

tuarial profession-are you generally pleased with our progress? Fibiger: Not completely. I've already expressed my concern about the structure of our governing organizations and how hard It is to explain ourselves to outsiders . We are also struggling with the idea of what it means to be a professional and trying to find the proper role for actuaries in a world in which the traditional employers of most actuaries, both insurers and pension plans . are undergoing rapid change. Additionally, we fill our professional role best when we bring our mathematical skills and our ability to develop models involving contingencies to bear on problems faced in the real world . I hope that in our basic educational requirement we are not focusing so much on the mathematics of our profession that we make it seem unattractive to those who want to use their mathematical skills to work on solving real life, real world problems . a

Academy Committee Examines the Property/Liability Insurance Industry Underwriting Cycle W Committee on Property and Liability es recently began public distribution of a report on the property/liability insurance industry underwriting cycle . The introduction to the report notes that an understanding of the industry requires a basic knowledge of the nature of this cycle, the unique factors contributing to the reaction of the insurers to the cycle . and alternate measures of the cycle . The committee developed the report to provide objective Information and actuarial analysis to legislators and regulators as they address issues concerning the recent problems of availability and affordability of liability insurance . In addition to describing the underwriting cycle, examining the unique elements of the 1978-1983 cycle, and discussing the factors that caused the cycle to turn, the report also discusses alternate measures of industry profitability .

One benchmark that the property/liability insurance industry has used to measure the underwriting cycle is the combined ratio (also called the trade ratio). The combined ratio is a calendar year ratio that focuses on paid losses and uses duringa calendaryear, adjusted hanges in reserves for unpaid losses expenses . As a so-called pure insurance result, the calendar year combined ratio tends to gloss over the effect of reserve strengthening and ignores investment results, says the report .

Accident year results assign claim payments and expenses to the year in which the loss occurred . Thus, the report notes, changes in the reserves for prior accident year' s claims do not affect the current accident year's results . When accident year losses are compared to premiums earned during the accident year, the result is an accident year loss ratio . The report suggests that this ratio provides a better matching of claims and premiums than the calendar year loss ratio . The combined ratio does not recognize investment income . It may include or exclude policyholder's dividends . The operating ratio adjusts the combined ratio for investment income from insurance operations (excluding capital gains and losses ) and for policyholder's dividends and, thus, according to the report, is a more encompassing measure of profitability than the combined ratio . Consequently, the operating ratio measures total return from insurance operations, including investment income on capital and surplus funds . Capital and surplus funds are necessary to support underwriting, but the income generated by their investment would exist whether or not they were used to support underwriting, the report says. A detailed analysis contained in the report indicates that both the peaks and valleys in the underwriting cycle are more severe than would be indicated based on calendar year data . When results are adverse, as measured by high accident year

loss ratios, reserve weakening occurs and calendar year loss ratios are dampened . When results Improve, as measured by low accident year loss ratios, calendar year loss ratios are increased through reserve strengthening . The report concludes that the swing in the cycle is wider than the published calendar year results indicate . With the distorting effect of changes in loss reserve adequacy, calendar year data masks the true results as

measured by accident year data .

FYI OnFebnrary24-26, 1988, theAmerican Academy of Actuaries and the Conference of Actuaries in Public Practice will host the thirteenth annual Enrolled Actuaries Meeting .

Registration information will be mailed this month . If you are planning to attend and do not receive registration materials, please call the Academy office. This year there will be a registration cut-off at 1,300 attendees with no on-site registration. Therefore, it is important that registrations are received early. More information on this new policy will be contained in the registration package .

The Actuarial Update




a collection of fea tures, oddities, and helpful tips



November 1987 Actuarial Update  

3 Statements- 3 Letters to the Editor In t The Updateare the following: • Government Relations Watch • In Search Of. . . NOVEMBER 1987 AMERI...

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