From a Guest Chairperson3

Letters to the Editor3

Standards Outlook

•ublic Relations Watch

GAAP forMutual Life Insurers

7Capitol Views

Included with this month'sissue otThe Actuarial Update

are the following:

In Search Of

ASB Boxscore

1993 CLRS TranscriptOrder Form

AMERICANACADEMY OFACTUARIES

VOLUME 22NUMBER 12

DECEMBER 1993

Early Retiree Health Under Clinton PlanBy Harry Suflon

A mong the many changes inPresident Clinton's pro-posed Health Security Actof 1994 is one that consti-tutes both a major change

in national retirement policy andassumption by the larger publicof current massive liabilities ofmajor American corporations .

Under the Health Security Act,nearly all American workers overage 55 would be eligible for subsi-dized early retirement healthbenefits . If a worker has therequired forty quarters of coveredemployment for OASI retiredworker benefits, then at age 55the worker can withdraw fromthe labor force and retain healthinsurance coverage by only pay-ing 20% of the average premiumrate for the health alliance in theworker's geographic area .

This is a dramatic departurefrom current policy. First, near-ly all Americans would be able toretire any time after age 55 withfull assurance that they would beguaranteed access to healthinsurance at only 20% of fullcost until Medicare eligibility atage 65 . Currently, early retire-ment with heavily subsidizedhealth insurance benefits isavailable only to workers whoseemployers are willing to providesuch a benefit, and this luxury islimited primarily to workersemployed by America's largest

I and most prestigious corpora-tions .

The second dramatic depar-ture from current policy is reliev-ing employers who currently

offer health insurance to theirearly retirees of their responsibili-ty for paying for the insurance .Under Clinton's proposal, theseemployers' only obligation wouldbe a temporary 3-year tax assess-ment of 50% of their savings dueto the change in government pol-icy. After 3 years, they would nolonger have any financial obliga-tion. However, many of theseemployers could be expected topay the employees' 20% of thepremium .

There is no compelling analyt-ic reason for making these policychanges a part of the President'sproposal. The overall proposalwould work equally well if indi-viduals over age 55 were treatedsimilarly to all other individualsunder the age of Medicare eligi-bility .

Continued on page 5

Academy Groups Testify on Capitol Hill

Chairpersons of two Academy Health Practice Council work groups testified before U.S.House of Representatives subcommittees in November . Alice Rosenblatt (above) of therisk adjustment work group spoke November 9 before the House Ways and Means Com-mittee's Subcommittee on Health . On November 17, Bill Bluhm represented his workgroup on health insurer solvency before a subcommittee of the Energy and CommerceCommittee. In their testimony, both Rosenblatt and Bluhm emphasized the Academy'swillingness to assist Congress as it examines President Clinton's health care proposal andultimately crafts final legislation .

AMERICANACADEMY OFACTUARIES

PresidentDavid G . HartmanPresident-ElectCharles A . BryanVice Presidents

Howard J . BolnickHoward Fluhr

Paul F. KolkmanStephen P . LoweJack M . Turnquist

Secretary- TreasurerJames R . Swenson

Executive VicePresident

James J . Murphy

EXECUTIVE OFFICEThe American Academy

of Actuaries1720 I Street, NW

7th FloorWashington, DC 20006

(202) 223-8196Fax : (202) 872-1948

MEMBERSHIPADMINISTRATION

Woodfield Corporate Center475 N . Martingale Road

Schaumburg, IL 60173-2226(708) 706-3513

THE ACTUARIALUPDATE

Committee on PublicationsChairman

E . Toni MulderEditor

Adam ReeseExecutive Editor

Erich ParkerAssociate Editors

William CarrollRonald Gebhardtsbauer

Patrick J . GrannanManaging EditorJeffrey Speicher

Contributing EditorKen Krehbiel

Production ManagerRenee Cox

Statements of fact and opinion in thispublication, including editorials andletters to the editor, are made on the

responsibility of the authors alone anddo not necessarily imply or representthe position of the American Academy

of Actuaries, the editors, or themembers of the Academy .

chairpersonThe ABCD:A Help, Not a Threat!By Norm Crowder

s chairperson of the Actu-arial Board for Counselingand Discipline, I can'tafford to be too sensitive .Many misperceptions exist

about the ABCD's work, anderroneous opinions are afloat .Recently, an experienced actuaryknown for his fierce indepen-dence said in total sincerity thatthe ABCD poses a threat to actu-aries comparable to the KGB!And I'm afraid he is not alone inthat opinion .

An important part of my taskas chairperson is to explain tomembers that the ABCD is not apower-hungry cabal bent onharassing the innocent, butrather is a group of fellow practi-tioners who strive to uphold thehigh professional standardsalready practiced by the over-whelming majority of actuaries .We at the ABCD must persist inour efforts to better explain thereal nature of our work .

The ABCD is a young organi-zation. Our early experience tellsus when we make an inquiry inresponse to a complaint about anactuary's conduct, the actuaryinvolved may not react well .Why is this? Well it's humannature. Most of us are uncom-fortable having a peer review ourwork or challenge it in some way .We are not used to outsidersinquiring about the propriety ofour client relations. Also, actu-arial standards are new, and toooften we have not studied themthoroughly. Certainly, we havenot become accustomed to docu-menting our work productagainst these standards. Andalthough we know that the threatof actuarial malpractice or othersuit on professional matters isthe new reality of the 90s, wehave not sufficiently modified

our daily practice to protect our-selves.

So it is understandable thatsome view the ABCD as anintruder into the realm of anactuary's personal practice andethics . Inquiries, complaints, etc.can be viewed as threats-toindependence, ethics, and com-petence .

Although the ground ruleshave changed in our world, manyactuaries are reluctant to changewith them. The longer we havebeen in practice the harder it is toaccept the new conditions . How-ever, we can no longer be lonegunslingers who shoot from thehip, answerable to no one .

After almost 2 years of experi-ence, the ABCD and its staff areaware of these reactions. We aresincerely dedicated to helpingactuaries improve their work andpractice-by guiding, advisingand helping. Punitive action isnot our purpose, except in themost egregious situations . It isunfortunate that it is the D fordiscipline in the ABCD's namethat seems to stick in most peo-ple's minds . We choose toemphasize the C for counseling.

In fact, we stand ready to helpin any way that might be usefulto members. We receive manyinformal inquiries and requestsfor guidance, as well as formalcomplaints. Any member of theABCD or our general counsel,Lauren Bloom, may be contactedfor assistance. If we don't have aready answer to your question,we'll develop one for youpromptly.

Where a potential violation ofthe standards or code of conductexists, the matter often can beresolved without formal action .Remember, every actuary whowishes to report a violation is

permitted by Precept 16 of theCode of Professional Conduct totake the matter first to theactuary and try to resolve weproblem to mutual satisfactionbefore filing a complaint. Oftenan apparent breach is really amisunderstanding based onincomplete or incorrect informa-tion. By direct talks with theother party, many disputes can beresolved without the interventionof a third party. If that processfails, the ABCD and its staff maybe able to help before the matterbecomes a formal complaint.

We encourage actuaries toconfront honestly the ethicalchallenges that arise in daily prac-tice. rather than let them slide .We do the profession and ourclients no good when we let apotentially material error or actof misconduct go unchallenged.Raising such an issue does notmake a person a troublemaker ;rather it is the mark of someonewho would like to see the profes-sion serve its public in the bestpossible fashion . The Aexists to serve as a good-arbiter of such issues . It standsready to help, not to threaten.

Crowder, president of the Academyin 1983-84, is a consulting actuaryin Darien, Connecticut.

The Lip date welcomes

letters from its retiers .:

Litters for publication

~hotrld .ba tttlttltttt d 11

"Letters to the Enter,"and must include the

writer 's nom, address ;•aI d t Jephotle nttratter .Letters may be edited 1

style alt space- :requirements

2 The Actuarial Update • December 1993

TO THE EDITOR

Notice From N.Y.

T he New York State InsuranceDepartment would like toinform the readers of The

Actuarial Updatethat the state hasnot yet adopted the equivalent ofthe Model Standard ValuationLaw promulgated by the NationalAssociation of Insurance Com-missioners in 1990 and amended

standardsOUTLOOK

By Christine Nickerson

t its October meeting, thectuarial Standards Board

(ASB) reviewed the proposedfinal version of an actuarial com-pliance guideline for statutorystatements of opinion not includ-ing asset adequacy analyses, con-sidered the proposed final versionof the revised standard for con-tinuing care retirement commu-nities, and discussed a proposedstandard on credibility for healthand property/casualty insurance .New board members were alsoannounced at the meeting.

Compliance Guideline forAppointed Actuaries

In 1992, the ASB asked the LifeCommittee to develop an actuari-al compliance guideline for statu-tory statements of actuarial opin-ion required under the modelStandard Valuation Law promul-gated by the National Associationof Insurance Commissioners(NAIL), as amended in 1990, and

r Section 7 of the NAIC'sel Actuarial Opinion and

emorandum Regulation.Opinions required under Section7 do not include an asset adequa-cy analysis, nor do they require anopinion as to reserve adequacy .The standard applies to appoint-

in 1991 . The prognosis for suchadoption is now uncertain . TheNew York Legislature considered,but did not adopt, the equivalentof that model in 1992 and 1993 .That proposal was submitted bythe State Insurance Departmentwith the assistance of an industrycommittee organized by the LifeInsurance Council of New York .A draft supporting replacementof Regulation 126 was also thenprepared.

Therefore, with regard to anycash flow analysis of liabilitiesand supporting assets as ofDecember 31, 1993, insurance

ed actuaries providing statementsof opinion, as specified in Section7, on reserves and related actuari-al items contained in the annualstatements of life or health insur-ers. The board voted to adopt theproposal which is titled, ActuarialCompliance Guideline No . 4,Statutory Statements of OpinionNot Including an Asset AdequacyAnalysis by Appointed Actuariesfor Life or Health Insurers .

Revised Standard for CCRCs

Actuarial Standard of PracticeNo . 3, Relating to ContinuingCare Retirement Communities,was adopted in 1987 . In 1993,the Academy 's Committee onCCRCs made substantive revi-sions and additions to the stan-dard. In addition, it was refor-matted in accordance with theuniform format for standards ofpractice adopted by the ASB .One significant change is that the"component approach" is nolonger included as an acceptableactuarial basis for financial man-agement of a CCRC. This andother changes necessitated expo-sure of the revised standard . Therevised standard was exposed, thecommittee reviewed the com-ments received , made changes tothe exposure draft, and drafted aproposed final version of thestandard. The board reviewedthe proposed standard and sug-gested removing some of themore purely educational materialand reorganizing the standard forbetter logic flow . A task force

companies should plan to complywith Regulation 126 through thesecond amendment datedNovember 25, 1992 . The NewYork State Insurance Departmentis thus primarily interested in thesufficiency of reserves of the typecovered by Regulation 126 .Other reserves may be separatelyanalyzed in the materials submit-ted to New York. Any aggregatereserve test shall continue tocomply with Section 95 .8(d) (2) .

Robert J. CallahanChief Life Actuary I

New York State Insurance Dept.

drawn from the CCRC Commit-tee, which has been discharged, isaddressing these concerns .

Credibility Procedures

The Casualty and Health Com-mittees worked together to devel-op a proposed standard relating tothe assignment of credibility val-ues to historical data, assump-tions, and external data. Theboard reviewed the draft and sug-gested changes to clarify the intentof the proposed standard . Theboard also suggested the drafting

Continued on page 8

The Actuarial Update ∎ December 1993 3

publicrelationsWATCH

By Ken Krehbiel

T wo press conferences in twocities in one day, followed bylive nationwide television and

radio appearances-all within 24hours-highlighted Forecast 2000efforts in Canada in November.The media attention was generat-ed by recommendations made ina Canadian Institute of Actuaries(CIA) report stating that futurecontributions to the Canada andQuebec Pension Plan (CIQPP)system could be reduced by asmuch as half over current projec-tions if four options are addressedby policy makers .

The publicity, part of the actu-arial profession in North Ameri-ca's Forecast 2000 public relationsprogram, was organized to coin-cide with a CIA meeting in Mon-treal . The report makes four rec-ommendations: increase normalretirement age, change the drop-out provision, eliminate theyear's basic exemption, anddownsize survivors' benefits .

Current government projec-tions call for workers' contribu-

Foilov,inn a J ily mcdir tour to ~r1i-qua ua and Kerituo'ky todisr.ll,~S ;tats; anti r ;I'mr1al health r=furry v,ilh reporters, Ju~iaPnilips rnadr;, a similar ono -day e;xcrrrsitx- t o Denv-e- onNtve'nli :ar rtt . There the ITIFt with Or7nl% ,~ 7rf Medical andScience 1.ti'dCer Ann Schr der an ' ;: .ar the soIc Duel-ton pub'iOaffaiis prwarris on lC~GD (w.Nl-FI!l ;ann F l iAf~1'; h7 ;E.

Philip- . c'nl-sulliurt acluarv for 11,1i1'in~isa R Robertson in~,1inrioapclis a'ld citai persan mar` the Acddellli ; s: wok croup

atanoard bcnr.filn, exphinec thee nrtnv irarlr _i~s that ha,,e tohe weighed in any nealrn r^tnrrn polo . She al o taihed ,ala IutCnlnradoCare Coloo•adn r o',~er rr Roy Hnrnnrstudy for stale I ealrn reform . Philips gas accornt)anien con theAcademy ni--dla lour by A.cader,rr Assl'taot Dilecrrcr of PtthfiRelatirnr+n; den < t-et fbi-e1 .

4 The Actuarial Update ∎ December 1993

tions to rise to 13.25% by the year2035 to finance the next genera-tion of retirees . If the fouroptions were adopted in theirentirety , those rates would rise toonly 7% from the current contri-bution rate of 5%, according tothe report .

Three Canadian actuariesmade the recommendations attwo press conferences on Novem-ber 11 . C.S . (Kit) Moore, chair-person of the task force that pro-duced the report , vice president ofMLH + A Inc . and formerCIA president, andRobert Brown,former CIApresident andassociate pro-fessor of statisticsand actuarial sci-ence at the Univer-sity of Waterloo,released the report tomedia at a Torontopress conference inthe morning, thenflew to Montreal,where Denis Latulippe,bead of the research anddevelopment department at theCommission administrative desregimes de retraite et d'assurances,Quebec City, joined them as fran-cophone spokesperson at theMontreal press conference .Brown and Moore then presentedthe report at a CIA meeting ses-sion .

As CIA meeting attendeesarrived on the main meeting floorthat morning, they were greetedwith an overhead projection of anewspaper clipping under theheadline "Actuaries count onpension plan ." The column byEllen Roseman appeared in thatmorning's Toronto Globe andMail. Details of the report wereembargoed for release, however,Roseman received an advancecopy with the understanding thatshe could write about the report,but could not divulge details tobe released at the two press con-ferences. Roseman attended theafternoon press conference inMontreal, and a short item enu-merating the recommendationsappeared in the next day's Globeand Mail.

Before seven o'clock the

CBC's "Canada AM." At thesame time, Moore was beinginterviewed live on CBC rPrint media coverage of thereport on the C/QPP appeared inthe Montreal Gazette, La Presse,Toronto Sun, and The FinancialPost, in addition to columns andeditorials in the Toronto Globeand Mail.

Accompanying the spokesper-sons in Toronto were AcademyDirector of Public Relations

is

Erich Parker and Elizabeth KelleyGrace, senior vice president ofStephen K. Cook & Company,which provides public relationscounsel to Forecast 2000. Forecast2000 is cosponsored by the sixmajor organizations in NorthAmerica representing actuaries :the Academy, the American Soci-ety of Pension Actuaries, the CIA,the Casualty Actuarial Society,the Conference of ConsultingActuaries, and the Society ofActuaries .

At the Friday CIA meetingluncheon in Toronto, Moore for-mally presented the Silver AnvilAward to the CIA and currentPresident James Brierley and rec-ognized the efforts of Forecast2000 staff. The Silver AnvilAward, the most prestigioushonor bestowed upon a publicrelations program by the PublicRelations Society of America, wasawarded to Forecast 2000 inEach of the sponsoring orgtions received its own trophy.

Krehbiel is the Academy's assistantmorning of November 12, Brown director of public relations .appeared live nationwide on

CUNTON PLAN,continued from page I

ot Shifts

Under Clinton's proposed treat-ment, early retirees who normallywould be self-insured or havecompetitive health options wouldshift to the health alliances ratherthan be included under largeemployer plans, which wouldgenerally be expected to be cor-porate alliances . The resultwould be a cost shift away fromthose employers currently offer-ing early retiree health benefitsonto other payers in the system .

Recent comprehensive aggre-gate data on employers' costs forearly retiree health benefits arenot readily available . However,data from a 1991 GeneralAccounting Office (GAO) studygive some notion of what is prob-ably a lower bound estimate ofthe magnitude of the cost shift .The GAO study examined theimpact on employers' earlyretiree health liabilities of lower-

Medicare eligibility from ageto age 60, and throughout the

study assumed that Medicarewould pick up 70% of the tabnow paid by employers offeringthese benefits .

According to the GAO study,estimated total balance sheet lia-bilities for retiree health benefitsof large corporations wereapproximately $335 billion in1991 . The study further estimat-ed that reducing the employers'liability by 70% for retirees age60 to 64 would shave $99 billionoff the employer liability . Apply-ing the same relative ratio to lia-bilities to age 55 to 59 retireesshaves another $26 billion offemployer liabilities . Adjustingthe GAO numbers to reflect the80% savings to employers underthe Clinton proposal (rather thanthe 70% used for Medicare in theGAO study) yields a reduction incorporate liabilities for earlyretirees' health benefits in excess

140 billion.hifting a $140 billion liability

om a reasonably small numberof large corporations to otherhealth insurance payers is anenormous cost shift. Some of thiscost shift, however, may beretrieved indirectly . For example,

an estimate based on data fromannual corporate reports suggeststhat approximately 10% of thisreduction in corporate liabilitiesfor retiree health belongs to thebig three auto manufacturers, andindirectly the United Auto Work-ers and other major unions .

There is speculation that theadministration's cost estimatesassumed that either the workersin these companies will havewage increases following the nextbargaining with resulting increas-es in federal income tax revenue,or there will be increased corpo-rate profits, again subject to fed-eral income taxes, to partially off-set the decrease in early retireehealth costs . Unfortunately, theadministration has not seen fit torelease sufficient information onits cost estimates to evaluate thereasonableness of interactionsand offsets assumed .

Other Compounding Factors

While important to large corpo-rations and unions, particularlyin the automobile and steelindustries, the cost savings fromearly retirees' health insurancethat will be shifted to other pay-ers are only a small part of theoverall savings that may accrue tomajor corporations . A morecomplete estimate of the costshifting implications has to takeaccount of other factors .

Prescription Drugs. In addi-tion to subsidizing corporations'retirees under age 65, the HealthSecurity Act will reduce corporateretiree health liabilities for theirretirees covered primarily byMedicare, Prescription drug cov-erage for the large employers forretirees amounts to between 30%and 40% of claim costs . The pre-scription drug program for Medi-care outlined in the Health Secu-rity Act would probably eliminate25% or more of the corporateexpenses for over-65 retireehealth care .

While the early retiree healthcosts of the auto industry mayapproach 75% of their total lia-bility, it's not clear how the esti-mated $335 billion would bedivided between retirees underage 65 and those over age 65 forall corporations . Assumingapproximately a 50150 overall

split, a reduction in liability forthese companies for early retireehealth care would be an addition-al $25 billion to $30 billion . Themagnitude of these corporate sav-ings is enormous .

Noncovered Early Retirees .There are millions of retired peo-ple who have not yet reached age65 and eligibility for Medicarewho do not have employer-basedretirement coverage . These alsowould become eligible under theHealth Security Act to join ahealth alliance, with the federalgovernment subsidizing 80% oftheir cost .

Retirement Block. In additionto providing a windfall for earlyretirees, the Health Security Act isdesigned to address such factors as"job lock" where people are afraidto move upward to a higher-pay-ing job because of possible loss orlimitations in health insurancecoverage. However, there is alsowhat may be called "retirementblock." Particularly in such fieldsas teaching or state governmentemployment, there are a numberof people who might have ade-quate income to retire but cannotafford to pay for health coverage .An estimate is needed for a possi-bly large induced early retirement,which would greatly increase thesubsidies required over and abovethe subsidies that would go tothose under age 65 who arealready retired .

Spouse coverage. For a num-ber of individuals who haveretired, a spouse may continueworking in order to maintainhealth insurance . Particularlywhen the working spouse isfemale, the availability of exten-sive health insurance at only 20%of its family cost would probablyinduce many of these formerlysecond wage earners to considerretirement as well .

Members of the administra-tion assert that estimates havebeen made concerning the num-

1, ber of early retirees who willbecome re-employed, or who willhave a spouse employed . Thenature of the coverage of the earlyretirees would shift the coveragefrom the employee (assuming theemployee doesn't work at all) tothe spouse . This would lower thefederal subsidy but indirectly shift

Continued on page 8

Unfortunately,the administrationhas not seen titto release sufficientinformation onits cost estimatesto evaluate thereasonablenessof interactions

and offsets

assumed .

The Actuarial Update ∎ December 1993 5

EA DIRECTORY NOW AVAILABLEThe t9i%3 c nrol,red Actuaries Directurj- is the onlycomprehensive listing of the more tha ~ 3,t?00 enrolledactuaries practicingin the United States ono abroad . Adenrolled actuaries are listed alphabetically , faith currentaddress , telephone , and fax. numbers. The directory alsofeatures a useful breakdown of EAs by geographical region .

The directory i s available from the Academy for $30 . Seri! la check payable to the Americali Academy , of Actuaries, toy17201 Street NUJ . 7th Floor, W sh,ia ltO , I)IC 20006 .

GAAP for MutualLife InsurersBy Stephen L. White

n addition to their statutoryfinancial statements, stock lifeinsurance companies issuestatements in accordance withGAAP (generally accepted

accounting principles) . Rules forGAAP statements are prescribedby the Financial AccountingStandards Board (FASB). Tworequirements of particularimportance to life insurers areFAS 60 and FAS 97. FAS 97defines the accounting for uni-versal life-type policies .

Policyholders of stock lifeinsurance companies are clearlycustomers. Policyholders ofmutual life insurance companiesare also owners of the company .It is very difficult to characterizetransactions with policyholdersas company-customer or compa-ny-owner; therefore, FASBexempted mutual life insurersfrom FAS 60 and FAS 97. Mutu-al insurers are also exemptedfrom FAS 113 on reinsurance .FASB did not prescribe any alter-native to those statements forGAAP statements .

With no explicit definition ofGAAP for mutual life insurers,many companies published theirstatutory financial statementswith descriptions such as, "Thesestatements were prepared inaccordance with statutoryaccounting principles, which are

considered to be generallyaccepted accounting principlesfor mutual life insurance compa-nies." Public accounting firmsgave unqualified ("clean") auditopinions on such statements .

In 1992 FASB issued interpre-tation No . 40 . Effective with1995 statements, a mutual com-pany's statements can bedescribed as GAAP only if theycomply with all GAAP require-ments except those where explicitexemptions are given . FASBencouraged the American Insti-tute of Certified Public Accoun-tants (AICPA) to recommend anaccounting model for insuranceactivities of mutual insurers .

The AICPA formed a MutualLife Insurance Task Force underthe auspices of its InsuranceCompanies Committee (ICC)and charged them with develop-ing a model within the framework of FAS 60 and FAS 97.With the 1995 deadline and thetime required for exposure, com-ment and implementation, rapidprogress was essential . The taskforce comprised seven represen-tatives of the public accountingprofession and four representa-tives of the mutual life industry .The Academy appointed StephenL. White its nonvoting liaison tothe task force. Academy mem-bers White, Peter Duran, GlenGammill, Michael Levine, andGeorge Silos discussed theinsured and prepared numerous

I illustrations for the task force .The primary issues before the

task force were:

1 . Should profits emerge basedon premiums (as in FAS 60) oron margins ( as in FAS 97)?

If the choice is margins, anaccount balance must be defined .The account balance is readilyavailable on a universal life poli-cy. No single value of a bundledlife insurance policy is clearlyequivalent. Alternatives consid-ered included the dividend fund,cash surrender value, the statuto-ry reserve, and a net level premi-um reserve ( either using valua-tion or nonforfeiture interest) .2. Should premiums be reportedas revenues (as in FAS 60) or asdeposits (as in FAS 97)?3. How should deviations fromoriginal assumptions be handled:

a. Fully locked, as FAS 60 iswritten ;

b. Unlocked prospectivelyFAS 60 is applied in practicother products repriced afterissue; or

c. Unlocked retrospectively,as in FAS 97?4. Should assumptions includeprovision for adverse deviation?5. How should the use of divi-dends (e.g., to purchase paid-upadditions) affect the accountingmodel?

A major difficulty was decidinghow independent those questionswere . For example, some con-tended that reporting premiumsas revenues would be incompati-ble with having income emergebased on margins. There was noconsensus on this general issue,which may lead to minority rec-ommendations at various levels .

The five actuaries who con-sulted with the task force did notagree among themselves whichanswers were best, but it is clearthat several of them would pduce reasonable results .

The task force made the -lowing recommendations, whichmust be reviewed by FASB :

1. Income should emerge pro-portional to margins, where mar-gin calculations use the net levelpremium reserve for guaranteedbenefits calculated at the divi-dend fund interest rate .2. Premiums should be reportedas revenue.3. Deviations from assumptionscause DAC amortization to berevised retrospectively, as in FAS97 .4. There should not be a provi-sion for adverse deviation .5. Generally, DAC amortizationshould be based on dividendspaid in cash .

The actuarial illustrations pro-vided by the Academy volunteershelped the task force reach a rec-ommendation in 6 months, avery short time for such a cplex project

. 10

White is vice president and actuaryof Provident Mutual Life inPhiladelphia.

6 The Actuarial Update • December 1993

CapitolVIEWS

Tennessee received a Medicaidwaiver from the Health andHuman Services Department(HHS), to implement its healthcare program . TennCare is a 5-year demonstration projectdesigned to deliver care to a mil-lion Medicaid recipients throughmanaged-care organizations .According to the HHS, the projectalso is expected to cover an addi-tional 300,000 currently unin-sured people in the first year .Under the plan, enrollees withincomes above the federal povertylevel-except for those in manda-tory Medicaid eligibility groups-willl be required to share some ofthe costs by paying premiums,deductibles, and copayments .Some limitations on hospital andphysician outpatient and inpatientcare, prescription drugs, and labo-ratory services will be removed .

tpatient treatment for sub-ce abuse will be covered . The

waiver was granted with morethan thirty terms and conditions .One condition states the adminis-tration will not allow Tennessee toenroll anyone in a plan lackingsufficient qualified practitioners ;therefore the Health Care Financ-ing Administration must approveaccess standards before any partic-ipants maybe enrolled . TennCareis scheduled to be implementedon January 1, 1994 .

The U.S. Tax Court's decision inVinson e Elkins v. Commissionerof the IRS was upheld by theUnited States Court of Appealson November 29 . In the U .S . TaxCourt case, the Commissioner ofthe IRS assessed deficienciesagainst Vinson & Elkins, disal-lowing a portion of the deduc-tions, which were passed throughto its partners, for contributionsto defined benefit pension plans .The U.S. Tax Court found that

ctuarial assumptions under-g those contributions were

reasonable and ruled in favor ofVinson & Elkins . The U .S. Courtof Appeals affirmed the TaxCourt's decision, despite theCommissioners' challenge thatthe U.S. Tax Court applied both

an improper legal standard and aproper one improperly .

Labor Department audits of pen-sion plan assets would be expand-ed under legislation scheduled tobe introduced early in 1994 .Under ERISA, all pension planfunds that have been invested ininstitutions such as insurancecompanies that are already regu-lated by federal or state govern-ments are exempt from review byan auditor . The exemptionplaces an estimated $2 trillion inpension fund assets at risk. Theloophole also endangers govern-ment assets because it guaranteesthe payment of pension benefitsfor defined benefit pension plans .

An IRS hearing on proposedmutual insurance company regu-lations attracted no witnesses,though representatives from thestock and mutual insurance com-panies had requested to testifyand were scheduled to speak . Ingeneral, the proposed regulations,issued in September, are used todetermine the equity base forpurposes of computing the differ-ential earnings amount andrecomputed differential earningsamount .

Rep. J .J . Pickle (D-Tex.), an advo-cate of proper funding of pensionplans, will retire next year aftermore than 3 decades in Congress.Pickle is the third-most seniorDemocrat on the House Waysand Means Committee and servesas chairman of the Ways andMeans Subcommittee on Over-sight. Recently, Pickle has pro-moted legislation seeking tostrengthen the Pension BenefitGuaranty Corporation .

The IRS announced that pensionplan sponsors are not required tonotify participants when plans areamended to comply with thereduced retirement benefit com-pensation limit mandated by theOmnibus Budget ReconciliationAct of 1993. IRS Announcement93-146 states that the ERISA Sec-tion 204(h) notice is not applicableto plan amendments arising out ofstatutory changes to qualified planlimits . Despite the fact that theremay be a significant reduction inthe rate of future benefit accruals

under their qualified plans,employers are not required toinform plan participants that themaximum annual compensationthat may be considered under thequalified plan will be reducedfrom $235,840 to $150,000 (asindexed) beginning in 1994 .

Vermont Governor Howard Deanproposed universal access tohealth care in the state by 1995 .The governor's bill proposes amultipayer system with employerscontributing at least half the pre-mium costs for their employees.Additional funding for the pro-gram would come from increasedtaxes on beer, tobacco, gasoline,and hospitals . Participationwould be mandatory, nearly allresidents would be enrolled in analliance, and delivery would bethrough both managed care andopen plans . As of January 1, 1995membership in the alliance wouldbe required for workers whose

Continued on next page

CAPITOL HILL TURF BATTLEOVER HEALTH GI$LAT ON

Prosideni Cllnton'S hetttth care uuposa° is creating aiurisdictional i,att1e bet'„~2en Sen ;rtors Fdvw?rrt Kennn ;

and Daniel Patr=r, rvloypihan prompting eur .to iiwoouce versions of th bill tailored to their owncummittees . R nnFas . chairwIn of th-e Sate Labor . ndhuman Re ::oume :- C mmittee . want to retain iuiisdi ti vi 0%,a[fre ernpla'.Jer- premium tinattci{rp_rnechanism .o bur Nl'oyrrizan ,chairman -,t ire Sfl nate Frnarrw Co-u rr. ittee : :irifs file prrwlssibnto be 'tooled tike ri'_iier venue provi sirirs and taken up byFinance, The jurisd ;otional battle over the Clinton proposall hasbeen much less intense in the house . There, the bill has bees=refened to the Ways and W7,ns . Energy and Commerce . andEducation and Labor Ce mmitt=.es .

MIeanv,while, Rep . Jim Cooper (,D TFrtrr . ; is atteniptinh tot ) ar,ition his hill (,loser to the president's health rare propnsa anddi ;tancr his plan from.. ore, Cdiere-d t,v-_ S erlatra Popublirans . IIIrecent remarks, Cooper has trir,d to ;rllap the sdminist,ation'sconcern that his managed r.ompctit on hifl does not pm,A, euniversal coverage by portraving his proposal as an increnrntalapproach to universal coverage , Fur t ernr re, he has dlianltssedthe Senate GOP bill sponsored bl,' John Ch,nfee lR - R .l .) asrnns:nerably to the if llht in the retorm gcbale Gorper`s

actiooe fttitGwe CCrrlut,e : is 1 y Ira mag.ir4rter that ir,d"ated theadministration's i linr,r rrr,s to :omprnmise with managedcompetition ad ocatrs_ Cooper's mareuverir?o also ha& castdoubt on recent efforts by Cooper and Cirafea supporters toreach agreement on a single alternative to the Cllnton P1,111

The Actuarial Update ∎ December 1993 7

Actuarial StandardsBoard f eettngJ3rltla y 19 -4)

Enrolled ActuariesMeetingMa,cti17-9

r4ar-hozb3; Associationof InsuranceCnmm!s'5innersSpring MeetingMardi 5-8

Actuarial Board forCounselin g andDisc;ioline MeetingF .1ircf1 It,

Joint Execut ceCcminl it'ee MeetingM•ar [ 127 1

Society of ActuariesSpring Meeting withAFIR Cofloquiu€rlmApril 20-22

Actuarial Standards'Board MeetingApril 27-28

Casualty ActuarialSociety SpringMeetingMay 15-18

Society of Actuaries `Spring Meeting(Financial Reporting,Investment)'May 26-27

National Association'of InsuranceCommissionersSummer MeetingJune 12-15

Society of ActuariesSpring Meeting ''(Pension, Health)June 15-17

Actuarial StandardsBoard MeetingJuly 19-20

CLWTON PLAN,continued from page 5

the cost to the spouse's employer,who is much more likely to be asmall employer and not one ofthe very large companies fromwhich the employee retired .

Intergenerational Cost Shifts.There is another source of cover-ing the subsidy rather than direct

continued from previous page

employers do not offer compara-ble coverage, state workers, andthe uninsured . Other groupswould be permitted to join toassure financial stability on anactuarial basis . By January 1,1997, all Vermont residents areexpected to be enrolled in thealliance.

The Missouri Commission onState Health Insurance has pro-posed a reform plan that wouldestablish regional health careboards to oversee insurance cov-erage and drastically alter the wayresidents receive medical cover-age. For urban residents, the planwould establish region-widehealth care purchasing pools ; res-

STANDARDS, continued from page 3

committees discuss with the ASBLife and Pension Committeeswhether the proposed standardcould and should be broadenedto apply to those areas of prac-tice. The Pension Committee hasnamed two of its members to atask force that is working onthese changes

New Board Members

ASS members are appointed tothree-year terms by a selectioncommittee comprising the presi-dents and presidents-elect of theAmerican Academy of Actuaries,the American Society of PensionActuaries, the Casualty ActuarialSociety, the Conference of Con-sulting Actuaries, and the Societyof Actuaries .

The terms of Jack Turnquist,

funding from federal sources .The federal funding of these peo-ple is based on the communityrate offered through the healthalliances . Based on the adminis-tration's original estimate of anemployee-only cost of approxi-mately $1,800 per year, it is esti-mated that the average cost percapita per year in the healthalliances would run about $1,500

idents in rural areas wouldreceive coverage under one ofthree plans: single payer, man-aged competition, or managedcollaboration . The commission'spriority reforms include theadoption of community rating,open enrollment, and the cre-ation of a "limited number" ofstandard benefit packages . Theplan is before the General Assem-bly for consideration .

The 103d Congress is adjournedsine die until the second session isconvened on January 25, 1994 .

For more information on thelegislative or regulatory mattersmentioned above, contact DavidRivera of the Academy'sGovernment InformationDepartment.

Edward Burrows, and Harry Sut-ton expired at the end of 1993 .Burrows and Sutton were bothreappointed to a second three-year term . Turnquist, havingcompleted the maximum twoterms on the board, was replacedby Frank S . Irish . The selectioncommittee, which annuallyappoints the chairperson of theASB, named P . Adger Williams toserve as chair during 1994. GaryCorbett and Daniel J. McCarthywill serve as vice-chairpersonsduring 1994. Willard Hartmanresigned from the board with oneyear remaining of his term ;Harper L. Garrett, Jr . has agreedto join the board to fill thisvacancy.

per year, which includes childrenand other dependents .

Typical actuarial estimatthe cost at ages 55 to 65 for hebenefits relative to the averagecost of a total population of peo-ple under age 65 would be at leastdouble the average cost, or $3,000per year. With possibly tens ofmillions of early retirees shiftedto the community rated pools,the cost difference would addapproximately 10% to the com-munity rate .

Therefore, we are passing asizable portion of this cost shift toindividuals and small employerswho are forced to enroll on acommunity-rated basis in thehealth alliance . This is in addi-tion to the increase in communi-ty-rated cost due to the additionof Medicaid eligibles, the unin-sured, and eventual shifting ofsome Medicare members into thehealth alliances .

Careful Analysis Needed

To date the Clinton administion has not released all theon the assumed number of peo-plc to be covered in this dramaticand extremely expensive cost shiftbuilt into the Health Security Act .Many large, unionized companieswould be bailed out by shiftingsubstantial amounts of their cur-rent cost to individuals andsmaller employers. These provi-sions have many of the sameeffects as lowering the age for eli-gibility for Medicare to age 55 .(See Contingencies, March/April,1992 .)

Congress needs the completedata to understand the full impli-cations of these changes beforeacting. The administration andothers should carefully analyzethe effects of these sweepingchanges on employers who wouldsave large sums of money and onworkers who would be releasedfrom retirement block. The effecton the basic community rate forindividuals and employers owhom this cost in largewould be transferred also req sclose examination .

7-he ASB will hold its next meeting Harry Sutton is senior viceon January 19-20, 1994, in ` president and chief actuary forArlington, Virginia. Allianz Life in Minneapolis .

8 The Actuarial Update - December 1993

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