•ActuafWe ial UpdateVOLUME 19 NUMBER 11

In

2

this issue

From the ASB

3 Letters to the Editor

3 Issues Digest Available

4 Editor Toni Mulder Reportson Readers Survey

5 Contingencies Authors Wanted

5 Pepper Commission Report

5 Academy Twenty-five Years Old

Accounting for RetireeBenefits Other Than Pensions

7 Health Committee MemberTestifies on H.R. 2649

7 Murphy Meets with NAICCasualty Actuarial Task Force

Congress Amends7 the Age Discrimination

in Employment Act

8 Washington Briefing

1 Annual Meeting BusinessSession

13 Practice councils meet

Study on Effectiveness of16 Casualty Loss Reserve

Opinions Released

EnclosuresIncluded in this month's issue ofThe Update are the following:

• Government Relations Watch

• In Search Of . . .

• ASB Boxscore• Academy AlertRequest Card

AMERICAN ACADEMY OF ACTUARIES NOVEMBER 1990

Rostenkowski Delivers Keynoteat Annual Meetingby Ken Krehbiel

Those attending the Academy's AnnualMeeting luncheon, September 26, inWashington, D.C., got a taste of whatmembers of Congress have been em-broiled in for weeks : budget politics .House Ways and Means CommitteeChairman Dan Rostenkowski (D-Ill.)addressed Academy members andguests as well as thepress .

"We have em-barked on a greatnational undertak-ing to rid ourselvesof a public menaceknown as thebudget deficit . If wesucceed," he said,"it will mark a tre-mendous victory forthis country. But ifwe fail, it will signalthe breakdown ofgovernment."

Rostenkowskisaid that if therewere no budgetdeficit agreementthis year, the economy would get worsebefore it got better. "The deficit is thesort of fiscal creature that thrives onhard times," he said . "It will only growbigger. And the bigger it gets, theharder it will be to control."

Consumption taxes are part of whatRostenkowski considers an acceptablebudget package to trim the federal defi-cit. "Taxes that lower the deficit andmeet other policy goals are the mostattractive," he said . "That means in-creasing consumption taxes . We'veheard a lot in recent weeks about how

Look for our report on the 1990Casualty Loss Reserve Seminar inthe next issue!

a gasoline tax increase is bad. Well, Isay it's much worse to allow our de-pendence on foreign oil to continue ."

Rostenkowski said the current U .S .economywasn 't being run by the Presi-dent, Congress, or by the Office of Man-agement and Budget, but by SaddamHussein. Acknowledging that the gaso-

line tax would cre-ate some hardship,Rostenkowskipointed out that itat least gave peoplethe option of eitherdriving less or buy-ing more fuel-effi-cient automobiles .

`The samelogic holds true fortax increases on to-bacco and alcohol,"he said. "If Ithey}want to minimizetheir tax burden,they should cutdown on smokingand drinking. Ifthey cut back on

smoking and drinking, it will have thepositive effect of lowering the nation'shealth care bill ."

In addition to recommending con-sumption taxes . Rostenkowskiventureclsome bleak speculation on what couldbe in store. "Without an agreement, wecan look forward to about $100 billionof federal spending cuts," he said ."Leaving aside the fact that this wouldbe a terrible blow to a shaky economy,spending cuts of this magnitude wouldbe curtailing government services byabout 40% . . . . That's devastating."

The entire budget struggle haspointed out fundamental differences inthe Republican and Democratic partiesthat have been festering for the pastdecade, according to Rostenkowski . He

(continued on page 4)

The Actuarial Update

of Actuaries

presidentMavis A . Waiters

President-ElectHarry D. Garber

Vice PresidentsRobert H. DobsonCharles E . FarrDaniel J. McCarthyMichael A . Walters

SecretaryRichard H. Snader

TreasurerThomas D . Levy

Executive Vice PresidentJames J. Murphy

Executive Office1720 I Street, N.W 7th FloorWashington, D .C. 20006(202) 223-8196FAX (202) 872-1948

Membership AdministrationWoodfield Corporate Center475 N. Martingale RoadSchaumburg, Illinois 60173-2226(708) 706-3513

ChairpersonCommittee on PublicationsRoland E. KingEditorE. Toni MulderExecutive EditorErich ParkerAssociate EditorsGary D. LakeStephen A. MeskinCharles Barry H. WatsonManaging EditorJeanne CaseyContributing EditorKen KrehbielProduction ManagerRenee Cox

American Academy of Actuaries17201 Street, N.W. 7th FloorWashington, D .C. 20006Statements of fact and opinion in this publication,including editorials and letters to the editor . are madeon the responsibility of the authors alone and do notnecessarily imply or represent the position of theAmerican Academy of Actuaries, the editors . or themembers of the Academy.

by Walter N . Miller

Standards: Steady onthe Firing Line

As I near the end of my first year aschairperson of the Actuarial StandardsBoard (ASB), I am struck by how closemy views of "the state of the standardsmovement" are to those expressed byformer chairperson, Ron Bornhuetter,in last November's Update. Ron's ob-servations were that the "ASB is aliveand well" and "the concept of formal ac-tuarial standards of practice is a reality- and is moving forward at an aggres-sive pace." I think this Is still true .

Although we aren't trying to engraveour procedures in stone, I would sub-mit that we have a structure and anoverall modus operandi that is facilitat-ing the active development of appropri-ate standards, which will help to fur-ther define our profession and assistactuaries in practicing in a professionalmanner.

While there is properly some turn-over on the ASB each year, the nine-person board continues to include broadrepresentation from the various prac-tice areas within our profession . Vari-ous ASB members belong to the mainU.S. actuarial bodies and work asconsultants, for companies, or in aca-demia. And we continue to be very ablysupported by two outstanding full-timestaff people-Christine Nickerson, ourdirector, and Alan Kennedy, our tech-nical writer .

The ASB has continued to have fourmeetings a year. Because of morecrowded agendas, these meetings arenow taking more time than they did ayear ago .

Our communications to you con-tinue at a high level . One notable eventwas the release earlier this year of abinder (already almost full), whichbrings the current standards and somesupporting material together in oneconvenient place. Each month's Up-date also gives you good current infor-mation on ASB activities via the "ASBBoxscore" and "Standards Outlook,"aswell as frequent, additional articles

concentrating on a standard underdevelopment. Another way to learnabout ongoing standards activities is todrop by the ASS exhibit, which is takento actuarial meetings several times ayear.

One of our concerns continues to bethe volume of communications in theother direction, from you to us. Theseusually take the form of comments onASB exposure drafts, While we haveseen some increase In the number ofcomments, it is still generally in the lowdouble-digits per standard . This is nota lot of response for items that shouldbe professionally and practically im-portant to thousands of actuaries aswell as many others with whom theywork .

Ron observed last year that "we mustnot be . . . always reacting to standardsset by the accounting profession . . . .When appropriate, we should be thefirst to publish a standard (e .g., theactuarial standard of practice for con-tinuing care retirement communities) ."A similar situation exists vis a vis thestate regulation of insurance compa-nies. We're not doing an adequate jobof defining our profession and our pro-fessional responsibilities if the ASB doesnothing but react to new regulatory*initiatives . But we obviously have to bemindful of regulators' needs and con-cerns; so the right answer is an en-hanced joint effort .

I believe one of this year's important"standards events" was the initiation ofjust such an effort . The National Asso-ciation of Insurance Commissioners(NAIC) has authorized regular meet-ings among representatives of the NAICLife, Health and CasualtyActuarial taskforces, theASB, and theAcademy . Thisinitiative will be launched at the De-cember 1990 NAIC meeting. Majorareas ofdiscussion will Include actuar-ial standards of practice for casualty,life, and health actuaries ; qualificationstandards; and disciplinary procedures .I think that this kind of regular dia-logue will prove invaluable both to theregulators and to our profession.

We're aware that all of this stan-dards activity can seem confusing tomany actuaries who feel their first ob-ligation is to function effectively on thefiring line . In responding to a recentUpdate survey, one of you said, ,withall of the new activity in the standards*area . . .. . . it is pretty un clear exactly whatwe in the hinterlands are supposed todo to meet our obligation to sharehold-ers. management, policyholders, and

November 1990

the profession ."We in the ASB have an obligation to

Iecognize this concern by producingelevant standards on relevant sub-

jects, which provide true professionalguidance and are not merely detailed"cookbooks." We will also continueworking to improve our communica-tions to you, with emphasis on some ofthe practical applications of workingwith and recognizing the value of stan-dards of practice. We hope that as yougrow increasingly familiar and morecomfortable with the standards move-ment, your responses and communica-tions to us will increase .

The standards movement is on thecutting edge of better defining andenhancing our profession . Of course,standards of practice are not the magiccure for all professional misconduct,since, at the very least, the professionalso needs to be willing to enforce itsmembers' adherence to standards . Themore of us who participate in the twoprocesses. standards development andenforcement-by commenting on expo-sure drafts and supporting the Acad-emy's discipline procedures, the betteroff we wi l l all be . 'ASB i s alive and well,"as true now as it was a year ago . Even

so, we should not relax our commit-ment to a stronger profession and publicaccountability .

Miller is chairperson of the ActuarialStandards Board .

3

Letters to the Editor A Curtain Call?

OASDI Buildup Center Stage,Congress in the WingsRick Foster does not "pull aside the lastcurtain" in his letter about Old Age,Survivors and Disability Insurance(OASDI) financing (see August Update) .Much as I am opposed to building up amammoth fund balance over the years(peaking at $9 .2 trillion in about 2025),for other reasons than Rick cites, theliquidation of the assets would not haverequired the baby boom generation topay higher income taxes than if thatfund balance had not been accumu-lated. The reason is that, in the ab-sence of the trust funds purchasingthese government bonds, somebody elsewould have had to have done so-andthen, quite naturally, been paid back atsome time or other. It's all that simple,once you pull the last curtain aside?

Fundamental to the foregoing analy-sis and conclusion is the assumptionthat the monies available each yearfrom the buildup of the trust funds willnot cause Congress to be less prudentabout spending. If such is not the case,then the solution is not to have thebuildup, but rather to return to pay-as-you-go financing, so as to avoid thehigher income taxes for the baby boomgeneration in the distant future .

Robert J. MyersSilver Spring, Maryland

Under pay-as-you-go financing, futureOASDI benefit payments would be madeprimarily from future OASDI payrolltaxes. Suppose, instead, that financingis set by temporary, partial advancefunding (as under present law). Thenfuture benefit payments would be madefrom a lower level of payroll taxes, to-gether with interest on the Treasurybonds held by the trust funds and re-demption of these bonds . The actualcash to cover the interest payments andbond redemptions . however, can comeonly from other federal revenue sourcesin the future, primarily income taxesand borrowing from the public .

Thus, temporary partial advancefunding, as compared to pay-as-you-gofinancing, results in lower future pay-roll taxes and an increase in incometaxes or other federal taxes (or moreborrowing) . Bob Myers argues that "inthe absence of the trust funds purchas-ing these government bonds, somebodyelse would have had to have done so--and then, quite naturally, been paidback at some time or other." I believethere are two problems with this rea-soning . First, it is not necessarily thecase that somebody else would havehad to purchase the bonds . If Congresssuccumbs to the temptation presentedby the annual surpluses in the OASDIaccount and runs larger deficits else-where in the federal budget, then totalfederal debt would be greater than itwould be in the absence of the OASDIbuildup. In this instance, the buildupitself creates new federal debt-no oneelse would have had to purchase theresulting bonds had the buildup notoccurred .

Most experts conclude that, to date,the OASDI buildup has been offset byhigher deficits in other accounts . Inparticular, they note that under Gramm-Rudman-Hollings, the OASDI buildupis taken directly into account in deter-mining if the deficit targets have beenmet.

The second problem relates towhether, in the absence of the trustfund buildup, government bonds wouldbe "paid back at some time or other ." Ithas been many a decade since the fed-eral government has consciously en-deavored to retire the national debt.Treasury securities mature all the time,of course , and are repaid, but new secu-rities are immediately issued and thereis seldom a netrepaymentto the public.

(continued on page 16)

Issues Digest AvailableThe Academy presented its ninth annual Issues Digest to Annual Meeting at-tendees, September 26 . As in years past, this publication reports on thediverse public-policy issues of interest to Academy members. This year'sDigest focuses on providing for the nation's health care needs and providingcash income during retirement-two issues that will loom large on thelegislative horizon for the next few years at least .

Issues Digest is distributed to legislative staffs on Capitol Hill as well as tostate insurance commissions as a way of underscoring the actuary's growingrole in public-policy debate . As this year's introduction to the Issues Digeststates :

The same tools, analytic methods, and principles that actuaries use inproviding individuals and businesses protection against everyday risks areequally applicable to many areas ofpublic policy. In fact, there are probablyfew domestic policy issues that would not benefit in some way from actuarialanalysis. This is hardly surprising, since the major purpose of so many publicprograms is to help guarantee or improve the financial security of individuals,businesses, or society as a whole.

Additional copies of the Issues Digest are available by sending a check ormoney order for $1 .75 to the Academy's Washington address.

4

Editor Toni Mulder Reportson Readers SurveyBack in March, we sent all Updatereaders a questionnaire. As Incomingeditor. I was interested in getting feed-back on how TheActuarial Update wasserving Academy members .

I'm pleased to report that we had agood response rate, with 1,248 mem-bers, or 13% of our total membership,responding. (A 10% response rate istypical for readers' surveys .) Many ofthose responding wrote additionalcomments. We shared just a few ofthem with you in the August Update .

TheActuarial Update has never con-ducted a readers' survey before . I waspleased to see that many ofyou thoughtthat the newsletter was "right on themark." Of course, many of you alsosuggested ways to improve the publica-tion just what we were asking for.

Thanks to the invaluable assistanceof Jim Weiss, director of informationservices for the Society ofActuaries, theprocessing of the surveywent smoothly.He programmed the survey questionsinto a standard statistical package andgenerated the frequency distributionsand cross tabulations .

I was delighted to learn that 750/0 ofour respondents read The Update everymonth; another 20% read The Updateat least every other month. Granted,this distribution may be somewhat

biased, since those members who donot read The Update at all regularlymay not have received the survey orbeen inclined to answer it. The Updatecompares favorably, or about the same,to other company or actuarial newslet-ters according to 82% of respondents . Iwas reassured to see that the distribu-tions of respondents by practice areaand by type of employment were closelyrepresentative of the membership atlarge. By practice area, respondentswere distributed as follows : 12% wereproperty/casualty practitioners, 35%worked in the life insurance area, 32%practiced in the pensions area, and12% were health actuaries . Moreover,50% were employed by an insurancecompany, and 36% were employed by aconsulting firm .

It is of interest that 77% of the re-spondents have practiced as actuariesfor more than ten years. Of course, thisfigure reflects the fact that most Acad-emy members will already have theirAssociateship or Fellowship from one ofthe learned societies and have metcertain experience requirements .

When asked to rank, by order ofpreference, the various needs TheActu-arial Update fulfills for members, 29%of respondents ranked "reports on leg-islative and regulatory developments"

ROSTENKOWSKI DELIVERSKEYNOTE(continued from page 1)

said the'80s were kinder to the wealthythan to the middle class and poor,which violated one of the fundamentalprinciples of the Democratic Party-that those best able to pay for the costof government should pay the most ."We're just looking for a package that isfair-a deficit-reduction plan that re-quires shared sacrifice and sharedburdens from all Americans," he said .

"Howcanwe convince averageAmeri-cans to accept an agreement that dipsinto theirwallets, but leaves the wealthybetter off than they were before?" heasked. "The answer Is: We can't con-vince them, and it would be a disgraceto even try.

"As baffled as I was last year whenPresident Bush took a stand on capitalgains, this year I was totally flabber-gasted. The economy is on the verge of

recession. Our ability to compete ininternational markets is growing moreand more feeble . Our savings and loanindustry has left us, our children, andtheir children with an unheard of bill .Our banking system appears to be fol-lowing the path blazed by the S&Ls .And, oh yes, we are also on the brink ofa major war in the Middle East . If thereis one thing we need now, it is bold andcourageous action from governmentleaders. And if there is one thing wedon't need , it is a public declarationthat the nation's fiscal house has toremain in shambles because we can'tdecide what to do about capital gains."

The CBS Evening News and Wash-ington Fbst both covered Rostenkow-ski's speech to Academy members, andC-SPAN II televised it in its entirety thatevening. Other press members repre-sented CNN, NBC's cable channelCNBC, Reuters, "Marketplace, --NightlyBusiness Report," Daily Tax Update,and the Bureau of National Affairs . A

The Actuarial Update

as being their number-one choice, with65% ranking It as either their first,second, or third choice. "Communicating informationabout professional stardards of practice" came in a close sec-ond, along with "Informing members ofAcademy's leadership directives andcommittee activities ." Relating "devel-opments within the various specialtyareas in nontechnical terms" wasranked fourth. Members ranked lastthe need of serving as a forum forAcademy members to speak to theprofession at large .

These responses suggest that vari-ous new directives for The ActuarialUpdate are in order. We will boostcoverage of legislative and regulatorydevelopments. As Academy commit-tees prepare public statements andexpert testimony, committee membersand Academy government informationstaff will be asked to provide briefupdates on these activities . On occa-sion, fuller analysis of specific policyissues likely to be of interest to a broadsegment of the membership will be pro-vided. Every attempt will be made tocover at least one policy issue per spe-cialty each month .

Clearly, readers value communications about standards. We will continue to include articles on new expo-sure drafts close to the time that theyare issued. We hope that this type ofcoverage not only appropriately informsmembers of the exposure draft's con-tent but encourages members to com-ment on the draft to the Actuarial Stan-dards Board (ASB) as well .

Members expect The Update to con-tinue to inform them of their leader-ship's directives and committee activi-ties. We will continue to do just that.

Apparently there isri t strong feelingabout the need to have a forum for in-dividuals to speak to the profession atlarge. That is either because the needis clearly subordinate to the others, orthat members slightly undervalue theopportunity to communicate their viewsto others within the profession . Evenso, we continue to receive letters to theeditor: we typically publish two or threeeach month. I remain hopeful that astime goes on, more and more memberswill begin to use The Update letters col-umn to communicate with their peers .

Guest editorials were popular, wiclose to 52% of respondents indicatinthat this regular Updatefeature Is theirfirst choice . With that response, we willcontinue to have the presidents of thevarious actuarial bodies speak to you

November 1990

through The Update.The editors noted your pronounced

Apterest in our creating the new col-mns: "Futurist Perspectives," "The

Global Actuary," and regular practicecouncil reports. We plan to developthese columns in the year ahead . Ifyouwould personally like to contribute toany of them, please let me know .

Readers want to see the followingpublic-policy issues reported on regu-larly: national retirement income pol-icy, risk classification, Social Securityfunding, and health care benefits. Theseissues appear to have broad appeal formembers in all practice areas . Otherissues presented, nonforfeiture values,sales illustration and disclosure, auto-mobile insurance regulation, and pen-sion and employee benefits regulationwere of interest primarily within singlepractice areas.

It is not surprising, certainly, thatour readers are most interested in thepublic-policy issues that have somedirect application to their individualpractice areas. Many of the readerscommented that much of what we cov-ered wasn't directly germane to theirindividual practice areas .

The Update must, of course, reflectthe range of public-policy issues facingthe profession and report on develop-ments in the various practice areas in atimely way. I think that we can do thiseven more effectively. Also, we will beinvestigatingways to redesign the news-letter so that readers can readily findnews on their respective practice areas .

We will continue to consider yourcomments in the months ahead . I wishto thank all of you who participated inthis survey. And I would appreciateyour continued feedback as we gradu-ally begin to Implement many of yourgood suggestions. A

25 Years Old and10,000 StrongMembership has grown steadilyeach year, since the 1,427 chartermembers joined the Academy in1965. In this, its twenty-fifthyear, the Academy grew to morethan 10,000 members . Daniel M .Haggerty. a managing consultantwith A. Foster Higgins, is the ten-thousandth member of the Ameri-can Academy of Actuaries .

5

Authors Wanted! No Experience Required!

Yes, Contingencies needs you-to make thepublication as diverse, topical, contentious,and lively as possible . So don't worry ifyou're convinced that a vast canyon liesbetween the products of your Bic pen andthe elegant Mountblane of a William F .Buckley. Jr. As the Academy's new pastpresident, Joe Brownlee, loves to say, "That'swhat we hired an editor for!"

Of course, we're not gluttons for punish-ment; we're delighted to see a finely finishedmanuscript. But don't let a sense of imper-fection stop you from turningyour ideas . ob-servations, chronicles, etc. into Contingenciesarticles. We're here to help.We've kept the rules of the road to a mini-mum. Best length, we've discovered, Is 10 to12 double-spaced typed pages (approxi-

mately 2,000 to 2,500 words) . Best subjects are those of current concern tonewspapers, colleagues, neighbors . Best style for the magazine is as light,breezy, and as gently humorous as actuarial accuracy will allow .

So-have we stimulated any interest? If we have, please call Contingencieseditor, Dana Murphy, at the usual Academy number : (202) 223-8196 .

Pepper CommissionReport ReleasedOn September 25th the U.S. BipartisanCommission on Comprehensive HealthCare (the Pepper Commission) releasedits final report. The reforms proposedby the commission would ensure uni-versal access to health care and createa federal long-term care program at acost of about $70 billion .

The commission's "blueprint" forhealth care reform would be phased inover five years . It would build upon thepresent employer-based system byrequiring companies with more than100 workers to either provide privatehealth insurance coverage or contrib-ute to a public plan for all employeesand non-working dependents .

The public plan would cover employ-ees and dependents that contribute,and non working individuals who buyin or are subsidized ; it would effectivelyreplace Medicaid for specified servicesand would be financed and admini-stered primarily by the federal govern-ment. An additional component of thecommission's report requires the de-velopment of a basic benefits package .which would be exempt from state in-surance coverage mandates and wouldbe made available to any employersthat wish to purchase it . This packagewould have to include primary andpreventive care, physician and hospital

care, and other services . These serv-ices would be subject to cost sharingprovisions, with subsidies forlow-income workers and limits onout-of-pocket expenses .

The plan provides several incentivesfor small employers to purchase therecommended coverage in the form oftax credits and subsidies, and fulldeductibility of health insurance pre-miums for self-employed persons .Small businesses with 25 to 100 work-ers and firms with 25 or fewer workersare not required to provide coverageinitially. However, if specified coveragetargets for these groups were not metby the fourth and fifth year respec-tively, these employers either wouldbecome subject to similar requirementsof larger firms, or required to pay Intothe public plan on their employees'behalf.

The commission also recommendeda phased in long-term care programthat would include a social Insuranceprogram of home and community-basedcare for severely disabled persons of allages, a nursing home component, andimproved private long-term care insur-ance to fill gaps not covered by the plan .To safeguard against excessive finan-cial costs to elderly Americans . thereport calls for additional assistance tothose beneficiaries whose income isbelow 200% of the poverty level .

Two leading vice chairmen of thePepper Commission, Rep. Pete Stark

(continued ouerteaJ

6

(D-Calif.) and Rep . Bill Gradison (R-Ohio) did not endorse the final report.Rep. Stark argued that an employer-based plan, in itself, would not be trulycomprehensive. Rep. Gradison sug-gested that the commission's proposalfor reforming small group health insur-ance was tantamount to shifting $10billion in health care exenditures fromlarger to smaller businesses .

The commission's report, titled ACall for Action, can be purchased bycalling the Government Printing Officeat (202) 783-3238. To order the 18-page executive summary refer to StockNo. 052-070-06691-1 (price $1 .75) . Toorder the full 315-page final report,refer to StockNo. 052-070-6692-0 (price$16.00) .

Accounting for RetireeBenefits Other ThanPensions: FASB'sTe<ntcativ+e C oncl lions

by Stephen A. Meskin

Before the end of December, the Finan-cialAccounting Standards Board (FASB)plans to issue its final accounting stan-dard for postretirement benefits otherthan pensions (OPBs) . OPBs are pri-marily retiree health and death bene-fits .

FASB issued its exposure draft,"Employers' Accounting for Postretire-ment Benefits Other Than Pensions,"in February 1989. Public hearings onthe exposure draft were held last fall .Since the hearings, FASB has met morethan twenty times to review the pro-posed accounting standard . Along theway, FASB has reconfirmed much ofwhat was originally exposed in the draft .However, FASB has also made manychanges, some of which are significantfor actuaries. These actions are alltentative and could be changed againbefore the final standard is releasedlater this year.

The Academy presented its views onthe proposed standard in writing and inperson at a public hearing in Washing-ton, D.C., last November. Since then,members of the Health and WelfareCommittee have met with FASB mem-bers and OPB project manager, DianaScott, on a number of occasions, pro-viding additional written input on cer-tain technical issues .

Exposure Draft Highlights

The basic premise of the accountingstandard is that the cost of retireebenefits should be accounted for, thatis, recognized and accrued, while anemployee is working and producing theincome to pay for them . Currently,most employers account for the bene-fits when the retiree uses them . Recog-nition and accrual are not the same asfunding. Amounts recognized need notbe placed in a separate fund for thebenefit of retirees. However, any coststhat are recognized but not fundedmust still be deducted from profits andthen carried on the balance sheet as aliability.

A single method for measuring theOPB obligation and cost was mandatedin the exposure draft . Measurementwould use explicit actuarial assump-tions based on a best estimate of thefuture. A number of items would haveto be disclosed, such as the fundedstatus, plan descriptions, the assumeddiscount rate, the assumed health-care-cost trend rate, and the effect of achange in the trend-rate assumption .An additional liability would have to beadded to the balance sheet after anumber of years if the accrued liabilitywas not large enough (i.e., "minimumliability") .

FASB's Tentative Changes

Delayed the effective date by oneyear, to 1993, i.e. . to fiscal years begin-ning after December 15, 1992 . Non-U.S. plans and plans of small, nonpub-lic employers still have a two-year de-lay, so they need not comply until 1995 .

Expanded "small" to include,nonpublic employers having no morethan 500 participants, in aggregate, inall plans. This change will allow manyemployers to delay implementation ofthe OPB standard until 1995 . Underthe exposure draft, a nonpublic em-ployer was "small" if none of its planshad more than 100 participants. (Aparticipant is a family unit .)

Eliminated the minimum liabilitythat the exposure draft would have re-quired .

Permitted immediate recognitionof the transition obligation as well asdelayed recognition, i .e., amortization .The transition obligation is roughly theamount, as of the day the standard isimplemented, that an employer wouldhave accrued, if the standard had been

The Actuarial Update

in force, in excess of anything that theemployer might have actually accrued .Amounts that may be immediatelrecognized exclude business combina~tions and benefit improvements occur-ring after the standard is issued . Underthe exposure draft, only delayed recog-nition would have been allowed .

Extended to twenty years the per-mitted amortization of the transitionobligation, if the average remainingservice period of active plan partici-pants is less than twenty years . Underthe exposure draft it was fifteen years .

Required anticipation of certainplan changes. These are changes inthe cost-sharing provisions that theemployer uses to control the growth ofits health care costs, so long as therehas been a past practice of changingthem, or the employer has clearly com-municated its intent and ability to doso. (Cost-sharing provisions includecopayments, deductibles, out-of-pocketmaximums, and retiree contributions .)In FASB's words, " . . . the substantiveplan should be the basis for the ac-counting," not the written plan . Underthe exposure draft, the anticipation ofsuch changes was not allowed.

Made other tentative changes anclarifications. For example, FASB hasapplied the substantive plan concept tobusiness combinations, eliminated orsimplified certain disclosure items, butadded that the substantive plan mustbe disclosed, and allowed employersmore freedom to combine plans. FASBhas clarified that an obligation exists ifa "retiree-pay-all" contribution is under-stated, that the cost of administeringthe plan is included, what the treat-ment of people on long-term disabilityis, and how the discount rate should bedetermined .

FASB has decided to emphasize thatits previous statements on businesscombinations (Opinion 16) and onbenefits provided by individual con-tracts (Opinion 12) already apply toOPBs. and that generally the OPB stan-dard will be effective in those situ-ations, as of the standard's issue date .Some leewaywill be allowed for existingplans provided by individual contracts,for the convenience of employers whohave other OPB liabilities .

FASB has scheduled one more meeting to review attribution and clarify th4pconcept of the substantive plan.

Meskin is vice president and actuaryw ith MartinE. Segal, and associate editorfor The Update .

November 1990

Health CommitteeMember Testifies

S on H.R. 2649Health Committee member Harry Sut-ton presented expert witness testimonybefore the House Energy and Com-merce Committee's Subcommittee onCommerce, Consumer Protection, andCompetitiveness. September 19.

The subcommittee had requestedcomments on H.R. 2649, a House billthat would set national standards forproviding health insurance to individu-als with preexisting conditions. Inparticular, Sutton commented on theproblems that would result if healthinsurance underwriting were elimi-nated. 'You can't allow a programwithout underwriting, lfyou allow peopleto select when they get coverage," Sut-ton said, alluding to the resulting ad-verse selection and overutilization thatwould drive up premiums.

"The major problem is that healthcare has priced itself out of the reach ofthe average citizenand smallemployer,"he told Representative Doug Waigren(D-Penn.) and legislative staff attend-ing the hearing. "The bill you have willmake the situation worse ; if you elimi-nate underwriting, the price will go up. . . 50% to 100%," said Sutton, adding"a lot more people will be priced out" ofthe health insurance market .

Essentially we have a private insur-ance industry. According to Sutton,the problem is not that health insur-ance isn't available to most people, "it'sthat they can't afford It." The need is fora state/federal subsidy to help smallemployers pay premiums, reflectedSutton, but, with the current budgetproblems, "I'm not surewhere the moneywould come from." Sutton said that"we need a broad industry agreement"but emphasized that our short-terminterest lies in "keeping the employeroptimally involved" In providing insur-ance .

Follow-up questions from Walgrenrelated to "how [insurers) decide whatfactors are predictive of risk," whenunderwriting indlvtdual health insur-ance. His concern was that some of theunderwriting criteria used by insurers,for example, an individual's type ofemployment, may not be verifiable, inthe sense that there is a risk statisti-cally associated with the factor. Suttonsaid that health insurers generally don'thave good data for rating . And that"one of the problems with setting up anational rating system, if you were to doit, is that there is no good national database." e

7

Murphy Meets with NAICCasualty Actuarial Task ForceJames Murphy met with members of the National Association of InsuranceCommissioners (NAIC) Casualty Actuarial Task Force during the NAIC's Mid-western Zone Meeting in Kansas City, September 11 . Topics discussedincluded the definition of qualified actuary for purposes of signing loss-reserve opinions .

Murphy related the Academy's actions since the NAIC's adoption of loss-reserve-opinion requirements and the definition of qualified actuary lastJune .

He said that the Casualty Practice Council was now prepared to act onrequests for review of qualifications to sign loss reserve opinions byAcademymembers who are not also members of the Casualty Actuarial Society. Hethen described the Academy's proposal to the NAIC Blanks Task Force for arevision of the definition of qualified actuary . The Academy's proposeddefinition, in effect, would require an actuary to meet the Academy'squalification standards and continuing education requirements, to follow theActuarial Standards Board's standards of practice, and to be subject to dis-cipline for failure to do so. Murphy emphasized that there is no issue of"turf,"because the Casualty Actuarial Society's board supports the Academy'sproposed change to the NAIC definition .

The NAIC Casualty Actuarial Task Force concluded that since the newdefinition was adopted this June, the task force would wait one year, monitoractivity, and then make appropriate recommendations to the Blanks TaskForce concerning any change to the definition of qualified actuary for lossreserve opinions. Murphy related that the Academy would continue to workwith the task force "to develop a proposal that can meet all our goals ."

Congress Amends the Age Discriminationin Employment ActOn October 3rd, the House, in a vote of406 to 17, approved legislation thatwould reverse a 1989 Supreme Courtinterpretation of the Age Discrimina-tion in Employment Act. In the case ofPublic Employees Retirement System ofOhio, v. Betts, the high court ruled thatemployee benefit programs were notsubject to the act . This decision over-turned the Department of Labor's long-standing interpretation, under whichemployee benefit plans were subject tothe act and had to meet an "equalbenefit or equal cost" test .

Within weeks of the Supreme Court'sdecision in the Betts case, bills wereintroduced in the House and the Sen-ate to reverse the decision . These billsbecame the subject of a heated debate .Manyemployer groups strongly opposedthe bills because the bills went beyondthe Department of Labor's earlier inter-pretation and would have interferredwith providing subsidized early retire-ment benefits. The bills would havemade early retirement windows diffi-cult, if not impossible, to use to achieveworkforce reductions ; would have ad-versely impacted retiree health plans ;

and would have invalidated many rev-erence pay arrangements .

In July, Senators Hatch and Kasse-baum introduced an alternative to theoriginal Senate bill, S . 1511, that hadbeen favorably reported out of the SenateLabor and Human Resources Commit-tee in February and was awaiting Sen-ate floor action . In early September abipartisan compromise was reached Inthe Senate, and on September 24, theSenate passed by a vote of 94 to 1 anamended version of S. 1511, the OlderWorkers Benefit Protection Act .

The revised bill passed by the Senatecodifies the long-established principleof "equal benefit or equal cost." It alsoestablishes a series of minimum stan-dards for the waiver of rights by em-ployees in early retirement situations,while asserting the validity of theseprograms if they are "consistent withthe purpose" of the act. The bill pro-vides safe harbors for the two mostcommon forms of exit incentives: pen-sion subsidies and Social Securitybridge payments. The bill also allowscomplete integration of disability and

(continued on page 16)

8 The Actuarial Update

1990 Annual Meeting Report : Washington Briefing

Congressman Douglas Makes Predictionon McCarran-Ferguson

While a bill to substantially alter theMcCarran-Ferguson Act probablywon'tcome to a vote in the House of Repre-sentatives this year, the issue is likelyto surface again in the 102d Congress,a Republican member of the HouseJudiciary Committee predicted at theAcademy's Annual Meeting, September26 .

Rep. Chuck Douglas (R-N.H.) saidthat the Judiciary chairman, Rep . JackBrooks (D-Tex.), "isn't bringing the bill[H.R. 1663) to the floor" this year be-cause the committee's vote to approveIt last June was so close-19 to 17-that there might not be enough votes topass it .

However, said Douglas, "Jack is aMarine and will keep going up thathill-probably sharpening his bayonet ."In the next Congress the bill couldcome to a House vote, perhaps in achanged form that "could split the in-surance industry."Douglas warned theaudience of actuaries. He did not knowwhat support it might get in the Senate,he said, adding, "I hope it won't get overthere ."

Douglas mentioned two reasons tooppose the bill-one, It would depriveproperty-casualty insurance companiesaccess to industry-wide trending dataand advisory rates, with the result thatsmall companies couldn 't function ."This would concentrate the industry,"he said. "What are we fixing [if thathappens]? We would end up paying thebill." Second, the bill's proposal to end"tying" practices would run up againststate regulations that require the tyingtogether of property damage and liabil-ity coverages .

The federal government, Douglaswent on, is "least likely to be able to fixthe [industry's] problems . Just look atthe savings and loan crisis and seewhat the federal government has ac-complished," he said .

In response to audience questions,Douglas said the drive to repeal muchof McCarran-Ferguson's antitrust ex-emption for the insurance industry isbasically a populist one of consumersversus industry. "The general publicthinks you are hiding money."

Forecasts for HealthCare Reform

On the theme of health-care systemreform, Larry Atkins, a Washington-based policy consultant, told the Acad-emy audience that reform at the federallevel "will require a sense of crisis inCongress-and that's not here yet."

Also required for health-care reformand not yet present, said Atkins, are"more expressions of public concern tothe Congress, a fusion of interests bythe major players, and support for a taxto do something."

Atkins, a former minority (Republi-can) staff director for the Senate Spe-cial Committee on Aging. thus threwsome cold water on the prospects ofearly action on the recommendations ofthe U.S. Bipartisan [Pepper] Commis-sion on Comprehensive Health Care,released in final form the day before theAcademy briefing . (See story on page 5 .)The commission called for ensuringuniversal access to health care and

creating a federal long-term care pro-gram, at a cost of $70 billion .

Atkins, who now works for Winthrop,Stimson, Putnam & Roberts-a Wash-ington law firm consulting with corpo-rate clients on benefits and other policyissues-cited a number of current andpotential "disaster areas' in the field ofhealth care :

• erosion of Medicaid, with the costof long-term care cutting into servicesfor children, and the program payingonly 40% to 70% of the rates thatMedicare pays hospitals ; (At the Wash-ington Hospital Center, only 25% ofMedicaid-generated costs are coveredby the program .)

• The recent granting of legal stand-ing to state hospital associations to suestates over the costs of Medicaid :

• The fact that, in the Medicareprogram, half of the nations hospitalsare being paid less than what Medicarepatients cost them:

But besides consumer "anger" at theinsurance industry, the bill is also fueledby congressional concern over the risksof carrier insolvencies . "We have to finda way to weed out the high-risk compa-nies, orwe'll end up with double premi-ums," Douglas warned.

Asked where the bar stood, Douglas,a former state Supreme Court Justice,said the American Bar Association fa-vors the repeal of McCarran-Fergusonbecause the issues would "have to go tocourt and [attorneys] like to have asmuch litigation as possible ." The bank-ing industry, he added, is "lurking onthe sidelines, hoping to have the insur-ance Industrypinned down under fire ."

On another subject, health insur-ance, Douglas asserted that "no onelikes the existing health care system-not employers, not employees, not thedoctors, not the hospitals." With "37million uninsured." he said , 'we're goingto have to have a system for picking upeverybody. There may have to be someuniformity of health insurance . . . therewill have to be a marriage of public andprivate. But no one has the answer .-

He invited his listeners to send himideas on insurance issues, "no matterwhat state you're from." 6

• Hospitals facing insolvency, athreat made worse by managed-careprograms that press for more discountson payment rates: and

• The new accounting rule proposedby the Financial Accounting StandardsBoard requiring accrual of postretire-ment health care liabilities.

"Any of those, or a combination, couldforce Congress to act," saidAtkins . Buthe noted also that the experience ofpassing and then repealing the Medi-care Catastrophic Coverage Act of 1988"has taught Congress to wait for amessage from the people ."

"I do think the politics of this ischanging," he went on. "The businesscommunity is getting closer to the states,the hospitals, labor, and consumergroups."

The underlying issue for all is costcontainment, Atkins said, and no oneanswer has been uncovered for that ."But it won't work just to leave thesystem alone," he said. O

November 1990

Pension Policy Initiatives:Con&ess and DOL

*A"major expansion of the Age Discrimi-nation in Employment Act to employeebenefits plans," the so-called "Bettslegislation," passed the Senate two daysago, reported John Breyfogle, seniorlegislative officer for the Department ofLabor. "It may well affect the way you. . . do business , and the way pensionsand other plans, disability and sever-ance plans, are structured over thenext several years." he told actuariesattending the Academy's Annual Meet-ing, September 26 .

Breyfogle related that the legislationpassed 94 to l and represented a com-promise between bills drafted by Sena-tors Metzenbaum and Hatch, a kind of"unholy alliance," he quipped .

The compromise bill largely excludesearly-retirement programs from therestrictions proposed under Metzen-baum's earlier bill-"except for pro-grams that were basically subterfugefor discrimination," Breyfogle said .

And, the integration ofdisabilityandpension plans would be allowed, al-though "the coordination of pensionplans with severance plans" would stillbe severely limited, he said. Breyfoglenoted that although this last provisionmight not affect the vast majority ofemployers, some really big ones wouldbe seriously affected .

Breyfogle said he expected the bill tobe voted on quickly in the house and goto the President in the next week or two .(See story on page 7.) Acknowledgingthat there has been no decision as yet,Breyfogle suggested that the Presidentwould have a hard time vetoing the bill,given Senate Republicans' overwhelm-ing support.

Other than congressional initiatives,the Department of Labor (DOL) has de-veloped a series of proposals related toenforcing the Employee Retirement In-come Security Act (ERISA), notedBreyfogle. The agency has been con-cerned that their only measure of pen-sion plans' stability and security-auditors' reports-are inadequate, saidBreyfogle. These audits "didn't expressopinions [and ] didn't look at the fullrange of assets." Breyfogle reportedthat, among other things, the propos-als would eliminate the limited-scopeaudit, require peer-review for account-ants, increase excise taxes, and requireattorneys' fees in fiduciary breech casesonly.

These proposals are not final, al-though the department "hopes to have

a final package of statutory language tothe Hill before the end of this session,"said Breyfogle. He doesn't expect anycongressional action this year.

Breyfogle also discussed Secretaryof Labor Elizabeth Dole's interest inpension portability. He noted that mostportability losses result from peoplespending the lump sums they receivefrom their previous employer' s defined-benefit or defined-contribution plan-and not rolling the cash into anotherretirement vehicle, One thing beingconsidered is a requirement that em-ployees roll lump sums into an individ-ual retirement account or the definedcontribution plan of their subsequentemployer .

A "big stumbling block is revenue,"Breyfogle reflected . When people taketheir lump sums out of retirementvehicles, they pay income and excisetaxes. So, 'hat might be good retire-ment policy is actually bad tax policy ."Breyfogle said . He thought it would be"hard to get the portability proposals €nthe current budget environment."

Breyfogle made several predictionsabout what might be included in thefinal budget agreement. Regarding theissue of retiree-health benefits and assetreversions, Breyfogle said that theDemocrats on the Senate Labor Com-mittee take this view: "'€f companiesare going to take excess assets and . . .shove [them} into retiree health forcorporate purposes,' [which] they viewas a different kind of reversion, 'thenwe're going to place restrictions on ter-minations; and that's the price of thedeal.'" Breyfogle would expect any such"deal" to include higher excise taxesand require cushions for remainingdefined benefit plans and new definedbenefit and/or defined contributionplans .

Budget-summit negotiators are alsolooking at increasing Pension BenefitGuaranty Corporation (PBGC) premi-ums," reported Breyfogle. Breyfoglenoted that this would be "the first timethat PBGC premiums would be raisedwholly unconnected to a program prob-lem." In the past, the business commu-nity has been willing to support pre-mium increases, when they "werecoupled with the appropriate programreforms," said Breyfogle . "But justtossing [an increasel in there . . . couldbe a real discouraging sign for DB plansponsors in particular," he said .

"[t may end u p being just an increaseon the variable rate side, or just anincrease on the flat-rate side, or it maybe split," Breyfogle remarked . "Eitherway, it is on the table and subject tosome discussion ." A

9

Tax Issues for LifeInsurers"Members of the life insurance industryfeel like they're being singled out forpersecution," acknowledged Jack Tay-lor, a tax analyst for the CongressionalResearch Service . Referring to Con-gress's interest in the industry as apotential source for additional tax reve-nue, he added, "Let me assure that it'sabsolutely true;" Congress does intendto levy some heavier taxes on the indus-try .

Taylor identified several factors pre-cipitating Congress's present focus onthe life industry. "It is a fact that theindustry doesn't pay a whole lot of taxesconsidering the amount of income [ithas]," because a lot of the income-investment Income-is taxed lightly.Historically, policy makers haven't really"understood the connection betweenthe pure insurance function and thefinancial mediation function," he re-flected .

Taylor said that as insurers began toadvertise their financial services ("TheLast Remaining Pure Tax Shelter," wasone ad that he recalled), "the insuranceindustry finally managed to convinceCongress ofwhat the financial consult-ants had never been able to convincethem of-that there was a lot of un-taxed Income there ."

On the regulatory front, tax changesback in 1984 required the GeneralAccounting Office (GAO) and the Treas-ury Department to file formal reportson the tax status of the industry. AGAO report recommended taxing in-side buildup and levying a "proxy tax"at the company level in lieu of taxing abeneficiary's policy income. "Treasurydidn't actually recommend doing any-thing that serious," said Taylor, but didsuggest eliminating favorable tax treat-ment for predeath distributions, an-nuities not based on life expectancy,and borrowing from corporate-ownedlife insurance .

This gradual change in policy mak-ers' perspective on the tax status of theindustry, coupled with "the crushingneed for revenue," suggests that the in-dustry is apt to "remain a target forrevenue considerations," said Taylor .The industry is also vulnerable, headded, because of the insurance lobby'ssplit between stock and mutual compa-nies overthe policyholder dividend prob-lem.

The only congressional action heexpects on this front this year, how-ever, would come out of the current

(continued overleaf)

10

budget negotiations. Taylor remarked,"I have been told that both the Repub-licans and Democrats have acceptedthe idea of some sort of capitalizationand amortization ofacquisition costs oflife insurance products ."

Noting that there is still some uncer-tainty in the tax treatment of benefitsunder current law, Taylor said that hepredicts that Congress will move to-ward making them nontaxable .

Taylor noted that the internal Reve-nue Service has ruled that long-term

Risk Retention ActIs Working

The Liability Risk Retention Act of 1986does address problems of availabilityand affordability of insurance, and it isworking-on a very small scale . Thiswas reported at the Academy's Wash-ington Briefing by Jane Molloy, a law-yer with the Department of Commerce .

Despite a soft market for commercialinsurance, 72 risk-retention groups and415 insurance purchasing groups havebeen formed nationwide, she reported,and the amount of premiums written In1988 totaled $845 million .

An outgrowth of the liability insur-ance crisisof 1985-86, the 1986 amend-ments to the original Product LiabilityRisk Retention Act of 1981 broadenedthe options for many kinds of groupsand lines of insurance.

"We think Its use will rise sharplywhen the market turns hard again andpeople can't get insurance," said Mol-loy. Still, she said, the act is "hardlylikely to be a threat to big insurers ."

From a 1989 survey of the field .Molloy reported that a broad range ofrisks was being covered, from healthcare to product liability to taxi opera-tions to day-care centers . Some of herfavorite group names are Chariots forHire, a rental-car group, and The Ordi-nary Life Insurance Co., formed by aRoman Catholic archdiocese .

What problems were turned up? onerisk-retention group has been liqui-dated, Molloy said, but she noted thatthe group did not qualify under the actand lacked the capital required of it inits state of domicile .

Three insurance companies that soldinsurance to purchasing groups havebeen deemed problem companies bystate regulators, she added. Commercehas drafted proposed legislation thatwould impose financial standards re-quiring purchasing-group insurers to :

care benefits do qualify as life-insur-ance reserves . Conversion of life insur-ance benefits into long-term care bene-fits, however, would still require legis-lation to make the conversion tax-free .Taylor thinks that there's a good possi-bility that such a legislative measurewould pass. He also thinks that fa-vored tax treatment for acceleratedbenefits would have very little troublepassing, since it would pose very littlerevenue loss for Congress. A

• Be admitted in at least one stateand meet that state's capital and sur-plus requirements; (Or, as an alterna-tive, an alien insurer may write for apurchasing group if listed on the Na-tional Association of Insurance Com-missioners' (NAIC) quarterly list ofnonadmitted insurers , thus meetingcertain capital and surplus standards .)

• Retain risk (net of reinsurance) inan amount less than the maximumpermitted for an admitted insurer ineach state where the group has mem-bers ;

• Maintain a premium- to-surplusratio no greater than three- to-one; and

• Maintain at least $3 million ofcapital and surplus .

The Commerce Department has alsorecommended that Congress amendthe act to require control of the groupsby the members. This is to address theproblem of insurance agents "creatinggroups to avoid rate regulation," Molloysaid, adding, "the act is not meant to bea marketing toot for insurers ."

Also proposed for congressionalaction is an amendment that wouldmake clear that admission in one stateonly is sufficient for writing purchas-ing-group insurance . Some states,Molloy said, have muddied the pictureby insisting on admission in all stateswhere the group has members. Thesingle-state rule, she said, is designedto open the market to small, specializedinsurers .

Commerce has asked the NAIC toimprove communication among stateregulators about the groups-especiallythose with problems-and to encour-age regulators to pay more attention tothis field .

As for the users of the legislation,Molloy said some of them also need topay better attention to what they aregetting Into. She told of one medical-malpractice purchasing group that

The Actuarial Update

bought Its insurance from an Insurerlicensed in Guam, on the strength of adirect-mail ad. The insurer subse-quently left Guam for another island inthe Pacific. Reporting the address ofthe purchasing-group insurer was ac-tually not required in the 1986 law-anomission that is proposed to be cor-rected .

Bills to enact some, though not all, ofthe department's proposals have beenintroduced, and hearings were held inthe House last July. The likelihood isfor no action until the next Congress ."We hope for action before the marketturns," said Molloy.

One other avenue is being exploredto raise standards for risk-retentionand purchasing groups-the possibil-ity that the groups themselves will createan independent certification agency oragencies . This could be done, Molloysuggested, "in conjunction with a uni-versity or a group such as yours [i.e., theAcademy]." A

Pension Committee

Chair Testifies onNondiscrimination Regs

On September 28, Jack Thompson,Pension Committee chairperson,testified before the Internal Reve-nue Service (IRS) . He commentedon IRS's proposed nondiscrimina-tion regulations for pension plans .

Thompson said "some ofthe test-ing procedures outlined in the pro-posed regulations and addendumwill add significantly to the admin-istrative costs of many qualifiedplans that are not discriminatory .

"It could substantially reduce thecost of performing these tests if [thetests] required only active-employeedata. The inclusion of employeeswho terminated during the yearIncreases the complexity of thetesting significantly, without a per-ceptible gain in the reliability of theresults," said Thompson . "This isparticularly true for larger plans,"Thompson pointed out.

Thompson's testimony under-scored the need for "simplifying theprocess while maintainingthe com-mon goal of nondiscrimination ." ThePension Committee's major public-policy thrust is to encourage "keep-it-simple" tax policy-on all fronts .(See the December Enrolled Actuar-ies Report for a detailed report onIRC Section 401(a)(4) hearings .)

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November 1990

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1990 Annual Meeting Report : Business Session

11

Thefollowing is an edited transcript of the Academy's annual business meeting, which includes the nomination and election ofnew board directors, as welt as year-end reports from the Academy and Actuarial Standards Board

President Harold J. Brownlee : Wel-come to the Annual Meeting of theAmerican Academy of Actuaries . Thisis our twenty-fifth anniversary. Youare reminded to pick up your twenty-11fth-anniversary cup outside and alsoto register so that you have a ticket forlunch .

Our custom in the past has been topiggy-back the Academy's meeting onthat of one of the other actuarial organi-zations. We have decided now that itmakes a great deal of sense to have ameeting at this time of year, so theleadership and members of the Acad-emy committees can find out what'sgoing on in the Washington scene andplan committee work for the comingyear in each of the practice areas .

The purpose of the Academy's meet-ing Is twofold . First, we have to have ameeting so that we can elect directors .Second, we have to have a meeting sothat at the end of the meeting the newdirectors and officers can, in fact, takeover!

At this point. I want to invite JohnFibiger, chairperson of the NominatingCommittee, to present his report .

Past President John A . Fibiger: I amgoing to report the officers for the nextyear, who where elected at the Acad-emy's board meeting yesterday . Presi-dent-electMavis Walters, with the closeof this meeting, will become president,and President Joe Brownlee will be-come immediate past-president .

Other elections that did take placewere, for president-elect : Harry Gar-ber, for vice president : Mike Waltersand Bob Dobson (for two-year terms)and, to flll the one remaining year ofHarry Garber's term, Chuck Farr . Thesecretary will be Dick Snader, and thetreasurer, Tom Levy. Those were yes-terday's election results.

Now, the slate of directors that willbe voted at this meeting. For three-yearterms: Howard Fluhr, Jeff Petertil, andJim Swenson. For two-year terms :Mary Riebold, Don Sondergeld, andMike Toothman. That's my report, Mr.Brownlee.

Mr. Brownlee: Are there any othernominations at this time? Seeing none,I will entertain a motion to elect theslate of directors that was joust men-tioned by John Fibiger. All those infavor? (Affirmative .)

At this point, I'd like to introduceJim Murphy who's going to give you abrief report on some of the things thatthe Academy has been doing .

James J. Murphy: Thank you, Joe,and good morning. Welcome to this ourtwenty-fifth anniversary-year meeting .It has been a busy year foryour leaders,committees, members, and staff. To-gether, we have accomplished a lot thatwe can be proud of. And I think thatbodes very well for the next twenty-fiveyears. [ would like to describe a few ofthe things that we have been busydoing .

The leadership has continued to workwith the other North American actuar-ial organizations to strengthen theprofession-with real results . Recom-mendations made by the Joint TaskForce for Strengthening the ActuarialProfession-especially those meant toreinforce the Academy's public-inter-face role-are now a reality . In particu-lar, this year will see the formation, ona formal basis, of Practice Councils forthe casualty, health, life, and pensionpractice areas . The Practice Councilswill, in turn, set goals for and overseethe Academy's public-interface activi-ties. And, as of this year, the presi-dents-elect of all the U .S. actuarialorganizations will sit on the Academyboard. This will continue to ensure thefull support of the entire professionwhen theAcademy sets its public-inter-face objectives .

Our committees and their staff liai-sons have been very active on a numberof public-policy fronts. Our HealthCommittee has been providing expertwitnesses to congressional hearings onsmall-group health plans and the unin-sured. Our Pension Committee workedwith Congressman Visclosky and hisstaff on new legislation to modify thefull-funding limit for pension plans .

Our Committee on Health and WelfarePlans has been working closely with theFinancial Accounting Standards Board(FASB) on their proposed accountingrule for postretirement benefits otherthan pensions, and FASB has beenlistening and adopting many of thecommittee's recommendations .

Some long-term goals of the Acad-emy have come to fruition this year . Fora number of years, various committeemembers and staff have been workingwith the National Association of Insur-ance Commissioners (NAIC) . We havebeen pressing the role of the actuary inthe area of insurer solvency. This yearwe have seen some significant resultsfrom those efforts, probably helped alongby the publication of the document,"Failed Promises," a report on insurerinsolvency by Congressman John Din-gell's Oversight and Investigationssubcommittee .

The NAIC adopted a requirementthat all companies In all states haveloss reserve opinions signed by a quali-fied actuary beginning with the 1990statements . In addition, the NAIC is toadopt a revision to the Standard Valu-ation Law that will implement the valu-ation actuary concept for life and healthinsurers .

On the government relations andlegal fronts. Academy staff have metwith the Internal Revenue Service'sassistant commissioner. Robert Brauer,to discuss the Academy's concernsregarding actuarial assumptions andthe the service's small-plan audit pro-gram.

We visited with Senator Jeffords todiscuss tax simplification and withRepresentatives Stark and Gradison todiscuss national health policy -bothhow it's going and how the Academycan help .

And we submitted an amicus brief inthe Florida Bar case . The Florida Bar,as some ofyou may know, is seeking tomake it an unlawful practice of law forpension actuaries to design and draftpension plans, obviously a key elementin pension consulting . We now await

(continued ouerleafj

12

the results of the court case.On the public-relations front- the

key word is "awards ." Contingencieshas garnered two first-place awards :the "OzzieAward for Design Excellence,"sponsored by Magazine Design & Pro-duction, and the American Society ofAssociation Executives' "Gold Circle"award for editorial excellence andgraphic design .

Forecast 2000, is our program tobuild awareness in the general publicand among opinion leaders about therole of the actuary in society and pub-lic-opinion debate. The 1989 Forecast2000 campaign won the prestigious'Loth Award from the National CapitalChapter of the Public Relations Societyof America, for best public relationseffort in the category of institutionalprograms, which includes programs ofgovernment institutions, nonprofitorganizations, and professional andtrade associations .

Now In its second year, Forecast2000 has been by all accounts a tre-mendous success; the profession hasgotten, and continues to get, extensivepublic exposure .

I think that the fine results that wehave seen this year reflect the excep-tional dedication of our leadership, ourcommittee volunteers, and our staff.As the Practice Councils get underwaythis year, and our leadership continuesto work cohesively with the other actu-arial organizations to strengthen theprofession-the Academy will becomeeven stronger and more effective in itspublic-interface role . I look forward tothe next twenty-five years with greatconfidence .

Mr. Brownlee: The next twenty-fiveyears are important, and I want you allto set aside that date twenty-five yearsfrom now when we will get togetheragain and look back at this with someamusement .

Our next report will be from JackTurnquist who is vice chairman of theActuarial Standards Board (ASB). TheASB is one of the major Initiatives thatwe've taken up in the last two years . It'sbeen doing a great deal of good work . Iwould point out to all of you that theirmeetings. which are quarterly, are opento the public : they are quite interesting.It's like watching sausage being made!

ASB Vice Chairperson JackTurnquist: In July of this year the ASSbegan its third year of operation, and Iam pleased to report that the stan-

dards-setting process Is working. It'sevolving, and it's improving. This is noaccident . In large part it is attributableto the extensive planning of the Acad-emy, through its standards -implemen-tation committee and standards -organ-izing committee; the testing and ground-work of the Interim Actuarial Stan-dards Board; and the tremendous ef-fort of a large percentage of the Acad-emy membership serving on the oper-ating committees and task forces . Thesemembers actually develop the draftstandards and revise them based onthe membership's comments . It is alsodue to the support provided by the staffof the ASB, Christine Nickerson andAlan Kennedy, who do a terrific job, theresources of the Academy-namelyJimMurphy. Gary Simms, and ErichParker-who all provide tremendoussupport, and finally the membership,which ultimately is responsible for thecreation of the ASB and for its contin-ued financial support .

I believe you can see the results ofwhat's been accomplished by the ASBin the last year just by looking at theexposure drafts; the final standardsadopted; the standards handbook,which was distributed early this year;the excellent summary, the ASBBoxscore, which is included with eachissue of The Actuarial Update; and theregular articles in TheActuarial Updatehighlighting some of our activities .

I would like to comment also on theobjectives of theASB . These are namelythat, in the development of standards,the Academy or the actuarial profes-sion be proactive rather than reactive ;that there be a continual monitoring ofthe needs of practicing actuaries andthe publics that they serve ; and thatthe standards developed do not pre-clude the exercise of professional judg-ment by the actuary .

To these ends-if you look at what'sbeen developed- there's probably threeprimary areas where standards havebeen addressed. Emerging areas ofactuarial practice , such as continuingcare retirement communities and long-term care ; areas being addressed byregulators and other professions, whichare numerous , such as cash flow test-ing, loss reserves , involuntary termina-tion benefits, and the setting ofpensionassumptions; and previously unad-dressed areas where there is a demon-strated need for standards . These wouldinclude such things as appraisals ofinsurance companies , expert testimonyby actuaries, and data quality.

The Actuarial Update

The ASB has been working on estab-lishing and enhancing its working rela-tionships with organizations that relyupon the actuary's work product, suchas the Financial Accounting StandardsBoard, the Governmental AccountingStandards Board, the American Insti-tute of Certified Public Accountants-and, most recently, the technical actu-arial task forces of the NAIC .

The ASB maintains liaison with thevarious professional organizations andtheir committees and/or counterpartstructures that monitor standards ofpractice, guides to professional con-duct, qualification standards, and thediscipline process within United States .There is also contact with the CanadianInstitute of Actuaries and the Instituteof Actuaries in the United Kingdom .

In sum, I think what we have is atremendous operation . Much has beendone, there's much to do. We appreci-ate the present and past support of theAcademy and its members and lookforward to more in the future . So, let'skeep those cards and comment letterscoming In .

Mr. Brownlee: Thank you, Jack.When we were discussing the for-

mat of the meeting, one of the thingsthat came up was whether there shouldbe a presidential address. The presi-dential address is a tradition in manyactuarial organizations ; however, it isone that I thinkwe don't want here . Theproblem with presidential addresses is,if it's the outgoing president, he talksabout the great things he did (or didn't)do- trying to rewrite history, as othersorts of presidents sometimes try to do .

If we're going to have any remarks atall, they should be from the personwho's going to have to deal with all ofour problems for the next year. So atthis time I want to pass the gavel toMavis Walters, our president for thecomingyear. and invite her to make anyremarks that she thinks are appropri-ate at this time .

President Mavis Walters : Joe Is actu-ally going to be a very hard act to follow .I don't know if all of our Academymembers recognize that Joe has reallydevoted many hours of service to theAcademy over the past several years,not just during his year as president .He's going to make it very, very difficultfor me, or for anyone else, to measureup to the level of hard work and concen-tration he has contributed to Academybusiness .

November 1990

I would also like to express my grati-tude to our past president, Jim MacGin-nitie, and to his predecessor, JohnFibiger, who, along with Jim Murphy.established the practice of formallyintegrating the president-elect intoAcademy-leadership deliberations . Ourwork of the past year has been a terrificlearning experience and an excellentexample of team work . In the comingyear, I look forward to working veryclosely with Harry Garber, our newpresident-elect, in the same fashion.

During the past year, I have also hadthe pleasure of working very closelywith Jim Murphy. our executive vice

president. I want to assure all Academymembers that we've got the right per-son for the job. Jim has become anoutstanding leader of our profession,and we are very fortunate to have himat the helm in the Academy office .

This coming year will be an excitingand challenging one, with importantpublic-policy issues being debated atthe national level and, indeed, increas-ingly at the state level as well . Andthese public-policy issues affect all areasof actuarial practice . I look forward tothe contributions that the practicecouncils, now formally established, will

13

make--- under the leadership of DanMcCarthy for life, Bob Dobson for health,Chuck Farr for pensions, and MikeWalters for casualty.

Finally, It's my hope that in thecoming year all actuaries practicing inthe United States will recognize theirresponsibility to participate In the dis-cussion and debate of those public-policy issues where we have specialexpertise to contribute . It is also myhope that those contributions can andshould be made through participationin the American Academy ofAcctuaries .Thank you . A

1990 Annual Meeting Report : Practice Councils

Casualty PracticeCouncil MeetingMichaelA. Walters, newly-elected Acad-emy vice president, opened the firstmeeting of the Casualty Practice Coun-cil. Noting that the Academy's pur-poses include the dissemination of in-formation regarding standards ofpractice, qualification, and conduct, heremarked that a key mission of theCasualty Practice Council will be tocoordinate efforts of the Academy Inthis vital area . Other objectives of theCasualty Practice Council will be tocoordinate Academy responses to pub-lic issues in the casualty area, and toprovide appropriate Input Into publicrelations activities .

The Casualty Practice Council in-cludes the chairpersons of the Commit-tee on Property and Liability Issues, theProperty and Liability Financial Re-porting Committee, and the CasualtyLoss Reserve Seminar Joint ProgramCommittee, as well as the members ofthe Academy's board of directors whoare casualty actuaries. The chairper-son of the Conference of Actuaries inPublic Practice's Committee on Casu-alty issues is a practice council mem-ber also .

These individuals agreed with Wal-ters' statement on the objectives of theCasualty Practice Council . Indicatingthat the group would be an available"sounding board" for the full spectrumof casualty issues of concern to theAcademy. They underscored their in-tent to avoid interfering with ongoingcommittee activities, being loath tointroduce any bureaucratic limitations

on the ability of public issues commit-tees to go about their tasks in a timelymanner .

The Casualty Practice Council nowhas an additional responsibility thatthe other three practice councils do nothave. The Casualty Practice Councilwill be reviewing the requests of Acad-emy members who are not also mem-bers of the Casualty Actuarial Societyto determine whether they are qualifiedto sign loss-reserve opinions. Review-ing members' qualifications, a taskspecifically assigned to the CasualtyPractice Council by the National Asso-ciation of Insurance Commissioners(NAIC) in June, (see report in July 1990Update), Is this practice council's firstpriority. A subcommittee of the Quali-fications Committee has been estab-lished to screen these requests .(Members interested in applying for

Pension PracticeCouncil MeetingAcademy Board of Director Larry Zim-pleman chaired the meeting for Acad-emy Vice President Chuck Farr, whowas unable to attend. Committeechairpersons in attendance gave re-ports on current activities .

Pension Committee ChairpersonJack Thompson reported on the com-mittee's recent statements in supportof two tax bills intended to simplifyrules for qualified plans .

Thompson reported on the PensionCommittee's support of CongressmanVisclosky's effort to liberalize theOmnibus Budget Reconciliation Act of

consideration should contact GarySimms at the Academy's Washingtonoffice for further information .)

The practice council's meeting in-cluded remarks by Mavis Walters,newly-elected Academy president, andfellow of the Casualty Actuarial Society(CAS). She pointed out the specialresponsibility the council has in meet-ing her goal of"ecumenism" during thecoming year. Every actuary, and eachactuarial organization, should be en-couraged to understand the differentpurposes and functions of the variousactuarial organizations, and shouldsupport them according to Walters. Thepractice council was asked to form thenecessary liaison between the Acad-emy and the CAS, and to apprise casu-alty actuaries in general of the Acad-emy activities that bear on casualtypractice .

1987 full-funding limitation . He alsoreported on testimony he would giveSeptember 28 at the Internal RevenueService's public hearing on the pro-posed nondiscrimination regs and re-lated rules. Thompson concluded hisremarks with a brief description of aproposed modelling/data base projectthat is the subject of discussion be-tween the Academy's Pension Commit-tee and the Society of Actuaries' Pen-sion Research Committee. The pro-ject's objective is to provide a betterbasis for estimating the impact of pro-posed pension legislation ; part of itwould update the pension-plan datafor the 1985 Academy study, PensionCost Method Analysts. Thompson

(continued ouerieaJ)

14

pointed out that a major obstacle tolaunching this project is the antici-pated level of resources needed .

In response to Thompson's comment,Darrel Croot, practice council memberand chair of the Committee on PensionAccounting, stated that his firm waswilling to update the data for the pen-sion plans Included in the 1985 study,if an agreement could be reached re-garding how to update the wage andsalary data. Croot also pointed out thatthe updated plans could be used toapproximate the defined-benefit-planuniverse, ifweights could be derived foreach type of plan in the sample .

Over the past several months, theprimary focus of the Committee onPension Accounting has been the Gov-ernmental Accounting StandardsBoard's (GASB) exposure draft on ac-counting for pensions by state and localemployers. This committee submittedwritten comments to GASB in April andtestified at GASB's May 2nd publichearing. The committee's primaryconcerns are in the areas of interperiodequity, actuarialvaluingof assets, stan-dards for the selection of economicassumptions, and actuarial qualifica-tions. The committee has continued tocommunicate with GASB staff sincethe May hearing and expects comment-ing on this exposure draft to be thecommittee's primarywork until the finalaccounting standard is released .

Stephen Kellison, new chair of theCommittee on Social Insurance, relatedhis committee's agenda for the comingyear. In the Social Security area, Kelli-son expects to use the recently releasedreport of the technical advisory panel ofthe Social Security Advisory Council asa springboard for committee projects .According to Kellison, there is still workto be done on measures of actuarialbalance, and there is some disagree-ment between Social Security Admini-stration and Health Care FinancingAdministration actuaries on the appro-priate wage assumptions for preparingprojections for OASDI and Medicare .Kellison expects the Academy commit-tee to examine the differences andprobably to comment on them. Inaddition, Kellison plans to encouragethe committee to examine unemploy-ment insurance, a growing financialproblem for the states . Kellison is alsoconcerned that the Academy examineMedicare; he will coordinate work inthis area with the Health PracticeCouncil .

Howard Phillips, Academy board

member and practice council member .reported on a number of the AmericanSociety of Pension Actuaries' (ASPA)projects and Initiatives. In particular,he noted ASPA's recent extensive testi-mony before the ERISAAdvisory Coun-cil in which ASPA proposed a new IRSForm 5500 reporting schedule for de-fined contribution plans. The purposeof the new schedule would be to im-prove the oversight of defined contribu-tion plans . ASPA will provide theirrecent testimony to Academy PensionCommittee Chairperson Thompson forconsideration at the committee's No-vember meeting .

Academy Director of GovernmentInformation Gary Hendricks and LarryZimpleman reported on two major proj-ects of the Actuarial Standards Board's(ASB) Pension Operating Committee .The ASB approved release of an expo-sure draft on benefits upon involuntaryplan termination of an employee groupin January 1990, with comments dueJune 1. The Pension Committee of theASB is currently reviewing the com-ment letters and considering revisionsto the proposed standard of practice . Inaddition, the committee is developing aproposed standard on setting assump-tions for measuring pension obliga-tions and may present a discussiondraft at the ASB's October meeting .

This last item became the subject ofconsiderable discussion, primarilybecause members of the Practice Coun-cil thought there was a pressing need tohave this standard in place. JamesTurpin, a member of the Academy'sPension Committee, pointed out thathe had represented the committee at apretrial conference held by the tax courtin Phoenix on a number of test casesstemming from the IRS audit programof small pension plans . These casesinvolve actuarial assumptions. At thepretrial conference . Turpin made refer-ence to the ASB work on a standardgoverning actuarial assumptions andexpressed the Pension Committee'sconcern that the tax court's findings inthese test cases not be in conflict withprofessional standards of practice .Judge Clapp encouraged the Academyto make sure that the ASB standard ispresented to the court for considera-tion .

In addition, Darrel Croot pointed outthat GASB is willing to cite the ASBstandard as part of its accounting stan-dard for public pension plans . Crootindicated that the ASB views develop-ment of an assumptions standard as a

The Actuarial Update

priority and is aware of GASB's inter-est. Turpin will communicate the con-cerns regarding the small plan auditcourt cases to the ASB . A

The final issue discussed by thepractice council was the recommenda-tion of the Academy's Task Force onRetirement Income Policy. The taskforce recommended that a new taskforce be formed to develop a white paperthat codifies the Academy's concernsregarding retirement income policy inthe United States . The practice councilagreed that this was a good idea andwill encourage formation of such a taskforce soon . Larry Zimpleman stated hiswillingness to be a member of such atask force, and Howard Phillips sug-gested that ASPA would make discus-sion papers available that were devel-oped as part of ASPA's effort to write anational policy statement. A

Health PracticeCouncil Meeting

Issues concerning the financing andavailability of health care continue todominate both state and federal legisla-tive and regulatory agendas. Thecommittee reports presented at theSeptember 26 meeting of the HealthPractice Council by the health commit-tees of the Academy and the ActuarialStandards Board (ASB) served to illus-trate the wide range of significant top-ics currently confronting the healthactuary. Robert Dobson, Academy vicepresident, chaired the meeting, assistedby Harper Garrett, outgoing vice presi-dent .

Items discussed during the meetingincluded the current status of the Fi-nancial Accounting Standards Board's(FASB) proposed standard, "Employ-ers' Accounting for PostretirementBenefits Other Than Pensions ." TheAcademy's Committee on Health andWelfare Plans has worked closely withFASB staff to push for modification ofcertain provisions in the proposal,reported Jeff Petertil, committee chair .The ASB's Committee on Retiree Health,chaired by Ken Porter. plans to beginwork on actuarial compliance guide-lines as soon as the final version of theaccounting standard is released . TheCommittee on Health and Welfare PlansIs also exploring the problems obstruct-ing the development of a health-care

November 1990

data base and debating the need for adefinition of a "qualified actuary" for

,,.purposes of Internal Revenue Codeetion 419.Edward Wojcik, chairperson of the

Health Committee, reported that thecommittee plans to release two publicstatements , one on costs and basicissues relating to long-term care andanother on Improving access to healthcare. The committee has also recentlytestified at a congressional hearing onaccess to health insurance that consid-ered the question of who is "medicallyinsurable ."

The ASB has very recently adopted astandard ofpractice dealing with HMOsand other managed care health plansthat was developed by the HealthCommittee of the ASB . Currently. thecommittee is working on the develop-ment of a health ratemaking standardthat will address documentation anddisclosure.

Long-term care is also being ad-dressed by the Task Force on Long-Term Care of the ASB . Headed by BartMunson, the task force has drafted astandard of practice to provide guid-ance to actuaries practicing in the field

f c long-term care insurance. The pro-osed standard will be reviewed at the

October meeting of the ASB and isexpected to be released as an exposuredraft shortly after the meeting .

Harold Barney. new chair of theCommittee on Continuing Care Retire-ment Communities (CCRCs), reportedthat his committee's major project isthe revision of Actuarial Standard ofPractice No . 3, Concerning ContinuingCareRetirementComnuwnities. Thecom-mittee is also working with. both theNational Association of InsuranceCommissioners (NAIC) and the Ameri-can Institute of Certified Public Ac-countants, as these groups address theaccountingand regulatory treatment ofCCRCs.

The Committee on Liaison with theNAIC Accident and Health (B} Commit-tee has just been promoted from asubcommittee of the Health Committeeto a full committee . Bill Bugg, commit-tee chair, reported that the committeehas been asked by the NAIC to examineproposals for reforming the small-groupmarket. This effort will include looking

0.t tier rating. He said work is continu-

ing on the health rate-filing guidelinesand amendments are under considera-tion .

Having completed a standard on riskclassification and an educational slide

15

show on the same topic, the Committeeon Risk Classification now plans tofocus on issues relating to communityrating. Jean Wodarezyk, committeechair, said the committee plans tocontinue its efforts to educate legisla-tors, regulators, and the public on theneed for risk classification in develop-ing financial security systems . Thiscommittee's work will cut across thepractice areas, since risk classification

issues are also of interest to life andcasualty practitioners .

General group discussion includedcomments on the need to give moreattention to the special issues surround-ing HMOs, possible sources of datasuch as the federal employees healthbenefits program for the creation of ahealth-care data base, and suggestionsfor encouraging more comments onASB exposure drafts . A

Life Practice Council Meeting

One thing that the Life Practice Councilwill be watching in the year ahead is theextent to which the liaison group ap-proved by the National Association ofInsurance Commissioners' (NAIC) Ex-ecutive Committee is accepted andworks. The group, to include represen-tatives of both the Actuarial StandardsBoard (ASB) and the Academy, plans tomeet regularly with regulatory actuar-ies on the NAIC life and health, andcasualty actuarial task forces .

Walter Rugland reported that theNAIC Life and Health Actuarial TaskForce is expected to issue draft regula-tion on the Standard Valuation Law forexposure at either NAIC's December'90or June '91 meeting. Also, the modelStandard Valuation Law revisionsshould be ready for December 1990adoption. These changes will, whenenacted and adopted by the variousstates, implement the valuation actu-ary concept . Rugland is chairperson ofthe Joint Committee on the ValuationActuary, and has been following theseNAIC developments closely .

Academyboard memberJohn Boothdiscussed state adoption of the pro-posed revision to the model StandardValuation Law . He noted that supportfrom both the American Council of LifeInsurance and the NAIC would be criti-cal to the state-adoption process . Hethought that December exposure of theregulation would help .

Another possible route to implement-ing the valuation actuary concept maybe through the NAIC BlanksTask Force .Instructions to the NAIC Life and HealthBlank could be changed to require theopinion of a valuation actuary, in ac-cord with the revisions to the modelStandard Valuation Law and regula-tion being proposed. Members of theLife Practice Council will be followingup on that front this year .

The valuation actuary's opinion isan opinion on reserve adequacy, whichalso reflects the asset side of the bal-ance sheet. CompliancewithASB stan-dards and the Academy's qualificationrequirements would be important evi-dence of the profession's commitmentto the valuation actuary concept .ASB Vice Chairperson Jack

Turnquist gave a report on the ASB'scurrent projects in the life area. Hethought that there needed to be a liai-son between the Health and Life Prac-tice Councils .

Jim Murphy reported on some newNAIC projects for which people areseeking input: the Risk-Based Capitalproject, the Examiners' Handbook, andthe Mandatory Standards ValuationReserve Working Group of the NAIC .Bill Ward, chairman of this NAIC work-ing group, plans to make a preliminaryreport in December .

Regarding the future of the JointCommittee on the Valuation Actuary, itwas suggested that the Committee onLife Insurance Financial Reporting takeover the Joint Committee's work assoon as the valuation actuary conceptis implemented by the NAIC .

Academy board member StephenRadcliffe discussed the issues of divi-dend opinion and sales illustration.James Swenson, member of the LifeCommittee, said that the committeewas looking at interrogatories andconsidering how to update and tightenthem, as well as illustrations related todividend and nonguaranteed elements.

Other issues for the Life PracticeCouncil include : NAIC guideline }X{:Washington State universal life: two-tiered annuities; accelerated deathbenefits; and the NAIC's Commission-ers Annuity Reserve Valuation Method,CARVM. A

16

Study on Effectiveness of CasualtyLoss Reserve Opinions ReleasedAnecdotal evidence collected by theAcademy's Committee on Property andLiability Insurance Financial Report-ing suggests that the requirement ofcasualty loss reserve opinions hasprevented some insurer insolvencies.

The committee reviewed question-naire results received from state insur-ance departments reporting on 105 ofthe 153 companies declared insolventbetween 1969 and 1987, as well as 4additional companies that became in-solventbefore 1969 or after 1987-for atotal of 109 companies .

The committee then took the totalstudy and segmented it to focus on theeighty-two insolvencies occurring be-tween 1982 and 1987. The committeethought it important to focus on thisperiod because loss reserve opinionswere generally not required for prop-erty/casualty insurance companiesbefore 1981; by 1989 twenty-four statesrequired them .

Surveys were returned for fifty-fiveof the eighty-two insolvent companiesin this sample . Of these companies,twenty-seven had submitted loss re-serve opinions. Because there was alimited number of insolvent companiesthat had submitted loss reserve opin-ions, the committee was unable todrawfirm inferences as to the loss reserverequirement's role in preventing insol-vency. Nevertheless, from the full gamutof insolvencies looked at, the commit-tee was able to generalize about some ofthe causes of property/casualty insurerinsolvency.

About one third of the eighty-twoinsolvencies (twenty-four) occurred instates where a loss reserve opinion wasrequired. Approximately half of theloss reserve opinions submitted weresigned by actuaries. Under-reservingwas indicated as a contributor to insol-vency, in five of the eleven loss reserveopinions signed by actuaries . In theremaining nine opinions signed bynonactuaries , only one insolvency wasassociated with under-reserving. Ac-cording to the committee, "This maysuggest that companies with loss re-serves recognized to be potentially in-adequate were more likely to obtain anactuarial opinion."

"Under-reserving" was cited mostoften as the principle cause of insol-vency; "mismanagement" was the sec-ond most frequent cause. The studyalso noted that -many of the loss re-serve opinions for companies subse-quently declared insolvent were quali-fied or conditioned in some manner ."Based on these indicators, the commit-tee will recommend standardized quali-fying statements and suggest otherchanges designed to enhance the valueof the loss reserve opinion .

The National Association of Insur-ance Commissioners' new requirementthat loss reserve opinions be filed in all

LETTERS TO THE EDITOR(continuedfrom page 3)

The case of the trust-fund asset re-demption is different. If future benefitsare to be paid without raising payrolltaxes, eventually the required cash mustcome from redeeming the trust funds'bond holdings. In other words, thenational debt held by the trust fundsmust be retired, not just rolled over .Thus, redemption of trust fund assetswould be equivalent to repayment ofdebt held by the public only if federal

CONGRESS AMENDS THEAGE DISCRIMINATIONIN EMPLOYMENT ACT(continued from page 7)

pension benefits after an employee'snormal retirement age.

The House version of the bill thatpassed is identical to the Senate ver-sion , except for one provision that clari-fies the application of the act to em-ployee group-health plans . Specifi-cally, an employer that provides retireehealth benefits could offset the cost ofthose benefits with severance benefits.For purposes of the offset, there is norequirement for an employer to offer re-tiree health to employees both before

The Actuarial Update

states and signed by qualified actuar-ies, beginning with the 1990 annualstatement , is expected to help reducethe incidence of future insolvencietHowever, as the committee points out."strong loss reserve opinion require-ments cannot be expected to prevent allinsolvencies," since mismanagementand fraud--common causes of com-pany insolvency--do not typically sur-face in loss reserve analysis. Even so,the committee believes that loss re-serve opinions by qualified actuaries"contribute to the prevention and earlydetection of insolvencies." For thisreason, the committee plans to con-tinue to work to improve the effective-ness of loss reserve opinions .

Copies of the survey report can beobtained upon request from the Acad-emy's Washington office.

fiscal policy envisioned net retirementof a portion of the national debt -ascenario that is frequently hoped forand seldom achieved .

For these reasons, I continue tomaintain that under temporary partialadvance funding, repayment of trustfund assets when the baby boom re-tires will require higher income taxes,other federal taxes, or more borrowingthan would be the case under pay-as-you-go financing.

Richard S. FosterBaltimore, Maryland

and after age sixty-five. Senate ap-proval of this change is required beforethe bill can go to the President . Noopposition to the change is expected inthe Senate .

Although the compromise packageaddresses the concerns that employersraised with earlier versions of thesebills, analysts are not yet certainwhether the final legislation will Inter-fere with, or make more costly, volun-tary retirement incentive arrangementsthat have been used in the past . TheBush administration has taken no for-mal position on the bill. However,White House officials have given Re-publican legislators assurances thatPresident Bush will not veto the bill. A