October/November 2010 Volume 7 Issue 5

The Sections From 1981 to Now

Tennis Lessons A Look at 1-in-200-Year Events

Financial and Health economics The New FSA Module

Retirement 20/20 The Transformation of Ret I. Rement SOA 2O1O

Join us at the SOA 2010 Annual Meeting & Exhibit: Fresh ideas. Innovative seminars. Top-notch speakers. Plus—numerous networking opportunities. We’re heading to New York—a city on the move. Vibrant. Electric. And we plan to infuse that energy into this year’s meeting.

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Oct. 17–20, 2010 Hilton New York New York, NY The Actuary is published bi-monthly (February, Statement of Ownership, Contributing Editors SOA Staff Contacts April, June, August, October, December) by the Management and Circulation Steven W. Easson, FSA, FCIA Patrick Gould Society of Actuaries, 475 N. Martingale Rd., Suite Publication Title, The Actuary; Publication [email protected] Managing Director of Marketing 600, Schaumburg, IL 60173-2226. Periodicals post- Number, 022-627; Filing Date, 10/01/2010; Issue & Communications age paid at Schaumburg, IL, and additional mailing Frequency, Bi-monthly; Number of Issues Pub- offices. USPS #022-627. lished Annually, Six; Annual Subscription Price, Ronald Poon-Affat, FSA, FIA, MAAA [email protected] $22 students, $43 N.A. nonmembers; $64.50 [email protected] This publication is provided for informational Int’l nonmembers; Complete Mailing Address Lisamarie Lukas and educational purposes only. 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Features Cover Story

12 The Sections: 24 The Amazing Greatest Hits From Transformation 1981 to 2010 of Ret I. Rement A look back at the lives It wasn’t that long ago that and times of the SOA’s the world saw defined benefit Sections. and defined contribution as By Meg Weber our only retirement system solutions. Today, actuaries are 16  Tennis Lessons developing new options. As this article shows, By Emily Kessler and 1-in-200-year events can Andrew Peterson be found everywhere. By John Gordon Departments

06 Editorial 08 letter From The President 10 Letters to The editor 30 Continuing Professional Development 34 The SOA at Work 36 education

24 Editorial Look Out New York Here Come The Actuaries

By Larry Rubin, lifelong New Yorker

On October 17 – 20 more than 2,000 Of course not all actuaries have a scien- (New Yorkers consider this to be their risk management specialists will descend tific outlook on life. I hear there are a golf course), disco bowling, the Sky Rink upon New York City for the Society of minority of actuaries who actually prefer ice skating gallery and more. (Visit www. Actuaries’ Annual Meeting. As profession- aesthetic pleasures (how they ever passed chelseapiers.com/ for more information.) als skilled in averting risk, many may their exams we will never know). For choose to play it safe, perhaps by seeing these actuaries, New York offers world- A truly unique experience is available a Broadway production, having dinner at renowned art museums including the at the Alvin Ailey School of Dance. The Lindy’s and maybe even taking a ride to Guggenheim and the Museum of Modern school offers open dance classes in a vari- the Statue of Liberty or Ellis Island. For oth- Art. Farther off the beaten track is the New ety of techniques for levels from novice ers seeking reward for taking a risk, New Museum, which is a leading destination (the absolute beginner) to advanced for York offers a plethora of adventures that for new art and new ideas. less than $20 for 1 1/2 hours. (Visit www. will please even the most cautious among alvinailey.org/.) us. As a native New Yorker and Annual Unlike many other cities, New York has Meeting planning committee member, I four seasons and the fall is one of the New York is famous for its cuisine. Some encourage you to consider making a quick most pleasant times to be in the city. The of the world’s finest restaurants are in calculation about the returns and don’t Manhattan Waterfront Greenway encircles New York. But to really know the New delay getting your feet wet in NYC. New York offering a pleasant bike ride York cuisine you need to go off the along the Hudson and East rivers. (Go beaten track. You should not leave New New York City offers some of the finest to www.nycbikemaps.com/maps/manhat- York without experiencing a New York museums in the country. The American tan-waterfront-greenway-bike-map/ to see kosher deli. Two of my favorites are Wolf Museum of Natural History should fasci- more details.) Besides, anyone who has and Lamb and 2nd Ave. Deli—which nate anyone with a scientific outlook on driven a car in New York will tell you it is is famous for its apple strudel. For an life. Located at 79th Street and Central a strange feeling to be moving faster than interesting take-home of New York’s din- Park West, it features enough exhibits to be five miles an hour. For the less adventur- ing excellence, consider a stop at Guss’ intriguing for weeks on end. Be sure to visit ous, a stroll through Central Park is an Pickles at 85 Orchard Street and pick its website and download a personal GPS enjoyable way to spend an afternoon. up a few quarts of their famous pickles, for the museum at www.amnh.org/apps/ Located in Central Park is the Central Park although you may be too full from the explorer.php. Right next door is the New Zoo (www.centralparkzoo.com), a smaller free samples to enjoy dinner that eve- York Historical Society. For Boston actuar- cousin of the more famous Bronx Zoo. ning. The Hungarian Pastry Shop near ies, if you’re lucky, you may get to see its Columbia University offers some of the famous exhibit featuring Bucky Dent, Bill Or consider a visit to Chelsea Piers. It finest pastries in the city. Buckner and David Tyree. has the only driving range in Manhattan

06 | The Actuary | October/November 2010 Entertainment opportunities are abundant New York’s professional sports teams All this excitement in the city that never sleeps. While Broadway attract a loyal following that makes atten- should result in an plays initially come to mind, some of the dance at one of their games exciting. unforgettable trip more interesting opportunities occur under On Sunday, October 17, the New York to New York City. the radar. For those coming for the weekend Giants will be playing the Detroit Lions at While you’re here before the meeting, the National Comedy the new Meadowlands football stadium you may even want Larry Rubin Theatre offers a hilarious night of improvi- (future home of the next cold-weather to check out the Society of Actuaries’ sational comedy for $15 (however, given Super Bowl), which is only a short train Annual Meeting being held at the Hilton the area of the city where the theatre is ride from midtown Manhattan. The New New York. A lot of planning has gone into located, a risk-averse actuary may not York Rangers and the New York Knicks making this a great meeting. It would be a want to travel there alone). Visit www. play at Madison Square Garden, a short shame to miss it! A manhattancomedy.com/index.html. There walk from the Annual Meeting host hotel. are numerous jazz clubs that offer an oppor- Of course, this being October, you’ll be Larry Rubin, FSA, CERA, CFA, MAAA, is partner, tunity to mellow out and feel the rhythm of able to attend the World Series held annu- PricewaterhouseCoopers, LLP. He can be contacted at [email protected]. the city. Try the Blue Note Jazz Club, www. ally at Yankee Stadium. bluenote.net/live/index.html.

New Take advantage of these additional opportunities to Professional grow your knowledge on a variety of important and valuable subjects, while earning continuing professional Development development (CPD) credit, from the convenience of your computer. E-Courses The new e-course topics include: · decision making and communication, · enterprise risk management, · financial and health economics, · financial reporting, · fundamentals of actuarial practice, · health systems overview, · investment strategy, · operational risk, · pricing, reserving and forecasting, · regulation and taxation, · regulatory perspectives on ERM and · social insurance.

Learn more and register today at WWW.SOA.ORG.

October/November 2010 | The Actuary | 07 Letter From The President News on Many fronts

By Mike Mclaughlin

In this column, there are a number of items While I’m on the topic of international issues, internationally. It will also increase the influ- I would like to share with you, including a report I’ve appointed a task force to work on a strategic ence of the actuarial profession in the world of on my recent trip to Asia, an update on the global initiative to determine our future international ERM and will allow CERAs to have an interna- CERA credential, volunteer opportunities and strategy. The number of members outside of tionally recognized credential. information about the SOA’s research function. North America is 12 percent, and growing! You can expect to hear much more about this in the For current FSAs, the path to earn the CERA cre- Joint Regional Seminar in Asia next several months. dential is relatively short—all you would need to In August, I was privileged to spend a few weeks complete would be the Operational Risk Module in Asia as part of the Joint Regional Seminar. The Global CERA Credential and the Advanced Finance/ERM exam. I urge Joint Regional Seminar is a collaborative effort On September 1, I signed the final documents those of you who are interested to consider earn- among the SOA, the Institute & Faculty of Actuaries transferring ownership of CERA from the SOA to ing your CERA. and the Institute of Actuaries of Australia with the new CERA Global Association, in accordance the support of local actuarial organizations. The with the Board’s decision. This was a major step The Importance of Volunteerism theme this year was “Asset, Liability and Capital in creating the new organization and evolves the The SOA has a very capable professional Management: Where are your Risks?” The event CERA into a globally owned credential. staff—however the cost of running an opera- was held in five cities: Bangkok, Singapore, Taipei, tion like ours without the time and energy Hong Kong and Beijing. On my trip to Asia, I was pleased to hear a lot of of our volunteers would be prohibitive! The interest in the CERA—both from actuaries who are SOA has more than 1,500 dedicated mem- On this trip I met with hundreds of actuaries and planning on earning the credential and employers bers and candidates who volunteer. We have employers. Whenever possible, I took time out who recognize the benefit of having the CERA as many career-long volunteers, and we always to meet with representatives of the local actuarial part of the global marketplace. I met with many welcome new volunteers into the fold. (You associations. Informal meetings with local mem- bright students and members who are excited find that out when you attend the Fellowship bers, several visits to universities with actuarial sci- about the profession and the idea of a global actu- Admissions Course!) ence programs and meetings with local insurance arial credential! regulators rounded out my itinerary. I came away Volunteerism is an important way to grow your impressed with the high regard in which the actu- The global nature of the CERA will increase its career, and the SOA provides many opportunities arial profession is held in Asia, our opportunities prominence within North America as well as to do that. You continue to learn new skills and to serve the financial community, and the enthusi- around the world. Offering the CERA globally you build a network of professionals that is of huge asm of our members and candidates. will facilitate the free movement of actuaries value over time.

08 | The Actuary | October/November 2010 The SOA has established a Leadership This year’s results found that nearly one-third of This work will supple- Development Program which can help link you to pre-retirees—individuals currently in the work- ment—not replace—cur- various opportunities. Our volunteers are involved force—said that the concept of retirement will not rent SOA research efforts. in a variety of areas—from helping manage the really apply to them because they will never be We plan to work closely exam process, to organizing our meetings and financially able to retire. Among other findings, with the Academy and events, to driving our research, to leading the fewer than 30 percent of pre-retirees say they plan the Canadian Institute of Mike McLaughlin sections. Just this year, 500 people—members, to retire at age 65. Overall, inflation is the main Actuaries to ensure that this candidates and even students—have expressed concern of both retirees and pre-retirees, as are effort is valuable in their efforts to strengthen retire- interest. You can learn more about the Leadership health care costs. ment systems in the United States and Canada. Development Program on the SOA website. Strengthening the SOA SOA Dialogue: Interactive Research Generates Media Research Function Leader Session a Success! Attention for Our Profession We know that our members, our employers and We held our second Interactive Leader Session There are two pieces of SOA research that have clients, and the general public have found value on September 1, and we were happy to have earned strong media attention this year. One is the in the results of SOA research. We also know that over 250 sites participate, with people joining research completed in conjunction with Milliman, there are new and emerging issues in society— us from around the globe! In addition to those Inc., to determine the overall cost of medical such as health care reform and pension issues— from the United States and Canada, we also errors on the U.S. economy. that would benefit from the analysis that is the had a number of international participants hallmark of our profession. from countries such as Greece, Hong Kong, the Using claims data from 2008, the researchers Netherlands and Pakistan! developed an actuarially sound measurement This is why we are taking steps to strengthen that found avoidable medical injuries cost the U.S. the SOA research function. We are adding We covered a wide variety of topics including the economy $19.5 billion. two high-level oversight groups that will assist election of board and council members, volun- in driving research in appropriate directions. teerism and research. Approximately 30 minutes We were able to earn high-profile media atten- We are putting a greater emphasis on select- of the one-hour webcast were devoted to answer- tion for this news. For instance, SOA Fellow ing projects that will be valuable for members ing participant questions, whether submitted Jim Toole was interviewed on PBS’s “Nightly and the general public (such as an upcoming ahead of time or during the webcast. Business Report,” and we also got placements report on the costs of obesity project). in many other newspapers and magazines. This Ninety-five percent of participants reported was just one example of how we were able to We are also looking at producing outputs (other that they were either satisfied or extremely demonstrate actuaries’ expertise in helping to than reports) such as useful software and adding satisfied with the event. As I write this, the SOA provide solutions to the important issue of rising staff resources to the experience studies side of is preparing to archive the Interactive Leader health care costs. our operation. These steps will make our research Session on the website, so you can download efforts more timely and applicable. it there. And look for more Interactive Leader The SOA and Milliman were able to generate a Sessions in the future! lot of media interest in this important issue. The In addition, we are moving ahead with the Associated Press covered the findings, which Rapid Research Pilot announced earlier this Finding more and better ways to speak and listen led to dozens of placements in newspapers year, which will help us generate research to members is a priority for us. As always, if you and online. quickly on important issues. We hope to be have an idea, a question or a concern, feel free to able to address questions like the effect of the contact me at [email protected]. A Another pressing issue is retirement planning. financial crisis on pension solvency and how Every other year, the SOA prepares a survey called pension systems might be affected by signifi- Mike McLaughlin, FSA, CERA, FIA, MAAA, is president “Risks and Process of Retirement.” cant legislative or economic changes. of the SOA. He can be contacted at [email protected].

October/November 2010 | The Actuary | 09 Letters To The Editor Two Topics

Dear Editor, This letter is in response to the spending budget. As noted in the paper, more sophisticated calcu- June/July article in The Actuary titled, lation tools may be used for this purpose, but the most important “Retirement Software Eat Dots, aspect of determining an ongoing spending plan is to follow the Avoid Ghosts.” general actuarial process described in the paper to “manage the risks like an actuary.” After examining 12 non-randomly selected retirement planning software programs, the authors The website is: http://howmuchcaniaffordtospendinretirement. of “Retirement Software Eat Dots, Avoid Ghosts” conclude webs.com/ that there are a number of issues that these programs fail to adequately address. While I agree with the authors, No financial gain inures to me from visits to this site. I don’t think that retirees who chose to self-insure their retirement will necessarily be better served with more It is my hope that this site can be of some value to individuals who sophisticated software designed to address all the sup- choose to self-insure their retirement and want an idea of how posed shortcomings of the existing software. What is much of their accumulated savings they can afford to spend each needed, instead, are applications by retirees of effective year. The spreadsheets can also be useful for individuals who may algorithms to periodically adjust the results developed by know how much they want to spend each year, but may not know the existing software for deviations between actual and how much savings they need to accumulate to provide such an assumed experience to keep their retirement spending annual income. on track. In short, retirees who choose to self-insure their retirement need to apply accepted actuarial principles to I know that the spreadsheet has already helped at least one family; better manage the risks involved. my wife and I have developed our retirement spending plan for the next year. Our budget was based on a 4 percent investment return I’ve developed a website to help retirees and soon-to-be- assumption, 4 percent inflation and a 40-year life expectancy. retirees develop a spending budget throughout retirement. The website contains a paper that discusses the risks involved ken Steiner, FSA, EA, MAAA in self-insuring one’s retirement and includes two “unsophis- Ken retired from Towers Watson on April 30, 2010 after 38 ticated” spreadsheets that can be used to develop an initial years in the pension field. A

10 | The Actuary | October/November 2010 Mike, I just read your Letter from the President titled, “NO BOUNDARIES: The SOA as a Global Organization—Serving All Members,” in the June/July 2010 issue of The Actuary. In particular I noted your com- ment on page 8 in the third column, second full paragraph: “Now that the CERA has been launched as a global risk management credential, the CERA will increase the visibility and influence of actuaries within the international ERM sphere, leading to a more diverse and prominent actuarial profession.”

This statement got me to thinking. Every acronym referring to actuaries, like FSA, ASA, MAAA, FCA, FCIA, FIA, EA and so on, has the word actu- ary or actuaries in its title. However, the CERA (Chartered Enterprise Risk Analyst) credential does not contain the word actuary or actuaries, so I must disagree with your quoted comment. Instead, I believe the CERA credential will increase the visibility of analysts within the international ERM sphere.

May I suggest that the actuarial profession rethink the name associated with the CERA credential to Chartered Enterprise Risk Actuary?

Am I the only actuary who believes if one wants the actuarial profession to be more visible and influential in the global marketplace, one should at least use the word actuary or actuaries in any acronym referring to the profession?

There, I’ve had my say. Thanks for listening!

Warm Regards, Howie Heidorn, ASA, FCA, MAAA

Howie, When the SOA task force was selecting a name for the new actuarial ERM credential, many options were considered. Some people preferred actuary in the name, because it was to be a credential offered by the Society of Actuaries. Others, including me, felt the word actuary was so closely tied to insurance and pensions, that it would reduce the appeal of the credential in broader financial services and other industries. This was a judgment call, but the task force and SOA Board have approved and support the use of Chartered Enterprise Risk Analyst. It’s already gain- ing good recognition. In some countries, for example Australia, the word actuary already has broad appeal; hence the Australians will use the word actuary instead of analyst, and that is permitted by the Global Treaty.

Sincerely, mike McLaughlin, FSA, CERA, FIA, MAAA A Greatest Hits the sections1981-2010

12 | The Actuary | October/November 2010 From how they began to where they are going—a look at the SOA’s sections By Meg Weber

lashBack­—1981. Newly elected Financial Reporting, Futurism,1 Pension, and within certain parameters, our section lead- President Ronald Reagan appointed Product Development sections, all with simi- ers plan and execute tactics with a great deal Fthe first woman, Sandra Day O’Connor, lar member benefits. All these sections were of autonomy. Their efforts contribute to the to the Supreme Court. Going to Starbucks an outgrowth of the 1979 Task Force report overall actuarial brand. The SOA staff and meant 1912 Pike Place in Seattle for several to the Board which envisioned sections as, “a resources act as “shared services” to support more years. Quebec enacted the French lan- group of members organized to study and dis- the infrastructure issues for the sections. Sig- guage sign law. Also in Canada, liters of gaso- cuss their common functional and/or profes- nificantly, via continuing education events, line replaced gallons at the station. Powerful sional interests and to contribute information sections generate considerable non-dues earthquakes shook Greece and China. Five on those interests to the actuarial profession income. In fact, several SOA sections have men in Los Angeles were diagnosed with through special meetings, seminars and re- both the financial resources and member- a rare form of pneumonia seen only in pa- search projects.” Ten signatures on a petition ships that would be the envy of many not-for- tients with weakened immune systems (the and Board approval was (and still is) all it took profit organizations. first cases of AIDS). The first DeLorean sports to get started. And in these aspects, purpose car with its stainless steel body and gull wing and formation, sections have not changed. Present Day doors rolled off the assembly line in Ireland. Fast forward to 2010. Barack Obama is president. And this was the year the first SOA section, Early Growth Starbucks offers unlimited and free Internet in the Health Section, was launched. New Throughout the 1980s and 1990s, new sections more than 12,000 U.S. and Canadian locations. members and section leaders were ener- continued to be formed. They were created by GM begins phaseout of Pontiac, which follows gized! From the grassroots, individuals could members—for the members. Their focus was the Oldsmobile and Saturn product lines. There now contribute to their area of expertise in their special interest or practice and less so the are three women on the Supreme Court. The the profession. overall organization or profession. But as the latest “epidemic” in the United States is obesity. number of sections grew as well as their mem- Apple opens a flagship store in Shanghai. And, The “early adopter” members waited an- bership, so did their influence. Section outputs the Social Insurance & Public Finance Section other two years for the postman to deliver in continuing education, research and publica- celebrates its one-year anniversary. their first Health Section News newsletter. tions as well as the increased involvement of The newsletter, produced annually, in- their members greatly added to the develop- The world has certainly changed in 30 years and cluded problems and case studies to be ment and transfer of knowledge for the Society so have sections. Did the merger of sections and answered in the next issue. Members also of Actuaries. By the early 2000s, section energy practice areas work? Recently at the request of received a typed list of all fellow section outstripped the traditional practice area organi- the SOA Board Finance Committee, SOA Staff members and contact information for net- zation of the SOA. In 2005 the two were merged. reviewed the cost/benefit of the section organi- working purposes. (Council members and zation. What is the section influence in 2010? officers additionally appeared in the SOA SOA sections differ from most of their coun- Yearbook.) And that was about the extent terparts in other professional organizations. With 19 sections and nearly 35,000 section of the benefits for the $6 dues. Some have a much looser connection to the memberships, sections continue to attract parent organization. SOA sections resemble like-minded individuals to their organizations. But despite the initially slim portfolio of ben- strong corporate business units. Like Ford Networking electronically or face-to-face helps efits, the concept of sections had strong appeal. Motor Company supports product lines as build and cement relationships. At major meet- Sections meant “home” for members looking diverse as Mustang and Hybrid Escapes, ings, such as the 2010 Annual Meeting, there for people of similar interests in the larger or- may be as many as 20 such networking events. ganization of the SOA. Very quickly the Health FOOTNOTES: Sections, under the leadership of their councils, Section was followed by the formation of the 1 Now the Forecasting & Futurism Section. are essential for content and delivery of SOA

October/November 2010 | The Actuary | 13 continuing education. Frequently sections pay nization provides an effective means to recruit The section membership relationship to the for professional speakers at SOA events—in- qualified volunteers to work on teams, proj- SOA is more like a customer relationship. Each dividual sessions and even contributions for ects, or presentations when needed. Clearly year you make a decision to join or retain your keynotes. Using SOA publication resources, sections and their success are now vital to the memberships based on your perceptions of val- each section produces two to four newsletters SOA organization. ue (with the average dues amount being $25). (electronic and/or printed) per year. Some also This may surprise you. Whether it is paying sec- produce journals, bulletins, essays on critical is- More To The Story tion dues or purchasing a luxury car, for all the sues, and papers. For the SOA, the sections serve There is another compelling reason why we analysis and evaluation, typically the decisions an important role identifying emerging issues in should be interested in maintaining or in- to buy or join are emotional ones. strategic areas. creasing SOA member participation in sec- tions. Per the 2009 SOA membership survey, Why People Join—IN Their Words Retirement 20/20 and Untapped Opportunities people belonging to sections reported great- It is an easy trap as a provider of services to for Actuaries in Health strategic initiative were er satisfaction with the services of the SOA.2 make assumptions about what the members initiated at the section level. Many sections Therefore, it is imperative we keep looking think is important. As Mark Yu, 2010 chairper- partner with other professional organizations forward to ensure continued section rele- son of the Actuary of the Future Section, puts such as the American Academy of Actuaries, vance as the SOA membership and the world it, “We need to align our focus with members’ the American Bar Association, LOMA/LIMRA we live in change. perceived value. It’s what members/customers and PRMIA, to name a few. This strengthens want that counts, not what we have to offer.” relationships for the SOA and the credibility For that reason the Section Membership Value FOOTNOTES: of the profession. In aggregate, in addition to Team was created to review costs and benefits 2 To be truly happy, join the Taxation, Smaller recommending and overseeing projects, each from your individual member perspective. The Insurance Company, Reinsurance, or Financial year sections commit significant funds toward Reporting sections. Their members were the most team was formed from members of the Council research. Most importantly, the Section orga- satisfied with the SOA. of Section Chairs. The Membership Value Team

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Mary Lou Retton MTV’s first video airs. scores a perfect 10. 1981 1984 1987 1991

1986 1994

1983 1989 The first combat use of The first laptop Michael Jackson stealth bomber—Operation computer, releases all-time Just Cause in Panama. Osborne 1, is best selling album developed. Thriller. Halley’s Comet swings 1992 by. Back again in 2061. The European Union is formed. Nelson Mandela is inaugurated as South Africa’s first black president. * from Wikipedia. Memorable moments from 1981 to 2010 had several surveys to work from: the 2009 SOA cils within the broadly defined missions. As a SOA members but nonactuaries as well. The member value survey, four recent section mem- consequence, some sections address topics section leaders, staff and the Member Value ber “pulse” surveys, and also their colleagues in that are far more adaptable to an international Team will continue to explore and develop the Council of Section Chairs. Despite the differ- member base than others. Currently the four sec- new ideas. Opportunities using social network- ent sources, the reasons for joining a section are tions with the most appeal to non-U.S. members ing and new applications for Section Web pag- the same. They are: are: Financial Reporting, Product Development, es are being piloted. Obtaining feedback from Joint Risk Management, and the International our members and benchmarking with other Section membership … sections. Joint Risk Management is actually co- organizations provides more ideas pertaining 1. Enhances personal brand/image, sponsored by the Canadian Institute of Actuar- to benefits and service delivery. If you have 2. Provides direct communications based ies. It, along with the Education & Research and ideas or challenges you would like to share, on areas of interest, Pension sections, has always enjoyed higher please feel free to contact me or any other 3. Improves opportunities for networking, participation by Canadian members than some member of the Member Value Team. They are: 4. Provides an avenue for greater SOA par- sections. Plans are in place to attract more inter- Alan Cooke (International), Larry Stern (Entre- ticipation, and national section members. However, some sec- preneurial Actuaries and Reinsurance), Judy 5. Makes everything possible (altruism).3 tions will likely remain primarily U.S.-focused, Strachan (Health), and Mark Yu (Actuary of some North American-focused, and others the Future). We welcome your participation in International Organization worldwide. the process. A Sections stem from the grassroots. Their annual activities are determined by the current coun- Future Plans Meg Weber is director of Section Services at the Society Looking at the time spent and commitment of of Actuaries. She can be contacted at [email protected].

FOOTNOTES: all the team members (as well as other section 3 Makes everything possible in terms that the dues leaders and volunteers) should tell you we all paid enables the Section to take action. believe sections are a great value not only to

Chicago Blackhawks win September 11, the Stanley Cup! The first iPhone is United States attacked released. by al-Qaeda. Mike Weir becomes First Tweet is sent. first Canadian and 2007 first leftie to win the Dolly was the first Masters Tournament. sheep to be cloned Bill Clinton acquitted in from an adult somatic impeachment proceedings. 2003 cell. * from Wikipedia. 1999 1996

2001 2006 2010

1998 2004 2009 Last episode of Seinfeld airs.

2002

Salt Lake City, Utah hosts winter Olympics. Facebook becomes available to the public.

Barack Obama becomes first African-American President of the United States. Tennis

ALessons look at 1-in-200-year events By John Gordon

16 | The Actuary | October/November 2010 Tennis

ALessons look at 1-in-200-year events By John Gordon

October/November 2010 | The Actuary | 17 A risk management lesson was born at This year’s wimbledon matches.

hose of you who are interested in who’s been following tennis for a while will Simulations show that even their average match tennis—and perhaps even a few of know that the quality of MI (match information, would last three hours, 48 minutes, with the 5 Tyou who aren’t—will be aware that in this case!) that is available to viewers and percent tail of the distribution kicking in at an history was made at Wimbledon this year, commentators has gotten much better in recent impressive six hours, 40 minutes. Looking at the when those watching were treated to a match years. So courtesy of the BBC, in figure 1 are the split of their matches by number of sets, 27 per- of quite gargantuan proportions in the first match statistics that count for Isner vs. Mahut. cent would be straight sets victories and 19 per- round of the Men’s singles competition. cent would go to four sets, leaving a whopping So, how likely is it that a match like this could 54 percent of matches going the distance. How It was the kind of match to get the nerdy num- ever happen again? Well, a lot of factors will unlucky was Mahut to have lost? The answer is bers types among us scrambling for our proba- have a bearing on that, many of them not “a bit”: in practice, he could expect to win 60 bility distributions. Any actuary who presumes readily quantifiable. But there are two very rel- percent of his matches against Isner at this level that the past is a reliable guide to the future evant questions we could reasonably ask that of performance. could have been forgiven for thinking that a do have a very statistical flavor: tennis match could not possibly end 70 games More pertinently, how many times might they to 68 in the final set, or that a single set of ten- 1. How exceptional is it for two players to need to play each other before they broke their nis could not possibly last longer than any pre- serve this well in a match? own record? Well, on these performance stats viously recorded match ever had. 2. If these service and points won percent- they could expect a match this long about ages are typical of Isner and Mahut, how once every 500 outings. So it may not happen And who could blame them. Before John Isner long might we have to wait before they again for a while. But on this evidence, the of the United States walked onto court 18 with served up another match like this one? likelihood of that is still five times greater than Nicolas Mahut of France, most tennis players either of them winning a single set 6-0! didn’t think it could happen either. But 183 Sadly even my own degree of nerdiness doesn’t games, 11 hours and five minutes of power stretch to trawling the tennis archives for a large Just games with numbers, of course. Back in tennis later, John Isner had limped into round enough sample of past match statistics to test the real world, sadly nothing is ever quite so two and their match had stormed into the re- question 1 above. simple. Complete physical exhaustion might cord books. well bring any similar game to a grinding halt If we assume they are characteristic of a level or quicker conclusion if it didn’t happen to It is a contest that cries out for a little statistical of performance that the two players con- be spread over three days as this one was, analysis, but to do that we need first to break the cerned are capable of reaching regularly, then and I leave unanswered the question of just match down into its component parts, its base we have something to work with. how likely a repeat performance of such building blocks. As luck would have it, anyone dominant serving might be. There were, The obvious question for nerdy types after all, only 17 break points in the entire is if they played each other over and 980-point match. Figure 1: Isner/Mahut over again and always performed to Isner Mahut this level, what would be the likely out- 1ST Serves in: 74% 67% come? Well, being a sometime nerdy 2ND Serves in: 92% 88% type myself I built a little stochastic The Bigger Picture 1ST Serves won: 81% 87% model to test that out. And if you’re a Well, I guess that’s more than enough tennis 2ND Serves won: 63% 63% nerdy type too, the results might make for one article in an actuarial magazine. But Total points won: 478 502 interesting reading. Average interval between points: 41 Seconds

18 | The Actuary | October/November 2010 are there any lessons we might draw from • Growing social this relating to matters a little closer to home? tensions within countries I think there are. • Overexploitation of resources leading to Perhaps the Isner/Mahut match has something resource shortages important to tell us about the management of • Major terrorist in- risk. For as the financial crisis has ably demon- cident strated, dramatic events that many did not fore- see are not confined to the tennis court. Consider also that, in the wake of the financial Back in January 2009, I attended the presen- crisis, the macroeco- tation and discussion of a paper by Bernard nomic outlook remains Bergman called “Capital – It’s Over-rated!” in uncertain. The posi- London. Bernard presented his paper against tion of some developed a backdrop of financial crisis and the forth- economies in particular coming introduction of the Solvency II regime looks precarious, a com- across the EU (in 2012). The capital adequacy bination of low inter- test of the latter requires firms to maintain est rates and financial sufficient capital to ensure that the modelled stimulus masking slug- probability of defaulting on policyholder li- gish demand, structural abilities over a one-year horizon is no more weakness, ongoing debt Nicolas Mahut of France than one-half percent. In essence, this test issues, trade deficits and requires the assessment of so-called 1-in-200- unsustainable global financial imbalances. tions we serve may take a sanguine view, but year events and their financial impact. whether we are tennis fans or not, as actuaries Witness also the trend in recent years for with a strong public interest mandate it should Much lively discussion followed the presen- financial markets to become increasingly give us considerable pause for thought. tation of Bernard’s paper, but nobody men- volatile, with increasingly frequent devia- tioned the elephant in the capital require- tions from economic fundamentals. Not only For my own part, I’ve been pondering what ments room: how reliable is an actuary’s—or are our present economic and financial sys- I see as the gap between our own industry’s anyone else’s—judgment as to what a 1-in- tems not equipped to help us best manage preoccupations and this wider reality for some 200-year event actually looks like in present the impact of some of these risks, in present time now. Indeed I became so concerned by circumstances, let alone what its financial form they may well contrive to make some of it that I took a year off to write about it (see impact might be? those impacts worse. www.acturage.com/thepaper.asp).

Consider this list of significant risks that now I would wager that, by the time we see an- confronts us. other epic of Isner/Mahut proportions at Wimbledon the world will have had to pick Risks and Opportunities • Peak oil triggering an energy crisis up the pieces from a rather bigger global cri- At the risk of stating the obvious, risk manage- • Global warming sis than the one we’ve just witnessed. For I ment is more about finding ways to mitigate • Population growth would suggest that all of the risks I list above risks than it is about finding ways to analyze • Population aging fit comfortably within a 1-in-200-year risk them. Some risks can be mitigated without be- • Growing geopolitical tensions be- horizon—indeed some of them are already ing quantified; some risks can be quantified tween countries beginning to impact. Most of the organiza- but are impossible to mitigate; some risks—

October/November 2010 | The Actuary | 19 ted and more pragmatic ap- a critical risk area. For as we have learned to proach there is much that as our cost, these days we are all doing banking, actuaries we could be doing whether we want to or not. in a range of different areas to raise the profile of our pro- Economic and Financial Market fession, more effectively rep- Reform resent the long-term public Capitalism’s failings as an economic doctrine interest and contribute more are beginning to cost us dearly. No amount actively to the management of numerical dexterity is going to make eco- of high-profile risks. nomic growth plus population growth plus re- source consumption equate to a sustainable To illustrate the point, here future. Instead of acquiescing when others are a number of areas that persist in trying to defy this reality, the profes- I believe could benefit from sion could better serve the public interest by our input. promoting reasoned debate on the subject, with the aim of helping to develop a sustain- Banking Reform able Plan B before it is too late. At the time of writing, in the United Kingdom alone In the wake of the latest crisis it is evident taxpayers’ collective invest- to many people that to call only ment in the banking system for better governance John Isner of the United States amounts to around $250 bil- and greater transpar- lion, over $4,000 per head of population. UKFI, ency is simply to rather inconveniently most of the big ones— the company set up to look after that interest for treat symptoms rath- may appear stubbornly resistant to both. us, has just 15 employees. Its business to date er than causes, and In the wake of the recent financial crisis, talk has been conducted largely behind closed the profession could of risk management is not surprisingly now doors, which is disconcerting given the scale of (and should) be mak- all the rage. But if we wish to impress our investment they are representing on our behalf. ing a far more effective con- public interest credentials upon a skeptical tribution to the ideological debate about public then attempting to second guess the Banking has become far more complex than what kind of economic and financial mar- frequency and financial impact of big events it needs to be or needs to be to serve the ket reforms are now needed. will not suffice. Likewise, if we wish to give interests of its customers. If it hadn’t, there profile to our risk management credentials would not have been a banking crisis. For ev- Public Sector Reform we will need to invest proportionately more ery actuary who might manage a bank badly Given the present fiscal situation on both sides time contributing actively to the mitigation of there are plenty more who could bring valu- of the Atlantic, the need for public sector effi- risks that are of interest to the wider public able financial and risk management insight ciency has never been greater. Savings need to and proportionately less time contributing to to bear in helping to ensure that banks are be found. Whatever one’s political persuasion, the analysis and reporting of risks that are of better managed to the benefit of all. Perhaps it seems clear that the interests of individual interest to those who employ our services. it is time we stopped hiding behind the no- taxpayers have not always been well-served in tion that actuaries do not do banking and this area in the past. Vast sums are invested— In the context of the kind of risks I list on page started lobbying government, regulators and the United Kingdom’s health service alone 19, that might look a daunting challenge, and the banks that employ some of us, to utilize costs around $150 billion a year—but they are indeed it is. But with a bolder, more commit- our skills to better effect in what is evidently not always spent wisely, and institutions often

20 | The Actuary | October/November 2010 seem to be run in ways that would cause Unfortunately, government has a track re- Transport policy heads to roll in the private sector. cord of doing this poorly, and industry has One doesn’t need to look beyond the rela- a track record of doing it hardly at all. We tive cost of road, rail and air travel, and how The profession’s toolkit and public interest could do much to enhance our own risk the cost of each has changed over the last 20 mandate equip it well to assist, and doing so would strike a populist chord. It would be a bold move, but in the present climate We could do much to enhance our if the profession could find an effective own risk management credentials mechanism by which to offer its services it would be difficult for any party of govern- by being more proactive. … ment to refuse. And we should remember that as taxpayers this is an area that we all management credentials by being more years, to see that transport policy is a mess. have an interest in. proactive in promoting public debate and Furthermore, governments that talk green formulating policy initiatives in some of while expanding airports and building more Pensions Reform these areas (economic reform, the impact roads do little to reassure that the issue is in Another good place to start looking for of continuing population growth, the man- safe hands. public sector savings might be in the pub- agement of scarce resources, etc.). lic sector pensions provision. It would be Little short of a fundamental overhaul of interesting to see an analysis of that provi- Energy Efficiency and Recycling travel taxes and incentives and a new finan- sion across the public sector in comparison Policy cial framework for properly evaluating the with its equivalent in the private sector, with Investment in each of these has fallen on hard respective costs and benefits of different particular focus on the relative cost of each, times recently. Thanks to the financial crisis modes of transport is needed—and when and how this has changed over the last 20 and the associated collapse in oil prices, in- it comes to air travel, that would have to years or so. Who better placed than our vestment in renewables has taken a nosedive be on a global scale. The actuarial skill set own profession to undertake such a study, since early 2008, at a time when it should be is well-suited to the task of helping to build in the wider public being massively expanded. Similar logic (if one, and the profession could also bring a interest? one can call it that) explains a reduction in in- much-needed independent and objective vestment in recycling. Could the profession view to a subject that can be something of Policy not bring its risk analysis and projection a political football. Initia- skills to bear in articulating a longer term tives business case based on a more realistic Carbon costing Many of the economic cost/benefit model? That oil One of the largest and most topical intangibles l a r g e - s c a l e might run out looks rather less a 1-in-200- on the World Plc balance sheet, this is becom- problems we year risk than a 1-in-50-year near-certainty, ing a big employer. The development of reli- presently face particularly if fears that key producers may able carbon models is grow- require pre-emp- have been over-estimating their reserves prove ing in importance tive measures to be taken now to miti- well-founded. Is it not time we dedicated more as the scale of gate against adverse consequences in of our long-term vision and risk analysis ability the global the future. This is essentially risk man- to the task of painting some of the scenarios warming agement on a scale that transcends that could arise from underinvestment in these corporate boundaries in pursuit of a areas, given their criticality to the long-term greater good. public interest? and smarter pricing will be serving us well, but we must also challenge needed before, as consum- those that are serving us badly. ers, we are able to make informed choices and pay a These are exceptional times, both on and price more reflective of the off the tennis court. There are many reasons true resource cost of what why the world may never see another epic to we eat and drink. That will match Isner vs. Mahut, not all of them relating require the modelling of to tennis. Clearly we do not hold all of the risk many interrelated factors, management answers, but if as a profession for example energy invest- we wish to fulfill both our vision and our pub- ed in production versus en- lic interest obligations, we must improve our ergy value on consumption, own contribution to the collective cause of amount of land required for ensuring that some of the worse ones do not production, for how long it come to pass. If they knew what we have to is required and with what say about ourselves, our public would expect environmental impact, etc. nothing less. A Could we not assist? John Gordon is a U.K.-based independent actuary and As actuaries, we are well- consultant. His book is titled On the Role of the Actuary in a trained professionals. Our Changing World. If you have any comments on this article, Gordon is contactable at analytical skills are peerless; [email protected]. we have a strong public in- terest mandate; we under- stand the nature of risk; we have intimate knowledge of the workings of our financial system; we’re independent; and we’re used to taking a long-term view. As the presi-

Isner and Mahut, Wimbledon 2010 dent of the Faculty of Ac- tuaries said from the midst challenge becomes clearer. Actuaries are well- of crisis, back in October 2008, “These are qualified to provide input both into modelling times when the world needs actuaries, even techniques and to support analysis and projec- if the world does not yet know it.” tion of long-term costs and benefits. I agree, on both counts. But if we are to Food labeling change the world’s mind, we must first un- We’ve gotten used to eating what we like derstand the reasons for its thinking. In an when we like, but if an enforced drastic age of great change it is tempting to seek change in habits is to be avoided we are go- comfort in tradition, but the truth is that ing to need to be a lot smarter about the bal- in such times those same traditions can ance between consumption and conserva- become barriers to progress. We should tion than we presently are. Better labelling of course defend those traditions that are

22 | The Actuary | October/November 2010 Jan. 5–7, 2011 | Orlando, FL

World-Renowned Experts Share New Scientific Findings

Join distinguished speakers from around the world as they gather to share new ideas and knowledge on aging, changes in survival rates and their impact on society.

Supported by a host of international organizations, the Living to 100 Symposium offers two and a half days of groundbreaking presentations, as well as professional development and networking opportunities.

Whether you’re an actuary, gerontologist, demographer, physician, economist, scientist, academic or other professional, attend the Living to 100 Symposium to participate in the many thought- provoking discussions on:

• how and why we age; • measuring current mortality and projecting future rates of improvement in survival; • identifying potential advantages and risks associated with the increasing number of retirees; and • suggesting solutions to difficult issues resulting from individuals living longer. Contact Denise Fuesz at dfuesz@soa. org to become a sponsor. Contact Jan Don’t miss your chance to take part in this stimulating, interactive, multidisciplinary learning experience. Schuh at [email protected] to become a participating organization. Register today at http://livingto100.soa.org— and view our complete listing of participating organizations. Sign up by Dec. 8 to save.

By Emily Kessler and Andrew Peterson

It wasn’t that long ago that the world saw defined benefit and defined contribution as our only retirement system solutions.T oday, actuaries are developing a brave new world of retirement designs and opening up new frontiers.

he latest phase of the SOA’s Retire- but equally worthy, ways of rethinking the re- operation with the CD Howe Institute and the ment 20/20 initiative was a call for tirement system. Canadian Institute of Actuaries, will be held in Tmodels. The call for models asked Toronto in the fall. individuals to submit their ideas for new “Tier As a result of the call for models, the SOA re- II” retirement systems—i.e., what is typically ceived 18 paper submissions from Canadian We learned a lot, both from all the paper submis- thought of as employer-provided retirement and American authors. We congratulate the sions and from the June conference. We’d like benefits that fit between social insurance and four authors of the prize-winning papers: to thank all the paper authors and all the par- private savings. The call for models was the ticipants at the June conference. Even though culmination of the Retirement 20/20 work • “The SERIOUS System: A New Model for we haven’t yet held our Canadian conference, to date including three conferences which Retirement Income Success,” by Ken we want to take this opportunity to summarize explored needs and risks for stakeholders in Beckman, ASA, MAAA. some of what we have discovered to date. the retirement system (individuals, society, • “The Tracker Plan: A Controlled Risk De- employers and the markets). Submissions fined-Contribution Retirement Program,” What we learned from the were judged based on how well they met the by Rowland Davis, FSA. paper submissions criteria of the Retirement 20/20 Measurement • “Affordable Retirement Income through The 18 papers submitted in the call for models Framework (which considers needs and risks Savings and Annuities,” by Don Fuerst, considered a number of ways to reform the for the various stakeholders) and how well FSA, EA, FCA. retirement system. Yet, common themes they handled issues of risk, governance, ad- • “The Total Career Benchmark Model,” by emerged. While no single paper embodies ministration, transparency and transition. The Tom Walker, FSA, FCIA. all themes, most submissions contain several Pension Section Council, in conjunction with similar ideas. This can be seen as a framework the SOA, provided a $100,000 cash prize pool Each of the prize-winning papers, as well as to begin discussions about building a stronger to be split evenly among the prize-winning pa- four other papers, formed the basis for our most retirement system. pers. The Pension Section knew that it didn’t recent conference, Retirement 20/20: New want to select a single winner, as there would Designs for a New Century, held June 2–3 in Most designs “look” like a defined contribution likely be several papers with very different, Washington, D.C. A second conference, in co- plan, in that the individual and employer make

October/November 2010 | The Actuary | 25 a contribution into an account each year. But • Preselecting Investment employers might not be the plan spon- the similarities typically end there. Common mixes. While you can think of this sor. This allows more small employers to themes running through the papers include: feature as a target date fund, these new participate, and keeps the cost of running mixes typically put more investment in plans low (through economies of scale). • Focusing retirement accu- fixed income (particularly TIPS—Trea- It also helps with benefit portability—indi- mulations on Income pro- sury Inflation Protected Securities) viduals may be able to stay with the same vided. Participants may never see and much less investment in equity, plan even when they switch employers. In an account balance, but instead see particularly at retirement. The advan- some models, employers are able to offer an income projection based on con- tages of a preselected investment mix their own plan, and in some models, em- ployers may have wider choices on the form and level of benefits to be provided.

Some designs directly invest If employers are not the plan sponsor, this may also lead to more standard- in a deferred annuity. Others ization within the system. have a target befefit defined Some models assume there would be several large retirement plans (for- or not- at retirement age. for-profit) from which individuals or their employers can choose. Other designs as- sume a uniform benefit structure; individ- uals and employers then contribute more (or less) to ratchet up (or down) future tributions made to date. Some designs are that individuals participate in a retirement income. Standardization could directly invest in a deferred annuity. large fund with lower administrative help with portability, reduced administra- Others have a target benefit defined at costs, the funds use professional in- tion cost and retirement planning. retirement age. The plan may adjust the vestment advisors, and the funds are investment mix and sometimes require designed to meet target benefit goals • There may be a two-layer sys- mid-course contribution adjustments to at retirement (providing greater secu- tem. In some models, the targeted ben- help assure the individual reaches the rity to individuals). efits may only provide a small portion of target by retirement. • Building some variability income in retirement (e.g., 20 percent of final pay for individuals earning up to Some designs require or de- Into retirement Income. For $60,000 per year at retirement). The goal fault Individuals to take a example, if the benefit is defined as a tar- would be to create ample income, in portion of their benefit as get, the base benefit at retirement may be combination with social insurance, for Income. In most designs, individuals higher or lower than the target. But more most middle-income individuals. Individ- can opt out of an income stream at re- commonly, the income might vary based uals could elect to save more in account tirement, but as a result they might face on investment performance in the fund or balance plans like today’s 401(k) or Regis- a penalty, or lose protection from down- changes in future longevity (how long we tered Retirement Savings Plan (RRSP), or side investment risk. Note that in most live). This variability of payment would be employers could offer to provide benefits designs, if the individual is required (or small, but building in variability of pay- in addition to the basic layer provided by strongly incentivized) to take a portion ment avoids absolute guarantees, which these new systems. of the benefit as income, that amount is are expensive. typically limited. (This would represent • The cost of the plan would the first layer in a two-layer system, as • C hanging the role of the em- be borne by employers and discussed later). ployer. Individuals may access ben- efits through their employers, but their employees. The exact amount of the

26 | The Actuary | October/November 2010 contributions, and the exact level of cost ties. One design establishes a targeted account on a reasonably small dollar annuity (e.g., no sharing, would be determined. Some- value at retirement (that could be converted more than $10,000 – $15,000 in annual income). times employer contributions would be to an annuity) by establishing plans that track encouraged through tax incentives and investment performance over time (including One obstacle that quickly arose in the discus- sometimes equal employer and employ- making additional contributions after market sions was how to convince individuals that they ee contributions would be mandated, downturns) and de-risk investment mix signifi- should want (or need) annuities. As actuaries, but generally not at a high level (e.g., cantly as retirement approaches. Another adds we know that the cost of providing an annuity mandated contributions would only be a layer of protection with downside protection decreases if you can eliminate anti-selection. for the first layer in a two-layer system.) structured through a shadow account as a That is best done through mandates, but man- form of reinsurance (which is paid through a dates are not popular. More philosophically, as What we learned from the small charge to the real account). one conference participant noted, “if you have June conference to mandate something because otherwise no Joseph Califano, a former U.S. Secretary of Conference participants noted that most indi- one would take it, maybe you should rethink Health, Education and Welfare, wrote a book viduals are used to having some variability in the design.” in 1986 about the U.S. health care debate titled their income, and small variations in income America’s Health Care Revolution: Who Lives, are generally easy to adjust to. Much of the con- Many model designers and conference partici- Who Dies, Who Pays. Another version of the ference discussion focused on how we could pants hoped that using the best lessons of be- title is, “Who lives, who dies, who pays, and who better use markets, and structure investments, havioral finance would be sufficient to ensure decides.” The title, at least for health care, does to provide as much predictability of income individuals are protected against outliving their get at the heart of how the system manages risk as possible, primarily to protect against signifi- assets. This could include systems with strong and how the system decides whether and how cant downside. As one conference participant defaults that discuss benefits as income, rather to mitigate that risk. At our recent Retirement noted (to paraphrase): “If you’re working in than as balances and provide financial incen- 20/20 conference, equally perplexing ques- guarantees, you’re just packaging risk and tives that encourage annuitization (e.g., pro- tions were asked in our opening session by one moving it around. Almost always there viding account guarantees if you conference participant: “Do we provide guar- will be an escape clause for the guar- take the income as an an- antees? What guarantees do we provide? Who antor (including bankruptcy). And, nuity, or charging a small provides them? Who guarantees the guaran- guarantees become problematic once penalty to take the account tors?” While the conference itself was structured politicians become involved.” as a lump sum). somewhat differently, those four questions were at the heart of the submissions, and much of the What guarantees do we Who provides the conference discussion. provide? guarantees? Conference participants and the au- Many of the designs worked Do we provide guarantees? thors of the papers felt there were a toward a model where inde- Guaranteed income streams are very expensive few things that were very important to pendent institutions provide to provide, particularly in low-interest-rate envi- guarantee. Longevity and inflation benefits. The plans essentially ronments. A key question to answer is: what is risk are key risks to be insured. As become independent entities, de- the utility of the guarantees to the recipient (the noted, most of the call for papers signed to be self-supporting without individual) and to society, relative to the addi- submissions featured annuities, of- the need for a plan sponsor to guar- tional marginal cost of securing the guarantee? ten variable annuities, or variable antee them. In most cases, the designs Many of the Retirement 20/20 papers acknowl- annuities designed around TIPS to include a regulator to ensure these edge the high cost of guarantees, and seek to provide inflation protection as well. systems are well-maintained, make achieve reasonable certainty of income, with- Sometimes these protections are requirements for systems to hedge out providing a guarantee. For example, several put in the first tier of a two-tier risks and, in some cases, institute designs consider variable annuity options, or system, so the ultimate pro- a reinsurance platform as well. the purchase of a series of deferred life annui- tection is provided This model is very different

27 What is Retirement 20/20?

The Society of Actuaries’ Pension Section conference, “Resolving Stakeholder Tensions: Council has been concerned about changes Aligning Roles with Skills,” focused on deter- to the pension system over the past few years. mining and aligning the optimal roles for the In looking at the issue several years ago, they various stakeholders. The 2008 conference, concluded that they needed, with assistance “Defining the Characteristics of the 21st Century from others, to step back and look at the bigger Retirement System,” discussed optimal charac- picture. Retirement systems today are based on teristics for successful retirement systems.Based 20th century models, and there have been signifi- on the work of these three previous confer- cant demographic and economic changes that ences, the SOA issued a call for models in the may mean that yesterday’s models no longer fit summer of 2009 to solicit ideas for new Tier II re- today. Retirement 20/20 is a process to bring to- tirement systems that align with the principles of gether experts on retirement issues to redesign a the Retirement 20/20 initiative. The best call for system from the ground up to meet 21st century model papers were featured at a June 2010 con- retirement fundamentals. One goal the Pension ference in Washington, D.C., and a conference Section has in this process is to develop new re- in fall 2010 (date to be determined) in Toronto, tirement risk sharing models that better utilize Ontario. A monograph is forthcoming. risk pooling and risk sharing. To find out more, go to www.retirement2020. The 2006 Retirement 20/20 conference, “Build- soa.org. There is also an article in the April/ than the retirement ing the Foundation for New Retirement Sys- May 2009 issue of The Actuary at www.soa.org/ income system in the tems,” looked at the needs, risks and roles for retirement2020/theactuary. United States today, the four major system stakeholders (individu- where, with few ex- als, society, markets and employers). The 2007 ceptions, plans have a single employer or group of employers as a plan sponsor. These basis under the current system. They noted that to design retirement income such that an plans sponsors effectively provide a guarantee today’s system was not designed to ensure ad- individual may see some variability in his or on benefits, and are responsible, through IRS equacy of income or widespread coverage, so her payments, but that the payments would regulations, for ensuring the plans maintain a the fact that not all participants are covered by be highly predictable, we need strong market minimum funding level. pension benefits should not be held as a mark of hedges. Participants discussed specifically the failure for the system. On the other hand, anoth- role of the markets in financial innovation, and As such, these proposals assume the employer’s er conference participant noted that influential noted in particular investment options which role will be limited—and this concept is a bit Washington policymakers were questioning the could reduce the risk (and particularly the controversial. In some cases the employer is sim- role of the employer in the system, beyond that cost) of hedging: ply limited to collecting employee contributions of facilitator of payroll deductions. • One author discussed the G-fund, an in- and making elective contributions. Other models vestment fund available to federal gov- have some mandatory contributions for employ- Who guarantees the ernment employees (and retirees) partici- ers, or are designed assuming employer/employ- guarantors? pating in the federal government’s Thrift ee cost sharing. Several conference participants Most of the proposals did not assume guar- Savings Plan. The G-fund holds nonmar- noted that most employers would not like being antors backing up the guarantees. While a ketable U.S. Treasury securities whose required to make contributions for benefits. few proposals did have a role for a govern- rate of return is calculated based on the ment-sponsored reinsurer, most assumed weighted average yield of all outstanding In addition, several conference participants be- these new financial institutions would be Treasury notes and bonds with four or lieved the employer’s ability to use retirement self-sustaining. more years to maturity. The fund bears no benefits to attract, retain and retire individuals credit (default) risk and provides a rate of was important, and that employers had done What does this mean for the new financial return higher than 90-day T-bills. well in providing these benefits on a voluntary institutions? If, as noted earlier, we are going • Several model designers used TIPS in their designs, in both accumulation and

28 | The Actuary | October/November 2010 payout phases. TIPS as an individual Other political difficulties in the United States son realized early on in Retirement 20/20 is that investment (beyond a buy and hold facing any substantive retirement reform in- more generous social insurance programs put strategy) can be problematic because clude an inability for the political parties to more intergenerational pressures on taxpayers. the market price for the TIP security work toward compromise, particularly post- doesn’t always move the same way as health care reform and a general perception So what does this mean for market prices for non-inflation-linked within Washington that it’s more important Retirement 20/20? securities. One participant noted that to focus on savings credits for families (in Clearly we have to work hard to take what all you can tell from the price of TIPS general) rather than target secured retire- we’ve learned from the models and the con- is the demand for TIPS—there isn’t an ment income. One participant cited a 2006 ference (and what we’ll learn at the Canadian economic link between the TIPS price, study by the GAO which noted that 3 percent conference) and put that into context with data regular Treasury security price, and of the baby boomers hold 50 percent of the to show that the existing retirement savings sys- inflation expectations. As such, confer- baby boomer wealth (based on 2004 data tem does add value, and changing the system ence participants felt that TIPS needed from the Survey of Consumer Finance); this could increase the value it provides. Many of to be restructured to be usable—much study result has made politicians focus on today’s retirees still have defined benefit pen- the same way existing Treasury securi- increasing savings rates in general. Several sions to supplement their Social Security, so the ties are stripped of their coupon pay- participants argued that, if it was politically long-term risk of a system built on individual ments to make them better financial effective, the most efficient way of improving accounts has not yet been experienced. The building blocks. Finally, there was a retirement income for individuals in the bot- recent financial crisis has shown that we don’t lively discussion about whether or not tom half of the income distribution would be always understand the risks we take or the im- TIPS are a good investment because to improve Social Security. plicit assumptions we’ve made until conditions we have not yet seen real returns fall change. We have much more to do to help on TIPS the same way they’ve fallen in How should we respond to these build a common understanding of the impor- other countries issuing inflation-linked policy challenges? tance of retirement income. securities (e.g., the United Kingdom, Retirement 20/20’s goal has always been to where real returns on TIPS have been find new ways to generate retirement income To find out more about the results of the call for less than 1 percent). for the middle income workers. The 2007 Sur- models, and read the prize-winning papers, go vey of Consumer Finances defines the 20th to http://retirement2020.soa.org/new-designs. Policy challenges In United income percentile starting at $20,600 and the aspx. Selected papers will appare in an upcom- states to achieving Retire- 80th income percentile starting at $98,200. We ing monograph. A ment 20/20’s promise recognize that retirement income structures One theme of the conference quickly became proposed in the Retirement 20/20 call for mod- Emily Kessler, FSA, EA, FCA, MAAA, is senior fellow–In- the difficulty in changing the retirement in- els cannot address the needs of the poorest tellectual Capital, at the Society of Actuaries. She can be con- come system today beyond what some might citizens, nor are they needed by the wealthi- tacted at [email protected]. view as the inevitable shift to a system based est citizens. We also note that while the large Andrew Peterson, FSA, EA, FCA, MAAA, is staff fellow– on individual defined contribution plans, with proportion of assets are held by the wealthiest Retirement Systems, at the Society of Actuaries. He can be little annuitization or risk protection. Many Americans, middle tier households do hold contacted at [email protected]. participants cited current U.S. federal budget wealth in retirement assets, including pensions woes (making it difficult to make any changes (which weren’t included in the Survey of Con- to retirement systems that don’t generate net sumer Finances study cited by the GAO). The savings, or at least no net cost). In addition, in pension system was never designed to replace the United States, the 401(k), with a single sum Social Security, only to supplement it. What balance, is very popular, and annuities are about improving Social Security? Retirement very unpopular. Finally, individual distrust in 20/20 has always been concerned with not rely- institutions, particularly financial institutions, ing too much on intergenerational transfers of has increased with the recent financial crisis. wealth (as occur with Social Security); one les-

October/November 2010 | The Actuary | 29 The Attestation Hour is near The Attestation Hour is near Be sure you set your alarm! The attestation period is right around the corner. By Jane Chlapaty

hile the clock continues ment: the U.S. Qualification Standard, radial buttons for both standards. For to tick, all SOA members the CIA Qualification Standard, Category example, a member might fulfill half of Wshould be taking important 1 or 2 of the UKAP CPD Scheme or the the requirements in Section B one year steps in preparation for the first SOA Institute of Actuaries of Australia CPD and Category 1 of the UK CPD Scheme (if CPD Requirement attestation period Standard. And all members must report eligible) in the other. That person would that opens on Nov. 1, 2010, and closes compliance with the SOA CPD Require- click both the radial button for “the Basic on Feb. 28, 2011. ment as of Dec. 31, 2010. Requirement of Section B” and “Category 1 or 2 of the CPD Scheme of the Faculty As part of the SOA CPD Requirement The process of attestation is simple! At- of Actuaries and Institute of Actuaries.” that went into effect on Jan. 1, 2009, SOA testation will be done electronically. A If a member followed the U.S. Qualifica- members are required to attest compli- link will be sent to all members that, when tion Standard in both years of the cycle, ance with the CPD Requirement to as- clicked, will bring you to the member site he or she would click that radial button sure the users of actuarial services that login page. Once you log in using your user once (“the Qualification Standards for SOA members have stayed current with name and password, you will see a screen Actuaries Issuing Statements of Actuar- their continuing education standards. that looks like the example on page 32. ial Opinion in the United States”). Your employers, clients and the general public rely on the work that you do as Those members who click the first but- After you have completed the electronic an actuary and they need to be assured ton––certifying that they have fulfilled attestation, you are done! If you are that the existing standards are met. After you have completed the Currently, you should be earning and tracking your credit while you contin- electronic attestation, YOU ARE DONE! ue on your CPD compliance path. You should readily be able to meet compli- the requirement––must click at least one not able to complete the electronic at- ance with either the Basic Requirement of the next five buttons to identify the testation, you may fax or mail a written provisions (SOA CPD Requirement Sec- method of compliance. As illustrated in attestation by using the form that’s avail- tion B) or the Alternative Compliance the CPD Requirement (Section C), mem- able online or through SOA Customer provisions (SOA CPD Requirement Sec- bers can combine standards within a Service at 888.697.3900. tion C). Most members will use one of period; members who comply using one the four alternative compliance pro- standard for one year and another stan- Remember, from this point on, beginning visions to meet the SOA CPD Require- dard for another year should click the with the year ending Dec. 31, 2010, all

October/November 2010 | The Actuary | 31 Know your Attestation screen CPD compliance path

Most SOA members will follow an alternative compliance standard: the U.S. Qualification Standard, the Canadian Institute of Actuaries (CIA) Qualifica- tion Standard, Category 1 or 2 of the U.K. Actuarial Profession SOA members are required to attest to to show how he or she met, during the (UKAP) CPD Scheme, or the Institute compliance with the SOA CPD Require- most recent CIA cycle, the 100 hours of Actuaries of Australia (IAAust) CPD ment annually. Each year members will required by the CIA. Members’ records Standard. If you aren’t able to follow one attest compliance for the two-year roll- should show the amount of time spent in of the alternative compliance standards, ing cycle ending on that December 31. self-study, webcasts, meetings and semi- you can always use the Basic Require- Members will attest compliance with the nars attended, type of credit that was ment Provisions of Section B. You are 2009–2010 cycle at year end 2010, with earned, and how many hours or units of only required to meet the provisions of the 2010–2011 cycle at year-end 2011, credit were earned. one CPD standard. etc. SOA members are reminded that, should they not comply with the SOA For all SOA members, the clock is ticking Tips CPD Standard, they are still able to use loudly as we approach the attestation • If you are a member of the SOA, their SOA designations but must notify deadline. So know your CPD compliance you are likely subject to the U.S. anyone who relies on their actuarial ser- path, track and earn CPD credits, and at- Qualification Standard if you vices that they have not complied with test between Nov. 1, 2010, and Feb. 28, practice in the United States the SOA CPD Requirement. 2011. Assure the public that you are up (by issuing Statements of Actu- to date with the latest developments arial Opinion). The SOA will verify attestation by au- and that you meet all existing standards. diting a subset of the members––about • You are NOT exempt from earn- 1 percent of members (approximately Read the announcement regarding attestation ing CPD credits to meet the SOA 200 members). If you are audited you at: www.soa.org/professional-development/ CPD Requirement if you are ex- will be asked to supply a compliance re- cpd-requirement. A empt from an alternative com- cord, showing how you complied with pliance standard. For example, your elected attestation method. For Jane Chlapaty is director of Project Management if you are exempt from the CIA example, a member who complies with for the Society of Actuaries. She can be contacted at Qualification Standard, you must the U.S. Qualification Standard will be [email protected]. either voluntarily elect to fulfill asked to show how he or she fulfilled, the provisions of the CIA Quali- in each year, the 30 hours of required fication Standard, meet Section CPD for the U.S. Qualification Standard. B of the SOA CPD Standard, or A member who complies with the CIA meet the requirements of anoth- Qualification Standard will be asked er alternative compliance stan- dard for which you are eligible.

32 | The Actuary | October/November 2010 Teachers Across the Country Thank You The THIRST Remains “Thank you for your generous donation. Your support of our school and community is recognized and truly appreciated.” Morton High School (IL)

“Thank you for the generous support to educate our students in the areas of personal finance.” North Community High School (MN)

“Education is always running on a tight budget and we are so thankful for people who speak up and take action. Thank you for caring about the financial education of our Today, teenagers spend 30% of their income on debt high school youth.” repayment, doubling the percent spent in 1992. Bremerton High School (WA) You can stop this cycle and give them a lifetime of fiscal responsibility by sponsoring a classroom with our Building Your Future financial literacy curriculum. “Because of your generosity, I am able to provide my Thanks to your donations through our successful QUENCH THE THIRST campaign, students with resources that The Actuarial Foundation has already provided the Building Your Future curriculum will enhance the information to 2,500 teachers who reach more than 62,000 students. that I provide. I thank you and appreciate your The THIRST remains! We have a waiting list of 750 teachers who want to bring kindness.” this curriculum to their students. Riverdale High School (TN) Make a difference this “back to school” season. For just $250 you can bring the Building Your Future curriculum to a teacher “We are very grateful for your gift. As you know, having on our waiting list or even sponsor your alma mater, a local school or a school our students grasp the attended by a child or grandchild. Any teenager can benefit from these sound essential of personal finance financial skills. is crucial in today’s world and your support of us is very QUENCH THE THIRST for knowledge today. meaningful.” Somers High School (CT) Go to www.ActuarialFoundation.org/donate/quench.shtml

475 N. Martingale Road, Suite 600 • Schaumburg, IL 60173-2226 phone: 847.706.3535 • web: www.ActuarialFoundation.org The SOA At Work Professional Growth Opportunities

On a different note, I’d like to focus a bit of attention on one of the SOA’s strategic initiatives this year, the development of an international mem- bership strategy. The SOA has many members outside its traditional base in Canada and the United States. The Board directed the organi- zation to focus this year on developing a strategy for continuing that growth and serving our members wherever they are. As you read in Mike McLaughlin’s Letter From The President column on page 8, Mike has ap- pointed a special International Membership Strategy Task Force to take on this job and they’ve been hard at work this year. You do not want to miss this year’s annual meeting! Among the many sessions, we have a general session keynote speech by Ted The task force is working to: Koppel and a presidential luncheon keynote speech by Paul Embre- • Identify an appropriate SOA membership growth and services chts, the risk management thought leader who, when he’s not working “posture” internationally, including opportunities and risks facing as professor of mathematics at the ETH Zurich, keeps busy working on the SOA internationally. international advisory groups, consulting to major financial institutions • Identify international candidate and member service needs. on quantitative risk management issues and authoring books like Quan- • Identify key strategies to achieve the recommended goals in the titative Risk Management: Concepts, Techniques and Tools. I had the plea- most effective and efficient manner possible. sure of hearing Paul speak at the International Congress of Actuaries last March and can tell you his message is very relevant to actuaries and While in its early stages, the task force has already identified that a something you won’t want to miss. We also have more than 100 profes- collaborative approach to working with national societies around the sional development/education seminars which will help you get neces- world will be a key component in any successful international stra- sary CPD credit. Registration online closed October 1, but you can still tegic posture. A successful international strategy based on a strong, register for the meeting on site. collaborative effort with other actuarial societies and professionals globally will increase the value of SOA members’ credentials wherev- Speaking of CPD credit—don’t forget the attestation requirement. The er they choose to practice. By raising awareness of the SOA credential attestation period opens on Nov. 1, 2010, and closes on Feb. 28, 2011. globally it helps to make SOA members more portable and broadens All the information you need regarding this important subject can be their career opportunities. Look to hear more about this important found on the SOA website at www.soa.org/attestationinfo. effort as the task force continues and completes their work, expected early next year. A — SOA Executive Director Greg Heidrich

34 | The Actuary | October/November 2010 The Actuarial Profession in the News

The SOA is focused on raising awareness of actuaries in the media. Professional Recent efforts have been successful. Here are just a few examples: DEvelopment opportunities Study Puts Cost of Medical Errors Sleeping Under a TARP with One Bridging the Gap: A Primer to the At $19.5 Billion Eye Open Equity-Based Insurance Guarantees Jim Toole is quoted in The Wall Street Sim Segal discusses risk management is- Conference Journal about the SOA study on medi- sues with Forbes. Visit www.forbes.com. October 31 cal errors. Visit www.wsj.com. Search Search term: Sim Segal New York, N.Y. term: Jim Toole U.K. Actuaries Awarded CERA Equity-Based Insurance Guarantees Actuaries: Flu Could Be Expensive U.K. actuaries awarded Chartered Enterprise Conference Jim Toole is referenced is this article Risk Analyst. Visit www.insuranceerm.com. November 1–2 about the SOA’s pandemic report. Visit Search term: Actuaries awarded CERA New York, N.Y. www.lifeandhealthinsurancenews.com.

Search term: Jim Toole A New Plan for Valuing Pensions Health Valuation Boot Camp Members Jeremy Gold and Rick Roeder November 11–12 CNN Interview with American quoted in The New York Times. Visit www. New Orleans, La. Academy of Actuaries Public soa.org. In the Latest News section on the Interest Committee Chairperson home page, click the More News link. Enterprise Risk Management and SOA Member Techniques and Practices View Tom Terry commenting on increas- View all of these articles by going to www. December 7 – 9 ing the retirement age for Social Security. soa.org/newsroom and clicking on the Phoenix, Ariz. Visit www.soa.org. Search term: Tom Terry Profession In The News link. A 2011 Living to 100 Symposium January 5–7 SOA Completes Pandemic Flu Research Orlando, Fla. Although the effects of H1N1 were not as three groups: traditional health insurers, self- harsh as originally feared, no one can pre- insured companies, and the total U.S. health ReFocus Conference dict the severity of the next flu pandemic. care system. In addition to the report, the February 27–March 2 And with the cold and flu season just around research also produced a spreadsheet tool Las Vegas, Nev. the corner, now is the time to prepare for that health plans and others can use to better these events. In a new SOA-sponsored re- understand and manage the associated risks ERM Symposium search report, “Potential Impact of Pandemic of a flu pandemic as well as aid them in con- March 13–16 Influenza on the U.S. Health Insurance Indus- tinuity planning. To view this research and Chicago, Ill. try,” Jim Toole of MBA Actuaries, examines the the companion life insurance pandemic flu financial effects of different flu pandemic study, “Potential Impact of Pandemic Influ- View all Professional Development scenarios on the U.S. health insurance indus- enza on the U.S. Life Insurance Industry,” visit opportunities by visiting www.soa.org try and estimates the major medical costs www.soa.org/research/research-projects/ and clicking on Event Calendar. resulting from a potential flu pandemic for default.aspx. A

October/November 2010 | The Actuary | 35 Education Financial and Health Economics By Jeff Allen

On July 1, 2010, the new Financial and ness environments within which financial deci- The learning objectives for the Financial and Health Economics module became a require- sions are made. Knowledge and awareness Health Economics module are particularly well- ment for FSA candidates on all tracks and was of applied economics increase an actuary’s suited for delivery in an e-Learning environment. also made available for credentialed actuaries understanding of key business and financial The candidates are able to achieve and dem- seeking professional development credit. It decisions within the insurance industry as well onstrate a deeper understanding than can be enhances the previous Financial Economics as in general industry and the public sector. demonstrated with traditional proctored exami- module by broadening the scope to include nation methods by working through complex applied economics topics and applications The chart on page 37 illustrates the framework examples, case studies and spreadsheets. The that address all areas of practice. of the new Financial and Health Economics module also allows interactions that demon- module. The module builds on those areas strate how the economic theories actually apply Importance of Applied of microeconomics relevant to financial and in real-life actuarial situations. Completing the Economics Topics for Actuaries health systems management. module will help actuaries increase their ability An understanding of economics is essential to to participate in strategic discussions with other the management of risk. Macroeconomic theo- Applied economics is of strategic importance business professionals regarding these topics. ries of inflation and unemployment underlie to the executive management of various the modeling and discounting of future cash organizations, and includes topics that other The Financial and Health Economics mod- flows. Microeconomic theories of supply and professions have traditionally addressed. ule provides an important initial exposure demand provide insights into the valuation Broadening the coverage of applied econom- to applied economics for many candidates. and pricing of risk. Together they support the ics will help the actuarial profession remain In practice, many actuaries have determined concepts and techniques for modeling and competitive with other rigorously trained pro- the need to address these topics independent managing risk. Mastery of these concepts has fessionals who are increasingly encroach- of the Education System. This module bet- been established as an important learning ing on our historical areas of practice and ter provides candidates with a foundational objective for our associate level candidates. newer areas like enterprise risk management. understanding of applied economic topics, so Understanding and applying these key con- they can appreciate and pursue future applied At the fellowship level, candidates are expected cepts help to position actuaries as well-round- economics professional development opportu- to demonstrate expert knowledge of the busi- ed business professionals. nities throughout their careers.

Financial and Health 2009 FSA examination candidate survey results are available on Economics Module Overview the SOA website. Find out what the candidates had to say. Visit www. The Financial and Health Economics soa.org/fsacansurveyresults e-Learning module enables candidates to

36 | The Actuary | October/November 2010 tailor the content to their specific track of • Explain the dynamics and the basic As a result of these broad- study. The module contains several dif- financial and resource structures that ening roles, the need ferent sections. Some of the sections are are common to all health economies. to educate actuaries in required of all candidates and provide high- • Demonstrate a basic knowledge of util- the health field has also level exposure to all of the topics addressed ity theory. increased. The health eco- in the module. Other sections are track- • Explain sources of empirical anomalies. nomics topics covered in Jeff Allen specific and are required depending on the • Explain modern corporate finance. the new module will provide candidates with a candidate’s chosen track. For example, a broader perspective of the financial dynamics, more in-depth health economics section is Group and Health Track Topics resource constraints, and overall personal and required of candidates following the Group Traditionally, actuaries pursuing the SOA’s system-wide risks present in any health system. and Health Track. Candidates on other Group and Health Track initially worked tracks complete the same set of sections, almost exclusively in the health insur- Following are the learning objectives for the but there is specialty material within the ance industry. However, over the last 50 health economics topics: sections tailored to their needs. years, health economies around the world have grown and evolved in many differ- • Establish a framework for understand- While specified sections are required based on ent ways. As health systems have grown ing how funds flow through the health a candidate’s chosen track, candidates have and evolved, actuaries’ roles have also care system. access to all sections in the module if they evolved, branching into areas such as pub- • Contrast the economic concept of desire to learn that material in more depth. For lic sector work, health outcomes research, demand versus the medical concept example, a finance track candidate who works and organizational productivity. of need. in the health industry might be interested in the option to also study the health economics section. A health track candidate, who works in a financial role, consulting on health plan Chart 1: New FSA Module Framework mergers and acquisitions, might also benefit from the more in-depth coverage of financial Economics economics and asset pricing.

Core Topics Required of All Candidates The core topics addressed in the new Microeconomics Macroeconomics e-Learning module ensure that all candi- dates, regardless of track, have a back- ground in financial and health economics. There are aspects of these subjects that Financial Health Other Economics Economics Branches of affect all areas of actuarial practice. Sections 2-3 Sections 2, 10 Microeconomics

Following are the learning objectives for these core topics: Incentives, Financial Asset Pricing Corporate Flow of Funds Behavior and Mathematics Sections 4-7, 9 Finance Sections 11, 13 Decisions Sections 5, 7-9 Section 14 Sections 12, 13 • Explain that financial economics has a global perspective, tools and analysis that are applicable for all actuaries.

October/November 2010 | The Actuary | 37 • Describe and discuss the assumptions of individual member’s responsibility to identify mean-variance portfolio theory and its and track.) “Knowledge of health principal results. economics will enable • Describe asset pricing models and dis- Summary actuaries to better understand the big cuss the principal results, assumptions All industries are undergoing significant chang- picture dynamics of and limitations of such models. es. By increasing exposure to topics such as health care and how • Describe derivative securities. financial economics, health economics, and they affect what we • Explain stochastic models and the corporate finance, actuaries will be better do. In turn, it helps us to make bet- behavior of security prices. prepared to work closely with other business ter decisions.” — Dale Yamamoto, • Explain the properties of option prices, professionals, and support corporate execu- FSA, EA, FCA, MAAA valuation methods, and hedging tech- tives as they evaluate and manage risk in an niques. evolving business environment.

• Analyze cost-benefit and cost-effective- Opportunities for Continuing A description of the new Financial and Health ness of health care alternatives. Education Economics module can be found at www.soa. Like all of the FSA modules, the Financial and org/fhe. Finance/ERM, Investment, Health Economics module is offered as an Individual Life and Annuities, e-Course for members and reflects 7.5 units of Questions may be directed to education@ and Retirement Track Topics structured continuing professional develop- soa.org. A Candidates on these tracks will focus more in- ment. (Study time to complete this course will depth on the Financial Economics topics. The be greater than 7.5 hours. Additional units of Jeff Allen, FSA, FCA, MAAA, is managing director, learning objectives are: unstructured credit can be earned and are the HHS, with Ingenix Consulting. He can be contacted at [email protected].

Notice Notice of Disciplinary Determination

On March 25, 2010, the Society of Actuaries convened a Discipline Committee to re- and appropriate to the circumstances and its intended audience and satis- view a matter referred by the Actuarial Board for Counseling and Discipline (“ABCD”). fies applicable standards of practice.” The matter related to work performed by William Lynn Townsend, FSA, in his role as the appointed actuary for a life insurance company for year ends 2004, 2005, and 2006. A violation of Precept 1 related to Mr. Townsend’s failure to stay current with the rel- evant requirements of the insurance department of the state in which the company The Discipline Committee determined to publicly reprimand Mr. Townsend for ma- was domiciled with respect to statements of actuarial opinion for the subject year terial violations of certain Precepts under the Code of Professional Conduct. ends. The violation of Precept 3 related to his failure to comply with the requirements of the U.S. Actuarial Standards of Practice Nos. 22 and 41. Violations of Precepts 1 and • Precept 1 states, “An Actuary shall act honestly, with integrity and compe- 4 related to his issuance of statements of actuarial opinion indicating compliance tence, and in a manner to fulfill the profession’s responsibility to the public with the insurance department’s asset adequacy analysis requirements, and his fail- and to uphold the reputation of the actuarial profession.” ure to incorporate the appropriate analyses in providing those statements of actuarial • Precept 3 states, “An Actuary shall ensure that Actuarial Services per- opinion. formed by or under the direction of the Actuary satisfy applicable standards of practice.” All members of the SOA are reminded that when they are faced with potential is- • Precept 4 states, “An Actuary who issues an Actuarial Communication shall sues regarding professional conduct, the ABCD is available for counseling. A take appropriate steps to ensure that the Actuarial Communication is clear

38 | The Actuary | October/November 2010 CompetencyFRAMEWORK DESIGN your future.

Learn about the new Society of Actuaries (SOA) Competency Framework—a valuable tool, developed by actuaries for actuaries! Use the Framework as a guide to help determine your own career by choosing SOA events that will help develop any or all of these eight competencies:

• Communication • Professional Values • External Forces & Industry Knowledge • Leadership • R e lationship Management & Interpersonal Collaboration • Technical Skills & Analytical Problem Solving • Strategic Insight & Integration • Results-Oriented Solutions

Visit SOA.org/competency-framework for more information.

Notice Equity-Based Insurance Guarantees Conference and Primer

Bridging the Gap: A Primer to the Equity-Based Insurance Guarantees Conference Oct. 31 (half day), New York, NY

Equity–Based Insurance Guarantees Conference Nov. 1-2, New York, NY

This seminar and primer are designed to give professionals with limited-to-moderate experience an understanding of how to better quantify, monitor and manage the risks underlying the VA and EIA products.

Learn more at www.soa.org.

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