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etlc~,uarial Upda e t


In this issue 2

From the ASB


Centennial Portrait


Letter to the Editor


1989 Casualty Loss Reserve Seminar


Nonforfeiture Values Report Available


Florida Bar Brief


Standards Outlook


Enrolled Actuaries May Opt for Inactive Status Checklist of Academy


Statements September 1989



Estimating the Cost of HIV : A Proposed Standard of Practice am, r .

by Harold

Actuaries who establish reserves for life and health Insurance financial statements and insurance regulators will both benefit from the proposed standard, Guidance on Estimating and Providingfor the Cost ofHlV-Related Claims Covered Under Life and Accident and Health Insurance Pdictes. An exposure draft is included in this Update malling. I urge you to review the exposure draft carefully, if it is applicable to your practice, and to submit comments to the Actuarial Standards Board . The text of the exposure draft is straightforward, but the proposed standard itself would profoundly influence actuarial practice and therefore deserves thoughtful review.

Need for Standard Meager guidance has been available to actuaries estimating and providing for extra claims resulting from HIV infection . Until the mid-1980s, few life and health insurers even were aware of the potential impact of the HIV epidemic and AIDS on their business . Startingin 1987, however, a substantial body of information has been contributed to actuarial literature, which attempts to assess the financial repercussions of the epidemic on individual insurance companies . One such report, "The Financial Implications of AIDS for Life Insurance (continued on page 8)

Study on Full-Funding Limitation Released


Regulators File Qualifications Inquiries with Discipline Committee Actuarial School in Mexico City Celebrates 20th Year


An Open Letter to the President of the Institute of Actuaries

Enclosures Included In this month's Issue of The Update are the following : • Government Relations Watch *In Search Of . . . • ASB Boxscore

sure Drafts on the Cost of IV-Related Claims, and When to Do Cash Flow Testing • Continuing Education Announcement

Investment Actuaries Forecast Volatile Market in 2000 by George So es Consolidation of financial institutions; a Dow Jones Industrial Average dropping to 2,000 and peaking as high as 4,000 ; and the imposition of income taxes on the healthy pension market were among the major predictions offered by a panel of actuaries and economists assembled in New York, September 13 . for a Forecast 2000 symposium on asset management and investment . Results of a survey of 446 asset management and investment actuaries, reported at the seminar by Academy Executive Vice President Jim Murphy, portended a bullish, yet volatile, stock market between now and the turn of the century . Ninety-four percent of respon(continued on page 1 1)

Casualty Loss Reserve Seminar attendees, John Muetterties and Kevin Ryan. review their meeting programs . Held annually, the seminarpresents sessions on a variety of topics related to lossreserving . More than 640 actuaries and loss reserve specialists attended this year's September 18-19 meeting in Chicago. See story on page 4.

The Actuarial Update


vary, including topics such as AIDS, risk classification , expert witness testimony, discounting of casualty loss reserves, involuntary termination

IMP of Actuaries President Harold J. Brownlee President-Elect Mavis A. Walters


Ronald L. Bornhuetter Vice Presidents Harry D . Garber Harper L . Garrett, Jr. John H . Harding Daniel J . McCarthy Secretary Virgil D . Wagner Treasurer Thomas D . Levy Executive Vice President James J. Murphy

Executive Office 1720 1 Street, N .W. 7th Floor Washington, D .C . 20006 (202) 223-8196 FAX (202) 872-1948 Membership Administration Woodfield Corporate Center 475 N. Martingale Road Schaumburg, Illinois 60173-2226 (312) 706-3513

Chairperson Committee on Publications Roland E . King Editor Charles Barry H . Watson Executive Editor Erich Parker Associate Editor Warren P. Cooper Managing Editor Jeanne Casey Contributing Editor George Soules Production Manager Renee Cox

American Academy of Actuaries 1720 1 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.

Standard-Bearer & Retinue As Actuarial Standards Board (ASB) chairperson, I am pleased to report that the ASB is alive and well . Its "army" now counts almost 150 involved , dedicated actuaries and staff. Thanks to their combined efforts, the concept of formal actuarial standards of practice Is a reality-and is moving forward at an aggressive pace . As my personal involvement is nearing an end, I am grateful for this opportunity to pass along a few thoughts about the ASB and its activities. On the ASB board , there are nine of us representing all disciplines , plus two very capable , full-time staffersChristine Nickerson , our director, and Alan Kennedy, our technical writer. Three board members belong to the Casualty Actuarial Society, seven are Fellows of the Society of Actuaries, and one board member belongs to both learned societies . Board members also are representative of the various practice areas within our profession: two are from the pension area, two from casualty, three from life . One is from health , and one is a generalist. Sliced another way, the board has five consultants, three from the company ranks, and one from academia . All board members are dedicated to the standards movement . The board meets four times a year for two days, usually In St . Louis, Missouri. Our meeting agendas are full, because the pace at which the ASB's seven operating committees are generating standards is Increasing. Presenting proposed standards can take considerable time and, once presented, they require a lot of thought. The board also is working on the ASB's infrastructure : you will see some fruits of this labor soon, when your standards reference guide arrives . And there are numerous other projects on the ASB's drawing board . With a quick glance at the "ASB Box Score " Included with every issue of The Actuarial Update, you can find out just what standards are being considered . The subjects of the proposed standards

fits, to name some of them . In addition, a joint casualty/ life tats force Is drafting a standard for valuing an insurance company prior to its merger or acquisition . The task force has enlisted the help of two investment bankers-the first time the ASB has reached out to. involve experts outside the profession. Although many topics never evolve into a final standard , the ASB is committed to meeting the need for standards In all actuarial disciplines, in a timely manner. Certainly, the standards movement is off-and-running and growing at a very satisfactory rate. However, in spite of the ASB board's very substantial accomplishments, I leave the board with some concerns about its future . Without discussing each of them in detail, I will list them . •Compliance/Discipline. Unless the profession is prepared to enforce practice standards , the ASB Is wasting its time . •UttllzationofStandards . Standards must be responsive to the actuary's practice needs, not limiting . We hay be sure that we can see the forest low trees, in establishing new standards of practice. •Enthusiasrn/ Inuoluement . Acertain amount of apathy toward the standards movement persists within our profession. We must encourage more participation as the standards movement shifts Into second gear . We also need to get younger actuaries just starting out involved . *Recruiting for ASB. Continuing to find dedicated, hard-workingASB board members, committee chairpersons, and committee members may be difficult. •Initiatiue in Standards-Setting. We must not be in the position of always reacting to standards set by the accounting profession (the American Institute of Certified Public Accountants and Financial Accounting Standards Board) . When appropriate, we should be the first to publish a standard (e .g ., the actuarial standard of practice for continuing care retirement communities) . We are off to a great start , but there is much more to be accomplished . Without your continuing Interest an volvement , we may not see a retu the tremendous investment of time and effort we've already made . I believe actuarial standards of practice are well worth all the effort we put into them .A

November 1989


Centennial Portrait Letter to the Editor Haynes Miller, a6-1988

Christmas Day of last year, the profession lost "one of Its most distinguished and admired members ." At the age of eighty- two . John Haynes Miller died at his home in South Hero, Vermont . An weary appearing in the Transactions Society of Actuaries relates : Mr. Miller had a major role in organizing the Academy . He liked to say Jocularly that he 'Invented the Academy ; ' when the organizers were wrestling with the question of just what structure would be best for the certif ication of actuaries and government relations In the United States, he was the one who suggested the concept of a body that would be neither subordinate to, nor would have any authority over, any of the existing actuarial bodies. A Fellow of both the Society of Actuaries and the Casualty Actuarial SociTHE WIZARD OF ID

Trust in the Treasury Regarding Carl Strunk's letter (September 1989 Update), and the editor's response ("I tend to agree with you. . ."), do you two really think that U .S . government bonds are not prudent investments? Should the U. S. Department of Labor and the U . S . Treasury charge " imprudent investing" by every private pension fund that holds U .S . government bonds? Would you tell E-Bond (or whatever they are currently called) holders that they have invested imprudently? Of course the money, borrowed from and owed to the Social Security Trust Funds, is spent by the U . S . Treasury ; isn't that what any borrower does? I would rather be owed money by the U.S . Treasury, and therefore by the full taxing power of the government and

ety, Mr . Miller was a charter vice president of the Academy in 1965, and its president in 1967 . In 1974 , eight years after he had retired from Monarch Life Insurance Company in Springfteld. Massachusetts . he launched the Disability Newsletter to provide "international coverage of current statistics and other information bearing on disability insurance and rehabilitation of the disabled." As historian Jack Morehead states in Our Yesterdays: Miller, an authority in this field, quickly established the corps of subscribers needed to make this enterprise successful, and has persuaded actuaries to contribute experience data avail-

strength of the economy, than by any other debtor. I've frequently suggested-only partly in jestthat the Social Security Trust Funds ought to buy title to the Strategic Oil Reserve and similar governmentowned assets . That wouldn't change anything as far as total government activity is concerned, but it might help those who think the Trust Funds aren't real. Certainly there are important concerns about how the Treasury can best use the money to strengthen the economy, but actuaries ought to help clarify the distinction between such questions and any misconceptions about the existence ofthe Old Age, Survivors, and Disability Insurance (OASDI) Trust Funds . Like any fund invested in financial assets, they really do exist . Howard Young Livonia, Michigan

able nowhere else. His essays have provided historical as well as current information, and he has never hesitated to criticize practices that he considered inappropriate or unsound. AN in all, the Disability Newsletter has been educational and an influence for the good. The Disability Newsletter has been revived recently by two consultants at Milliman & Robertson, Inc . The first issue is due out this month and is dedicated to John Haynes Miller. For subscriptions, contact Bill Bluhm or Dave Scarlett at the Minneapolis office of Milliman & Robertson ; (612) 8975300 .

by Brant parker and Johnny hart

0 By permission of Johnny Hart and NAS, Inc.

The Actuarial Update


1989 Casualty Loss Reserve Seminar More than 600 actuaries and loss reserve specialists attended the 1989 Casualty Loss Reserve Seminar, September 18-9, at the Hyatt Regency O'Hare Hotel, Chicago. Sponsored by the Academy and the Casualty Actuarial Society, the seminarofferedforty ive sessions tailored to the continuing education needs of attendees . as well as a stimulating luncheon address.

Fireman's Fund CEO Tells Why Underwriting Cycle Hurts P&C Industry Offering "strong medicine" for a perennially unstable property - casualty insurance underwriting cycle. John J. (Jack) Byrne , chairman , chief executive

officer , and president ofFireman's Fund Insurance Company, urged loss reserve actuaries "to bring discipline to their balance sheets." Byrne was the luncheon speaker at the 1989 Casualty Loss Reserve Seminar, September 18 . "This casualty property cycle really does ruin what ought to be a very good business," said Byrne, adding that "the nation deserves more stability than what we have been able to provide." The swings have damaged the insurance Industry's credibility with consumers, as well as causing problems for management and agents . Byrne charged that the major culprit Is "too much reported capital sloshing around ." Byrne alleged that in 1982, at a time when the industrywas "telling the world

that we were supporting their needs," overreporting of capital caused by undisciplined balance sheets resulted in a $10 billion shortfall that hellp bring about the insurance Indust "crisis" In 1983. Since then the industry has "come roaring back," pumping in $40 billion into the property/casualty business, he noted . Even so, an Insurance Services Office (ISO) report indicates that current loss reserves are generally 12%-13% "light," said Byrne, and that allocated loss adjustment reserves are 50% "light." He exhorted the assembled actuaries to "mark bonds to market right now," and to "get our reserves right ." Byrne recommended that statutory blanks going to insurance commissioners be signed by a qualified casualty actuary and that the profession take on a role in enforcing discipline within the property/casualty industry. He also suggested that informal hearings could be held by the Actuarial Standards Board to determine, when necessary, the appropriateness of loss reserve certifications . Byrne asked that state insurance regulators "take the balance sheet more seriously," and he encouraged the tablishment of a "central office" for National Association oflnsurance Commissioners . "We might lose state regulation ofthe solvency of property/casualty companies unless we do something," Byrnewarned, adding that funding for such an office could come from the private sector .

Studies Reveal Effect of Tort Reform Measures Enacted tort reform statutes have had a limited effect on reducing claim costs, and government entities have been seen as "deep pockets" more likely to pay their "fair share" in multi-defendant cases, according to separate studies sponsored by the Insurance Services Office (ISO) . These findings were reported by Philip D . Miller, senior vice president and actuary, ISO, speaking on "Tort Reform" at the 1989 Casualty Loss Reserve Seminar . The Claim Evaluation Project, an independently conducted study of six typical claim situations, found that "in m instances the qualifications and exis tions in many of the enacted tort reform statutes substantially limited their Intended effect of reducing insurance claim costs ." However, the study also


November 1989 noted that a three-point program to abolish the rule of joint and several liability, relax the collateral source rule, place a cap of $250,000 on nonnomic damages `would produce significant cost reductions in virtually all of the claim situations tested ." The second study, the Claim File Data Analysis, culled Information from over 13,000 commercial bodily injury claim files, analyzing large claims, both open and closed, claims of all sizes closed as ofAugust 1987, and government entity claims of under $25,000 from policy year 1983 . In the instance of municipal liability claims, the insured's percentage of settlement exceeded its percentage of fault 46% of the time, compared with 36% for general liability multi-defendant cases . Litigation occurred more frequently in government cases, with lawsuits filed in 75% of the small government claims and in 88% of the large governmental claims, in contrast to only 32% of the claims In the general claim population. Average compensation in governmental claims was also higher than for faultadjusted economic loss for the general claims population.

other finding, said Miller, was the tively small number" of large claims responsible for the vast majority of total liability insurance compensation . In fact, fewer than 3% of the claims were responsible for 54% of total compensation . "While some critics have discounted the effect of recent tort law trends as only affecting large claims," Miller said, "the findings suggested that

tort reforms targeting high value cases can indeed make a difference .Miller said the ISO Data Analysis study would be valuable to insurance regulators, legislators, and other parties debating the merits of tort reform, but that there were certain limitations In the claim studies, including the fact that information is often only available when a case actually goes to verdictabout 2% of the time . While it is clear that tort reform will have an effect on future liability insurance costs , since tort reforms were not enacted until 1986, "you will generally have no frame of reference for predicting the effects of such reforms," said Miller. However, he added, "it should be clear that you do not necessarily

need brand-new reserving methods for dealing with tort reform ."

New Focus for Environmental Impairment Liability Superfund cleanup problems will soon take a back seat to indoor air, acid rain, and ozone-related environmental hazards, creating a "tremendous risk management problem" for pollution liability insurers, according to William P . Gulledge, vice president, Front Royal Group, speaking at a panel discussion on "Loss Reserves for Environmental Impairment Liability"at the 1989Casualty Loss Reserve Seminar. Gulledge was joined by Thomas J . Coyle, vice president underwriting, EPIC Insurance Company, and Roger M . Hayne, consulting actuary, Milliman & Robertson, Inc . Pollution liability insurance is currently a "government-driven market," Coyle remarked, with few companies nowbuying policies on avoluntarybasls . For example, the Environmental Protection Agency has mandated that all hazardous waste treatment, storage, or disposal facilities must have third-party liability insurance for sudden and accidental occurrences . Unfortunately, some 25% of service station owners affected by this regulation, with regard to underground storage tanks, will be unable to afford coverage . This will "put heat on the politicians" to come up with a solution, said Coyle . He added that, in general , "it â‚Źs just not possible" for insurers to "mediate cleanups to a pris(continued on pane 12)


The Actuarial Update

Nonforfeiture Values Report Available

profit charge. The asset share value is recommended as the benchmark for testing minimum nonforfelture value methods .

by Walter N. Miller

4 . The Methodology in the Current Standard Nonforfeiture Law (SNFL) Still Works and Can Continue to Be the Basis for Minimum Norforfeiture Benefits . The SNFL calculates policy values by providing a means of grading between initial values and maturity values . This method works adequately for fixed premium products . Flexible premium contracts, such as universal life, are not directly defined by this process because the maturity value is not defined . We propose a method that would adapt the SNFL for universal life by defining a maturity value .

How do the concepts of equity and solvency relate to nonforfeiture values in light of current and anticipated conditions? Since its formation in the spring of 1987, the Task Force on Nonforfeiture Values has been examining this broad and tangled area of practice . Its final report has just been completed ; an executive summary appears below. Copies of the full report are available from the Academy's Washington office . The task force is interested in your comments ; please send them to either Walter N. Miller or Douglas C . Doll at their Academy Yearbook addresses .

Executive Summary 1 . Premise : Nonforfeiture Values Will Be Mandated . Regulations that have mandated nonforfelture values on life insurance date back to 1861 in the United States and have been required in all states since the 1940s . Given the historical and regulatory context of the insurance industry in the United States, we assumed that nonforfelture benefits would continue to be mandated . We believe that it is important to have the same general methodology apply to all types of life insurance contracts. 2. Paid-Up Insurance Is a Benefit that Satisfies Nonforfeiture Equity. Policies should provide paid-up insurance nonforfeiture benefits, subject to minimum standards, but should not be required to provide cash surrender benefits. Requiring minimum Insurance benefits meets concerns regarding adequate policyholder equity. 3 . The Asset Share Is an Appropriate Value on which to Base Minimum Nonforfeiture Benefits. We concur with the 1941 National Association of Insurance Commissioners (NAIL) Committee and the 1975 Unruh Committee . Asset shares are the best measure of equity defined as follows : `a terminating policyholder should not leave the continuing policyholder in a worse position for his having been there ." The asset share value is defined retrospectively as the net assets accumulated by the company under the policy, less a risk and

5 . A Retrospective Methodology Was Explored, but Is Not Endorsed. In order to provide meaningful minimum values, such a methodology would require control of all elements of the retrospective accumulation, which would have the effect of placing a maximum on gross premiums for a given benefit. Explicit rate regulation historically has not been imposed on individual life insurance and would preclude certain policy designs that may provide benefits to policyholders . We therefore do not endorse this methodology. 6 . Cash Values , If Provided, Should Have Minimum Standards Linked to Paid-Up Values. Minimum Values Should Equal 90% of Present Value of Paid -Ups. The increased volatility of interest rates in recentyears means thatcash surrenders-which occur disproportionately In times of high interest rates-produce an additional cost . We concluded that issuers should be able to recognize this cost equitably by specifying a reduction of up to 10% of the policy's insurance fund value in determining the cash value available to a surrendering policyholder . 7. Economic Adjustments To Cash Values . As an alternative to the 10% adjustment on paid-up values to determine cash values, companies should be allowed, but not required, to provide economic adjustments for changes In Interest rates . We do not have a proposal for a specific type of adjustment that the SNFL law should allow, but do have some recommendations for desirable characteristics of such an adjustment .

8A. Non -Guaranteed Elements in Non-Par Policies May Require Further Regulation , but Not Under t Standard Nonforfeiture Law . general, non-guaranteed eleme that are illustrated at issue pose disclosure issues that should be subject to regulation. In addition, some nonguaranteed elements distribute gains from prior contract durations; these should be subject to regulatory and actuarial standards similar to those in effect for dividends . 8B . A Non-Guaranteed Element, Once Credited, Should Be Nonforfeitable . However, once a non-guaranteed element has been credited to an Insurance fund value, it may be subject to the same adjustments as guaranteed portions of the insurance fund value, such as surrender charges not exceeding unamortized, unused acquisition expense allowances . A

Florida Bar Brief On September 29,1989, the Academy filed a brief with the Florida Supreme Court , In re: FAQ # 89001 , Nonfawyer Preparation of Pension Plans. The case, referre to in the October Updates Leg Lines column , involves an attempt by the Florida Bar Association to gain a decree from the State's Supreme Court that would prevent nonlawyers from active participation In retirement plan de-' sign, drafting, operation , and termination. The suit has garnered much attention , and the involvement of other parties including the Conference of Actuaries in Public Practice ; the National Association ofLife Underwriters and its Florida affiliate ; the Association of Private Pension & Welfare Plans ; the American Council of Life Insurance ; the Florida Bankers Association : and several major actuarial and accounting consulting firms . The Federal Trade Commission also is scheduled to Me a brief on the negative Impact such new limitations might have on competition. The court has granted a delay to the Bar Association to respond, and we are following the case carefully, awai Ing further developments . Copse of the Academy's brief are available upon request from the Washington office .


November 1989

IC Standards Outlook 0



by Christine Nickerson

At its final 1989 quarterly meeting on October 12-13, theActuartal Standards Board (ASB) unanimouslyvoted to adopt a new standard of practice titled, Actuarial Standard of Practice Concerning Risk Classtjtcatfon- The purpose of the standard is to provide guidelines for actuaries in designing, using, and updating risk classification systems, This standard was released as an exposure draft in April 1989 . The drafting committee received twenty-three comment letters and, based on these comments, made several changes to the exposure draft . Also at the meeting, the ASB approved the release of four exposure drafts, as described below . Discounting of Property and Casualty Loss and LossAdjustment Reserves. The purpose of this proposed standard is to define the issues and considerations that an actuary must take into account In determining discounted loss and loss adjustment expense reserves . Guidance on Estimating and Prouidfor the Cost of HIV-Related Claims lovered Under Life and Accident and Health Insurance Fbiicies . This proposed standard would provide guidance to the actuary in carrying out professional responsibilities in estimating and providing for future claims costs arising from the human immunodeficlencyvirus (HIV) epidemic . (See Harold Ingraham's article, page 1 .) When to do Cash Flow Testing for Life and Health Insurance Companies. The intent of this proposed standard is to provide guidance to the actuary in deciding whether or not to perform cash flow testing ( in a manner consistent with the cash flow testing standards adopted by the ASB in October 1988) when giving a professional opinion or recommendation for a life or health insurance company. Actuarial Practice Concerning Health Maintenance Organizations and Other Managed-Care Health Plans. In developing this proposed standard, the Health Committee of the ASB Identified several major issues requiring special consideration for HMOs and other Waged -care health plans-issues not splicable to all health plans in general. These include (1) transfer of risk to providers, (2) management of delivery of care, and (3) multiple delivery systems and financial structuring.

These exposure drafts will be published and distributed during the next two months, and interested parties are urged to submit comments and suggestions to . the ASB. All comments will receive consideration by the pertinent drafting committees in preparing the final standards for adoption by the ASB . Projects currently under development by ASB operating committees are as follows : Casualty Committee In addition to the discounting exposure draft listed above, the Casualty Committee is awaiting public comment on a second exposure draft titled, ?rending Procedures in Property/Casualty InsuranceRatemakfng, which was published last month. Health Committee The Health Committee is focusing on two projects, the HMO exposure draft described above and development of a generalized health ratemaking standard . The committee hopes to present a proposed ratemaking standard to the ASB in January 1990 . The proposal will address health ratemaking in general and include health insurance in all its forms.

which Is developing a standard on actuarial appraisals and actuarial analyses of insurance companies and related organizations. The task force plans to have a proposal ready to present to the ASB in January. Pension Committee The Pension Committee has revised Its exposure draft on shutdown benefits and because of substantive changes to the draft will re-expose it. The draft is a proposed addition to the standard of practice titled, farMeasuring Pension Obligations. The committee has retitled the draft, "Benefits Upon lmmluntaryTennlnation ofan Employee Group" and has strengthened the requirement for a numeric demonstration of potential effects of the activation of group termination benefits . Retiree Health Care Committee The committee Is planning to meet with the project manager for the Financial Accounting Standards Board 's standard on post-retirement benefits other than pensions and discuss drafting an actuarial compliance guideline. Specialty Committee The Expert Witness Task Force has completed its work and, at the January ASB meeting, will present a proposed standard relating to expert witness testimony by actuaries .

Life Committee Task Force on Long-Term Care The Life Committee will review comments on the HIV and cash flow testing exposure drafts described above and consider revisions to the proposals . The committee will continue to work with the Casualty Committee in monitoring the work of the Appraisal Task Force,

The task force held its first meeting on October 6, 1989 . and discussed major Issues relating to the financing of longterm care. The task force hopes to have a proposed standard ready to present at the April ASB meeting. A

Enrolled Actuaries May Opt for Inactive Status There is a provision at the very end of the regulations on continuing education for enrolled actuaries that permits inactive retirement status . An enrolled actuary (EA) who applies for this status is allowed to keep his or her EA status, although he or she is no longer permitted to sign a Schedule B . According to Leslie Shapiro of the Joint Board for the Enrollment of Actuaries, after choosing inactive retirement status for any reason, active EA status can be regained simply by meeting current continuing education requirements . However, if an EA does not know to claim this status and relinquishes his or her FA status completely , EA status can be regained only by retaking the exams. Inactive retirement status can be obtained simply by checking off a box on the re-enrollment form that will soon be sent to all EAs by the Joint Board .

8 ESTIMATING THE COST OF HIV (continued from page 1) Companies in the United States," was produced by the Society of Actuaries' (SOA) Task Force on the Implications of AIDS. A second report. "U .S . General Population Projected AIDS Mortality Rates, " was produced by the SOA's Committee on HIV Research . These projections are Important to actuaries because, as Thomas W. Reese, chairperson of this HIV Research Committee, states, "actuaries must consider AIDS projections in establishing reserves and evaluating surplus requirements that provide for the ongoing financial health of the company."

Reserve Testing The exposure draft states that reserve bases typically include margins . for mortality and morbidity to absorb part of the risk of pricing. However, such margins In statutory reserves historically have not been set at levels intended to cover the excess mortality and/or morbidity resulting from the occurrence of epidemics of sudden impact and short duration (such as the influenza epidemic of 1918-1919) . In those instances, a combination of surplus allocations and dividend reductions has been the accepted way of handling the excess risk. In the case of the HIV epidemic, this approach is not appropriate, however, because of the magnitude and potentially long-term nature of the epidemic . The exposure draft opines that the valuation actuary should demonstrate either that net statutory and GAAP reserves contain adequate provision for the cost of claims related to HIV infection, or that the cost of any excess claims not so covered is provided for by an appropriation of surplus or other adjustments . With respect to valuation work and the impact of the HIV epidemic, the actuary may need to do cash flow testIng, in order to properly formulate an opinion on statutory or GAAP reserves. If the reserve testing clearly indicates that, In the actuary's judgment, reserves should be increased, then these reserves should be increased directly; an allocation of surplus alone would not be appropriate .

The Actuary's Report Under the proposed standard, the valuation actuary would prepare a report

The Actuarial Update documenting the assumptions made concerning the extent to which HIV infection is associated with the blocks of insurance being valued for the company. Projections of HIV-related claims that the company should expect to pay are also documented . If additional reserves are not established after such projections are made by the valuation actuary , the reasons for the company's not doing so should be fully documented .

business strategy for dealing with the HIV epidemic, with respect to pricing and appraisals, for example . The co pangs business plan would inclu directives for pricing / repricing, underwriting , marketing/ seiection, the company's reserving philosophy, and level of surplus.

Lapse Rates .

A premise of the proposed standard is that It is essential that actuaries responsible for reserve valuations evaluate the impact of the HIV epidemic on their companies . Their analyses should include development of estimates of dW-related claims expected to be paid, and studies of reserves in the face of this epidemic, using cash flow testing whenever appropriate . The actuary providing the opinion should describe the manner in which the HIV epidemic is taken into account . And, , if the actuary determines that some form of financial statement recognition is necessary, it is preferable to set up additional reserves (and, in some cases . virtuallyrequired) ; however, some allocation of surplus funds is also a* ceptable . A

Any cash flow testing that Incorporates the Impact of the HIV epidemic should recognize that lapse rates for the infected Insured population will be significantly lower than the corresponding lapse rates for the uninfected population. Almost all HIV-infected individuals will keep their policies in force, and there is a high risk that projections of future HIV-related claims involving a given cohort of insured lives will be materially understated unless this indicated lapse differential is taken into account and appropriate reserving techniques are used .

Range of HIV Impact Apart from valuation work, the actuary needs to consider his or her company's

Concluding Comment

Checklist of Academy Statements September 1989 TO : NAIC Life and Health Actuarial Task Force, September 26, 1989. RE: Recommendations regarding nonforfeiture values on life insurance . BACKGROUND : This report was prepared â‚Ź n response to a request from the NAIC Life and Health Actuarial Task Force .

Study on Full -Funding Limitation Released In mid-November the Department of Labor will issue a report on the impact of the new full-funding limitation Congress established as part of the Omnibus Budget Reconciliation Act of 1987 (OBRA 1987) . Under the additional OBRA 1987 limitation , sponsors of defined benefit plans cannot make tax deductible contributions to their plans if such contributions would cause the assets of the plan to exceed 150% of current liabilities under the plan. Moreover, current liabilities must be valued using an interest rate within a narrow band around a four -year weighted average of the thirty-year Treasury Bond rate . The report examines the effect of the new limitation on plan assets and employer contributions between 1988 and 1992 , the first five years of the new rule's operation.

The Department's study, OBRA I987: The Impact ofLimiting Contributions toDef lned BenefitPlans, was performed under contract by Hay/Huggins . The December Update will feature a discussion of the study's major findings .

November 1989


Regulators File Qualifications jnuiries qwith Discipline Committee by John A. Fibiger Inquiries to the Academy's Committee on Discipline from insurance regulators concerned about actuarial qualifications are placing new scrutiny on members who sign loss reserve opinions.

The inquiries relate toAcademy Qualification Standards for signing opinions as a "qualified loss reserve specialist" on the National Association of Insurance Commissioners (NAIC) Fire and Casualty Annual Statement Blank . The Qualification Standards (published annuallyin theAcademyYearbook) were adopted in 1981 ; they set forth specific requirements for educational achievement and experience by Academy members . Educationally, the qualified loss reserve specialist should be either a Fellow of the Casualty Actuarial Society (CAS) or should have acquired a comprehensive knowledge in several areas, including mathematics, economics, emaking principles, insurance aclunting, and reserve techniques . The experience requirement mandates at least three years of recent experience in a responsible capacity under qualified supervision, so as to develop the skill and judgment required to render an opinion . The inquiries received from insurance regulators all concern individuals who are not Fellows of the CAS ; hence, the individuals will need to demonstrate how they have acquired the "comprehensive knowledge" of the required subjects . They will also need to demonstrate that they have updated and maintained their knowledge by continued study and practice . A failure to satisfy Qualification Standards may result in the imposition of a disciplinary action . Interpretative Opinion 5 to the Guides to Professional Conduct of the Academy notes that an "actuary's rigorous training" may lead the public to believe that "every actuary is well-qualified to advise on all actuarial matters ." However, a "special responsibility rests on every actuary to dertake only those assignments for ch the actuary is currently qualified ." While each actuary must make an initial determination as to whether he or she is indeed qualified, in the end . "the actuary must be prepared to ac-

cept the judgment of peers on the validity of the decision" as to his or her qualifications . When the NAIC decided that membership in the Academy would be a definition of qualifications to sign an annual statement , the Academy stressed that qualification standards and the disciplinary process would help make sure that Academy members only signed statements that they were indeed quailfied to sign . Members who hold credentials from the Society ofActuaries or the Joint Board for the Enrollment ofActuaries should therefore be aware of the need to satisfyadditional criteria, should they sign loss reserve opinions . They should be prepared to establish those qualifications upon inquiry . Appropriate documentation of educational and experience qualifications will assist the Committee on Discipline in responding to inquiries from insurance regulators . In a development related to disciplinary matters and property/casualty practice, the New Mexico Department of Insurance announced its imposition of substantial fines against an insurance company, and the preparation of charges against another two firms, for false statements made in connection with rate requests . The Department also announced a decision to review more closely the actuarial certifications required under state law in connection with rate filings . Superintendent Fabian Chavez, Jr . stated "we have always relied heavily upon actuarial memoranda and the actuarial certification in approving rates and rate increases of insurance companies." He also stated that "the actuary is a professional, and as such should be providing the state with a professional opinion regardless of his or her affiliation ."

He noted that, while the actuaries in each disciplinary case claimed that they were not responsible-because their work had been unknowingly modified, the superintendent noted that the actuary, as signatory to the certification, retains responsibility for It. He stated thatwhile no referrals had been made to the Academy for disciplinary investigations to date, "the Department will not hesitate to report violations when warranted . "A

Actuarial School in Mexico City Celebrates 20th Year The Actuarial School of Universidad Anahuac , Mexico City, held an actuarial symposium October 2-6, in honor of the school's 20thand the university's 25th-anniversary . Four actuaries from the United States ofAmerica attended the symposium and presented papers . Samuel Cox from the University of Nebraska spoke on the organization and education of actuaries in the United States of America . Robert Darby of The Wyatt Company spoke on the role of actuaries in risk management. Robert Myers, a Social Security consultant, related the actuarial procedures and financial problems of the Social Security System . Fernando Troncoso, an internaT}u ncaso tional consultant with The Wyatt Company, and a graduate of the Anahuac Actuarial School's charter class , spoke personally to the school's current 120 undergraduates about the future responsibilities of actuaries . He later recalled that, of the twenty- three students enrolled in that first class of 1969, seventeen (fourteen men and three women) had finished . The four-year program, largely based on books recommended in the Society ofActuaries' syllabus , is still a tough one . In addition to passing university exams, a graduate can become an actuary in Mexico only if he or she completes a written thesis and takes a public professional exam similar to the oral defense of a dissertation. If successful , the actuary will be assigned a number by the government of Mexico, indicating his or her professional license to practice .


The Actuarial Update

An Open Letter to the President of the Institute of Actuaries Roger D. Corley, president of the Institute of Actuaries in Great Britain, contributed an editorial to the August 1989 Update, which he asked, "Do we know whether we have the will , as a profession , to be responsiblefor the financial probity and longviability of the institutions and funds that we advise ?" His reflections elicited this response from an American actuary , John C. Angle, who is a U.S.. delegate to the International Actuarial Association .

Dear Roger: My thoughts were stimulated by your provocative guest editorial: thoughts about actuaries' interdependence with the business world; actuaries' resistance to change ; and the demise of the romantic notion that an actuarial diploma makes its holder a final and supreme judge of solvency and probity . I understand that you are troubled by the prospect of the European Community in 1992 because of the 'very wide gap between the 'freedom with publicity' culture of the United Kingdom and Ireland and the 'tight regulation' culture of the rest [of Europe] ." Apparently, you understood discussions at the North American centennial celebration to signal a similar underlying issue for American actuaries . You encapsulated your sense of the American issue in your editorial with this challenge : Do we have the will, as a profession, to be responsible for the financial probity and long- term viability of the Institutions and funds that we advise?" I found it helpful to restate your challenge as two choices for American actuaries, and thereby make explicit the conditions that seem to be implicit in the challenge . I . Do American actuaries have the will, as well as the power and influence, to be solely responsiblefor thef lnancial probity and long- term viability of the institutions andfunds that they advise? The answer to this question is an unqualified "no ." The American system is one of shared and , often overlapping, responsibilities . Our hierarchies have disappeared . (As have entities that might once have empowered actuaries to act as holders of the collective conscience .) Congressman Tom Foley , a gentle and thoroughly competent lawyer, recently succeeded Jim Wright of Texas as Speaker of our House of Representatives . When asked why the Speaker can't deliver votes anymore in the style of Sam Rayburn, Foley replied: "The

hierarchical society is gone, in the country and in the Congress ." "Tight regulation" by the fifty states has been a characteristic of the United States since 1851 . The debates here have never been whether regulation is appropriate, rather they have been about the advantages of state versus federal regulation . The huge scandal of U.S . savings and loan banks does little to help those who favor federal regulation. The legacy of inept regulation and blatant influence-peddling will cost American taxpayers at least $ 150 billion over the next ten years . But even where we have federal regulation, as in pensions and variable life insurance , it is "tight" regulation . Actuaries who practice In the pension area must be certified by a federal board of examiners and make their way through a thicket of laws, regulations , and court decisions . II . Do American actuaries have the political , management. and human-relations skills, as well as the patience and will , to gain positions of influence over the probity and long-term viability of the institutions and funds that they advise? My answer to this question is a guarded "yes ." At mutual life insurance companies , where I have spent my career, actuaries have long been appointed to senior management positions . There, some succeed and some fail in influencing company policy . A few, like myself, become company presidents. Then we find ourselves trying to interpret actuarial reports to intelligent laymen and becoming exasperated at actuaries who cannot meet deadlines or manage complex projects . However the hierarchy has become as diffuse at most mutual companies as it has elsewhere in America . The post of chief actuary has vanished and its powers distributed to pricing actuaries in several strategic business units and to the chief financial officer (CFO), who often manages the planning and reporting systems . Some of these systems monitor how well pricing actuar-

ies do , with respect to the decisions of business leaders. There is, on the other hand, growing responsibility on the part of actuaries for the consequences of their decisions and recommendations, within the business units .

Boards of directors In America are noticeably more assertive than was the norm fifteen years ago . They constitute yet another entity that has both the power and the will to be concerned about long-term viability. Boards of directors cannot be expected to delegate what they see as their responsibilities to an actuary. They are, on the other hand, anxious to hear what actuaries have to say. But only on the condition that the communication is in common English and appropriately addresses such key assumptions as future interest rates and expenses .


American Actuaries Respond Meanwhile, American actuarial leaders are not asleep . They recognize the changing atmosphere here. The stickiest issue , one unlikely to be solved wholly within the profession, is the matter of accountability for results . The clearest statement of this problem comes from the pen of Peter F . Drucker: * Professionals have always resisted attempts to hold them accountable. It is the essence of being a professional -- so the doctor, lawyer, engineer, or priest has always argued -- that one is not accountable to laymen and that qualation rather than performance is the ground ofaccepta nce. This was so, but today it is no longer tenable . . .(People who) possess a distinct organized knowledge.. . are the very center ofsociety and . . . its performance capacity . . . .fllhetr claim that they Just ffy themselves by their diploma, tla traditional claim of theprofesstonal, no longer valid. Society must demand that these people think through what (continued on page 12)

November 1989 INVESTMENT ACTUARIES FORECAST VOLATILE MARKET IN 2000 *ntinued from page 1) dents expect to see the Dow Jones Industrial Average peak above 3,000 in the next ten years; 64% said that the Dow Jones average also would reach a low of under 2,000 at some point before A.D . 2000 . Nearly half of the actuaries polled predicted a stock market crash (a sudden drop of more than 30%) by the year 2000, although they agreed that such an occurrence would not precipitate a general economic depression.

Insurance companies were not likely to fail In the event of a crash, according to 67%-and 59% thought that pension plans would be similarly unaffected . In this regard, Murphy commented that "proliferation of investment vehicles, the opening up of new global markets, and the consolidation of financial securities firms are just a few of the critical changes taking .place that will profoundly affect the state of our economy in the coming decades ." Referring to survey results predicting ater use of employee stock option d stock bonus plans In employee compensation programs, he added : "It Is clear that the average workingAmerican will be directly affected by stock market trends as many employee benefits will be delivered in the form of investment vehicles." Following Murphy's address, the panelists delivered perspectives on upcoming changes in the world of investment and asset management . Frederick B. Putney, on the faculty of Columbia University Graduate School of Business, declared that "American hegemony over Europe and Japan Is over," explaining that the United States' "consumptive and confused behavior of the sixties and seventies" disrupted the country's economic focus so that, 've are now trying to make the moves to stay competitive in aworld that is changing fast." The "driving force" for change in todays insurance companies will be the pension and investment side of the uses, Putney said . The experience of umber of life insurance companies in the 1980s writing guaranteed investment contracts with long horizons against their portfolio and the changing market will provide "good lessons" on

11 investment risk management and asset liability duration . "Modeling and statistical breakthroughs will help actuaries and Investment managers handle or limit their risk better," Putney added, cautioning that this does not mean that actuaries will become the "rocket scientists" of the 1990s . However, "the opportunities [for them] to try new techniques to manage and specify risk will blossom ." Eric P. Lofgren, consultant for The Wyatt Company, projected "an exponential increase in the level of government Intervention In pension fund investment management" by 2000 . He

Charles Trzcinka, senior research economist with the Office of Economic Analysis of the Securities and Exchange Commission, said that "probably the single most difficult myth to dispel is that the financial markets are growing in importance ." As evidence that they're not, Trzcinka related that "volatility of U.S . and world financial markets has not permanently changed since the early 1980s and continues, post crash . to be about the same as before the crash ." Although "nearly 25% of the value ofthe equity In U.S. and world corporations was destroyed in a week. . . no other sector of the economy was affected," he

Investment Forum' s Media Spinoffs Press coverage surrounding the Investment Risk Forum kept pace with the successes of the two previous Forecast 2000 forums- with radio, television, and the print media all taking part . The New York Post ran a story following the forum, as did the Wall Street Journal CNBC-NBC's cable business channel-conducted a live five-minute interview with the Academy's Jim Murphy for their "Moneywheel" program, carried to over thirteen million homes. Financial News Network, Business Radio Network, and Mutual Broadcasting/NBC Radio all interviewed Murphy in conjunction with the forum . As a result of media contacts from previous Forecast 2000 forums, these somewhat unusual placements also were made : Willard Scott, NBC's Today Show weatherman, in the course of celebrating a Maryland woman's 100th birthday, told his audience "My actuary lives in Maryland," and proceeded to define what an actuary is . Lastly, the earlier environmental risk forum In Toronto, Canada, elicited a National Public Radio interview with Insurance Services Office Senior Vice President Mavis A . Walters, who discussed the financial effects of then-raging Hurricane Hugo.

noted that "the possibility of directing pension investing for social objectives is so compellingly attractive for Congress , that pension plan investment income may be taxed even if the budget deficit is solved by other means ." As legislation drives Investment, benefits, and pension contribution policy In "conflicting directions," an arbiter is needed . "The actuary is best positioned to fill this role," said Lofgren, " since nobody else has as good a chance to perceive interdependencies between assets, liabilities, and contributions ." Further, now that pension Investment consulting on an asset-only based approach has become obsolete, Lofgren said he would not be surprised if by the year 2000, "we saw many of the investment consulting firms merging with actuarial firms."

said . "Compared to the effect of the market in 1929, there is little doubt that financial markets today are less influential .' He reported that the unification of the European Economic Community in 1992 will have the effect of accelerating the reduction in the costs of investing and the expansion of investment strategies . And the development of overseas financial markets will tend to "reduce the chances of 'absurd policies from Congress' that the respondents to the survey are concerned with," Tizcinka said . "To the extent that regulation tends to improve access to markets and lower the cost of Investing, I predict that we will see more regulation-for example, insider trading rules will likely become international," he said . A

The Actuarial Update

12 OPEN LETTER TO BRITISH INSTITUTE PRESIDENT (continued from page 10) they should be held accountable for and that they take responsibility for their contribution . Individual actuaries in the corporate world are held accountable , whether they like it or not. Planning is endemic as are performance appraisal systems . One suspects that consultants are successful only to the degree that they accept accountability for their actions and try hard to explain the rationale of their recommendations . Actuarial bodies have a different problem . In one area our leaders walk a tightrope . On one hand , they must avoid over- selling the qualifications of actuaries. Skills can indeed be taught but manageme nt ability or comfort with market-driven decisions cannot . On the other hand, our organizations must develop standards of practice , keep the skill of their members up-to - date, and recruit candidates who can succeed in the world of tomorrow. These matters, indeed, are all being addressed in the United States. The Board of Governors of the Society ofActuaries has endorsed a Task Force Report on the Actuary of the Future . The task force recommended recruiting candidates who are interested in business and management and adding more business subjects to the syllabus. A new Actuarial Standards Board (ASB) now sits under the chairmanship of Ronald Bornhuetter. The ASB has set out to establish standards of practice to which actuaries can be held accountable . You will sense the difllculties the ASB faces when I tell you that a major question is one of explicitly assuming the time value of money in calculating long-tail casualty loss reserves . Also, the American Academy is planning to restructure itself. One possibility under consideration is to name the presidents-elect of all U .S. actuarial bodies as voting board members of the Academy. It is hoped that this move would allow U . S . actuaries to speak with one voice on public questions of concern to them . Even so, our profession' s leaders are constantly reminded of the conservatism and inertia of the rank and file . SOA President Ian Rolland , speaking at the centennial, noted a survey of

member satisfaction with their careers . It found SOA "members . . . generally content with their current circumstances . " SOA members also narrowly defeated arecentamendmentthatwould have allowed a membership vote to grant examination credit for college work. Some years back , SOA members had voted to muzzle their leaders from expressing any opinion that had not been specifically authorized by a majority of members In a special election .

Last Word

CLRS SEMINAR (continued from page 5)

tine condition not seen since the din saurs roamed the earth ." Insurance adjusters must move quickly to assess environmental damage, Gulledge said, as a way of controlling adverse publicity and to hold down costs . Problems can "escalate very quickly," he noted, but instead of focusing exclusively on coverage availabilities, bodily injury, and property damage issues, he urged insurers to delve into the underlying nature of the envi-

I can 't resist one final quotation about the United States . You know, of course, of Sir Alan Walters, the economic adviser to Prime Minister Margaret Thatcher. Sir Alan divides his time between Washington, D.C . and London . When in Washington he is a senior fellow of the American Enterprise Institute . The president of that conservative think-tank, Christopher Demuth, was quoted by the Wall Street Journal as he spoke about changes within the Soviet Union .

I hope (Soviet Ambassador Yuri) Dubinin won ' t mind my observing that those of us in the West who are so enthusiasticabout thechanges sweeping his country feel this way not only because we know of the happiness and prosperity [such changes) can bring to his countrymen, but because we relish the thought of a Soviet Union transformed into a politically fractious and argumentive nation, rent by disagreements and uncertainties and by personal and philosophical rivalries-- in short, a nation just as self absorbed and unruly and incapable of decisive state action as our nations are . Was Soviet power builtfor this?' is the question put by Yegor Ligachev. We Americans hope so, since this is conspicuous ly what American power was built for. Mr. DeMuth might just as well have been talking about actuaries in the United States. John C . Angle Livonta, Nebraska Angle is a member of the board ofdirectors of Guardian Life Insurance Company- . 'Managing in Turbulent Times, Peter F . Drucker. New York: Harper & Row, 1980, p. 131

ronmental hazard . Gulledge noted that federal and state environmental policy guidelines are now more clearly spelled out, which is likely to result in the dispute process being "speeded up ." Due to the widespread use of the claimsmade policy, "in some cases you can do this without legal counsel-you can go to the regulator and tell them what you want to do." Gulledge added that the burden of environmental cleanup cannot be reasonably assumed by the government . Market-based incentives, such as the upgrading of loans to improve pollution control facilities and the use of emissions trading credits, are being developed to improve risk management. "Environmental claims management does require specific expertise not found in the traditional insurance loss reserving area," he said ; however, the Introdu tion of specialty Insurers, improv4 regulation, and a better overall understanding of the environmental liability problem should help return more companies to the market . A

November 1989 Actuarial Update