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THESE JOBS AND MANY MORE CAN BE FOUND AT EzraPenland.com ■ SEP | OCT ■ 2016 Features Contents COVER ILLUSTRATION BY PAUL PHILPOTT

In the Red Zone Awareness of concussions and their 30 aftermath is on the rise—and nowhere is this more true than in the NFL By Michael G. Malloy

The Sustainability Puzzle When is solvency important, and how 38 can plan sponsors adjust over time to maintain sustainability? By Bill Hallmark

Cryonics: ‘The Best Crapshoot in Town” 46 The practice of freezing people after death with the hopes of later reviving them is riddled with question marks By Alyssa Oursler To Block a Blowout A possible partnership between the 52 actuarial and earth sciences By Roberto Gullco and José Manuel Castillo Covarrubias

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INSIDE TRACK �� 66 Published by Growing Pains Eric P. Harding

PRESIDENT’S MESSAGE �� 88 Sustaining Our Future Tom Wildsmith PRESIDENT Tom Wildsmith LETTERS �� 10 EXECUTIVE DIRECTOR COMMENTARY �� 12 Mary Downs In Defense of Simplicity The problem with health insurance complexity— DIRECTOR OF COMMUNICATIONS David J. Nolan and how to solve it Kurt J. Wrobel EDITOR Eric P. Harding

UP TO CODE �� 18 PUBLICATIONS & MARKETING PRODUCTION MANAGER Test Your Professionalism IQ Laurie Young Allan Ryan ADVERTISING Jeff Rhodes PRESIDENTIAL PAPERS �� 22 410-316-9857 The Academy and the Web of Professionalism [email protected] Part 2: Qualification Standards Tom Wildsmith DEPARTMENT EDITORS Josh Feldman POLICY BRIEFING �� 26 Sam Gutterman Election 2016—Breaking Down the Positions Warren Manners Heather Jerbi Stephen Meskin Robert J. Rietz SPECIAL SECTION �� 56 Tom Toce SOA Annual Meeting and Exhibit PUBLICATION DESIGN & PRODUCTION BonoTom Studio Inc. TRADECRAFT �� 60 www.bonotom.com Open the Doors COMMUNICATIONS REVIEW COMMITTEE How risk exchange can help address John Moore, Chairperson the organ shortage Shawna Ackerman Gwendolyn Anderson Bob Beuerlein Bill Hallmark Jeff Johnson CRYPTIC PUZZLE �� 70 Ken Kent Queen’s Gambit Mary D. Miller Tom Toce Cathy Murphy-Barron Jeffrey Schlinsog CROSSWORD �� 72 Tom Wildsmith Stockholm Visitors Contingencies (ISSN 1048-9851) is published bimonthly by the American Warren Manners Academy of Actuaries, 1850 M Street, NW, Suite 300, Washington, DC 20036-5805. For subscription information and customer service, PUZZLES �� 74 contact the Contingencies subscription department at the address Marbles in Boxes above or (202) 223-8196. Advertising offices: Jeff Rhodes of Network Media Partners, 410-316-9857, [email protected]. Stephen Meskin Periodicals postage paid at Washington, DC, and at additional mailing offices. END PAPER �� 76 Copyright 2016. All rights reserved. This magazine may not be Sins of the Father reproduced in whole or in part without written permission of the Bob Rietz publisher. Opinions expressed in signed articles are those of the authors and do not necessarily reflect official policy of the American Academy of Actuaries. Postmaster: Please send change-of-address notices for Contingencies to Contingencies, PO Box 16976, North Hollywood, CA 91615-6976.

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scor.com Inside Track ERIC P. HARDING

Growing Pains

AS I WRITE THIS NOTE, THE METRO D.C. REGION is mired in a typical August heat wave. Tempera- tures have hovered near 95 for weeks, and oppressive humidity makes any trip outside unbearable. (Who decided to build the nation’s capital on top of a swamp, anyway?)

These unpleasant conditions require creativity when it the issue affects athletes across many sports and at all levels. comes to managing two boisterous boys. There are only so many This feature discusses the history and current standing of the episodes of American Ninja Warrior we can watch before the concussion conundrum, and looks at how various sports are kids want to try the stunts themselves. In this heat, we forgo changing protocols to protect athletes while preserving the es- the playground and set up indoor obstacle courses—repurpos- sential nature of the sport. ing leftover wooden railings as a balance beam, using toy arrows In the pension world, the issue of solvency usually gets the to measure long jumps—so the boys can work off some energy headlines. But “The Sustainability Puzzle” (page 38) suggests (and hopefully tire themselves out, leading to an easy bedtime). that a more important metric may be sustainability—that is, can The kids love it, but my wife and I cringe watching the inevitable plan sponsors afford to pay obligations over time based on cur- trips, twists, and falls. rent assets and anticipated future revenue? This feature looks at My younger boy especially likes to test the rules of physics, the different sustainability implications faced by plans in growth throwing himself (literally) into any bodily endeavor. Sometimes industries vs. those in more mature fields, and suggests some that intrepid nature gets him into trouble. One time, for example, ways that plan sponsors can make appropriately risky invest- he saw his older brother leap over a small plastic stool set up as ment decisions to grow plan assets based on those differences. an impromptu hurdle, so he tried it. He fell just short of clearing In “Cryonics: ‘The Best Crapshoot in Town’” (page 46), the it, sending him sprawling face-first onto the carpet. A bit of rug author examines the practice of preserving one’s body after burn and tears ensued … then after about 90 seconds, he was death, in the hopes that future scientific discoveries will allow up and at it again. for regeneration and longer life. The field is still in its infancy, I’ve found that holding myself back from intervening in those but recent breakthroughs suggest the first part of the equation— precarious moments is one of the most challenging aspects of the cryo-preservation—may be feasible. Putting one’s hopes in parenting. But any child development expert will tell you that this nascent technology is risky, but the potential payoff could taking risks—and sometimes failing—is an important part of de- be enormous. velopment. Without challenging yourself and testing the limits Our fourth feature this month, “To Block a Blowout” (page of your abilities, you’ll never realize your true potential. 52) suggest that insurance companies can underwrite offshore Our features this month investigate some other intersections oil drilling expeditions with greater accuracy if they consider of risk and growth: the geophysical properties of the site in question. A partner- The National Football League has never been more popu- ship between the geophysical and actuarial sciences could yield lar. Its televised games regularly dominate the Nielsen ratings, a more precise risk profile for high-stakes drilling enterprises. and the league is building its fan base outside the United States. And a final note: The November/December issue will be the Amid that global growth, though, sits the issue of player safe- final opportunity to enter our fiction contest. Don’t miss your ty—specifically risks to brain health. In our cover story this chance to share your creative side—and the chance to win a $500 month, “In the Red Zone” (page 30), Michael Malloy looks at prize. For details and to enter, visit actuary.org/2016contest. the swirling controversy of sports and concussions. The NFL Deadline to enter is Sept. 30. has garnered the most attention in this area because of its multi- Thanks, as ever, for reading—and for helping to quantify the million-dollar settlement with former and current players, but risks of our world.

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Sustaining Our Future

SOCIAL SECURITY AND MEDICARE have changed what it means to be old in America. Poverty is no longer the almost inevitable companion of aging. Millions of Americans depend on these programs for their financial security and health care. Both programs represent long-term promises to the retirees of today and tomorrow—and both face long-term financing challenges. Actuarial work often focuses on technical On one level, the issues are simple. Eliminat- measures of solvency. The specific measures used ing the financial shortfall will require raising depend on the type of program involved, how it’s revenues, reducing benefit costs, or more likely financed, and how far the promises made extend some combination of the two. But given the sig- into the future. But certain underlying questions nificance of these programs for people’s lives, remain the same: Can the promises be kept? Is the decisions will not be easy. My Social Secu- the program on track to achieve its goals? Is the rity benefits will help determine the lifestyle program sustainable? I can afford to lead in retirement—or perhaps Solvency asks whether the books balance. even whether I can afford to retire. The way my Sustainability asks whether a program is likely Medicare benefits are structured will affect the to be prematurely curtailed or discontinued. care I receive on my deathbed. Sustainability is harder to measure, but it’s also Determining how the costs and benefits perhaps the more important of the two concepts. of these programs are spread across income Both Social Security and Medicare are fi- groups, age groups, and generations is an nanced through trust funds. The trustees for the funds issue inherently political question. Recognizing this in no way annual reports on their financial status, including financial pro- minimizes the vital role that actuaries play in helping the na- jections developed by the chief actuary of the Social Security tion understand the financial challenges, quantifying them, Administration (SSA) and the chief actuary of the Centers for and evaluating the adequacy and effectiveness of potential Medicare and Medicaid Services (CMS). Recent reports have solutions. The annual trustee report projections, prepared by consistently projected that key trust funds for both programs dedicated actuaries at SSA and CMS, are widely recognized will run out of money in the relatively near future. as reliable and authoritative measures of the health of these The most recent Social Security Trustees Report projects programs. The Academy has a long history of providing the that the Old Age and Survivors Insurance (OASI) trust fund will nation with objective, unbiased actuarial analyses of both the be depleted in 2035. When that happens, revenues under the financial status of the programs and options for strengthen- program are estimated to cover only 77 percent of the promised ing them. But the tough decisions—such as choosing between benefits. The most recent Medicare Trustees Report projects higher taxes and lower benefits, or between higher Medicare that the Hospital Insurance (HI) trust fund will be depleted premiums and fewer choices of health care providers— in 2028, at which time revenues will cover only 87 percent of must be made by the American public through their elected benefits. It’s not clear what would happen at that point. Would representatives. Medicare pay benefits at only 87 cents on the dollar, or would You and I are not just professionals—we are citizens as well. benefits be paid on a “first-come, first-served” basis? In either We are in the middle of an election year, and the decisions made case, the result would be a significant curtailment of benefits. by the next president and Congress will shape the long-term fi- And these programs are growing as the U.S. population ages, nancial health of Medicare and Social Security. Each of us has a taking up a greater percentage of GDP and crowding out other right—and a responsibility—to understand the candidates’ posi- spending priorities in the process. tions on these vital programs before entering the voting booth. In my judgment, neither Social Security nor Medicare is fully As you evaluate those positions, the Academy’s 2016 election sustainable under current law. Does that mean the programs are guides on Social Security and Medicare can provide a useful doomed? Of course not. We have time to fix them, and given the roadmap to the critical issues facing each program—you’ll find number of voters who depend on these programs, Congress will them at election2016.actuary.org. Once you’ve studied the can- eventually come under tremendous pressure to do so. But the didates’ positions on these and other issues, I encourage you to sooner we do it, the easier it will be. vote—it’s a civic duty that we all share.

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A Matter of Optics To assert that one individual should The authors have done us all a service applaud Tim Geddes and Robert Rietz have a greater reduction in benefits than by articulating a potential solution to a I on their thoughtful article “Step by another because he or she is expected to problem that deserves our attention. My Step—Reforming Social Security by live longer solely based on their benefit position is simply that we need to look Aligning Retirement Age With Income” levels might hit a wall of resistance. Some beyond the macro analysis. (July/August 2016). I will assume that people with higher benefits do die early, Mark Shemtob anyone reading this letter is familiar and some of those with lower benefits do Florham Park, N.J. with the Academy’s support for an increase in Social Security Retire- The authors respond: ment Age (SSRA) and is also aware AMERICAN ACADEMY OF ACTUARIES ■ JUL | AUG ■ 2016 e thank Mark Shemtob for of the controversy surrounding an Whis support of the Three-Tier increase in SSRA due to a dispar- SSFRA concept and respond to ity in mortality improvements his concerns. First, just as some between low-income and high- females will die sooner than some income workers. This disparity males the same age, some high- supports the position that an in- Step by Step income earners will die sooner crease in SSRA places a greater Reforming than some low-income earners the burden on low-income workers, Social Security same age. The former doesn’t in- by aligning those most dependent on Social retirement age validate individual annuity pricing, Security in retirement. with income and the latter shouldn’t invalidate The authors’ proposal is for a the Three-Tier SSFRA design. transition in the program to have Second, as Shemtob pointed multiple SSRAs (three), dependent out, most high-income earners do on Average Indexed Monthly Earn- realize a smaller benefit per dollar ings (AIMEs). AIMEs are based on of payroll tax paid than low-income wages that Social Security taxes earners—that is, they generally re- have been paid on and are used to ceive a lower “money’s worth” than calculate Social Security benefits. low-income earners. However, the The result based on the proposal decreased “money’s worth” is ac- would be that those at a lower tually not as significant as it seems AIME levels would have no re- due to disparate mortality impact. duction in benefits because their When the analysis uses appropriate SSRA would not change, and those at go on to live longer lives. mortality assumptions for the three in- the higher levels would experience a re- It is true that on a macro level we are come groups, the longer longevity of the duction in benefits because their SSRA living longer, and that increase in longev- high-income earners compensates for would increase. There would also be an ity does support an increase in SSRAs, much of the reduction in benefits. The in-between cohort with a more modest but such bold differentiation in the pro- Three-Tier SSFRA design merely bends increase in SSRA. gram SSRAs as proposed by the authors the “money’s worth” curve back toward Conceptually, this proposal makes may not be a wise approach. I agree that its historical shape, before differences in sense at a macro level. But it poses a we need to protect those individuals longevity among income levels became serious perception issue. Higher-paid that are not able to work to an increased so significant. workers already receive a smaller ben- SSRA and thus would suffer a reduction We emphasize that this design alone efit per dollar of payroll tax paid than in benefits upon early commencement would not resolve Social Security’s 75- do lower-paid employees. The authors’ that would be critical to their well-being. year deficit, nor achieve sustainable proposed change would exacerbate that A minimum benefit level of some manner solvency, but hopefully this proposal will disparity further in a manner that may could accomplish this goal without hav- begin a conversation on how to achieve not be well received by some individuals ing to categorize our population based these goals sooner than later. when considering their own circum- on anticipated life expectancy purely as Tim Geddes stances and potential life expectancies. a function of benefit levels. Robert J. Rietz

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AXIS-ELink-07-2016.indd 1 7/27/2016 11:52:36 AM Commentary KURT J. WROBEL

In Defense of Simplicity The problem with health insurance complexity—and how to solve it

INSURANCE HAS BEEN PART OF HUMAN SOCIETY since the be- services, maximum out-of-pocket, six- ginning of civilization. Ancient Mediterranean sailing merchants would tier prescription drug plans, co-pay per secure loans that would be repaid only if an overseas shipment was hospital stay, limits on the number of visits, prior authorization requirements, received. The Greeks and Romans created benevolent societies that maximum allowable charges, health would care for the family of a deceased member. Today, insurance poli- reimbursement accounts, health sav- cies provide financial protection against a wide range of unforeseen ing accounts, medical savings accounts, or untimely events, including unexpected death, automobile accidents, flexible savings accounts, and rewards and property damage. for lifestyle choices and other behavior conducive to good health. In other ben- Whether in the ancient or more Complexity for Consumers efit programs described as “value-based modern forms of insurance, these ar- Unlike most other insurance arrange- insurance design” (VBID), the products rangements have made modest attempts ments where the premium is based on are designed to provide economic incen- to change individual behavior that could past or current behavior—for example, tives to use the most appropriate type of affect the cost of risk for the coverage— if you smoke, you will pay more for life care unique to individuals and where including higher premiums for smoking, insurance—a major goal of health insur- they are in their disease state. For ex- poor driving, or engaging in risky pas- ance plan designs is to drive significant ample, the cost sharing for a particularly times. In these cases, the financial impacts change in how members access and effective service will be lower than for of such behaviors are well understood at purchase health services. The benefit other services. the inception of the coverage and are re- provisions supporting these purchase In addition to plan design complexity, flected in the premium charged. an individual could also have the oppor- Unlike the past and current uses of tunity to purchase a significant number other insurance products, the benefit of products and benefits options across structures of health insurance have be- different metallic tiers (bronze, silver, come increasingly ambitious. Health gold, and platinum) on the Af- insurance is now designed to fordable Care Act (ACA) change the behavior of con- exchanges or within an sumers and providers with employer group. a wide variety of complex The plan design com- benefit features and compensation plexity and large number of available mechanisms that are designed to plan options has led, in many cas- encourage more efficient choices es, to overwhelmed and confused in the provision of health services. consumers who are making poor in- In response to this trend, this article surance choices. A recent article in will discuss some of the many plan design or care changes are numerous: reduce the Journal of the American Medical As- and compensation features that use eco- usage at an emergency room, increase sociation cited two research studies that nomic incentives to change consumer and in-network utilization of services, use highlighted many of these challenges:1 provider behavior and then highlight the generic drugs, manage costs within an ■■ A 2013 survey of 202 insured U.S. most significant shortcomings and costs account, choose a particular site of ser- adults found that only 14 percent could for these complex approaches. vice, lose weight, adhere to a healthy diet, answer four simple multiple-choice The article will conclude by suggest- go to the gym, and so on. questions regarding the definition of ing alternative approaches that carefully In keeping with these goals, the list of cost-sharing features.2 consider the costs of these complex ap- benefit design mechanisms used to en- ■■ Sixty-one percent of employees chose proaches in developing strategies that courage these behaviors is also lengthy: plans for which no level or pattern of are simple and that consider nonmon- deductibles, co-insurance differential their health care spending could jus-

etary rewards. between in-network and out-of-network tify their choice. These mistakes led to ISTOCK

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learned fromlearned theimplementation assessments. ofown solvency risk data; andexamine lessons genetic testing andtheavailability ofcertain and retirees; analyze inlight theinformation of usedinlife underwriting experts’Including views onways for risk to manage longevity bothinsurers exposure); andanalyze how BigData willaffect auto insurance. explicit coverage, (i.e.,layers risk enterprise risk, ofcyber andlatent Program, includingexpansion oftheprivate explore market; themultiple atLooking future legislative changesto theNational Flood Insurance prescription drugsandoptionsfor reducing thosecosts. andexplore thegrowthwill meanfor healthcare inspendingon delivery; new Medicare Access of2015andwhat Act it andCHIPReauthorization updatesOffering on Affordable CareAct implementation; examinethe andstudyemergingretirement pension-plandesigns. security; Examining multiemployer pensionplans;explore ways to strengthen Laura Cali. Corporation Director Tom Reeder, andOregon Insurance Commissioner Congressional Director KeithHall, BudgetOffice BenefitGuaranty Pension speechesfrom Dodd, former Chris keynote Sen. Hearing andplenary WWW.ACTUARY.ORG/2016ANNUALMEETING that matter themostto you, your andoursociety. work, and Public Policy Forum Policy and Public 2016 Annual Meeting 2016AnnualMeeting AGENDA ITEMSINCLUDE

8/5/16 3:50 PM Commentary

care, pay for performance, values-based reimbursement, and global capitation. The natural response to this The need for this change makes sense, of course. The existing FFS structure information overload and fatigue is to does not provide a clear incentive to provide services in simply disengage and hope for the best. a cost-effective manner, and these new payment mechanisms attempt to correct for this problem. Like the overspending by employees equivalent of providers rather than actively engag- goals of the benefit plan designs, the to 42 percent of the cost of their yearly ing in activities that are incented in the goals of these programs are laudable and insurance premiums.3 benefit plan. Taken in total, the added very much consistent with the goals of These complex benefit features that complexity of health insurance plan de- those organizations paying for health are difficult to communicate are then signs, in many cases, adds precious little services. Health insurance companies, administered using equally complex to the member’s experience, health, or employers, and government payers are explanation of benefits (EOBs) that can human flourishing and just further adds simply demanding transparency and comprise lengthy documents describing to the fatigue many people feel in engag- greater value for their health care dol- the reimbursement minutiae of each cov- ing in the complexity of modern life. lar, and these new programs strive to ered service. In the most extreme cases, In addition, as suggested in the achieve these goals. However, the in- members may receive large stacks of doc- value-based design literature, many of creased complexity of these programs uments explaining their benefits at the the traditional cost-sharing features pro- may reduce effectiveness and may not same time they are suffering through a vide disincentives to use more effective be worth the added cost. The discussion difficult illness. services and an incentive to use services below highlights the specific challenges While the health insurance plan de- that have very little value. that inadequately prepared providers sign and administration attempts to This complexity also needs to be could face with complex provider pay- achieve laudable goals—to improve a considered in light of other insurance ment programs: member’s health or ensure the cost- products where an event leads quickly to ■■ Provider payment programs that make effectiveness of purchasing a health a simple result—an evaluation by the in- providers financially liable for the service—the designs and associated ad- surance company of its liability and then a total cost of care—including global ministration could also substantially single payment to the recipient. Whether capitation and many ACO payment add to the difficulty in engaging with the insurance company uses an adjustor to programs. While these programs of- an insurance product at a time when an determine liability or a death certificate to fer the promise that medical costs individual may be most in need. In addi- pay a claim, the experience is much more can be moderated through the provi- tion, the rules and limits of many of these likely to be simple and easy to understand. sion of more cost-efficient care, they plan designs are not stand-alone features Even the additional complexity of disclos- also transfer a significant amount of in the lives of members, but rather one ing a particular risky behavior produces risk to providers that may be unable of many complex arrangements that are an explicit, simple premium charge. to differentiate the financial effects put in place by organizations providing of cost-efficiency programs from the increasingly complicated products and Complexity for Providers statistical variation that naturally oc- features. The complications are many— The challenge of dealing with the grow- curs in any insured population. As a the deluge of information from other ing complexity of health insurance does result, without sufficient statistical health insurance products (vision and not end with consumers. Like the bene- credibility in the underlying insured dental), retirement savings accounts, fits package, payments for health services population they are treating or a core credit card bonus programs, frequent are moving increasingly toward complex competency in analyzing the results, flyer miles, internet passwords, and the payment structures that are designed to many providers are left trying to de- list goes on. reward providers for providing better termine whether the financial results The natural response to this in- and more cost-effective care than that of were connected to their own perfor- formation overload and fatigue is to the fee-for-service (FFS) system. The list mance, random chance, or a program simply disengage and hope for the best of these programs is long—accountable that provides inadequate funding for as one listens to the recommendations care organizations (ACOs), episodes of the medical risk accepted.

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WTW_GL-16-PUB-1652b1 SOLUTIONS FOR LIFE ADVERT US 8 X 11.indd 1 29/03/2016 14:05 Commentary

■■ Bundled payments for providing care the true value of the program is the ■■ Plan design simplicity. Product de- within entire episode of care for a marginal change, the compensation velopment leaders should carefully fixed amount. In the most refined pro- approach must be considered in light consider the additional cost of com- grams, the episode budget will be risk of the marginal improvement. plexity associated with new products adjusted for the individual patient and In all the above payment approaches, that influence behavior. We should make allowances in the budget for po- the hoped-for change also requires pro- develop plan designs that have fewer tentially avoidable complications. The viders to change their practice patterns in cost-sharing features and a simple and potential benefits of these programs a market where a particular health plan easy-to-understand EOB that clearly have been well documented in the could represent a small fraction of the explains a member’s benefits, and we academic literature—providers have overall revenue for a particular provider. need to explicitly consider the addi- an incentive to manage costs within This dilution occurs because providers tional cost of complexity associated a defined continuum of care without have to balance the competing rules and with a new feature that attempts to the additional burden of managing the financial programs among several differ- influence member behavior. The work cost of an entire population. ence insurance companies, as well as the by the VBID advocates also provides a The downside of these programs Centers for Medicare and Medicaid Ser- guide for moving forward. While we is a substantial increase in complex- vices, in order to identify the changes in need to explicitly consider the com- ity. By moving from FFS to a bundled their practice patterns with the highest plexity of specific plan designs, we payment model, providers must con- potential impact. In many cases, the net also need to be open to highly effective sider the entire cost of a treatment, effect has been little improvement across economic incentives that can signifi- develop mechanisms to track and then the entire universe of providers. cantly improve the adherence to an reimburse physicians and facilities, important treatment plan. and ensure that the overall payment is An Alternative Approach: Going ■■ Targeting provider payment pro- adequate. While this coordination rep- Beyond Complex Financial grams. Provider payment programs resents a significant step forward, it Incentives should maintain the option for a fee- also requires a degree of management In keeping with other insurance prod- for-service structure for providers not and financial skill that many providers ucts, I believe we need to appreciate the equipped to handle a more sophisti- may find challenging. historical purpose of insurance prod- cated payment structure. ■■ Quality- and efficiency-focused ucts—financial protection following an As we do with many programs, we programs that provide additional unexpected or untimely event—and have often instinctively look for complex payment for meeting specific objective some humility in our ability to influence monetary incentives rather than con- criteria (immunizations, screening, consumers and providers. Consumers sidering nonmonetary alternatives that H1Ac control, well-care visits.) While and providers have developed well- could produce equally positive results. intuitively appealing, the connection entrenched personal habits and practice The nonmonetary alternatives include between the provider activities in patterns over time, and modest economic everything from public recognition for a meeting the criteria of the program incentives are simply not likely to produce job well done or even public embarrass- and a specific financial outcome is significant change—particularly when ment for poor behavior. tenuous. As a result, if a health plan is many other consumer-oriented organiza- These nonmonetary alternatives not able to tie the program results to a tions are already attempting to influence are not new. They are used throughout financial outcome, the amount of the behavior with other financial incentives. our society to produce better collec- additional payment will invariably be Beyond the limitations in changing tive outcomes and help guide behavior more limited. behavior, the additional costs associated toward neighbors, family, and commu- In addition, a health plan has to with complex solutions should be care- nities. Some specific examples include consider the marginal change of the fully considered when plan designs are awards for volunteering, recognition for health care services provided result- developed and when payment mecha- contributing to a website, or a nod for ing from such a payment program. If, nisms are created. This human empathy simply following the rules. Ultimately, for example, 60 percent of patients for basic design principles will help these nonmonetary actions help contrib- are already receiving a service before limit the frustration for consumers and ute to a community’s culture and can be the introduction of a program and the providers trying to make reasonable de- much more effective in producing lasting program improves from 60 percent cisions within an increasingly complex change than a small economic incentive. to 70 percent, then marginal advan- framework. In many cases, a simple ap- As health care in the United States tage of the payment program is only a proach with simple rules could be the has become increasingly driven by finan- 10-percentage-point increase. Because most effective. cial imperatives, we have unfortunately

16 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG moved away from other solutions that incentives that have the potential to pro- that encourage and discourage other could be used to improve results. For duce better results if people respond to behaviors. Lastly, instead of focusing re- example, a payer could provide addi- them. Unfortunately, the designers of sources on increasing complexity, health tional services or nonmonetary rewards these approaches have not fully appre- plans could focus their efforts on the core for those members who adhere to a care ciated the negative effect that additional fundamentals of insurance—providing management program, or publically complexity has on people’s response to high-quality customer service, paying call out a provider for abusing the FFS the incentive. Invariably, these incen- claims quickly and accurately, reducing payment system. The Medicare FFS pro- tives come at an enormous cost in terms the cost of health care, and organizing gram, for example, routinely publishes of complexity to many important stake- the delivery of health care to ensure the the names of those providers who have holders of health plans. provision of the highest quality of care received the highest aggregate reim- An alternative approach would for its members. bursement from the program. In many simply acknowledge the cost of the com- KURT J. WROBEL, MAAA, FSA, is cases, this has led to disciplinary action plexity and instead look for alternatives chief financial officer and chief actuary at against these providers. that are simpler and could produce simi- the Geisinger Health Plan in Danville, Pa. lar results with nonmonetary approaches Moving Forward With more complex computing tech- Endnotes nology available, we can develop more 1. Bhargava S, Loewenstein G. “Choosing a Health Insurance Plan Complexity and Consequences,” Journal of the American Medical Association; 2015. sophisticated benefit plans and more 2. Loewenstein G, Friedman JY, McGill B, et al. “Consumers’ misunderstanding of health complex payment structures for pro- insurance.” Journal of Health Economics; 2013. viders. With this availability, product 3. Bhargava S, Loewenstein G, Sydnor J. Do Individuals Make Sensible Health Insurance development leaders have naturally Decisions? Evidence From a Menu of Dominated Options. National Bureau of Economic looked to influence behavior through Research working paper No. 21160; 2015.

2016 Seminar on Effective P/C Loss Reserve Opinions

Early registration ends August 31. DECEMBER 6-7, 2016

HILTON CHICAGO O’HARE AIRPORT | ACTUARY.ORG CHICAGO

SEP | OCT.16 CONTINGENCIES 17

AMERICAN ACADEMY OF ACTUARIES 2016 Seminar on Effective P/C Loss Reserve Opinions

DECEMBER 6-7, 2016 HILTON CHICAGO O’HARE AIRPORT REGISTER TODAY ACTUARY.ORG at least oneofthefive recognized U.S.-based actuarialorganizations. Requirements. AndActuary (with acapitalA) refers toanactuarywhoisamemberof Statements ofActuarial Opinionin the United States, Including Continuing Education ial standard ofpractice, and“USQS” toQualification Standards for Actuaries Issuing pletes atruestatement? 3. 2. 1. ticular actuarialservice, anactuarymust: In order tobequalifiedperformapar Question 2 4. 3. 2. 1. organizations? recognized North Americanactuarial are membersofatleast oneofthefive binding guidanceforactuarieswho Which ofthe following are considered Question 1 Multiple Choice(selectoneanswer) the answersonpage20,alongwithexplanation asappropriate. multiple–choice questionsandfourtrue/false questions. You canfind an older-style exam;rather thanshort-answerformat, itconsistsofsix entertaining as well educational. Inanodtonostalgia, Ihave created if you enjoyedtakingexamsasmuch asIdid—thisarticle shouldbe If ithasbeenawhilesinceyou earnedyour actuarialcredentials—and Test YourProfessionalismIQ 18 UptoCode CONTINGENCIES Which oftheabove phrases com- Be familiarwithevery ASOP am qualifiedtodothis work” Be abletolookatoneselfandsay “I standards Meet applicablequalification emy ofActuaries Practice notesof theAmericanAcad- USQS ASOPs The Code Note that“Code” refers totheCodeofProfessional Conduct,“ASOP” toactuar

E. All D. C. only B. 2 only A. 1 E. All D. C. B. only A. 1 1 and 3 1 and3 1, 2, and3 1 and2 1 and3 1 and2

SEP |OCT.16 ALLAN RYAN - Have youalways hadtrouble withmultiple choice? - 4. 3. 2. 1. tial materialviolationoftheCode: Which ofthefollowing couldbeapoten- Question 3 sor actuary Refusal tocooperate withasucces- tax returns Intentionally failingtofilepersonal agement pressure Understating reserves duetoman- information Refusal todiscloseconfidential

C. B. A. None E. All D. WWW.CONTINGENCIES.ORG 2, 3, and4 2 and3 1 and2

JOE SUTLIFF JOE SUTLIFF any actuarial communication; section cusses thedisclosures thatshouldbein 41 containsfoursubsections: 4.1 dis - nications andDisclosures” inASOPNo. actuarial services. “Section 4. Commu- standard thatwillapplytovirtuallyall along with ASOP No. 41,Actuarial Communications, Question 6 3. 2. 1. isobligatedto: another Actuary” solved, material violationoftheCodeby with “knowledge ofanapparent, unre Under Precept 13oftheCode, anActuary Question 5 4. 3. 2. 1. spect totheUSQS: Which of the following are true with re Question 4 Law if suchactionwould be contrary to Report theapparent violationeven ABCD whetherresolved ornot Report theapparent violationtothe Actuary inanattempttoresolve it Discuss thesituationwithother arial services The USQS donotapply tonon-actu- Standard first meettheGeneral Qualification fication Standard, anactuarymust In order tomeettheSpecificQuali- specific opinionsonly applies toactuariesissuingthree The SpecificQualification Standard ment ofActuarial Opinion applies toactuariesissuingany State The General Qualification Standard

D. C. B. only A. 1 All E. All D. C. only B. 1 A. None E. All 1, 2, and4 2 and3 1, 2, and3 1 and2 1 and2 Precept 4oftheCode, isone - - -

Code. Enrolled Actuaries are boundby the Question 8 based onage. and currently qualifyfordueswaivers ments when they were working full time, met the continuing education require long astheymeetallotherrequirements, education requirements oftheUSQS, as occasion withoutmeetingthecontinuing suing statements ofactuarialopinion,on perform actuarialservices, includingis- “retired” in the actuarial directory may Actuaries whodesignatethemselves as Question 7 True orFalse 1. the following statements are true? cerning thesethree sections, whichof 4.2, 4.3, and4.4 describedabove. Con- 4, includingspecific reference tosections refer theActuary toASOPNo. 41Section providing guidancespecifictothatASOP, sections inotherASOPs, inadditionto The “Communications andDisclosures” and Disclosures” section in each ASOP. of ASOPs, including a “Communications has brought consistency to the format ASOP.” TheActuarial Standards Board “Deviation from theGuidanceofan and Methods”; and section 4.4 covers 4.3 is “Responsibility for Assumptions Methods Prescribed by section Law”; 4.2 discusses “Certain Assumptions or (Select oneanswer—note thereisonetrickquestion!) sumptions are set by law, thatthe Section 4.2 requires, where as- False True False True

- SEP |OCT.16 Answers andnotes appear onpage 20➜ is notboundby theCode. tuarial services”(asdefinedintheCode) position whoisnolongerproviding “ac An actuary in a senior management Question 10 actuaries. useful guidancebutare notbindingupon my’s CouncilonProfessionalism provide Discussion papersissuedby theAcade Question 9 3. 2. reasonable, ifpracticable assumptions heorshebelieves are actuary estimate theimpactofusing ance inthatASOP deviated materiallyfrom theguid- sional judgment,theactuaryhas even where, intheactuary’s profes- can complywithaparticularASOP, Section 4.4 describeshow anactuary for assumptionsand/or methods tuary states reliance onothersources than describedinsection4.2, theac disclosed, where insituationsother Section 4.3 describeswhatmust be False True False True E. All D. C. B. only A. 2 1 and3 1 and2 2 and3 CONTINGENCIES 19 - - - Up to Code

Answers shall disclose such violation … except no such requirement where an assump- 1. D where the disclosure would be contrary to tion is determined by law. 2. C Law or would divulge Confidential Infor- ■■ Question 7: This is false because retire- mation.” III, while perhaps not actuarial 3. D ment status and age have no bearing services per se, could violate Precept 1, 4. E on being qualified to perform actuarial Professional Integrity, which has broader 5. A services and issue statements of actuarial applicability than Precepts applying only opinion. 6. B to “actuarial services.” 7. F ■■ Question 8: This is the trick question! If ■■ Question 4: All statements are true, 8. “It depends” (trick question) the enrolled actuary is also a member of which should be clear from a careful read- any of the five U.S.-based actuarial orga- 9. T ing of the USQS. 10. F nizations that have adopted the Code of ■■ Question 5: All statements are false. Note Professional Conduct, then the answer is that an Actuary is encouraged to discuss true. Otherwise, false—the enrolled actu- Notes apparent violations with the other Actu- ary would be bound only by the federal ■■ Question 1: All are binding guidance ex- ary, but not required to do so. If the issue regulations of the Joint Board for the En- cept practice notes. Practice notes provide is resolved, there is no need to report, and rollment of Actuaries, which do include useful information, but an Actuary is not finally Precept 13 states disclosure should standards of performance and eligibility obligated to follow any practices that may not be made where such action would be requirements to perform actuarial ser- be described in them. contrary to Law (just as with confidential vices under ERISA. ■■ Question 2: Refer to Precept 2 of the information, as discussed above). ■■ Question 9: True; discussion papers, Code. Note that II is what we refer to ■■ Question 6: This question presents a lot while very useful, are not considered sometimes as the “Look in the Mirror of information on an important topic. binding guidance. Test.” Familiarity with every ASOP might Note that II and III are correct, as they ■■ Question 10: False, as Precept 1 always be admirable, but I would be hard-pressed state correctly what must be disclosed applies. to come up with a situation in which it when an actuary relies on methods or would be required. assumptions he or she is not taking re- ■■ Question 3: All but I have the potential to sponsibility for and what an actuary must ALLAN RYAN is a member of the be a violation. Note that with respect to I, do in case of deviation from the guidance Actuarial Board for Counseling and Precept 3 of the Code states: “The Actuary of an ASOP. Statement I is false, as there is Discipline.

Life & Health Qualifications Seminar NOVEMBER 13-17, 2016 | KEY BRIDGE MARRIOTT, ARLINGTON, VA

EARLY REGISTRATION ENDS SEPTEMBER 12

Qualify to issue actuarial opinions for the NAIC life and health annual statements and earn necessary CE credit.

TOPICS INCLUDE: Asset adequacy testing | Statutory insurance accounting | Valuation and nonforfeiture requirements Health insurance valuation topics | Premium, loss, expense, and contingency reserves | Risk-based capital ACTUARY.ORG

Wanted: actuaries with vision As a top actuary, you’ve got vision and drive. Join EY’s Insurance and Actuarial Advisory Services team and become an integral member of an insurance practice full of people who share your passion for helping clients reach their potential. Unite with the power of our leading national Advisory team, and we’ll make your career shine. Find out more at ey.com/us/insurance or contact Richard Dannenberg at [email protected]. Editor’s note: This is the second in a four- part series on the key elements of the TOM WILDSMITH professionalism infrastructure of the U.S. Presidential Papers actuarial profession. The first in the series covered the Code of Professional Conduct.

The Academy and the Web of Professionalism Part 2: Qualification Standards

WHEN I WAS A CHILD IN MIDDLE TENNESSEE, boys’ hairstyles fixed the problem as best he could, which were simple, with just three choices: short, shorter, or a “flattop” (which involved removing quite a bit of my remaining hair. was pretty short). Haircuts weren’t very expensive, but you needed one Why did Mom insist that I be taken every few weeks. The cost could add up. to a real barber, duly credentialed by the great state of Tennessee? Because hav- Dad decided we could save some Had the furrow been centered, it might ing seen the alternative, she wanted to money if he cut my hair, so one day he have been the world’s first reverse mo- be sure my hair was cut right. bought an electric hair clipper. He read hawk—but it wasn’t. It was just wrong. Like most homeowners, my wife the manual, checked all of the acces- And Mom noticed. It was decided that Sally and I sometimes need home re- sories and adjustments, and set me in a Dad would take me to a barber to see if it pairs and improvements. Before hiring kitchen chair for my first home haircut. could be fixed. anyone, we talk to neighbors, look at on- Dad turned on the clipper, and took his That wasn’t a comfortable thing for line reviews, and check references. For first swipe with it—cutting an almost bald him to do. It was obvious that my dad had jobs that don’t require any special skill, streak all of the way from the front of my been trying to avoid paying for a haircut. such as cleaning gutters, we’ll hire any- head to the back, just slightly off-center. But, the local barber seemed amused. He one with a good reputation. But we hire only licensed plumbers and electricians. Why? Because water that isn’t where it’s supposed to be can cause thousands of dollars of damage; electricity that isn’t where it’s supposed to be can kill you. When getting something done right is important—whether it be cutting a boy’s hair or wiring a house—competence matters. Credentialing, certification, licensure—these are all ways of protecting the public by ensur- ing a minimum level of competence. The goal is to make sure that important jobs are done correctly. This isn’t just a technical requirement. Professionals have an ethical responsibility to agree to take on work only when they are competent to do it correctly. How do I know whether I’m competent to do a particular type of actuarial work? By looking at the U.S. Qualification Standards (USQS). The USQS provide us with the guidance we need to meet our ethical obligation to practice compe- tently and responsibly. The purpose of the qualification standards is not to make folks jump through arbitrary hoops, but to ensure that actuaries practicing in the United States are competent at what they

do. Protecting the public in this way is ISTOCKPHOTO

22 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG one of the central reasons the Academy The creation of the Academy was the when the Academy Board adopted the was founded. first step in a long journey toward our recommendations from the COQ that This is the second in a series of ar- current qualification standards in the suggested restructuring the qualification ticles exploring the key elements of our United States. The Academy established standards to create a “General Qualifica- professionalism infrastructure and the “competence” as a bedrock membership tion Standard.” This General Standard deep connections among them. This requirement in its first set of bylaws. In would apply to Public Statements of article will discuss our professional 1965, the year of the Academy’s found- Actuarial Opinion (PSAOs) for which a obligation to practice in a competent ing, the Academy’s Board of Directors Specific Qualification Standard had not manner, how that obligation is expressed issued Guides to Professional Conduct, yet been developed. At that time, three in Precept 2 of the Code of Professional which stated: “The member will bear Specific Qualification Standards existed Conduct, and the role the U.S. Qualifica- in mind that the actuary acts as an ex- for the NAIC Life, Health, and Casualty tion Standards play in helping us meet pert when he gives actuarial advice, and annual statements. that obligation. he will give such advice only when he is Two years later, in 1991, the Acade- qualified to do so.” The next year, in 1966, my Board adopted the newly structured Accreditation and the Search for the National Association of Insurance Qualification Standards for Public State- Recognition of the Profession Commissioners (NAIC) adopted a reso- ments of Actuarial Opinion, incorporating Prior to the Academy’s founding in 1965, lution supporting recognized standards continuing education requirements for there were no standards that an actuary of actuarial competence and conduct and the first time. While the scope of the had to meet in order to practice in the urged the commissioners to support the 1991 qualification standard was broad, United States. As one regulator put it at Academy’s efforts to gain official recog- it remained limited in this sense: The the time, “Our laws today demand no nition. Indiana was the first to do so in qualification standard did not apply to all more proof of the actuary’s competence 1968. By 1975, 17 states had recognized statements of actuarial opinion (SAOs) than did the laws of ancient Rome.”1 In- Academy membership as qualification but only to those issued for purposes of stead of waiting for a crisis that would for signing life and health insurance compliance with (i) law or regulation; (ii) result in heavy-handed standards and annual statements; 15 had done so for an actuarial standard of practice (the Ac- requirements being imposed on actuar- public employee retirement systems. tuarial Standards Board was established ies by the government, visionary leaders In 1981, the Academy Board adopted in 1988); or (iii) standards promulgated recognized the need to create a self- Qualification Standards to Sign State- by certain accounting standard-setting regulating profession that could earn ments of Actuarial Opinion on NAIC bodies. recognition by legislators and regulators. Annual Statement Blanks (for “Life, These visionaries knew we had to build a Accident, and Health” and “Fire and Strengthening the Web: The profession that would ensure that prac- Casualty”), addressing education and 2008 Qualification Standards ticing actuaries were both competent experience requirements. In 1982, the When the current Code of Professional and committed to serving the public. Academy created the Committee on Conduct took effect on Jan. 1, 2001, it They had the insight to recognize that Qualifications (COQ), consolidating the included a qualifications mandate that such a profession could be built on a previous committees in order to consider echoes the requirement of the 1965 flexible, self-regulating system, rather qualifications across practice areas. The Guides to Professional Conduct. Precept than on a rigid system of prescriptive current committee is composed of high- 2 of the Code states: “An Actuary shall government regulations. And they had ly regarded practitioners in each of the perform Actuarial Services only when the initiative to make it happen. Rather profession’s traditional practice areas— the Actuary is qualified to do so on the than waiting for government to impose casualty, health, life, and pension. basis of basic and continuing education the types of standards and institutions and experience, and only when the Ac- that other professions use to protect The Current Qualification tuary satisfies applicable qualification the public, they decided we should do it Standards Take Shape standards.” ourselves—and created an independent In June 1989, modern U.S. actuarial qual- Within a few years after the adoption body, the Academy, for that purpose. ification standards began to take shape of the 2001 Code of Conduct, the COQ

SEP | OCT.16 CONTINGENCIES 23 Presidential Papers

moved to better align the 2001 qualifi- affects people’s lives. Qualifications mat- cation standards, which applied only to ter because competence matters. The PSAOs, and the iron-clad requirement distinguishing mark of actuaries as proof professional qualification set out in fessionals is that we recognize an ethical Precept 2 of the Code, which applies to responsibility not just to our employers all actuarial services. These develop- and clients, but to everyone who relies ments culminated in a watershed on the work we do. Competence is event in the evolution of actuarial part of that responsibility. qualification standards when, The USQS are a vital tool in in 2008, after a five-year effort meeting our professional obli- by the COQ that included several gations. They help us understand opportunities for the profession to what services we are competent to comment, the Academy Board adopted provide, and when we can responsibly a revision to the Qualification Standards public in a competent manner. offer actuarial advice. Being qualified is for Actuaries Issuing Statements of Actu- Because the goal of the standards is a key requirement of the Code of Pro- arial Opinion in the United States. to ensure that the public can rely on the fessional Conduct; it is also an ethical The 2008 USQS revisions repre- work done by actuaries, the standards imperative. By defining what compe- sented a true milestone in U.S. actuarial are written to focus on the final results tence, or qualification, means, the USQS professionalism because they expanded that we present. The technical term help us meet our responsibilities to the profession’s commitment to robust “Statement of Actuarial Opinion” is used the public—individually and as a pro- professional qualifications that the pub- for this; some might misunderstand this fession. Just as the Code creates the lic can rely upon: The USQS broadened term to be limited to a formal statement foundation we need to build a culture of the definition of a Statement of Actuarial filed with a regulator—nothing could professionalism, the USQS provide the Opinion (SAO) to an opinion expressed be further from the truth. A simple rule framework we need to build a culture of by an actuary in the course of performing of thumb is that if I perform work that competence. actuarial services and intended by that someone else relies on because I am an Over its 50-year history, the Academy actuary to be relied upon by the person actuary, then the USQS likely apply. has developed our actuarial qualification or organization to which the opinion is It is also important to note that once standards from inchoate concepts to ro- addressed. This was a significant expan- we get beyond basic education, each of bust, objective, and officially recognized sion of the USQS from applicability to these elements is dependent on the spe- standards of professional competence. By PSAOs to all SAOs. cific jurisdiction in which we provide doing so, the Academy has ensured con- actuarial services. Laws, regulations, tinued respect for, and the well-earned Qualifications and the and markets vary from country to coun- favorable reputation of, actuaries—and it Real World try. I cannot assume that I am qualified has played an important role in strength- The 2008 USQS recognize that “qualifi- to practice in China, for instance, simply ening the web of professionalism. cation” is not an abstract concept—I am because I am qualified to do health work TOM WILDSMITH is president of the qualified (or not qualified) with respect here in the United States.2 American Academy of Actuaries. to a specific set of actuarial services or It is worth noting that the profes- area of practice. In the U.S. actuarial pro- sion is mature and highly specialized Endnotes fession, qualification and competence in the United States. Our qualification 1. “Address by Henry Root Stern, Jr.,” have long required a minimum level of standards reflect this and focus on the Transactions of the Society of Actuaries, technical skill; practical real-world ex- specific type of work done by each actu- 1965, Vol. 17, Pt. 1, No. 47AB, p. 74. perience; familiarity with all the laws, ary. This approach is more sophisticated 2. For more on this subject, see regulations, and standards of practice than is common in the rest of the world. Considerations of Professional Standards that apply; and up-to-date knowledge in International Practice, a discussion of new techniques, rules, and market Meeting Our Responsibilities to paper release earlier this year by the developments. These elements are not the Public Academy’s Committee on Professional arbitrary, but simply reflect what is need- Why are qualifications important? Be- Responsibility. ed for any actuary to be able to serve the cause the work we do is important—it

24 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG CMY CY MY CM K Y M C

ISTOCK Ad_SOA-002_Pryor-Rev_SO15_fpb.pdf 18/10/152:30PM www.ppryor.com (516) 935-0100x307 or(866)6-ACTUARY pauline To findyourperfect fit,pleasecontactherat: nationally andinternationally. modelers, andriskprofessionalsboth finding therightpositionsforactuaries, Pauline Reimer,ASA,MAAA,hasbeen For morethantwentyfiveyears, @ ppryor.com HEATHER JERBI

Election 2016—Breaking Down the Positions

EVERY FOUR YEARS, millions of Americans head to the polls to cast oversight of the Federal Reserve Bank a vote for president of the United States. Before that auspicious day, (the Fed), supporting legislation intro- duced by Sen. Paul Rand that would though, voters and nonvoters alike are subjected to months of debate, essentially provide an audit of the Fed, horse-race polling, character attacks, and rare moments of true inspi- and potentially taxing hedge-fund man- ration that allow each of us to decide on the best candidate to repre- agers’ “carried interest” as income rather sent us. than capital gains, recognizing that they should not be able to have their income Every cycle is unique, but 2016 taxed at rates capped at around 23.8 has been particularly interest- percent. ing—we’ve seen everything While Trump wants to from email leaks and hacks eliminate Dodd-Frank, and promises to build a Clinton wants to extend wall at the Mexican bor- it to encompass larger der, to divisions within insurance companies both the Republican and and hedge funds. She Democratic parties and has explicitly stated threats against the first that she would veto any and second amendments. legislation that would Often missing from the weaken the law. Her pro- headlines, though, are actual posal includes levying a policy debates and proposals. graduated risk fee on banks with With the end of the Republican more than $50 billion in assets, en- and Democratic national conventions, couraging regulators to impose higher the American populace now has its capital requirements as necessary, and primary candidates: Donald J. Trump, presented in the two party platforms, closing the Volcker Rule’s hedge fund a businessman whose anger and will- which may not fully comport with an in- loophole that allows firms to invest up to ingness to say whatever he thinks has dividual candidate’s positions. 3 percent of their capital in hedge funds resonated with many voters, and Hill- that can make risky investments. ary Clinton, a politician and policy wonk Wall Street Reform The GOP has generally not favored who stands as the first female nominee of Both candidates have been fairly vocal breaking up big banks, and Trump has a major political party. Having accepted about their opposing viewpoints on Wall demurred when asked, but Clinton has their respective parties’ nominations, Street reform, specifically in reference noted that she will use the authority in Trump and Clinton now head into the to the Wall Street Reform and Consum- Dodd-Frank to do so if they pose a sys- final months of campaigning—using all er Protection Act (often referred to as temic risk to the financial system. In available resources to differentiate their Dodd-Frank). Trump has announced addition, Clinton has indicated plans to policy positions from those of their oppo- his plans to significantly scale back or strengthen the Financial Stability Over- nent in the hopes of gaining a few more repeal Dodd-Frank, some of the most sight Council (FSOC), impose strong votes. significant financial regulatory changes global capital requirements, increase This article will focus on outlining since the Great Depression, arguing that transparency in the financial system, each candidate’s stance on several key if banks aren’t lending money to indi- tax carried interest as ordinary income policy issues of interest to the actuarial viduals and/or small businesses, then the (similar to Trump’s proposal), and ban profession. To the extent that one of the economy suffers in terms of growth. He private bankers from the boards of the candidates may not have specific policy has consistently blamed federal regula- 12 Fed banks. proposals on any of these key issues, this tion for the country’s slow recovery from article will supplement with informa- the 2008 financial crisis. Tax Reform tion based on public statements made In addition, Trump has expressed sup- Comprehensive tax reform is a corner- by the candidate and/or information port for imposing tighter congressional stone of Republican policy. In one of the

26 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG most detailed of his policy positions, taken opposing views of the Affordable individuals who serve as caregivers for Trump has outlined his proposal for tax Care Act (ACA), with Trump supporting elderly family members and has pro- reform, including a reduction from the repeal and Clinton supporting potential posed a 20 percent tax credit to offset current seven tax brackets to four (at 0, expansions. But health care reform isn’t $6,000 in caregiving costs (up to $1,200 10, 20, and 25 percent), with no income only about coverage, meaning both can- in tax relief per year). tax for individuals who earn less than didates will have to eventually offer more Medicare and Medicaid are also key $25,000 and joint filers who earn less detail around their individual plans to components of any discussion of health than $50,000. Through further changes address the growth in health care costs, care policy. Trump has not provided in the tax code, he would eliminate the as well as mental health and long-term specific plans for Medicare; however, marriage penalty and the alternative care reform. the GOP platform calls for no changes to minimum tax, no business would have to As noted, Trump has consistently the program for anyone over age 55. For pay more than 15 percent of their income indicated that repealing the Affordable those under age 55, the GOP’s platform in taxes, and there would be no more es- Care Act will be a day-one priority for would provide individuals an option of tate tax. his administration. He favors imple- the traditional Medicare program or On his website, Trump also provides menting some reforms to replace the the ability to transition into a premium some detail on how he would plan to pay current law, including allowing the sale support program that would provide for these tax cuts, including reducing of insurance across state lines, allow- individuals with an income-adjusted or eliminating certain tax deductions/ ing individuals tax deductions for their government contribution they could loopholes (e.g., phasing out the tax ex- health insurance premiums, encourag- put toward a plan of their choice. Fur- emption on life insurance interest for ing the use of health savings accounts thermore, the GOP platform indicates high-income earners), a one-time 10 and health eeimbursement accounts, an interest in reevaluating the eligibility percent repatriation fee for corpora- requiring price transparency, and re- age for Medicare to bring it in line with tions holding cash overseas, and ending moving barriers to allow importation increasing lifespans. the deferral of taxes on corporate income of safe prescription drugs. According to In terms of Medicaid, Trump has earned overseas. analysis from the Center for Health and indicated his support for a block grant Clinton has outlined several general Economy, repealing the ACA would like- approach, essentially providing states proposals for reforming the tax code. ly result in an increase in the uninsured with a specified amount of money that She has indicated plans to implement a population of approximately 18 million they can decide how to use. States 4 percent “fair-share surcharge” on indi- people, although the study also notes could use their annual federal allot- viduals making more than $5 million per that his plan could also lower premiums ment to provide benefits for their year and supports a 30 percent minimum for some individuals. low-income populations with the un- rate for individuals making more than $1 Clinton is probably best known for derstanding that any benefits provided million per year (also referred to as the her commitment to health care issues, above the allotment would be paid for Buffett rule, a proposal made during the specifically for expanding affordable by the state. Obama administration). In addition, she health care options for low-income and Clinton, who has been a vocal advo- has proposed tax relief for a variety of vulnerable populations. She has reit- cate for strengthening Medicare as well individuals (i.e., caregivers) and small erated her plan to retain the ACA and as expanding health care reform, offers businesses (i.e., employers with one to would, in fact, expand the program by a different approach for Medicare. She five employees), and she has proposed considering the implementation of a has advocated a “Medicare for More” an exit tax on businesses leaving the public option. Furthermore, she has program that would allow individuals United States, as well as incentives to proposed incentivizing states to ex- over the age of 55 to buy into Medicare, reward businesses that remain in the pand Medicaid—to date there are still 19 the details of which have yet to be fleshed United States. states that have not expanded Medicaid out. Furthermore, she has endorsed pay- under the ACA. ment reform by encouraging bundled Health Care Clinton has some specific thoughts payments initiatives and delivery system Health care reform remains one of the about addressing long-term care, spe- reforms. She also advocates looking for most debated domestic policy issues in cifically the caregiving aspect. Clinton opportunities to drive down prescription the campaign. Trump and Clinton have is a strong proponent of supporting drug costs for seniors.

SEP | OCT.16 CONTINGENCIES 27 Social Security any reduction in the annual cost-of-liv- indicated that he would renegotiate the According to Trump’s campaign website, ing adjustment; and 3) increase taxes on Paris Agreement, a climate agreement “The key to preserving Social Security high-income earners (over $250,000) to adopted by 195 nations, and roll back is to have an economy that is robust and pay for any expansion. the Obama administration’s regulations growing.” He then lists his proposals It will be interesting to see wheth- to limit greenhouse emissions. Beyond for accomplishing a robust economy, er either candidate provides any more that, his plans regarding climate change including comprehensive tax reform, detail about potential proposals in the have been vague. The GOP platform has renegotiation of trade deals, repealing coming months to provide incentives been somewhat more explicit, calling Dodd-Frank and the ACA, and immi- to encourage individuals to save for re- for a rejection of the Kyoto Protocol and gration reform. The GOP platform also tirement—a key issue for the actuarial the Paris Agreement and the cessation of has few specifics beyond opposing any profession (see sidebar for Academy funding for the United Nations Frame- tax increases to shore up Social Security. publications that address the need for work Convention on Climate Change. Historically, Republicans have supported lifetime income). The party favors solving environmental privatizing Social Security and raising the concerns through incentives for the de- retirement age. Climate Change velopment of new technologies rather For Clinton, her plans for Social Se- Despite polling that indicates 73 per- than the imposition of extensive regula- curity fit into three key proposals: 1) cent of Americans believe that climate tory requirements. expand Social Security for women who change is real—up from 66 percent two Clinton, on the other hand, has gen- are widows and/or caregivers; 2) oppose years ago—with the steepest increase erally favored maintaining the current an increase in the retirement age, any at- among Republicans, Trump has referred course of action on climate change. She tempts to privatize the program, and/or to global warming as a “hoax.” He has has indicated plans to deliver on the

2016 Election Guides: ‘Making Issues Count’

The Academy’s 2016 election guides focus on several system: For insurance The Medicare pro- major issues to help voters become better informed markets to be viable, gram has played a vital in the run-up to the 2016 election. The guides, avail- they must attract a broad role in providing health able at election2016.actuary.org, provide high-level cross section of risks; care benefits to nearly descriptions of major public policy programs such market competition all Americans age 65 as Social Security and Medicare, as well as various requires a level playing and older. Last year, 55 options for reform. The Academy has raised these field; and for long-term million Americans had issues because of their importance to voters and the sustainability, health Medicare coverage, well-being of the nation. spending growth must but the program faces be reduced. long-term sustainability Health care policy is approaches to mitigate challenges as the baby consistently at the top health care spending The most recent addi- boomer population ages of the domestic policy growth and improve tions to the guides out- into the program in the agenda and often a ma- quality, candidates are line what a single-payer next few decades. The jor topic of debate during hinting at a variety of system would look like; guides consider the election years, and 2016 proposals to modify the high-performance net- implications of revising is no different. From current “Obamacare” works; and the Medicare Medicare’s traditional measured improve- system. buy-in option. Another benefit design, premium ments to more signifi- guide considers the The Academy’s Health support, buy-in option, cant repeal-and-replace growing issue of long- Practice Council has and more. strategies for the Afford- term care, including identified three keys to a able Care Act, as well as financing and insurance. sustainable health care

28 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG promises made during the Paris climate campaign trail. A current (as of this writ- References Kaiser Family Foundation. Status of State conference, including reducing green- ing) national CNN/ORC poll has Clinton Action on the Medicaid Expansion Decision house gas emissions by up to 30 percent leading Trump 52 percent to 43 percent, (July 7, 2016) by 2025 and 80 percent by 2050. She in large part because of recent divisions House Republicans Health Care Proposal. A Better Way: Our Vision for A Confident has proposed a $60 billion “Clean En- between Trump and some top Republi- America (June 22, 2016) ergy Challenge” that would allow the can leaders, but those numbers change “Where Hillary Clinton and Donald Trump administration to partner with states, daily. Consider this—the race was con- Stand on Wall Street,” Wall Street Journal (June cities, and communities to reduce car- sidered neck and neck coming out of the 20, 2016) bon pollution and expand clean energy conventions. Hillary Clinton for President (website) resources. Specifically, the Democratic The horse-race polling will continue Donald Trump for President (website) Tollefson, Jeff, “Trump vs Clinton: Worlds Party platform has expressed a com- up until the election, but we can only Apart on Science” Nature (July 26, 2016) mitment to getting “50 percent of our hope that the candidates will pivot to Goode, Erica, “What Are Donald Trump’s electricity from clean energy sources policy sometime in the coming weeks Views on Climate Change?” New York Times within a decade.” and do their best to ensure an informed (May 20, 2016) Solly, Milan, “Where Clinton and Trump Stand electorate shows up on Nov. 8 as we on Social Security and Medicare,” Kiplinger The Road to Election Day elect the 45th president of the United (July 27, 2016) It’s still a long time to November. Each States. Center for Health and Economy, Healthcare day brings new opportunities for Trump Reform to Make America Great Again, (July 7, HEATHER JERBI is an assistant 2016) and Clinton to highlight their policy posi- director for public policy at the American Republican Platform 2016 tions on key issues and/or struggle with Academy of Actuaries. 2016 Democratic Party Platform the political minefields that litter the

2016 Election Guides: ‘Making Issues Count’

Social Security is the or some combination of in retirement plans, to refine their models, most significant public the two; how raising the facilitate greater use of most data show program for retirement retirement age would lifetime income options. record-breaking warm security in the United address the program’s temperatures in many Many Americans have States, and more than challenges; whether parts of the world in keenly felt the effects of 90 percent of Americans payroll taxes should be the past several years. extreme climatic events, over age 65 receive ben- raised; and whether any While acknowledging including droughts and efits from the program. proposed changes to the public debate on wildfires in the West, This year, the program Social Security would climate risk has often higher rainfall and is providing benefits disproportionately affect been contentious, the snowfall in the East, and to more than 60 mil- women. Academy encourages significant damage from lion retirees, survivors, the public to inform Another Election tornadoes, hurricanes, disabled workers, and itself with objective Guide considers and floods across the dependents. information and data to lifetime income issues, country. more fully engage in the The Academy’s Elec- including altering While climate debate, with an overview tion Guides look at op- federal retirement scientists continue to of climate-risk issues. tions to provide adequate policies, highlighting long-term financing for the importance of The Academy is committed to highlighting these Social Security, includ- financial literacy important issues as Americans prepare to cast their ing potential revenue and education, and ballots in this pivotal election year. increases, benefit cuts, encouraging flexibility

SEP | OCT.16 CONTINGENCIES 29 in REDthe PHILPOTT ISTOCK / PAUL ZONE

30 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG oncussions are nothing new in sports, Awareness of concussions but widespread attention and concern and their aftermath is on Cabout them have jumped in the past the rise—and nowhere is this few years, to the point where concern has become front and center across just about all more true than in the NFL sports, at every level. While most attention has been focused on the National Football League, By Michael G. Malloy concussions and their related concerns are prevalent across all sports, men’s and women’s alike, from the NFL to hockey, basketball, and soccer—and both boys and girls youth sports. Concussions in the NFL jumped 31.6 percent to 271 recorded in the 2015 season, from 206 in the 2014 season, according to the league’s official figures. Most occurred in games, accounting for 234, or 86.3 percent of the total, with another 37 in practices, including preseason. But just eight happened during inseason practices, as the NFL limits full-contact practice with pads to 14 per year. The movie Concussion, released in late 2015, fictionalizes the discovery of what is now known as chronic traumatic encephalopathy (CTE) by Dr. Bennet Omalu—played by actor Will Smith—who was a neuropathologist based in Pittsburgh. While documenting tension between the powerful pro league and Omalu over his work in the cause and effect of players with brain disease, the film’s end credits note a statistic from an actuarial study prepared for the NFL that 28 percent of all pro football players will suffer from some form of serious cognitive impairment, including CTE, over the course of their lives.

RED PHILPOTT ISTOCK / PAUL ZONE

SEP | OCT.16 CONTINGENCIES 31 their brain tissuecanbeexamined, Rhodessaiditwould be patient runsoutofmoneyandcould needmore inthefuture. said, notingthatsuchcasescan involve situationsinwhicha fine foranumberof years, butthen hedeteriorated,” Rhodes with theSteelers duringhis 16-year Hall ofFame career, “was generative brain disease. Webster, whowon fourSuper Bowls work onhisbrain tissuehelpedinform hisdiagnosisofthede Webster’s death was never officially releasedpublicly, Omalu’s age 50—prompted Omalu’s discovery ofCTE.Whilethecause Pittsburgh Steelers subsequentdeathat centerwhosecase—and Much of Concussion andCTE’sFirstDiagnosis 32 require future surgeries and/or ongoingtreatment. due totheresult ofaninjury, suchasacar accident,whichcould he explained. For example, theyare oftensetfrom acourtcase financial effect,withmore monetarycosts for treatment later. said, addingthatwithCTEthere couldbelessofanimmediate annuity thatmakes level payments over aperiodoftime, Rhodes treatment eitherimmediately orinthefuture, asopposedtoan “The NFLviewed thisasmore ofathreat totheirincome.” of thestudies thatwe doonstructured settlements,” hesaid. based onmy current experience atMIB. Ialsolookatitinterms writing todetectit. long-term care forCTEandtheabilityoflifeinsurance under sue involves questions as well open-ended as implications for evidence ofconcussiononpro footballplayers,” andthattheis- sion controversy “quite disturbing, especiallywiththescientific MIB Group inNew York, saidhefindstheNFL’s ongoingconcus- draw penaltiesandoftenfinessuspensions as well. prohibitions against helmet-to-helmetcontact,whichroutinely tact toplayers’ headsandnecks, inadditiontoitslongstanding in recent years modifieditsplaying rulestosharply reduce connection between footballandCTE,even thoughtheleaguehas stated toacongressional roundtable thatthere was acon- NFL’s executive vicepresident forhealthandsafety, Jeff Miller, In re:NationalFootballLeaguePlayers’ConcussionInjuryLitigation,MDL2323 Source: ReportoftheSegalGrouptoSpecialMasterPerryGolkin less than50 Age Group CONTINGENCIES Because CTE is not diagnosable until a person has died and Because CTEisnotdiagnosable untilapersonhasdiedand Structured settlements are based on the facts of a given case, In atypicalstructured settlement,payments are structured for “When Ilookatconcussionsfrom an actuarial view, it’s Thomas Rhodes, vicepresident andactuarialdirector with This year, just several months after the movie’s release, the 75-79 70-74 65-69 60-64 55-59 50-54 80-84 85-89 90+ Concussion Segal Model Results—Prevalence Segal ModelResults—Prevalence Participating PlayerPopulation of Alzheimer’s andDementiain focused on the case of Mike Webster, the 12.1% 22.2% 58.2% 7.8% 5.2% 3.5% 2.3% 1.4% 0.8% n/a SEP |OCT.16 General Population Epidemiology on Epidemiology on 12.3% -13.0% 38.5% -45.2% 20.3% -21.6% <0.1% -2.1% <0.1% -1.3% 2.8% -3.7% 4.9% -6.8% <0.1% <0.1% <0.1% - - the best—well beyond Pop Warner.” high stakes,” Governale said.“We’re talkingabout thebest of help … with players competing at such ahigh level for such who shouldberesponsible forthat,andhow farintothefuture? getsymptoms, therewhen [players] are costs. …Thequestion is, dent ofActuarial Health SolutionsinMaple Glen,Pa. “Certainly, heightened alerttotreating this,” saidJohn Governale, presi- ability concernsofconcussions. “Everybody’s beenputona for monetaryawards andclaimsexpenses, itbelieved that nal proposed settlement,whichcontemplated acappedfund For itspart,SegalGroup saidthatinconnectionwiththe origi- NFL andPlayers’UnionViews ability ofitoccurring,” Rhodessaid. of concussionsthatyou’ve hadwould tendtoincrease theprob insurance underwriting, anditseemsrelated thatthenumber tion (seechart,above). numbers rose dramatically compared withthegeneral popula- 0.1 percent forthoseagegroups, whileabove age60theNFL’s population epidemiology prevalence, by contrast, was less than to 54were 1.4 percent, and55to59were 2.3 percent. Thegeneral 50 hada0.8 percent prevalence ofthoseconditions, whileages50 zheimer’s and dementia. Its figures showed thatplayers under age on existing players, constructing amodeloftheprevalence ofAl- the SegalGroup andsincepubliclyreleased—used information severe effectasit worsens inthelongterm. diabetes has less of an immediate effect but generally has a more the effectscouldbelesspronounced. Conversely, aconditionlike in whichsomeoneisseverely injured immediately, butover time duration of its effect, he said,using the example of a car accident system,” Rhodessaid. brain andcentral nervous system, ortheheartandcirculatory along thedimensionsofbodilysystem affected,“suchasthe ual lifeunderwriting, provide medicalimpairmentinformation ously animportantfactor.” for professional football players. Repetition [of injuries] is obvi the central nervous system would tendtogetworse over time much more frequent,” hesaid.“So Icanseehow theeffectson men doingconstant collisionswhichare muchmore violent,and the head,thoughjust onetime. But intheNFL,“Theseare big that hewas onceknocked outduringapractice afterbeinghitin it fitswithinthatmedicalimpairment.” the effectsaren’t immediately assevere, theygrew over time, so more or less fits within the central nervous system, and although he said.“Themore extreme… effectsofconcussion,suchasCTE throughout theirlifeanditseemstobecumulative over time,” and frequency andnumberofconcussionsthatpeoplehave had reflect it.“But my suspicionisthatitdependsontheseverity unlikely foranunderwritertofindmedical evidence that would “Certainly, eliminatingthousandsofhitstotheheadwould Another actuary noted some of the potential health and li CTE is“notsomethingthatwould appearinyour typicallife Rhodes notedthattheNFL’s actuarialstudy—undertaken by The severity of any injury or impairment is important, as is the MIB’s impairmentcodes, whichare widelyusedinindivid- Rhodes, who himself played football in high school, recalled WWW.CONTINGENCIES.ORG - - -

PHOTO PROVIDED BY LAUREN CHASE PHOTO PROVIDED BY LAUREN CHASE tion,” thecompany said.“Therates ofincidence, thetimingof for boththegeneral populationandtheformerplayer popula- a group ofmaladiesforwhichthere islimitedincidencedata inherently complex, sinceitinvolves a65-year projection of to Contingencies questions. able topay allawards, SegalGroup saidinawrittenresponse possible injuries to ensure that adequate funds would be avail was purposely designed to err on the side of overestimating ficient topay allconceivably possibleclaims, itsmethodology eventual $765 fundwould millioncapped-settlement besuf ceeding $760 million[emphasisinoriginal]. proposed settlementthatithada“very ofex low probability” based onreasonable assumptionsover the65-year lifeofthe “There is no simple way to explain what we did, which was Because thepurposeofexercise was totest whetherthe The movie Concussion about concussions inthepasttwo years. research on TBI, mostinvolving athletes. coursework hasincluded papers, study, and interest isinsports injuries, andhermaster’s as high schoolandyounger levels. Her main with other athletes” at the collegiate as well and take my own experiences andusethem to tryturnmy situation into apositive the injury psychologically, Imadeanattempt year,” she said. “Once I was able to get over out with concussions throughout my junior with athletes who, like her,have hadTBI. Chase saidshehasagoal of working is scheduled tocomplete inDecember. traumatic brain injury (TBI)—which she tion counselingwith aconcentration in work toward thedegree—inrehabilita GWU. Theinternship waspartof Chase’s gree, which she iscurrently pursuingat study theissue aspartof amaster’s de and falling tothe floor—inspired herto opponents in both practice and games, injuries—collisions with teammates and with traumatic braininjuries. Her own in on counseling sessions for veterans and employment section, where shesat fairs intheVA’s vocational rehabilitation at theU.S. Department of Veterans Af Maryland Baltimore County. GWU and,previously, at theUniversity of she suffered during her playing career at year due toaconcussion, one of several in March, wasforced tosit out herjunior ton University’s women’s basketball team up astandout careerwith George Washing men’s sports. Lauren Chase,who wrapped Concussions are not limited to football—or Concussion ConcernsNotLimitedtoProfessionalLeagues “I’ve noticed amore serious approach “It wasarough timeintermsof sitting Chase did an internship this summer came out [in - - - - out in my last year in a very successful way.” a long period of time,and Iwasable togo There wasatimewhere Ihadheadachesfor that Iwasable toovercome theconcussions. healthy now and is “appreciative of the fact championship lastyear—said she isfeeling Colonials won theAtlantic 10conference legiate career on a winning note, as the not even realize theyhave concussions.” hone inandfocus on athletes who might an invisible injury andyou really have to being taken more seriously because it is concussions later inlife,” shesaid.“It’s late 2015]…andathletes have died from Chase—who endedherDivision Icol- - - - that noplayer becomesbankruptbecauseofuncovered medical than onnatural grass fields. increases ininjuriesonartificialturf, whichare more prevalent a player simplymissingpractice orgametime, andmeasuring ries inrecent years have includedmeasuringinjuriesbeyond late May thatseveral changesinprotocol regarding headinju- said onthe“Sports Junkies,” aWashington, D.C., radio show, in for thisarticle, butNFLPA Executive Director DeMaurice Smith our results.” with leadingmedicalexperts andepidemiologists toproduce it usedactuarialtoolsandtechniquesin“careful coordination neurological conditionsallinfluencethe results,” underwhich presentation, theseverity ofonset,andtheprogression ofthe As for the players, “What we’ve tried to do is to make sure The NFLPlayers Association(NFLPA) declinedtocomment SEP |OCT.16 heading theball byplayers—boys and year, the U.S. Soccer Federation banned reduce concussions intheirranks.Late last year asweexplore additional measures.” cited to look at the results at the end of the the nature of thisgreat game. We are ex another layer of safety without changing “Eliminating kickoffs at this level adds Butler, Pop Warner’s executive director. important stepinthat direction,” saidJon athletes, and we think this move is an the game safer and better for our young in astatement. for players 8-10 years old, the league said time, down from 33percent previously—are practice contact to25percent of practice The change—along with areduction of in- reducing high-impact tackles andhits. beginning this year as a means toward league announcedit would bankickoffs soccer-playing children inthiscountry.” role inimproving thesafety of thesport for … arepleased that wewereable toplay a have accomplished ourprimarygoal and Soccer andits youth members,wefeel we the youth concussion initiative by U.S. in a statement. “With thedevelopment of man, lead counselfor theplaintiffs, said of concussions inyouth soccer,” Steve Ber youth memberorganizations on theissue focus theattention of U.S. Soccerand its among younger players. a prevalence of concussions in the sport suit filed bya group of parents, who cited old. Thosechangesfollowed aclass-action practice sessions for players 11to13years girls—under 10,andlimited headingin Youth sports are also taking steps to “We areconstantly working tomake In March, the Pop Warner youth football “We filed thislitigationto in[an]effort CONTINGENCIES - - 33 players who suffered fromwould suffer those conditions—or whether $675millionwould beenough tocompensateretired 2014, butsoon thereafter Judge Brody denied that,questioning gram andothermiscellaneouscosts. CTE. Theremaining moneywas fora baselineassessmentpro Disease), Parkinson’s disease, oradiagnosisofpost-mortem trophic lateral sclerosis (ALS, alsoknown asLouGehrig’s conditions includingdementia,Alzheimer’s disease, amyo was forcompensationtoplayers who suffered from qualifying gust 2013 fora$765 millionsettlement—$675 millionofwhich covering all 20,000 retired players and family members in Au- ern District ofPennsylvania before Judge AnitaBrody. The casewas consolidatedintheU.S. District CourtfortheEast league’s treatment anddisclosure ofconcussion-related risks. tal—filed suitagainst theNFLbeginningin2011 regarding the we continuetofightforourplayers for workers’ comp.” your medicalcosts ifyou have long-term healthcare costs, and benefitthat you canapplyforthatwillcoverneuro-cognitive “We created newbenefitswhere if you getinjured there’s a that [time],andpay premiums out ofyour HRA,” Smithsaid. that players canbeginbuildingintheirrookie year. bursement accounts(HRAs),whichare deductedpretax and post-career healthcare, underwhichtheycanusehealthreim- ment between theNFLandunion,players getfive years of sociated withconcussionsandrelated neurological disorders. ago, theleaguereached asettlementtocover long-term costs as- Following lawsuits by agroup ofretired NFLplayers several years Retirees’ SuitNearingFinalResolution way tobecomebankrupt.” and you have topay outofyour own pocket, that’s thequickest it’s notcovered by eitherworkers’ comporsomeotherbenefit, ers. “If you have aninjurythatoccurswhileyou’re playing and leave,” saidSmith,fieldingquestions from the radio show’s call- care—that’s thethingthatcosts ourplayers dearlyafterthey 34 CONTINGENCIES A motionforpreliminary approval was filedinJanuary The partiesreached aclass-wide agreement in principle “You’re allowed to stay in the NFL [health] plan throughout A group of 5,000 retired players—out of about 20,000 to Smith saidthatunderthe2011collective bargaining agree SEP |OCT.16 - - - - - from concussions. players injury-free,particularly season, asameanstokeeptheir ban in-practicehittingduringthe coaches votedunanimouslyto This pastspring,IvyLeaguefootball appeal alltheway totheU.S. Supreme Court. were facing adeadlinelatethissummerofwhethertocarrythe percent oftheobjectorsoptedoutsettlement. Objectors appeal was alsorejected, withthecourtnotingthatlessthan 1 then appealedtotheentire Third Circuit Appeals Court;that unanimous opinioninApril rejected theappeal.Theobjectors phia heard theobjectors’arguments last November, andina appealed toafederal appealscourt. approving thesettlementinApril 2015, afterwhich theobjectors November 2014, and Judge Brody overruled theirobjections, remain inthesettlement.Thosewhoobjectedwere heard in object toit,askingforthecourtrevise it. the righttosueNFL;orremain partofthesettlement but in whichcasetheywould notreceive benefitsbut would retain would becomepartof the settlement;optoutofsettlement, before July 7, 2014. players aboutthesettlement,whichcovered players whoretired programs about head injuries and for notifying andeducating line assessmentprogram, withtheremainder foreducational million settlement was in addition to $75 million for a base The $675millionincompensationcosts from theoriginal$765 interest growing over the65-year lifespanoftheagreement. have been enough to pay out about $1 billion in claims, with ported innewsstories becausetheoriginal$675millionwould causation offuture injuriesormedicalconditions. proof was inpartthatitwillbevery difficult to prove direct their ultimateNFLcareers did.Therationale fornotrequiring youth, highschool,andcollegelevels—that lasted longerthan part becausemany players hadpriorplaying experience—at the playing in the NFL caused a subsequent condition. That was in have beenfootball-related. older aplayer became, thelesslikely any oftheconditionsmay The rationale for the tiered compensation structure was that the er amounts, withreductions basedon length ofplaying career. reaching age45. Otherqualifyingdiagnosesare eligibleforless- who hadplayed atleast five seasonswhodeveloped ALSbefore tion perplayer issetat$5 million, whichwould beforaplayer there was noreduction incompensation.Maximum compensa- er with five or more seasons under the age of 45, for example, on theplayer’s ageandlengthoftimeintheNFL.For a play timately approved inApril 2015. uncapped settlement agreement was filed in June 2014 and ul- from themover thelifeof65-year agreement. Arevised, The U.S. CourtofAppeals fortheThird Circuit inPhiladel- Ultimately, about99percent ofretired players optedto nothing, Players inwhichcasethey hadthree options—do A settlementamountof“nearly$1 billion”was widelyre Also underthesettlement,players donothave toprove that Compensation isdeterminedby anactuarialformulabased WWW.CONTINGENCIES.ORG - - -

ISTOCK ISTOCK a bodymightbe abletotake, don’t usethemallupin practice.” sure you dothingssafelyandsoundly; there’s only somany hits togameday.[players] Hispushwas protect your players, make and hesaidSpurrier“madeapoint, asonlyhecould,ofgetting South Carolina for10years and was brieflyanNFLheadcoach— Florida underSteve Spurrier—who coachedattheUniversity of Championship Subdivision last season. Green’s defense, whichwas ranked No. 4intheNCAA’s Football to two last season, on offensive linemen, and none on the Big juries, whichpreviously talliedabout15to20peryear, declined from about22 percent, Teevens estimated. Concussive headin- it moved away from tackling in practice, toabout10percent efit oftheirplayers and theirprograms.” amount ofcontactwithoutcompromising thegametoben- people willtake alookatalllevels andconsiderreducing the even thoughtaboutconcussions,” Teevens added.“Ihope them down theroad? My gutsays yes. a longtime, buttheywillusetheirminds. Is thisgoingtohelp ment officials, investment bankers—they won’t play footballfor is up. ThekidsI’mcoachingwillbedoctors, engineers, govern- “fallen appreciably. Ourinjuryrate isdown, butoursuccessrate thousands?”—but thatbothinjuryandconcussionrates have player by the new protocol—“Hundreds? Thousands? Tens of than guyswhowere takinghitsMonday through Thursday.” share of hits, butIwas always betteroffthefollowing Saturday teammates were gettingbangedaround. On game day, Itookmy 1970s, recalling thathe“never gottackledinpractice, whilemy said Teevens, whoplayed quarterbackatDartmouth inthe late ers topractice with “sowe wouldn’t have totackleeachother,” ers willfollow.” tackling forthebenefitofourplayers, and my hopeisthatoth- team. It really was agoodstep totake toeliminatein-season and saw thatwe were avery solidfootballteam,atackling and everybody was allin,” hesaid.“Theyallplayed against us for theentire Ivy League. “There was afive-minute discussion, brought upthe proposal practice for an in-season tackling ban thing significant—and certainly it’s turnedouttobe.” it was going—it seemedback then like itwas goingtobesome it?’ It was concernIhadwithconcussive headinjuryandwhere asking, ‘Whatdidyou do, how didyou doit,andwhy didyou do banned suchhittingsince2010. lead ofDartmouth College, whosecoach,Buddy Teevens, has particularly from concussions. Indoingso, theyfollowed the during theseason,asameanstokeep theirplayers injury-free, football coachesvoted unanimouslytobanin-practice hitting to theirfootballpractice protocols. Thispast spring, Ivy League the NFL,with colleges and lower leagues also making changes Growing awareness oftheconcussionissuehasspread beyond Ivy LeagueTakes aStand Teevens was previously anassistant coachattheUniversity of Dartmouth’s missedtacklesdropped by half inthefirst year “The way most ofuswere raised playing thegame, noone He said he could not quantify how many hits were saved per Dartmouth has developed amobiletacklingdevice forplay Teevens saidthatatthisyear’s springcoachesmeeting, he “People were kindofshocked,” Teevens said.“Theywere - - sion dataalong with alltheotherinjuries,” shesaid.Comstock became “a rightplace, right time, where Iwas capturingconcus- lance system, rather thanstrictly aconcussiondatahub, it development ofthemobiletacklingdevice. felt we needtodoatthecollegelevel,” whichledtoDartmouth’s knew how totackleanddidn’t needtoteachtacklingtheway I “But Ijust saidwe’re notgoingtodoitanymore. NFLplayers not entirely well received” atfirst, he recalled withachuckle. Dartmouth staff ofbanningtacklingduringpractice. “It was extensive amountofgametapesandpitchedtheideatohis the Mike Webster concussioncasewas gainingpublicity. had bannedtacklinginpractice. Thatwas around thetimethat coach oftheLosAngelesRams),whotoldTeevens thathe, too, talked withthen-Tennessee TitansheadcoachJeff Fisher(now care ofyour players, protect your players,” Teevens recalled. He Francisco 49ers inthe1980s, andwho“saidthesamething—take Bill Walsh, whowon three Super Bowls asheadcoachoftheSan early 2000s, where he met regularly with former Stanford coach porting informationonline. school sportsinjuriesknown asthe HighSchoolRIO, forre investigator foranationalsurveillance system tracking high sports andconcussionstwo beentheprimary years ago—has gathering suchstatistics inthepast decade. ogy attheUniversity ofColorado-Denver, hasbeenaleaderin high schoolfootball.Dawn Comstock, aprofessor ofepidemiol- certain, with more than 1 million boys estimated to be playing tion toreduce contactonthepractice field.” three-and-a-half years, and46of50states have taken someac Ronnie Lott, and Warren Moon. “We’ve been in business for former NFLstar players andcoachesincludingMike Ditka, O’Neill said,notingthatPractice Like Pros hasthebackingof week inseason. at practices to 30minutesaday, and a total of80minutes per regulations inJuneOhio—passed fullcontact limitingin-season gest highschoolfootballstates, alongwithTexas, California,and they fellby more ofthecountry’s thanhalf. big Florida—one cussions after implementing the rules in the 2014 season showed promoted by Practice Like Pros, andareview ofthatstate’s con- of concussion reporting, he said. Wisconsin adopted regulations although somehave passedlegislationrequiring somedegree difficult,” because player-safety rules are regulated by states, terview request forthisstory.) all levels ofcompetition.(TheNCAA didnotrespond toanin- promotes reduced hittingandtacklingforfootballplayers across O’Neill, founderandCEOofPractice Like Pros, agroup that does nothave amandatoryreporting structure, saidTerry College statistics are harder togaugeoverall becausetheNCAA Statistics forLowerLevelsStillEvolving Following thosediscussions, Teevens saidhewatched an Teevens alsoworked asassistant atStanford University inthe While High School RIO is a general sports-injury surveil Comstock—who spoke at a White House summit on youth Overall highschoolconcussionstatistics are difficulttoas- “The trend shows great momentumforourmovement,” “The sameistrueforhighschool,butthat’s even more SEP |OCT.16 CONTINGENCIES 35 - - - - and others, Comstock said. NFL, theNational Hockey League, USA Football, USA Lacrosse, heightened awareness by professional and other leagues like the sion clinics for coaches. Those efforts were inaddition to the of State HighSchoolAssociations, whichproduced free concus- developed educationalinformation,andtheNational Federation U.S. CentersforDiseaseControl andPrevention (CDC),which concussion awareness programs, includinginitiatives from the in 2009. state becamethefirst topassconcussionlegislation youth-sports is a huge increase in concussion awareness,” since Washington or stronger inthepast 10years,” shesaid.“Whathashappened because highschoolkidshaven’t gottenparticularlybigger, faster, byries, schools. “or “It was anartifactofreporting” likely thelatter, (2012-13), withrates from 3.22 to5.63 per10,000. 2015) theyjumpedtoarange of192,000 toahighof348,500 10,000 athletesof2.27 to2.55. Inthefollowing sixyears (2009- the first four years (2005-2009), witha rate ofconcussionsper and girlsvolleyball—were inthe135,000 to150,000 range for from football,boys andgirlssoccer, boys andgirlsbasketball, although theyhave leveled offinthepast few years. three years later“concussion rates rose dramatically,” shesaid, years following itscreation schoolyear, inthe2005-06 about cussions. Whilethefigures were relatively stable forthethree the largest data-gatheringsystem forhighschoolsportscon- has maintained the RIO system since 2005, and it has become 36 to addresstheissue, even astragic stories profile athletes coming forward with plans sports have led tolargenumbers of high- Concussions becoming aspotlight issue in Concussions’ Effects CanBeSeriousfor Athletes inManySports high-visibility athletes include: have affected thelives andcareers of amples of how concussion concerns WWE denied any wrongdoing. chronic traumatic encephalopathy (CTE). WWE concealed thelong-term effects of World Wrestling Entertainment, claiming wrestlers filed aclass-action suit against mid-July, when several dozen professional revelations. Oneof themostrecent wasin brain trauma. continue toemergefrom theeffects of ■ CONTINGENCIES The increase coincided with a host of groups ramping up Comstock saidtherates rose foreitheratrueincrease ininju- RIO figures show thatthe overall concussions—including ■ Brandi Chastain,48,former profession - for CTEresearch. “It’s scarytothink nate herbrain toscience posthumously World Cup, said in March she will do- player andstarof the1999Women’s al and U.S. women’s national team soccer Some otherrecent individual ex- Rarely aweekgoes bywithout more SEP |OCT.16 ■ ■ Sidney Crosby, 29,of theStanley Cup in makingherannouncement. told theConcussion LegacyFoundation my life, but it’s bettertoknow,” Chastain cussions that were never diagnosed in about all theheadingand potential con- the mostvaluable player of lastseason’s champion Pittsburgh Penguins and reporting issue ishuge.” responded toconcussive symptoms,” Robbins said.“Theunder arial scienceperspective—even more unsettlingwas how they manager. Cliff Robbins, thefoundation’s educationand research programs ers how many concussionstheyhadtheprevious season,said reported, basedona2014 study thatasked collegefootballplay started in2007, believes thatonlyabout1in6concussionsare The ConcussionLegacyFoundation, anonprofit organization Better EquipmentNotaCure-All,GroupSays long-term outcome.” appropriately atthetimeofinitialinjury, whichimproves their term perspective beingcared that’s for goodnews—they’re being injured, butfewer are undiagnosed, thenfrom along- juries. Ontheflipside, ifthere aren’t thatmany more people could have long-term complications associated with these in- said. “On onehand,you’re thinkingaboutmore peoplewho sword,”creasing numberscouldbeadouble-edged Comstock she added. “From an actuarial perspective, seeing those in- are beinghurt,butthatmore concussionsare beingdiagnosed, and we refer tothemasbrain injuries.” matic cultural shift.Now peoplecallconcussions‘concussions,’ see that anymore,” she said. “We’ve had this amazing and dra- terms like ‘He gothisbellrung,’ or‘He hadadinger.’ You don’t The foundation’s website says thatasmany as3.8 million “That’s a really important piece, especially from an actu- The higher rates did not necessarily mean that more athletes “I thinkadecadeagoitwas notuncommonatalltohear Chastain ■ ■ ■ ■ ■ ■ WWW.CONTINGENCIES.ORG Chris Borland,former linebacker for Calvin Johnson, 30, five-time Pro Bowl Dale Earnhardt Jr., 41,one of NASCAR’s due tomultiple hits tohishead. sat out for almost a full year in 2010-11 National Hockey League (NHL)playoffs, season in the NFL, citing concerns about season intheNFL,citing concerns about league, retiredlastyear at 24 afterjustone the mostpromising young players inthe the San Francisco 49ers who was one of nine-year professional career. his “fairshare”of concussions during his at hisposition. He toldESPNthat hehad being among thebestplayers intheNFL tired at theendof lastseason despite wide receiver for theDetroit Lions, re- symptoms. a raceinJuly due toconcussion-like ple concussions four years ago, sat out weeks of racing after suffering multi- search. Earnhardt, who missed several his brain posthumously to scientific re- Twitter inMarch that hewould donate most popular drivers, announcedvia - -

ANJA NEIDRINGHAUS

ISTOCK Concussions’ Effects CanBeSeriousfor Athletes inManySports

ANJA NEIDRINGHAUS

ISTOCK believes that only about 1 in 6 concussions believes thatonlyabout1in6concussions concussions theyhadthepreviousseason. ■ ■ ■ are reported, based on a 2014 study that are reported,basedona2014studythat ■ ■ ■ asked college football players how many asked collegefootballplayershowmany Dave Duerson Doug Whaley , general managerof the Bubba Smith, NFLHall of Fame defen- career, his amateur andbrief professional football suffered about 30 concussions throughout head trauma. Borland estimated hehad tized inthe2015movie Concussion. for CTEstudy. Thisincident wasdrama- and requesting that hisbrainbe donated 50 in 2011,shooting himself inthechest in the1980s,committed suicide at age safety who played for theChicago Bears used a“poor choice of words.” quently toldPro Football Talk that hehad humans aresupposed toplay.” He subse- lent gamethat Ipersonally don’t think earlier thisyear that football is“avio- Buffalo Bills, saidinaradio interview May of thisyear that Smith hadCTE. sion LegacyFoundation announcedin ’70s, died at age66in2011.TheConcus- and Oakland Raiders inthe1960sand sive linemanwith theBaltimore Colts use ofhelmetaccelerometers togaugeexposure estimates on to ways oflimitingexposure. Thefoundationisbackingmore reduce concussions, Robbins said,withfocusinstead shifting the headcanreduce thatdecoupling.” tinues tomove forward—nothing you canputontheoutsideof comes toaquickstop, theskull[isprotected] butthebrain con- sue that’s suspended inthefluidofbrain. Sowhenthehead rate between the hard bone of the skull and the soft, fatty tis because whatcausesconcussionsisadifference inthe response athlete passaway from askullfracture onthefieldindecades.” skull fractures, andtheydoagreat jobofthat.We haven’t hadan “Hard plastic helmetsincollisionsportswere designedtoprevent cure-all foreliminatingsportsconcussions. ward, he said that while better equipment can help, it is not a States, whichRobbins saidisbasedonCDCfigures. Goingfor recreation-related concussions occurannuallyintheUnited nonprofit organization started in 2007, nonprofit organizationstartedin2007, Equipment, whilehelpful,isnotthemost effective way to But headded,“Theydon’t really address concussionsatall, “Helmets are asolutiontodifferent problem,” Robbins said. The Concussion Legacy Foundation, a The ConcussionLegacyFoundation,a ESPN TheMagazine reported. , Super Bowl-winning ■ ■ ■ ■ ■ ■ ■ ■ Chyna Junior Seau, aHall of Fame NFLline- Stephen Peat, 36,aformer NHLplayer Josh Satin, 31,aformer New York Mets 2012. He was43. and preservinghisbrainfor study, in suicide byshootinghimselfinthechest New England Patriots, also committed backer for theSanDiego Chargersand symptoms, hastrouble focusing and tired 10years ago, suffers from CTE-like with theWashington Capitals who re- nor league game. into a teammate last year during a mi- to concussive hits, including running tiring from Major League Baseball due infielder, announced in June hewasre- Concussion neuropathologist portrayed inthemovie be donated to Dr. Bennet Omalu, the following herdeath that herbrainwould Her managertoldtheAssociated Press died of adrug overdose inApril at age46. whose real namewasJoan Marie Laurer, , the female professional wrestler who firstdiagnosedCTE. - - ing actiontocurbtheirincidencesandeffects. coaches, andadministrators atallsportsandlevels continue tak ously, and awareness of the issue is growing rapidly as players, more directly, Robbins said. of concussionsrates” becauseofthe abilitytomeasure exposure estimates down theroad willbeamuchmore reliable indicator toward gettinganobjective measure ofthatexposure. how many hitsare taken, includinglow-level hits, andtowork managing editorformembercontentat theAcademy. MICHAEL G.MALLOY,arabid NewEnglandPatriots fan,is The sportsworld hastaken theissueofconcussionsseri- “My guess is that using that data to inform our decisions and SEP |OCT.16 ■ ■ ■ ■ Len Oliver, 82,aU.S. soccerHall of Famer Dave Mirra,abicycle motocross (BMX) one was hurt. the lit inhisgarage,burningdown hishome, ently inadvertently leaving a blowtorch arson inCanadalastyear afterappar- with headaches, and was charged with Washington Post reported inMarch. 1963 Pan American Games in Brazil, the his playing career,including one at the suffered sixhead-to-head injuries during posthumously for CTE research. Oliver Germany, said he would donate his brain on semipro andU.S. armedforces teamsin who played college soccerinthe1950sand during hisBMXcareer. and endured “countless concussions” a fracturedskull at 19when acarhit him forerunners of the action sport, suffered Magazine reported that Mirra,one of the mously diagnosedwith CTE.ESPNThe age 41inFebruary andwasposthu- rider, killed himselfwith agunshotat New York Times reported inJune. No CONTINGENCIES 37 - THE SUSTAINABILITY PUZZLE

38 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG ments inthefuture. Thesepromises are onlysecure iftheyare government plan isoutofassets. Shouldwe focuson the sustainability or the solvency of a pension plan, or both? The Central States multiemployer plan is projected to run out of assets within 10years, and the Puerto Rico Are Illinois’pensionplanssolvent? Are theysustainable? Whataboutotherpensionplans? is sustainable. for theobligationthatdetermines whetherornotanobligation to thewealth, income, andwillingnessoftheentityresponsible the obligationforwhichnoplan assetsare available compared not likely tobemade. Anditisnotsustainable. It isthesizeof income andnoassetssetaside, fullpayment oftheobligationis years. But iftheentityresponsible fortheobligationhasminimal nual incomesufficienttosetasidethe $100,000 over the10 next considered sustainable iftheentitywithobligationhadan- example ofa$100,000 obligation in10years, itwould likely be sustainable even ifnoassetshave beensetaside. Using thesame nificant wealth compared totheobligation,obligationmay be If itisanobligationof anentitywithsignificantincomeorsig supports theobligationaswell asthecurrent assetsoftheplan. value oftheobligation issaidtobe$80,000. to meettheobligationwhenitisdue. Inthiscase, thesolvency less theU.S. government defaults, there willbesufficientassets asset may only have a market value today of $80,000, but un amount of$100,000, theplanwould beconsidered solvent. The Treasury bondhadbeensetasidethatmatures in10years inan the obligation with near certainty. For example, if a zero-coupon Solvency meansthatthere are sufficientassetssetasideto pay just theavoidance ofinsolvency, orrunningoutofplanassets. gation topay $100,000 in10years. Solvency,asusedhere, isnot measurements andflawed decisions. each other, andthisconfusioncanleadtothemisuseofactuarial solvent. Unfortunately, these concepts are often confused with the pensionplantobesustainable. We may alsowant ittobe corporatesion plan,orasingle-employer pensionplan,we want Defined benefitpensionplans create promises ofpay In contrast, sustainabilitydependsontherevenue source that Consider ahypothetical planinwhichthere isasingleobli- Whether itisapublicpensionplan,multiemployer pen- and how canplansponsorsadjust over time When issolvency important, to maintain sustainability? BY BILLHALLMARK - - -

the amountofassets setaside;theyalsohave tobeinvested, not and invested suchthattheplanissolvent. Note thatitisnotjust plan unsustainable unlesssufficientassetshadbeensetaside soring thepensionplanmay declineordisappear, makingthe out ofbusiness?Theincomeand assetsofthecompany spon- what happensifcompetitorsin theindustry drive the sponsor a changeinlaws orregulations thatprotected theindustry? Or pens ifthe industry isdisrupted by atechnological innovation or base, andthenetcashflow oftheplan. plan compared tosponsorrevenues ortheplan’s contribution tainable: thereliability ofplansponsorrevenues, thesizeof to whichapensionplanneedsbesolvent inorder tobesus- the promised benefits atsomepointinthefuture. contribute intheevent theplan’s assetsare insufficient to pay be sustainable ifthere isnolongerasponsorwithresources to sion plan,ontheotherhand,may needtobesolvent inorder to provide thatrevenue stream ifwe sochoose. Aterminatedpen- sustain SocialSecurity, buttheU.S. economy islarge enoughto due. Under current law, theprojected revenueto isnotsufficient a sufficient revenue stream to pay thebenefitswhen theyare ple, does not need to be solvent. To be sustainable, it just needs be sustainable, butoftentheydonot.SocialSecurity, forexam- sustainable. Sometimes theseplansneedtobesolvent inorder to invested inadiversified trust. aside. More commonly, some level of assets are set aside and conclude thattheplanissustainable even ifnoassetsare set company. Based ontheprobability offuture growth, onemay pears tobevery smallcompared totheassetsandincomeof growth industry. As the company grows, the pension plan ap Suppose apensionplanis sponsored by asmallcompany ina The ImportanceofPlanSponsorRevenue There are three key considerations inassessingthedegree But whathappensif the company’s growth stops? Whathap SEP |OCT.16

CONTINGENCIES

39 - -

SHUTTERSTOCK The Sustainability Puzzle

Historical Changes in Revenue 2.0 Michigan

1.5

1.0 City of Detroit

0.5

0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: City of Detroit, State of Michigan annual financial reports in a diversified trust, but in a default-free portfolio that matches approximately 400,000 active employees who worked for more the anticipated cash flow of the pension obligation, because the than 11,000 employers. It was thought that individual company sponsor no longer has any resources to make up for any losses. bankruptcies would not affect the sustainability of the plan be- Even plans with no assets set aside can be sustainable if the cause any bankrupt employers would be replaced in the plan by ongoing revenues are sufficient. When the ongoing revenues new employers or mitigated by the growth of current employers. cease, however, the plan needs to be solvent or it cannot be sus- However, with trucking deregulation and other changes to tainable. This situation has played out repeatedly in the private the industry, many of the employers went bankrupt or withdrew sector, most notably in the steel, auto, and airline industries, from the plan, and they were not replaced by new employers in where the revenues of plan sponsors did not keep pace with the plan. In 2005, there were fewer than 3,000 employers con- the size of the pension plans due to changes in the industry as tributing to the plan. At the same time, the active membership well as the growth of the plans. and the contribution base for the plan had also declined dramati- On the other hand, if the revenues of the sponsor continue cally to about 150,000 active employees. The withdrawal of the to grow, the pension plan does not need to be solvent. It can largest participating employer further reduced the contribution continue to be sustainable while a lesser amount of assets are base, and today there are only about 60,000 active employees par- invested in a diversified portfolio. Consider our initial example ticipating in the plan. While sponsor revenue didn’t completely of an obligation to pay $100,000 in 10 years. At a sufficient in- disappear (as it may in a bankruptcy), the plan’s resources to come level, this obligation would be sustainable with no assets make up for any unanticipated loss were significantly curtailed. set aside in advance. If the sponsor’s income is lower, the sponsor may need to Public Plan Examples budget for the obligation by, for example, setting aside $10,000 Changes in sponsor revenue have also affected public pension per year for 10 years in order to make the obligation sustainable. plans from Detroit to Stockton, but the revenue for these plan If the sponsor wanted to reduce costs further, the assets that are sponsors does not disappear as it does for bankrupt private em- set aside could be invested in zero-coupon Treasury bonds that ployers, and it doesn’t decline as precipitously as the revenue in mature when the $100,000 obligation is due. The plan would a single industry might if that industry is disrupted. Revenue for be sustainable if the sponsor can afford to make the budgeted public plan sponsors, particularly states and large cities or coun- contributions each year. ties, usually comes from a diverse tax base that can recover from Alternatively, the sponsor may choose to invest the assets changes to specific companies or industries. However, smaller in a diversified portfolio, hoping to achieve a higher return and public entities or areas that are highly dependent on a specific reduce the total contributions needed to pay for the obligation. company or industry may be more vulnerable to changes. If so, the plan is still sustainable if the sponsor can afford the In Detroit, revenue declines were driven by the decline of planned contributions plus any investment losses that may en- the auto industry within the city, eventually resulting in a bank- sue. However, the plan is not solvent—and if the plan sponsor’s ruptcy filing in 2013. The chart above compares the changes in revenue declines or disappears, the plan that appeared to be nominal revenue for the city of Detroit and the state of Michi- sustainable may not be so any longer. gan starting in 1996. Both governments are broadly subject to the same economic factors, but the larger, more diverse state A Multiemployer Example continued to grow revenues after 2002, while the city of De- The Teamsters’ Central States plan is an excellent example of troit’s revenues stagnated and then declined to less than it was this dynamic. Before trucking deregulation, the plan covered receiving in 1996.

40 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG Historical Changes in Revenue 3.5 California 3.0

2.5

2.0

1.5 City of Stockton 1.0

0.5

0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: City of Stockton, State of California annual financial reports

In Stockton, the housing bubble created a flood of revenue Importance of Plan Size and an expansion of pension obligations followed by a drop in Compared to Plan Sponsor Revenues revenue when the bubble burst. The chart above compares the While we have focused on the risk of unanticipated changes in changes in nominal revenue for the city of Stockton and the state plan sponsor revenue, one of the most critical factors in assess- of California starting in 1996. From 2002 to 2007, Stockton’s rev- ing the sustainability of a pension plan is the comparison of the enue increased by more than 50 percent. After some long-term size of the pension plan to the revenue that supports it. If the decisions were made based on this expanded revenue base, the pension plan is very large compared to its supporting revenue housing bubble burst and revenue declined by 23 percent from base, any changes to the pension plan may have a dramatic im- 2007 to 2012, when it declared bankruptcy. Again, the broader, pact on the plan sponsors. During the 1990s, for example, it was more diverse tax base for the state of California continued to often said that General Motors had become a pension plan that grow, while the city of Stockton suffered its revenue declines. operated a car business on the side. The gains and losses of its In each of these cases, sponsor revenues are ongoing and can pension plan were just as important to the bottom line as the continue to support some level of contributions to the pension profitability of the car business. plan. The issue is whether that level of contributions is suffi- When a pension plan starts, it typically has no liability, and cient to provide for active employees’ benefits, the payment of the initial benefits that are earned are not paid until many years the unfunded benefits for past services, and any unanticipated in the future. By far, the most important cash flow to the plan investment losses. If so, these plans can be sustainable. is contributions. Investment returns—good or bad—pale in comparison. As the plan matures, these relationships change. Investment When a pension plan starts, returns become much more important, and the relative size of it typically has no liability, and the contributions to benefit payments becomes more important. The initial benefits that are earned are not paid speed and extent to which these relationships change is affected significantly by the level of growth of the plan sponsor. If the plan until many years in the future. By far, sponsor grows rapidly, the pension plan may retain many of the the most important cash flow to the plan characteristics of a new pension plan, including that investment is contributions. Investment returns— losses are easily made up with additional contributions. If the plan sponsor becomes smaller, however, the natural growth and good or bad—pale in maturation of the pension plan is compounded, and investment comparison. losses and other changes to the pension plan are much more difficult to make up through additional contributions. Investment losses can be recovered either by increasing contributions, usually over a period of time, or by future investment gains. To the extent the sponsor cannot afford the needed contributions to make up for an investment loss, the plan would need to rely on future investment gains—and the plan may not be sustainable. Consider two hypothetical pension plan sponsors with the same level of revenue, but different levels of pension assets

SEP | OCT.16 CONTINGENCIES 41 The Sustainability Puzzle

invested in a diversified portfolio (not matched to liabilities) as losses through either additional contri- shown in Table 1. butions or future investment gains, or TABLE 1. The Effect of Investment Loss both. For a plan that is large compared Varies With Assets to its contribution base, investment Sponsor A Sponsor B losses may be too large for additional contributions to cover. If the plan’s Revenue $1,000 $1,000 cash flow is significantly negative, even good future investment Pension Assets 3,000 6,000 returns may not be able to make up for an investment loss be- 10% Investment Loss 300 600 cause the asset base on which the future investment returns are Loss as a Percent of 30% 60% earned diminishes from the negative cash flow as well as from Revenue the investment loss. The same 10 percent investment loss for both pension plans Table 2 shows the effect of negative cash flow compared to represents 30 percent of revenue for Sponsor A and 60 percent no net cash flow in a simple case where the expected return of revenue for Sponsor B. As a result, Sponsor B is twice as sensi- is 0 percent. With no net cash flow on assets of $100, a $10 in- tive to investment experience as Sponsor A and, all other things vestment loss requires an 11.1 percent return to recover to the being equal, Sponsor B can only sustain half as much of an in- expected level of assets of $100. With negative cash flow of $10, vestment loss as Sponsor A. Note that to the extent the pension the same $10 investment loss requires a 12.5 percent return to investments are matched to the pension obligations, interim recover to the expected level of assets. Plans with large negative investment gains and losses don’t matter. If Sponsor B were to cash flows are most sensitive to investment returns in the short match $3,000 of its pension assets to a portion of its pension term when their asset base is the largest. obligations, then Sponsor B would have the same sensitivity to TABLE 2. Impact of Negative Cash Flow pension investment returns as Sponsor A. Sponsor A Sponsor B To address this issue, corporate pension plans have worked to downsize their pension plans through payment of lump Initial Assets $100 $100 sums, purchases of annuities, and reductions in the accrual of Net Cash Flow 0 –10 additional benefits. They have also worked to limit the risks Expected Return 0 0 remaining by more closely matching investments to the obliga- Expected Assets $100 $90 tions and transferring other risks to employees by switching to defined contribution plans. These actions have been strongly Actual Return –10 –10 incented by federal rules on minimum required contributions Actual Assets $90 $80 and Pension Benefit Guaranty Corp. premiums. Return Needed to 11.11% 12.50% Multiemployer and public pension plans have also reduced Recover Expected Assets the accrual of additional benefits, but for the most part have not offered additional lump-sum payments or purchased an- Managing Investment Risk for Sustainability nuities to transfer the risks to another party. They also have not Many financial economists advocate the funding of pension matched investments to obligations. Public plans have shifted plans by matching contributions and investments to the solvency some risks to employees and retirees through variable cost- measure of pension promises. Under this approach, investments of-living adjustments and higher employee contributions, and are made in a default-free bond portfolio that matches the cash there has been some movement toward defined contribution flow of the benefit promises, and contributions are made in the plans among employers that have traditionally participated in amount necessary to purchase the additions to the portfolio nec- multiemployer pension plans. essary to match the future cash flow for the benefit promises earned that year. Importance of Negative Cash Flow This approach ensures that the plan is always 100 percent Investment returns from a diversified portfolio are by their na- funded on a solvency basis, and contributions vary only due ture volatile. Expected returns represent an estimated average, to demographic changes and changes in interest rates. This taking into account the ups and downs that are likely to emerge. approach is sustainable as long as the sponsor can afford the However, expected returns do not take into account the impact contribution level required, which may require controlling the of cash flow (contributions less benefit payments and adminis- level of benefits promised for future accruals. trative expenses). Ignoring some of the practical limitations, the downside of For pension plans that are large compared to the contribu- the matching bond approach is that the total contributions re- tion base, the cash flow may increase the difficulty of sustaining quired over time are likely to be significantly higher than if the the plan through the ups and downs of investment returns even assets are invested in a diversified portfolio. However, as dis- if the average return appears to be sufficient to sustain the plan. cussed above, investing in a diversified portfolio can imperil the As noted above, pension plans can make up for investment sustainability of a pension plan, particularly if:

42 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG governments; and that small governments dependent on a single industry or employer represent greater risks than large governments with a diverse economy. The greater the risks associated with the contribution base, the closer the investment portfolio may need to be to a default-free matching strategy. Second, how large is the plan compared to the contribution base? This can be measured as the assets or obligation The risk to sustainability is whether or not an divided by the revenue of the sponsors of the plan. The ratio unexpected loss or change in assumptions based on assets is useful for assessing the sensitivity to investment risk. The ratio based on the obligation is useful for can be made up with future contributions. assessing the sensitivity to demographic experience and as- Consequently, it may be useful for the sumption changes. For multiple employer plans, information plan’s trustees to assess what level of on the revenue of the sponsors may be difficult to gather. For public pension plans, payroll is often used as a rough proxy for future contributions would be affordable sponsor revenues, and for multiemployer plans, it may be more either for a short period or appropriate to use contributions given that contributions to the for a sustained period. plan are collectively bargained with active employees. While in- formative, these measures are not intuitive and can be difficult to translate into actions by the fiduciaries of the plan. 1. Plan sponsor revenues (or the plan’s contribution base) de- The risk to sustainability is whether or not an unexpected cline or disappear; loss or change in assumptions can be made up with future con- 2. The size of the plan becomes too large relative to its contributions. Consequently, it may be useful for the plan’s trustees tribution base (or plan sponsor revenues) to make up for to assess what level of future contributions would be affordable investment losses; or either for a short period or for a sustained period. Investment 3. Negative cash flow exacerbates either of those conditions. losses, for example, that would cause the plan to exceed these af- When a pension plan starts, none of these three conditions fordability parameters should be avoided, if possible, by limiting are typically a concern, so the appealing approach is to invest the investment risks in the plan’s portfolio, either by matching the assets in a diversified portfolio. Any modeling will show that a portion of the assets to the obligations or by reducing the risk over the first 20 or more years, the plan is sustainable under a in the diversified portfolio, or both. wide variety of economic conditions provided that the sponsor Third, what is the ratio of net cash flow to plan assets? If does not go bankrupt. Over time, however, the size of the plan this ratio is positive, there is generally more capacity to take on and any negative cash flow can become significant factors, and investment risks. Any investment losses can likely be made up the realization of their significance may come too late. By the with an affordable level of future contributions, and moderately time the risks are realized, it may not even be possible to con- good future investment returns will diminish the need for such vert the portfolio to default-free matching securities without additional contributions. If this ratio is significantly negative, significant reductions in the promised benefits or increases in any investment losses will likely need to be made up by addi- contributions. So, how should we think about managing the in- tional contributions because the declining asset base diminishes vestment risks of a pension plan? the impact of any future good investment returns. Consequently, Investment professionals can help plans implement a va- there is less capacity to take on investment risks. riety of strategies, but conceptually it may be useful to think Even with this type of analysis, the difficulty is recognizing of a spectrum ranging from default-free matching strategies to the need to adjust strategies as a pension plan matures. One high-risk versions of diversified portfolios. Plans need to assess simple conceptual way to track how the strategy may need to their strategy on this spectrum based on the three conditions shift from a fully diversified portfolio to a fully matched bond described above. portfolio is to split the obligation of the plan into the obligation First, how strong is the contribution base? Is there a risk for active employees and the obligation for retirees and other that it will disappear? Is there capacity to increase contribu- inactive participants. The obligation for active employees is pro- tions, if needed, to make up for investment or other losses? A portional to the current size of the sponsors and has a positive detailed analysis of the plan sponsors is beyond the expertise net cash flow, so it might be funded using a diversified portfolio. of most pension actuaries and many investment professionals, The obligation for retirees is unrelated to the current size of the but at a macro level, it is understood that individual small com- sponsors and has a negative cash flow, so it might be funded us- panies represent greater risks than individual large companies; ing a matching bond portfolio. that individual companies represent greater risks than groups As a plan grows and matures, this conceptual division of companies; that companies represent greater risks than would naturally move the plan’s investment strategy from

SEP | OCT.16 CONTINGENCIES 43 The Sustainability Puzzle

predominantly a diversified portfolio to a blend of a diversified that they have simply not made the recommended level of con- portfolio and a matching bond portfolio. This simple conceptual tributions, sometimes for years or decades. The accumulated strategy may need to be modified to reflect the attributes of the missed contributions have now become so large that it is dif- plan sponsors. That is, an individual company sponsoring a plan ficult to catch up. The sustainability of the plan in the future may want to be closer to the matching bond portfolio to ensure depends largely on developing an affordable plan to catch up sustainability while a large, multiple-employer public plan may on the missed contributions and finding the discipline to stick be able to be closer to or entirely in a diversified portfolio and to the plan. In some of these cases, the downside investment still maintain its sustainability even when it is relatively mature. risks may be affordable (at least until the plan is better funded), and good investment returns have significant potential to relieve From Here to There the long-term burden. In any case, plans in this type of situation The discussion above has focused on some key factors affecting will not be fixed overnight. It will take time—perhaps decades. the sustainability of pension plans and how to manage them as For many mature pension plans, the situation is not so dire. they mature. Unfortunately, many of the problems today are the They have accumulated a reasonable, but not solvency-level, result of not making the needed adjustments as plans matured. amount of assets and are making contributions to improve their How do we get those plans from where they are today onto a funded status. They may have some capacity for additional con- more sustainable footing? The answer is difficult, and may not tributions, but they may be taking more investment risk than be possible to apply in every case. they would like or can afford. For plans like Central States and Puerto Rico, the only so- The difficult trade-off is that reducing the investment risk lutions are some combination of contribution increases and reduces the potential for investment returns to provide relief to benefit reductions. To the extent there is no capacity for con- already high contribution rates and may require contributions to tribution increases from plan sponsors or other sources, benefit increase immediately. To manage this trade-off, plans are likely reductions will have to be made at some point. to need to develop strategies to gradually move to the level of For some public pension plans, the most significant issue is risk they prefer over time.

Want to drive greater value from your AXIS conversion? Go with an advisor who’s been down the road before. Steering a successful AXIS conversion takes in-depth experience and that’s what you’ll get from KPMG’s member ﬁ rms. KPMG partners and professionals have more than 200 combined years of AXIS actuarial modeling experience and have implemented more than 100 signiﬁ cant conversions. So if you want to speed the return on your investment and gain more value from AXIS’ pricing, valuation and modeling capabilities, contact us directly. And avoid any detours.

For more information on how KPMG’s Actuarial Consulting service can help, contact:

Nazir Valani Michael Helewa Steeve Jean James Christou Partner & North American Leader Partner and Business Leader Principal Principal AXIS Implementation KPMG in Canada KPMG in the U.S. KPMG in the U.S. 416-457-8622 | [email protected] 416-560-4661 212-872-3672 212-954-1844 [email protected] [email protected] [email protected] Recognized as one the Global Leading Actuaries 2015 by Acquisition International www.kpmg.com/us/axis

KPMG is a global provider of solutions

© 201644 KPMG LLP, a CanadianCONTINGENCIES limited liability partnership and a member fi rmSEP of the KPMG | OCT.16 network of independent member fi rms affi liated with KPMG International Cooperative (“KPMG International”), a SwissWWW.CONTINGENCIES.ORG entity. All rights reserved. 8083

7792-KPMG Axis “Driving” Ad-16.5" x 5.5" double-truck w/bottom bleed Created by MGT Design 05.13.2016 Sustainability and solvency are different concepts, and the primary objective for a pension plan is to may also be developed to reduce investment risk toward a target make sure it is level as plan sponsors grow and higher contribution amounts are more affordable. All of these strategies, however, rely on some sustainable. good experience to facilitate the transition to lower levels of risk. If the good experience does not materialize, the transition will not take place and the plan could become unsustainable. Sustainability and solvency are different concepts, and the primary objective for a pension plan is to make sure it is sustainable. Sometimes a pension plan needs to be solvent in order to be sustainable, but not always. The reliability of plan sponsor revenues, the size of the plan compared to its contribution base, and the degree of negative cash flow are all key factors in determining how much risk can be undertaken while still maintaining the sustainability of the plan. To the degree plans are different with respect to these characteristics, they may need to adopt different contribution and investment strategies. Consequently, these characteristics should be monitored closely, the need for The California Public Employees’ Retirement System (CalP- changes should be anticipated, and strategies should be adjusted ERS) recently adopted a strategy such that whenever actual accordingly to ensure the sustainability of the pension plan. investment returns exceed its assumption, instead of just reducing contributions to reflect the good investment returns, it BILL HALLMARK, MAAA, FCA, ASA, EA, is a consulting will also reduce the investment risk. As a result, contributions actuary with Cheiron Inc. and serves as the chairperson of the go down, but not as much as they would have. Similar strategies Academy’s Pension Practice Council.

For more information on how KPMG’s Actuarial Consulting service can help, contact:

KPMG is a global provider of solutions

© 2016 KPMG LLP, a Canadian limited liability partnership and a member fi rm of the KPMG network of independent member fi rms affi liated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 8083 SEP | OCT.16 CONTINGENCIES 45

7792-KPMG Axis “Driving” Ad-16.5" x 5.5" double-truck w/bottom bleed Created by MGT Design 05.13.2016 BY ALYSSA OURSLER

‘The Best Crapshoot in Town’

CRYONICSThe practice of freezing people after death with the hopes of later reviving them is riddled with question marks—even the organizations touting it don’t offer those who sign up any guarantees.

46 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG RYONICS is an effort to use low temperatures of quite a few science-fiction plots (Austin Powers and Futurama to freeze humans (or animals) with the hope that are perhaps the most recent examples of this common trope). medical technology will advance and later be able It’s been done on much smaller scales, such as when sperm, egg, to restore them. In some instances, just a person’s embryo, or ovarian tissue is frozen via vitrification and saved Chead is preserved, with the hope the brain can later be restored, for later use. There have also been cases where hypothermia while other times it’s the entire body that is preserved. Cryonics inadvertently saved individuals who seemed to have drowned is often confused with cryogenics, which refers simply to the in cold water. As aging and technology expert Steven J. Haus- study of low temperatures’ effect on materials. (In between is man, Ph.D., explained to me, in such cases, “The water had the cryobiology, which is the study of low temperatures’ effect on effect of slowing down a person’s metabolism such that brain organisms specifically.1) function was preserved and tissues and organs were stabilized. This field is admittedly nascent and often contested; plen- Then, once body temperature was gradually raised, the person ty of research and thought about cryonics and its implications could be revived with no loss of function.” still needs to take place, as we’ll cover here. But a recent break- The medical community has learned from these instances through suggests things may at least be moving in that direction. and related research, now using or testing the use of mild hypo- Earlier this year, we learned that scientists were able to preserve thermia as a method to safely perform heart operations and treat a rabbit brain in “near-perfect” condition—the first time a whole patients with cardiac arrest3 and gunshot wounds.4 mammalian brain wasn’t damaged from the freezing process.2 In such applications, the hope is that cold temperatures CRYONICS The idea of using extremely cold temperatures for preserva- can buy time and/or minimize blood loss and thus make ex- tion likely sounds familiar, and not just because it’s the premise isting medical procedures more effective. With cryonics, the

SEP | OCT.16 CONTINGENCIES 47 CRYONICS: The Best Crapshoot in Town

difference is that patients are already legally dead. As a result, Deep Freeze even colder temperatures are needed to buy even more time. A simplified version of the actual cryopreservation process goes We’re talking enough time for the creation or discovery of as follows: new medical procedures altogether. 1. Patient is placed in an ice-water bath and breathing is ar- And those new medical procedures need to not just reverse a tificially restored (using a thumper that performs CPR) to far more extreme and often damaging cooling process, but also maintain oxygen to the tissues. to potentially cure whatever caused the death to begin with. 2. In cardiac arrest cases, heparin is used to prevent the formation of blood clots. Death: Just the Beginning 3. Femoral arteries and veins are “surgically accessed” and used Before diving into the theoretical future medical procedures to establish a circulatory system “bypass loop.” This loop takes that cryonics hinges on—and that represent a big bullet point over the CPR function. in the list of reasons cryonics is contested—let’s outline the pro- 4. As the patient’s blood is circulated and oxygenated, it’s also cess of being cryonically preserved as it stands today. There are cooled to lower the body temperature quickly, and is then just a handful of cryonics companies (most technically classified replaced with an organ preservation solution. as nonprofits), and none has more than 200 “patients” (read: 5. The patient is packed with ice and transported to a suspen- legally deceased and now frozen bodies or heads). sion facility for further treatment. Alcor is one of the better-known names in the field; the 6. At the facility, the patient undergoes an operation during Arizona-based cryonics organization stores baseball star Ted which increasing concentrations of cryoprotective solution, Williams’ head (and was the subject of a whistleblowing book similar to antifreeze, are circulated and replace all blood. penned by a former employee a few years ago). Alcor has 146 Technically speaking, the solution does not “freeze” the brain patients, while a similar organization called Cryonics Institute, and other tissues, but “vitrifies” them, turning them into a based in Michigan, isn’t far behind with 137 patients. The Cali- glassy substance and preventing the formation of ice, which fornia-based American Cryonics Society is much smaller, with can cause damage. just shy of 30 patients, while KrioRus (the first company outside 7. Patients are then cooled further and stored under liquid nitro- the United States that offers cryonics services) has 51.5 gen at around negative 190 degrees Celsius in dewars (large Preservation ideally begins almost immediately after a formal vacuum-insulated tanks). declaration of death. Time is of the essence to minimize dam- Even if started promptly, this procedure isn’t perfect. The age, to the point that Alcor’s procedures state: “Cryonics cases vitrified substance can fracture, for example, causing damage. in which life support techniques are promptly used to maintain And the American Cryonics Society notes: “Cryonic suspension brain viability after the heart stops are considered to be ideal subjects are research subjects where the procedures used are cases.” Similarly, it is encouraged that terminally ill members NOT proven techniques, and where ACS must use its own best relocate near their respective cryonics facilities, although medi- judgment to determine what treatments are most appropriate cal and transport teams (made up of contractors and cryonicist for any given subject.” volunteers) are put on “standby” for patients in critical condition. But while shortcomings remain, the process has come a long But the hard reality is that it’s difficult to predict precisely way from earlier ones. Bob Nelson, a former TV repairman who when the end is near. Jim Yount, COO of the American Cryon- became the first president of the Cryonics Society of California, ics Society, was on the standby team for Jerry White, a longtime led the first freezing (of a Dr. James Bedford) in 1967, which ACS member and former president. Yount recalls that even while was recounted (using a pseudonym for Bedford) in a book pub- White’s health was declining, his actual death was (perhaps un- lished the following year.7 Bedford’s body was then turned over surprisingly) hard to predict with accuracy. In one instance, the team was called in because White was believed to be near death, 6 yet by the time they arrived, he was sitting up and drinking a beer. The hope is that cold temperatures Other times, preservation can be delayed because the body has to be released from a local medical examiner, and autopsy pre- can buy time and/or minimize blood vented. Cases that involved hours of delay are relayed in Frozen, loss and thus make existing medical former Alcor COO Larry Johnson’s 2009 book recounting his time procedures more effective. With working there. Prior to joining Alcor, Johnson was a paramedic for 25 years and laments in the book the lack of organization and cryonics, the difference is that patients training that went into the cryopreservation procedures. are already legally dead. As a result, Still, any cryonicist would likely add that even a less-than- even colder temperatures are needed to perfect procedure offers a better shot than none at all, and that procedures will continue to improve. buy even more time.

48 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG What “bring you back” means, of course, is up in the air as well—for folks with just a brain preserved, for example, there is talk of cloning or rebuilding a body, downloading the brain’s information to a computer, perhaps living fully in virtual reality—or perhaps a type of existence we cannot yet fathom.

to relatives, but Nelson continued to freeze and actually care for “I have discussed the idea of cryonics with dozens of my the bodies of several others in the years that followed. fellow neuroscientists over the years and this is the central Unfortunately, not all patients had financial arrangements question that comes up again and again: ‘Do current in place to pay for the storage and dry ice (which was being cryonic suspension techniques preserve the precise wiring used instead of liquid nitrogen at the time). As a result, Nelson of the brain’s neurons?’ The prevailing assumption among eventually put multiple bodies into a single storage capsule to my colleagues is that current techniques do not. It is for save money, but ran out of funds anyway and let the bodies thaw this reason my colleagues reject cryonics as a legitimate without telling anyone. medical practice.”12 This lapse was later discovered and in the 1970s, Nelson was Hayward thus offered a prize for the successful preservation sued for what’s since been dubbed “the Chatsworth Incident,”8 of mammalian brain—a prize that was just won a few months named after the town in California where Nelson had purchased ago when, as mentioned, 21st Century Medicine preserved a an excavated cemetery plot and kept the capsule that stored the rabbit brain with all internal neurons and synapses intact. The bodies. (Note: Bedford’s body, because it was handed back over new technique was hailed as a huge breakthrough for cyronics. to relatives, was not thawed and actually has since been trans- But even assuming it will eventually be applied successfully to ferred to Alcor.) If the whole thing sounds like a movie plot, it human brains, gaps remain—the first being the fact that there is might be; a few years ago there was talk of an Errol Morris film currently no way to successfully revive the rabbit brain, nor any based on these events, but progress seems to have stalled.9 other cryonically preserved brains or bodies. Following the Chatsworth Incident, two members of the Cryonics Society of California (which no longer exists) went The Second Life Cycle on to form Alcor. But even with new procedures, Alcor hasn’t Cyronics organizations are upfront about the current medi- avoided bad publicity. While the freezing of Ted Williams may cal gap between cryonic preservation and reanimation, with have put cryonics on the map for many, reports of his head being the American Cryonics Society writing in its brochure: “No damaged and mistreated run rampant. Plus, reports suggest that animal with a backbone can now be frozen to liquid nitrogen his son signed him up for the procedure after his death, going temperature and revived. What our procedure seeks to do is against Ted’s wishes for cremation. In his book Frozen, Larry reduce the damage which would otherwise occur.”13 Similarly, Johnson paints a gruesome picture of both the situation and the Alcor writes: “The nature of the injury caused by cryoprotec- procedure (although Alcor denies his allegations). tant exposure is currently unknown. We are hopeful that it is a More recently, cryonics was thrust in the spotlight via a New relatively minor injury.”14 York Times feature on Kim Souzzi, a 23-year-old neuroscience Which brings us back to the creation or discovery of new student dying of brain cancer who crowdfunded her brain’s medical procedures; cryonicists are optimistic that technology cryopreservation.10 She was able to successfully raise the funds and medicine will advance to a point that reanimation, damage via Reddit (and with the help of the Society for Venturism), and control, and possibly curing the original cause of death are all her brain was preserved after she died in early 2013. Alcor itself possible. Dennis Kowalski, a paramedic and the president of the released mixed results on how the procedure went, though, first Cryonics Institute, summed up this thought process by saying: saying there was “negligible” or “minimal” cryoprotection, then “Cryonics is an ambulance ride to a hospital of the future that saying protection was actually “vastly better” than originally re- may or may not exist. If the hospital is advanced enough, they’ll ported, due to the fact that the CT scan had been uncalibrated.11 be able to bring you back. But if you don’t get in the ambulance, Again, though, Alcor’s assessment of cryoprotection is not you’re guaranteed to be dead.”15 widely accepted. In fact, that’s what spurred neuroscientist What “bring you back” means, of course, is up in the air as Kenneth J. Hayward, Ph.D.’s call to action in 2011. In Alcor’s well—for folks with just a brain preserved, for example, there Cryonics publication, he wrote: is talk of cloning or rebuilding a body, downloading the brain’s

SEP | OCT.16 CONTINGENCIES 49 CRYONICS: The Best Crapshoot in Town

information to a computer, perhaps living fully in virtual real- MINIMUM FUNDING REQUIREMENTS ity—or perhaps a type of existence we cannot yet fathom. AMERICAN CRYONICS SOCIETY: Thus, the many questions raised by the possibility of reanimation—cost of resuscitation, quality of life, culture shock, $33,000 to $153,000, whole body only NOTES: Lower end requires membership of care, governance—tend to be answered with something along CI and ACS; upper end includes standby the lines of “we don’t know yet, but we will.” Yount of the American Cryonics Society, for one, admits and a more “technologically cryonics is a crapshoot, but is fond of saying that “it’s the best sophisticated procedure” crapshoot in town.” KRIORUS: Funding the Cryonics Gamble $36,000 for whole body As things stand now, there are two main financial requirements for becoming a cryonics patient. First, you need to have funding CRYONICS INSTITUTE: in place; Yount said the big lesson from the Chatsworth Inci- $28,000 to $35,000 for whole body dent was for cryonics organizations to never take patients on NOTES: Includes just preservation; price is between $88,000 and $95,000 credit. Minimum funding requirements vary by organization and run anywhere from $28,000 to $200,000. (Specific prices with standby/transport included. and breakdowns can be found in Table 1.) Young refers to this option as the Second, you need to become a member of a cryonics orga- “McDonald’s” of cryonics procedures. nization, which usually means annual dues of a few hundred dollars. Broadly speaking, these dues are meant to fund ALCOR: $200,000 for whole body or $80,000 research, further fundraising, and eventually the cost of resuscitation (which cryonicists believe will end up being quite low for brain only NOTES: Whole body breakdown is $115,000 thanks to technological advances). For ACS, annual dues are for storage; $60,000 for cryopreservation; $376 per year for the first four years and $300 per year after 16 $25,000 for standby, stabilization, and transport. that, with discounts for younger members and students. CI Brain breakdown is $25,000 for storage; $30,000 charges $1,250 once for a lifetime membership or $120 yearly and maps minimum funding to membership type. Alcoa for cryopreservation; $25,000 for standby, stabilization, charges $525 annually with discounts for long-term members and transport. (over 20 years) and additional family members. While annual dues are relatively manageable if you’re serious about the prospect of a second chance at life, the minimum funding requirements are a bit more daunting. As mentioned earlier, though, you don’t necessarily have to be out- City Life, which is also the carrier he recommended for my right wealthy to make cryopreservation happen (although some own indexed universal life policy—one with a premium of $64 people do use trusts to cover their expenses). Instead, life insur- per month for a $200,000 policy. ance is often used as the funding means. A would-be cryonicist Beyond sometimes underwriting these policies, though, the must take out a policy in the amount of the minimum funding insurance world doesn’t seem to have given much thought to requirement and name the respective cryonics organization the the implications of a successful cryopreservation and resuscita- beneficiary. tion—perhaps because of the aforementioned “reputation risk,” Some insurance companies have no problem with such a or perhaps because insurance is generally meant to provide a setup; Daniel Witt, for example, is a retired actuary and cur- guarantee and cryonics is far more speculative. rent Alcor member who said he had no trouble taking out a life Most safeguards in place for patients, for example, are put insurance policy with North American Company for Life and there by the cryonics organizations themselves. The American Health Insurance to fund his eventual cryopreservation. Cryonics Society, for one, has “fail-safe” plans for a worst-case But Rudi Hoffman, an insurance salesman who brands scenario where the organization would go out of business. In himself as the “world’s leading cryonics insurer,” noted that such an event, patients will remain frozen, with custody, trusts, “insurance companies consider cryonics a reputation risk, of- and maintenance transferred to a new organization or compa- ten cannot see that there is an insurable interest on the part of ny. ACS also contracts with the Cryonics Institute, and the two the cryonics organization, and most of all are reticent to engage have an arrangement so that both would have to go out of busi- in corporate-owned life insurance.” ness before it was necessary to transfer care to a third-party Hoffman says the most cryonics-friendly carrier is Kansas organization.

50 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG A would-be cryonicist must take out a policy in the amount of the minimum funding requirement and name the respective cryonics organization the beneficiary.

But those fail-safes are merely for the risk of the organiza- Kowalski seconded this, saying: “There’s no way we can tion going out of business. ACS directly tells patients that even guarantee people can be brought back. And we make people if reanimation technology is created, there remains a “host of abundantly aware [of that].” other problems” that could prevent its application, such as Because patients are made aware of all the possible question “massive civil unrest or atomic warfare.” Patients of ACS are marks, they can add their own contingencies, including their actually stored at CI in Michigan and, while there is the usual preferred circumstances or minimum requirements for preser- hazard insurance on the building, according to Yount and Kow- vation, reanimation, and even a potential thawing. For ACS, all alski, there is not any additional coverage for potential damage members include in their documents what they wish to happen to patients. As Yount put it: “One could envision Lloyd’s of Lon- to the body if it is not possible to keep them frozen, for instance. don, for example, issuing a policy that would pay off a lump sum “Some wish burial in family plots; others want chemical pres- should there be damage to patients—but such a policy (if it was ervation; still others have various other wishes such as being issued at all) would likely be very expensive.” buried in permafrost,” Yount said. In terms of insurance against another Chatsworth Incident, In terms of reanimation, the idea is that the organization will, things are a bit more informal. With ACS, each frozen mem- in a patient’s best interest and in the interest of science, deter- ber has a live “sponsor” with the power to inspect the facility mine when the time is right, should the proper technology come and monitor investments made on behalf of a patient. Similarly, to exist. But patients can add their own specific stipulations if the facility has logbooks for each patient and storage container, they would like. conducts yearly inspections, and uses containers that have long Still, the same bottom line remains: There are no guarantees. holding periods, “meaning if someone fails to fill [it] with liquid As Kowalski put it, “I can’t guarantee it will work, but no one nitrogen in a timely manner that there will be a long time before can guarantee it won’t work, either. The only guarantee is that the cryostat runs out,” according to Yount. if you don’t try ... you’ll be dead.” But at the end of the day, cryonics organizations can’t and don’t promise patients that they will never accidentally be thawed, ALYSSA OURSLER is a freelance writer based in San Francisco. Yount said. “In fact,” he added, “we ask our members (future She has written for USA Today, Forbes, MSN Money, Thought patients) to sign a very extensive hold-harmless agreement that Catalog, and more. You can find her at teainacoffeeshop.com or makes them aware of all the possible things that might go wrong.” on Twitter: @alyssaoursler.

References 1. The book Frozen: My Journey into the numbers out on its website. The estimate Suozzi’s brain,” Alcor blog; Mar. 15, 2016 World of Cryonics, Deception, and Death from ACS comes from an interview with 12. “The Brain Preservation Technology Prize: (Vanguard Press 2009), written by former COO Jim Yount. A challenge to cryonicists, a challenge to Alcor COO Larry Johnson, outlines this 6. Yount also relayed this story during the scientists,” Cryonics; Second quarter 2011 distinction in its glossary. aforementioned interview. 13. This comes from an American Cryonics 2. “Researchers Have Preserved An Entire 7. We Froze the First Man, Robert F. Nelson Society pamphlet provided by Yount and Rabbit Brain,” Popular Science, Feb. 9, (Dell Pub Co, 1968) given to prospective and current 2016 8. “Mistakes Were Made,” This American members. 3. “Therapeutic hypothermia after cardiac Life; April 18, 2008 14. This is addressed on Alcor’s FAQ page. arrest: What, why, who, and how,” American Nurse Today; July 2011 9. “Paul Rudd, Owen Wilson, Kirsten Wiig & 15. This was explained during an interview Christopher Walken Will Get Frozen In with Dennis Kowalski. 4. “Gunshot victims to be suspended Errol Morris’ ‘Freezing People Is Easy’” 16. As with membership statistics, most between life and death,” New Scientist; IndieWire, Jan. 4, 2012 March 26, 2014 cryonics organizations also outline fees 10. “A Dying Young Woman’s Hope in on their websites. The American Cryonics 5. Most organizations include a patient tally Cryonics and a Future,” The New York Society, Alcor, KrioRus and The Cryonics on their websites, as seen on membership Times; Sept. 12, 2015 Institute have different minimum funding statistics pages for Alcor, The Cryonics 11. “Corrected analysis of CT scan data show requirements and membership dues, plus Institute and KrioRus. The American varying procedure details. Cryonics Society does not break these vastly better cryoprotection of Kim

SEP | OCT.16 CONTINGENCIES 51 To Block

52 WWW.CONTINGENCIES.ORG a Blowout Consequently, insurance against theselosseshasbecomebigbusinessandafinancial rescue tool. IN THEOILINDUSTRY, well losswhiledrillingunderwater represents areal financialbreakdown. By RobertoGullcoandJoséManuelCastilloCovarrubias further calculations by theactuary. prior todrilling. Thisprobability would betheraw materialfor estimated from thepore pressure profile inthe well location information allows thecalculationofindividualized premiums. all. In other words, the existence of geological and geophysical and thosethateventually would notbeconvenient toinsure at risk)andthose withahighriskofcontroleasy todrill(low loss— well. Earthscientists candifferentiate between wells thatare calculated onlyfrom anAFEfactor. optimized estimation ofthepremium canimprove apremium provided by theoilcompany. If thisinformationisavailable, an information thatdefinestheriskinvolved intheoperation. knowledge ofthepore Pre-drill pressure isafundamentalpieceof greater than the pressure exerted by the surrounding drilling mud. the drillbitcutsthrough permeablesandswhosepore pressure is will experience alossofthewell control—that is, ablowout—when the pores pressure). of the rocks in the A subsurface (pore driller is merely based onstatistical datacommontobothwells. not taken intoaccountintheauthors’experience. TheAFEfactor the geologicaldifferences between thetwo drillinglocationsare costs are thesamewould have topay thesamepremiums, because ized andcompetitive insurance products for well loss. to atruerunderstanding ofrisk,thereby allowing forindividual- miums usinggeologicalandgeophysical informationcouldlead firmly in the realm of the actuarial field. But calculation of pre science inestimating theprobability thatawell loss may occur. authors contendthatearthsciencescancomplementactuarial risk—the geological setting where the well will be drilled. The does nottake intoaccountthevery nature ofthesource ofthis In order tocalculate thisfactor, actuariesuseinformationthat a factortotheauthorityforexpenditures, orAFE,ofthewell. The probability thatawell willexperience ablowout canbe This optimizedpremium ischaracteristic foreachindividual Pore pressure calculationsrequire certaindatanormally Well control whiledrillingiscloselylinked tothepressure in Normally, two wells inthesamearea andwhoseprojected To beclear, financialimplicationsofthisprobability remain Normally, thecalculation ofpremiums isbasedonapplying - sure inthewater willbeP=Patm +ρ one atmosphere. At thebottom,where thedepthisH,pres- the tankisH.At thetopoftankpressure willbeexactly top ofthetankisopentoatmosphere andthattheheightof pores ofthesandare saturated withwater. Imaginealsothatthe in thepores issubjecttoapressure, whichwe callpore pressure. tably fortheoilcompanies)generally water. Thefluidcontained or not,buttheyare always filledwithafluid,whichis (regret sists ofsolids(minerals) andpores. Thepores may beconnected - such assands, orconsolidated, suchassandstone orshale—con The underground materials—which may beunconsolidated, Definitions the pressure exerted by thecolumn ofdrillingmud.If the pore able rocks, the pore pressure in these rocks must be less than a fluid—the drilling mud. When the bit cuts through perme hazards whenawell isbeingdrilledderive from highpressures. pressure have to be detected prior to drilling, because most of the of 1.7 g/cc (implying a very high pore pressure). These zones of high joining ZoneBcanhave anequivalent densityofthepore pressure equivalent density of the pore pressure of 1.03 g/cc, while the ad- ally impliesdifferent pressures. For instance, ZoneAcanhave an that exist in these different zones. The lack of connection gener zones intheunderground, there isnoconnectionofthefluids to beat“normalpressure.” tual densityofseawater (about1.03 g/cc) thepointisconsidered below sealevel ofthepoint.If suchadensityisclosetotheac by: by: pressure atsuchdepth,we say thatthepore pressure is“normal.” tual observed pore pressure isclosetothetheoretical hydrostatic to thehydrostatic pressure. Infact,atacertaindepth, if theac pressure canbeignored). depths ofhundreds ofmetersbelow sealevel, theatmospheric of water andg is theacceleration ofgravity (when dealingwith Imagine that we have a tank filled with sand and that the When awell isdrilled,the hole ispermanentlyfilledwith Because there are impermeablebarriersbetween different We can define the “equivalent density of thepore pressure” Note thatinordinary circumstances, thepore pressure isclose ρ eqpp =P/(gZ), where=P/(gZ), Pistheactualpressure andZthedepth SEP |OCT.16 and earthsciences between theactuarial A possible partnership CONTINGENCIES gH, where ρ is the density is thedensity

53 - - - - -

SHUTTERSTOCK To Block a Blowout

pressure is greater than the pressure exerted by the mud col- Example 1: There is only statistical information (the number umn, a blowout may occur. If the drilling engineer knows the of wells drilled in a certain sedimentary basin and the number pore pressures in the area where the well is going to be drilled, of wells that suffered a blowout in the basin). he or she will be able to keep the appropriate weight of the drill- An oil company wants to drill a new well in a basin where N ing mud to avoid any hazard. wells have already been drilled and k wells were obliterated by Another fundamental quantity closely related to pore blowouts. What is the probability that the new well will suffer pressure is the overburden pressure. At a certain depth, the a blowout? overburden pressure is defined as the weight per unit area of Under certain assumptions, it can be shown that this prob- all the materials (solids and liquids) located above the point in ability is not a single number, but a random variable, given by question. The pore pressure is always less than the overburden the beta distribution pressure. Theoretically, at a particular depth, the pore pressure could be equal to the overburden pressure, but this never occurs in practice. Even in zones of extremely high pore pressure, it is always less than the overburden pressure. Again, the overburden pressure can be expressed as “the where x is the probability that the well will suffer a blowout. equivalent density of the overburden pressure”: ρeqop=P/(gZ), Eventually, we can use the mean of the beta distribution to where P is now the overburden pressure and Z, as before, is the reduce this probability to a single number: depth below sea level. P = μ = (k + 1)/(N + 2) (1) Estimation of Pore Pressure For example, if N=30 and k=0 in a certain zone, the prob- This well-developed branch of geology and geophysics is rou- ability of having a blowout in a new well would be, according to tinely applied to the design of wells. The knowledge of the pore, (1), (0+1)/(30+2)=0.031. overburden, and fracture pressures (the last is very important but Example 2: There is statistical information (total number of beyond the scope of this article) allows the drilling engineer to set wells and number of blowouts) as well as values of the maxi- the casing points and determine the mud weight along the well. mum observed equivalent density of the pore pressure, both Pore pressure and overburden pressure are calculated from for wells that were successfully drilled and for those that had a seismic velocities. Note that the two most important waves that blowout. In addition, there is pressure information about where travel in the underground are the primary or longitudinal waves the new well is going to be drilled. Under these circumstances, and the secondary or shear waves. The velocity of the longitudinal what is the probability that the new well will suffer a blowout? waves is the parameter used in the calculation of pore and over- Consider that there are N wells, k of which suffered a blow- burden pressure (fracture pressure is a function of these two). out. An analysis of the maximum equivalent density of the pore Wherever we have a tridimensional seismic survey, we can calcu- pressure encountered in these k wells has been carried out, get- late a tridimensional distribution of velocity of the primary waves. ting a probability density function that we’ll call f1(x), x being So, for a certain region in space, we can have a velocity field, where the equivalent density values. Similarly, we can make a study of the velocity is known at each point of the region. Hence, we can the maximum equivalent density for the N–k wells that were have pore and overburden pressure fields, meaning we know these drilled successfully. Let us call this new probability density func- two parameters at any point in the region, prior to drilling any well. tion f2(x). At the well that is going to be drilled, the maximum Perhaps the most critical point in the pore pressure calcu- equivalent density of the pore pressure is given by xo. Then, ac- lation process is the assessment of the quality of the seismic cording to the Bayes theorem, velocities, which are the raw material for all further calculations. Note that an oil company that wants to insure the future well (2) should possess the required seismic information. Nobody drills an exploration well without a previous seismic survey these days. where: ■■ α: proportion of wells that experienced a blowout (as dis- Estimation of Blowout Probability cussed in the previous paragraph, the value is taken as the Estimating the probability that a certain event may occur and as- mean of the beta distribution, given by (k + 1)/(N + 2)). signing a financial meaning to such a probability is perhaps the ■■ x0: value of the maximum equivalent density of the pore pres- crux of actuarial work. However, statistics in the realm of the sure observed in the future well. earth sciences, where plenty of data are of a qualitative nature and ■■ f1(x0): probability density function of the maximum equiva- ultimately scarce and incomplete, are more difficult to interpret lent density for the wells that suffered a blowout, evaluated than in other sciences. The authors, as earth scientists, will make at x0. some rough estimations of the probability of a blowout. Howev- ■■ f2(x0): probability density function of the maximum equiv- er, we have not attempted to draw any financial consequences of alent density for the wells which were drilled successfully, such probabilities, because that is a field far beyond our expertise. evaluated at x0.

54 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG FIGURE 1. Family of Curves Representing Possible Relationships Between Equivalent Density of Pore Pressure and Probability of Blowout

Equation (2) provides the answer to the problem—that is, the PROBABILITY OF BLOWOUT estimation of the probability that a well will suffer a blowout if 1.0 at the well the maximum equivalent density of the pore pres- 0.9 sure is x0. Note that to apply this method, a lot of information 0.8 must be available in order to set the probability density func- 0.7 tions f (x) and f (x). 1 2 0.6 (It should be pointed out that the example above is a great 0.5 simplification of a complex reality. The idea here is to show how a complex problem can be quantified.) 0.4 Example 3: The only piece of information is the equivalent 0.3 density of the pore pressure at the well to be drilled—the pro- 0.2 posed well is to be the first in a basin. What is the probability 0.1 the well will suffer a blowout? 0.0 A heuristic approach can be taken to estimate such a prob- 1 1.1 1.2 1.3 1.4 1.5 1.6 ability. First of all, we accept that there is a relationship between EQUIVALENT DENSITY OF PORE PRESSURE (g/cc) pore pressure and the probability of a blowout. The greater the pore pressure (or the equivalent density of the pore pressure), particular depth, where the equivalent density of the net over- the greater will be the probability that a well suffers a blowout. burden pressure is 1.54 g/cc. Note that the straight line is the If a zone is at a normal pressure (when the equivalent density of upper limit of the family of possible curves. Above the straight the pore pressure is about 1.03 g/cc; i.e., the approximate density line, any curve would be concave downward. of seawater), the likelihood of a blowout is almost nil. We can Assume now that we have a point at the depth for which say, then, that when the equivalent density of the pore pressure Figure 1 was prepared, with an equivalent density of the pore is 1.03 g/cc, the probability of a blowout is zero. Recall that for pressure equal to 1.2 g/cc. According to Figure 1, the probability a particular depth, the equivalent density of the pore pressure of a blowout for this point would range between 0 and 0.333. will always be less or equal than the equivalent density of the The latter point is taken from the straight line. So, knowing the overburden pressure. The latter density could be regarded as equivalent density of the pore pressure, we do not get a single the maximum possible value that the equivalent density of the value for the probability but rather a range of values. pore pressure can achieve, although overburden pressure and However, an average value of these two end values can be pore pressure (and their related equivalent densities) cannot taken; that number would be the solution to the problem. Note be equal in practice. However, in the theoretical case in which that the solution presented here is completely heuristic, without both densities were equal, the whole system would not be me- a solid theoretical background. Most probably, the probabilities chanically stable. If both densities were equal, we would assign, calculated with this method are relative rather than absolute. arbitrarily, a probability of blowout equal to 1. At this stage we have accepted that an increase in the equiva- Conclusions lent density of the pore pressure results in an increase of the Financial loss due to catastrophic events while drilling an oil probability of a blowout. We have also defined two points. The well could be reduced if the probability of these events can be first point implies that for an equivalent density of the pore pres- assessed by means of applied earth science tools, such as the sure equal to 1.03 g/cc, the probability of a blowout is zero. The geological setting evaluation and the pore pressure estimation. second point means that if the equivalent density of the pore For this purpose, specific geological, geophysical, and statistical pressure is equal to the equivalent density of the overburden data must be collected and should be an input to any actuarial pressure, the probability of a blowout is equal to 1. Note that this analysis. This article points out the basic steps to be taken into latter point is depth-dependent, so ultimately the probability of account to complement this work. The proposed approach a blowout will be variable for different depths. would allow insurance companies to calculate individualized Although we have two points of the curve, we still do not premiums related to well loss insurance, driven by a more pre- know the shape of the curve. Empirically, we can guess that for cise knowledge of the risks at hand. low equivalent densities the probability of blowout increases A partnership between the actuarial and earth sciences slowly, while it increases rapidly for high equivalent densities might bring new insights to the oil insurance business. of the pore pressure. Expressed in other terms, the derivative ROBERTO GULLCO is a geologist who has worked in of the curve should increase monotonically, and such a curve companies such as CGGVeritas, Paradigm, and West Australian should be concave upward. Petroleum (a Chevron subsidiary). He has nearly four decades of Figure 1 shows the equivalent density of the pore pressure experience, most of it in the petroscience field. as the X-axis, the probability of a blowout as Y-axis, and several JOSÉ MANUEL CASTILLO COVARRUBIAS is a geophysicist possible curves that relate both quantities, satisfying the two with PGS. He has 14 years of experience in the oil industry. Both fixed points and the upward concavity. The graph is valid for a authors live in Tabasco, Mexico.

SEP | OCT.16 CONTINGENCIES 55 SPECIAL SECTION DW Simpson 4121 N Ravenswood Ave SOA Annual Chicago, IL 60613 PHONE: 800-837-8338 / 312-867-2300 FAX: 312-951-8386 Meeting and CONTACT: Bob Morand EMAIL: [email protected] WEB: www.dwsimpson.com DW Simpson Global Actuarial & Analytics Recruit- Exhibit ment has been specializing in the recruitment of actuaries and analytical professionals for 25 years. We work at all levels of experience, from Actuarial Ernst & Young LLP 5 Times Square Oct. 23-26, 2016 Student through Fellowship, and with all disciplines including Life, Health, Pension, Property & Casualty New York, NY 10036 Las Vegas, NV and non-traditional areas. We are the largest of the WEB: www.ey.com/US/insurance firms that specialize in the placement of actuaries EY is a recognized leader in providing assurance, and related analytics professionals. tax, transaction and advisory services to life, health, We publish the most trusted and comprehensive property and casualty insurers and reinsurers Actuarial Salary Survey. It is organized by discipline worldwide. Our dedicated team of more than 9,600 & career level, and is formatted using simple charts, insurance-aligned professionals spans many disci- graphs & trend lines. The 2015 survey includes spe- plines and offers a well-rounded understanding of cific information for Reinsurance, Consulting & In- business issues and challenges as well as integrated surance actuaries, along with salary surveys by state services to our clients. They include actuarial, risk, & international markets. finance improvement, operations improvement, transactions, accounting and accounting implemen- DWSimpson.com/news is written by our experi- tation, financial reporting and business intelligence enced actuarial recruiters and contains valuable and analytics professionals with deep subject matter market insights, jobs and career advice. Please visit knowledge who assist clients in enhancing their busi- our website for more information and register for ness opportunities. In doing so, we play a critical role actuarial jobs, salary surveys & news updates. in building a better working world for our people, Booth 415 our clients and our communities. Booth 400

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58 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG Experience the Don’t miss the innovations that RGA Innovation Series! Monday, October 24 help you write 2016 SOA Annual Meeting & Exhibit At this year’s RGA Innovation Series, more business. you can hear from the people at the cutting edge of InsureTech. Join us for TED Talk-style sessions RGA makes the connection between featuring venture capitalists, insurance innovation and results, delivering technology startups and insurance solutions with vision and value. innovation leaders. Presented by RGAx.

www.rgare.com Editor’s note: This is the second and final article in a series on risk ranking and risk exchange as they GWENDOLYN ANDERSON Tradecraft regard living organ donation.

Open the Doors How risk exchange can help address the organ shortage

HOW IS A HUMAN KIDNEY LIKE A HOUSE, a job, and a string of deteriorating states of disability. Black massive earthquakes? A new financial technique called risk exchange markets emerge, further endangering the poor. This system begs for flexibility and more ordinary tools tailored to living donors could open doors to from the financial sector, which can fea- solving one of the greatest calamities of our time: the organ shortage. sibly bend in response. It is time for some mathematical solutions to this ongoing Miraculous and Catastrophic better outcomes. But deceased donor disaster. The organ shortage has gone beyond organs, such as those procured in fatal crisis; it has morphed into a large-scale accidents, are neither in great enough Flexible Financial Tools catastrophe with a waitlist of more than supply to meet demand, nor do they last Missing from the imbroglio are the finan- 100,000 patients in the United States as well as kidneys from living donors. cial and risk-based approaches essential alone. The list continues to grow each Accidents can be remote, or damages to solve the organ shortage, which this year, in proportions overshadowing any too severe, to procure organs. Families article will describe. The tools are largely physical disaster ever experienced in U.S. and loved ones cannot always meet the available; for those that are not, the mar- history. Worldwide, The Lancet report- need for organs among themselves, es- ket has room for innovation. ed 5 million people In the past, pro- needed dialysis or tection against kidney transplants large-scale catastro- in 2010, yet esti- phes was limited by mated only half—at insurance company best—could access capital until an in- treatment crucial novative product for survival. The ex- appeared—the “ca- treme magnitude of tastrophe bond.” The the calamity suggests sale of these bonds that the organ short- opened up finan- age may warrant an cial market capital, emergency response, enormous resources much in the way spe- to protect disaster- cial teams are called prone areas along to respond to a major coasts and fault lines. catastrophe. “Cat bonds” pay a The miracle med- sizeable coupon, but ical advancement of in a disaster the bond organ transplanta- defaults and instead tion has allowed pays to the victim. thousands to maintain active lifestyles, pecially smaller families, those without Framing a medical crisis as a catastro- to enjoy a high quality of living for de- children, or those with certain medical phe allows similar solutions to unfold. cades, even after severe diagnoses of conditions. The ability to tap into financial markets end-stage renal disease (ESRD) that Compounding the shortage of living makes resources available. would otherwise result in permanent donors is a rigid and unsound system. A bewildering example of inflexibil- disability. Improvements in anti-rejec- Living donors arrive with benevolence ity is found in the insurance coverage for tion drugs and innovative programs like but are shut out by staggering costs and anti-rejection drugs; Medicare, for exam- “paired matching”—allowing kidney shaky, inconsistent protection to their ple, ends coverage after a fixed three-year recipients to swap for the most compat- own physical well-being. Patients unable term. This sharp cutoff assumes two ible donor—are leading to increasingly to receive a timely transplant wind up in things: first, that the recipient will have

60 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG FIGURE 1. Transplantation Cost vs. Wait Time Recognizing organ longevity Average Annual Cost per Patient (thousands of dollars) Organ Longevity (Years) 90 22 fully recovered with the new organ by 80 20 a preset deadline and will no longer be 18 70 disabled; second, that the recipient will A 16 60 resume employment with health insur- 14 ance or earnings to accommodate the 50 12 high cost of the organ-sustaining medi- 40 10 cation. But, if those assumptions should 30 8 not hold, all the good of the costly pro- 6 20 cedure will be instantly undone. The 4 body will reject the organ. A patient who 10 2 might have benefited for upward of 20 0 0 years from an organ sustained by meds 0 1 2 3 4 5 is instead returned—redundantly—to the fewer patients Wait Time (Years) more patients waitlist. Transplantation Surgery Hemodialysis A brighter future could be in store by Treatment Costs Longevity (Right Axis) using existing financial practices, and Treatment cost per year considers the full term of hemodialysis preceding surgery plus the future from new methods begging to be tested longevity of the organ, and incorporates costs for anti-rejection drugs. At point A, the average considers the past four years of hemodialysis, transplantation surgery, and future six years of anti- and tried. For decades, investors have rejection drugs; at this point, the patient has had to wait too long for the transplantation option to diversified portfolios to minimize risk. realize many advantages. By now, weather is being traded on markets, because atmospheric patterns have no prospective correlation to the rest of FIGURE 2. Transplantation Cost vs. Wait Time the market. Risk has been reduced, trans- Recognizing organ longevity ferred, and diversified, with new twists Cost per Patient per Year (thousands of dollars) Organ Longevity (Years) on age-old financial products. What if 90 22 risk itself could be exchanged? 80 20 18 Cost-Benefit Analysis 70 16 To arrive at a solution to the organ short- 60 A 14 age, a simple numerical system can be 50 12 created, optimized, and enhanced: 40 B 10 1. The most basic model begins with C 8 medical costs alone. 30 6 2. Income earnings and disability pay- 20 4 ments amplify the initial results. 4 10 2 3. A quasi-financial value may be estab- 2 0 0 lished for quality of life, portraying 0 1 2 3 4 5 the overarching goal of medicine. The more donors Wait Time (Years) fewer donors subjective nature of this element dic- Treatment Transplantation tates flexibility within the system. Treatment Cost + Insurance Package Hemodialysis Cost per Year Treatment Cost + Risk Exchange Longevity (Right Axis) Medical Costs As more donors enter the system in response to investment, the added costs are more than offset by Transplantation should be long-lasting, leftward movements in wait time. This hypothetical example begins at Point A, where transplantation does not realize any sizeable cost savings. Investment in an insurance package for donors shifts so costs are given as an annual average the cost curve up and the wait time leftward to Point B. Investment in a full risk exchange solution over the organ’s lifespan. Any delays shifts the cost curve up more and the wait time further leftward to Point C. necessitate the imperfect alternative of

SEP | OCT.16 CONTINGENCIES 61 Tradecraft

FIGURE 3. Transplantation Cost vs. Wait Time Recognizing Organ Longevity & Income Cost per Patient per Year (thousands of dollars) Organ Longevity (Years) 100 22 SS disability 20 80 18

60 16 dialysis, which does not completely filter tax contributions 14 40 the blood as a human kidney does. As a full income 12 result, the patient’s health will deterio- 20 10 rate, increasing the complexity and cost of surgery the longer the recipient must 0 8 net zero wait. The longevity of the organ can be 6 markedly lower for a less healthy recipi- –20 ent. All three factors drive average costs 4 –40 up with wait time: the increasing cost of 2 the surgery, the high cost of interim di- –60 0 alysis, and the diminishing longevity of 0 1 2 3 4 5 the organ. Fitted cost curves will vary by fewer patients, more donors more patients, fewer donors Wait Time (Years) patient profile, but the illustrative exam- Treatment Hemodialysis ple describes the predicament. Treatment Less Tax Contributions Hemodialysis Plus Disability The “first-come first-served” nature Treatment Less Full Income Longevity (Right Axis) of the waitlist means that patients enter- A net-zero cost solution is achieved from the transplant patient’s renewed ability to work and con- ing the queue will produce a rightward tribute to society. movement in wait time. That means that any growth to the list will bump up wait times to the full sequence of new entrants. Yet success of the procedure FIGURE 4. Transplantation / Donor Cost Fallacy—Neglecting Longevity in terms of costs and organ longevity Costs per Patient (thousands of dollars) would dictate otherwise—that organs 350 go to the newest members entering the waitlist. Skipping over waiting patients 300 would seem unconscionable. The length of the waitlist relative to available donors 250 is represented by movements in the wait time. To reach the desired zero wait time, 200 the supply must equal the demand, that is, the number of donors must equal the number of waitlist patients. 150 Optimization of organ longevity represents the lowest risk to organ re- 100 cipients. Notice that contrary to most common problems, higher costs here do 50 not produce better results; rather, poor results are costly. Optimization of risk 0 and costs follow the same direction to the 0 1 2 3 4 5 solution with no trade-offs or conflicts. Wait Time (Years) Solving the optimum at zero wait time appears trivial but is not possible without Transplantation + Risk Exchange Hemodialysis per Year Transplantation + Insurance Package Hemodialysis per Month living donors. Transplantation New donors are essential to an opti- Term budgets may view investment in donors as adding to total costs, if organ longevity is ignored. mal solution at a one-to-one ratio—one donor to each patient presently waiting.

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FIGURE 5. Utility of Quality of Life Utility of the Quality of Life U{Q(life)} 3.0 2.5 Optimal Utility A new organ can cost as much as a 2.0 house—and perhaps should be treat- 1.5 ed like one. Since an organ may last as 1.0 long as common mortgage terms of 15 0.5 to 30 years, costs could be amortized 0.0 with guaranty insurance features built in to the loan. A sudden increase of do- –0.5 nors by the thousands might otherwise –1.0 U{DEATH} cause shock losses to term budgets like –1.5 Medicare. Savings arise from proper al- –2.0 location. If payers are individuals, full tax –2.5 credits could cover the recipient’s “sec- –6.0 –5.0 –4.0 –3.0 –2.0 –1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 ond mortgage” and eliminate all burdens Quality of Life Index: Q(life) of disability costs to society.

Utility of Death Utility {Q(life)} Optimal Utility Quality of Life Analysis is only complete when we add This adds risks and costs to the do- to send firefighters to rescue others with quality-of-life implications. This element nors, revising the system equation. This no insurance protection for themselves emphasizes the actual purpose of medi- direct one-to-one transfer of life vital- and no promise of stable income and cine: not merely to keep people alive, but ity—from an otherwise healthy donor to employment. to allow them to thrive. Quality of life an unhealthy patient—has confounded correlates strongly to health and income, present-day logic and led to massive sys- The Net-Zero Solution but may be evaluated differently among tem failure. The initial results are amplified re- individuals, for instance, between scien- In the first article in this two-part markably by income considerations. tists and athletes. More individualized series, risk ranking showed that risk of An early recipient is likely to enjoy an is the personal value—the utility—that donation is ordinary, compared to com- active, high quality of life over longer is derived at each state. Life itself is mon occupations in present practice. years while earning income. Contribu- “priceless,” yet there are only so many Based on death rates alone, the risk of do- tions toward Social Security, income resources that can feasibly be invested nation was seen to be similar to a year of taxes, and health care premiums will in improving quality of life, regardless employment as a roofer, garbage collec- offset the treatment costs, where the of how highly such improvements may tor, firefighter, or long-haul trucker, and treatment is the very foundation for be valued. safer than being a fisher, logger, or pilot such paybacks. In stark contrast, most Valuating utility is inexact but may over the same time span. These results hemodialysis patients are disabled. So- be deduced by comparison. Maintaining suggest that, theoretically, a much- cial Security disability payments benefit a prosthetic arm has cost an average of needed organ could be no farther away them much like income, but at a hefty $800,000 per veteran. Such a value may than the nearest fire station, and no later price to society. serve as a gauge for allocating resources than the next trash pickup. A net-zero cost is shown at a zero wait toward self-sufficiency. Huge quality-of- The donor may also be viewed as an time. This basic result represents the to- life improvements are evidence of room emergency responder with an excellent tal self-sufficiency of successful organ to invest in living donors. To this end, chance for saving or extending exactly recipients. costs and risks must be well managed, one life. But donation is an elective pro- Full earnings can also be substantiat- through prevention, reduction, transfer, cedure (akin to rhinoplasty), requiring ed as a measure of costs versus benefits compensation, and innovatively through the donor to sacrifice not only an organ to society, where the recipient’s produc- “risk exchange.” but a month’s income for recovery plus tivity is valued in a simplified manner A complete utility equation for trans- the risk of financial ruin in the event of according to salary. Negative costs rep- plantation (or hemodialysis) can be complications. It would be preposterous resent an overall gain. written as shown in Figure 6.

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Size 8.125” w X 10.875 H- .125” bleed - set up as 4 color ﬁ le:ARM-16-09268-P2-L&H_Contingencies_Mag_Sand-Castle-7-11 Publication date: MAY 1, 2016 Tradecraft

FIGURE 6. A Complete Utility Equation for Transplantation Total Total Medical Living Donor Total Income Value of Life = – – + – Disability + U(t) Costs Expenses (Contributions) Enjoyment Payments –(Fixed Costt) –(Fixed Coste) [+income] [–income] U{Q(lifei)} –(Annual Costt) yearst

U(t) = – (Fixed Costt) – (Fixed Coste) – (Annual Costt) × (yearst) + [+/- incomei + U{Q(lifei)}] Σi=1 The per-year utility can then be written: yearst U(t) = – [(Fixed Costt) + (Fixed Coste)] / (yearst) – (Annual Costt) + [+/- incomei + U{Q(lifei)}] Σ (years ) i=1 t

Prevention. Not all cases of ESRD are injuries. From a pure risk standpoint, the Compensation. In undeveloped coun- preventable, but prevention is cost-ef- workers’ comp policy provides nearly tries, the poor have been coerced into fective for eliminating overall risk. The all the protections a living donor would selling organs. In many cases, these costs of prevention lie outside of a “per require. Additionally, an expense compo- vendors eventually return to the origi- patient” optimization. Instead, preven- nent of a complete donor policy package nal state of desperation. Establishing tion is shown as a leftward movement could provide a fixed reimbursement the practice as illegal was intended to in wait time as a result of fewer patients for lost wages during the anticipated prevent exploitation. Such laws have waiting. Prevention ultimately supports recovery. backfired, because the most desperate the capability of donors to optimize the Under such a framework, the donor now face unsafe conditions and may be system. may be considered an employee of the deceived out of payment. Bioethicists hospital, as essential to the procedure as study the controversies brought about Reduction. In Part I, the risk of death the surgeon and staff. The legal liability by advances in biology and medicine. Be- to a donor was shown to be 0.03 per- spurs the hospital to transfer its risk—as cause risk to organ vendors is similar to cent historically, with most risk within it does with its other employees—to an that of other common occupations, most a year of the procedure. But the risk is insurance company. The workers’ comp bioethicists agree that compensation not evenly spread among donors, or policy format may be tailored to the need not be illegal; rather, the problem among transplantation centers. “Risk ex- unique circumstances of living dona- is that compensation is inadequate. change” seeks to not only trade risk but tion, covering a caregiver or travel costs Clearly, in the organ trade, the ven- to reduce it. This reduction may come to the transplantation center. A second- dor has only one kidney to offer. A risk about by seeking donors of the greatest ary class code may apply to the donor’s exchange will only be effective if the ven- resilience, access to the safest and most primary occupation and indemnity levels dor has stable employment to return to. reputable surgeons and facilities, and for lost wages. Attention should be given Otherwise, the donor may become des- improved geographic coordination for to ideal policy mechanisms built in to the perate again and will be without another paired matching. workers’ comp model: experience rating, organ to sell. Such an outcome suggests which encourages safety of the trans- that the fair trade for an organ may be a Transfer. In a broad range of cases, plantation center, and rehabilitation, living wage lifetime annuity. From a risk insurance products provide a support which accelerates an injured donor’s exchange perspective, the organ donor system that might otherwise not be avail- return to work. These mechanisms con- would be permanently removed from able to individuals at a time of need. For tribute toward risk and cost reduction. risks of poverty. risky occupations, workers’ compensa- Given the imperative for financial Ironically, such an arrangement tion coverage provides an indemnity security, it is possible that wage replace- is financially feasible when the ex- component that reimburses lost wages ment and insurance protection might be change rate between nations is uneven. during the period a covered person is the only tools needed to forever elimi- Wealthy countries can provide a liv- unable to work, and a medical compo- nate the organ shortage. If not, risk ing wage life annuity to donors in poor nent to cover medical costs of workplace exchange tools can be tailored. countries, as long as stable banks can

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The miraculous medical solution of transplantation has advanced to the point where it could restore life and livelihood to thousands of people.

provide this financial product. The cost Risk exchange has enormous poten- income is stable removes potential for of the transaction may be no greater tial benefits when it reduces risk overall; coercion of vulnerable poor; preference than risk exchange for the roofer with- that is, when the activity can be perfor time off is not an unfair inducement, in the wealthy country, but it may be formed by someone to whom the risk is because it keeps risk the same as for the vastly more beneficial to the poor. To negligible, so that detrimental outcomes day job. In practice, risk exchange would remove the flow of organs in one direc- diminish. Thus, if a risk component were seek to trade risk down to its lowest bear- tion between countries, a fund for local a financial instrument, it could not be er. However approximate it may be, this procedures could be established as part represented by a fixed value; rather, its example immediately suggests a system of the risk-exchange provision. value would depend upon its holder. where not only recipients could benefit Compensation for organ donation enormously, but donors as well. is a complicated subject, both ethically The Basics of Risk Exchange and pragmatically. A national discussion Imagine, for any trade, a time period Should Help Come Knocking about the ethics and implications of com- exists that would make the insurer indif- The miraculous medical solution of pensation, including consideration of the ferent to “exchanging” the risks with a transplantation—once possible only be- risks and potential for alleviating suffer- living donor. If the time period were one tween identical twins—has advanced to ing, is appropriate. year for a roofer earning $50,000 per the point where it could restore life and year with a workers’ comp premium rate livelihood to thousands of people. Doors Exchange of 40 percent of payroll, then the mon- to access are currently closed, too solid The Concept of Risk Exchange etary value of this risk exchange would for individuals to break down. Financial Insurance is a classic example of a risk be $70,000 in theory. instruments can be the crowbar to open transfer, which includes financial con- Note from this result that the dol- doors to collective action. The optimum sequences of a risk, for reimbursement. lar amount in the exchange does not will be reached if we remember these Actual transfers and exchanges of risk— represent a fixed market price nor a tools are meant for those who are already not the financial consequences, but commodity price for an organ. A flat trying to help. One living donor reflected risk itself—are taking place constantly. payment would not be effective. Rather, on the gift of a genetically well-matched As an everyday example, a young adult the value defines a set of conditions that kidney she gave her sister over 20 years may give up a seat on a bus to a senior maintains a steady level of risk and in- ago, and only wished she had another to or carry luggage for a frailer person. We come for the donor. The arrangement is give. tend to see these actions as common based partly on insurance protections courtesy borne from intergenerational but also requires a stable occupation to This article is solely the opinion of its author. It does not express the official policy of the cooperation and human diversity. In return to at the end of the established American Academy of Actuaries; nor does it these examples, the young adult has a risk period. Because the exchange is necessarily reflect the opinions of the Academy’s individual officers, members, or staff. risk advantage: His potential for injury donor-focused, its valuation must vary is considerably less than another’s. with conditions. The insurer continues Notice that the value of a person’s covering the financial consequences of GWENDOLYN ANDERSON, MAAA, ACAS, is a property/casualty actuary well-being is not measured by a future risk, so it exchanges the type of risk that with background in catastrophe and stream of income, as may be used for is being transferred while its accounts workers’ compensation. With special approximating human worth in some are unchanged. The tradesperson is ex- thanks to Sigrid Fry-Revere, founder business applications. There is an in- posed to the risk directly, and therefore of the American Living Organ Donor tuitive appreciation for sheltering the is engaging in an exchange of actual risk. Network, which helps make donation vulnerable person. The young adult may Whether an agreement was made would possible by covering basic expenses and have the larger stream of future income depend upon the specific risk preferenc- wages of donors; and to [Anonymous], and could be assigned the higher “eco- es of the individual, toward both levels who donated to a kidney to her sister 20 nomic” value. Yet risk is not transferred and types of risk. years ago and now only wishes she had away from—but rather onto—that person. Notice that an exchange in which another to give.

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Oliver Wyman Actuarial Consulting Oliver Wyman provides customized actuarial services and strategic insight, supporting clients as they strive to exceed their business objectives. Our exceptional client and employee retention exemplifies our commitment to relationships built on trust, responsiveness and clear communication. Our clients can further capitalize on Oliver Wyman’s services through our partners at Marsh & McLennan Companies: Marsh, Mercer and Guy Carpenter – world leaders in insurance and risk management consulting. For more information, email us at [email protected] or check out our website at www.oliverwyman.com/actuaries Cryptic Puzzle TOM TOCE

Queen’s Gambit

THE CHESSBOARD DIAGRAM SHOWS TWENTY-FOUR STARTING POSITIONS FOR A QUEEN. The answers to the clues will be entered into the diagram in a direction for you to determine. The movement will always be in straight lines. As an aid, there are eight directional answers, one for each of the eight possible ways an unencumbered queen can move. For example, if one of the answers were SLANT, the entry would be slanted, too. Some of the directional answers will suggest unique directions; EAST or EASTERLY would indicate horizontal movement from left to right. Other directional answers, like SLANT, will only nar- row down the possibilities.

The hints provided below give the direction for each answer. Let me know 1 2 3 4 whether you used the hints in solving. There are two proper nouns and one common foreign word. All the oth- 5 6 7 er answers are playable in Scrabble. Ignore punctuation, which is designed to confuse. 8 9 10 Thanks to Eric Klis, Bob Fink, and Jerry Miccolis for test-solving and edi- torial suggestions. 11 12 13 14 15 1. Elmer Fudd’s progressive woof 2. Inconsequential ironwork 3. Organization of American States 16 17 taking temperature of grain 4. Hairs I hear found in smoked salmon 5. Poles akimbo on ski trail 18 6. Colors affixed to mug 7. Duplicity cut short by Uwe’s wife 8. Identify one with extra pay as an 19 20 21 imbecile 9. Twilight for First Lady 10. Blue feathers 22 23 24 11. Buffet for Spanish king 12. Ted’s getting a failing grade: this needs to be reversed—and quick 13. Chips off the old block with overtones of arrogance 14. Sandbar with a bunch of fish 18. Big Brown I’d expect in first place 22. Long Aida directed with bias 15. Encounter bosom enhanced with a with a big potential payoff 23. Guerrilla leader in pain after bit of lift 19. Take on a story of Galen, inauguration 16. Inadequate dexterity with bow post-surgery 24. Hesitant to support protégé 17. Belgrade resident appearing in 20. Churchgoer beheaded for robbery capitals of Slovenia, Estonia, 21. Untroubled after fluster gets put to

Romania, and Bosnia rights

24. RL 24. 21. BT 21. 18. BT 18. 15. DRL 15. 12. ULR 12. 9. URL 9. 6. TB 6. 3. TB 3.

23. ULR 23. 20. BT 20. 17. TB 17. 14. RL 14. 11. DLR 11. 8. DLR 8. 5. DLR 5. 2. RL 2.

22. ULR 22. 19. URL 19. 16. DLR 16. 13. DRL 13. 10. TB 10. 7. LR 7. 4. RL 4. 1. LR 1. Directional hints Directional

70 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG Previous Issue’s Puzzle—Are You Sirius? A Star Is Born An artisan (let’s stretch the definition) artisan = SINATRA Did wonders with a soup can he had drained. soup cans = CANOPUS His model sat near looking mighty pained sat near = ANTARES And gave no indication of contrition. gave = VEGA “I hate to brag, but I nailed my audition. to brag = BOGART My tardiness is easily explained: tardiness = STREISAND You sing; present a scene; then get detained. sing present = SPRINGSTEEN My costar calls it ‘Broadway Inquisition.’” costar = CASTOR

The way one sees an ox pull on a yoke. ox pull = POLLUX The way a Lee ad makes one overpay. Lee ad = ADELE You give a gal an inch, pal, and you’re through. Inch pal = CHAPLIN So April Fools! She stopped to do some coke. So April = POLARIS Now empty your gelée tubes while ye may; gelée tubes = BETELGEUSE A new star lives on old stars’ residue. lives = ELVIS

Solvers I have to use a rare or foreign word or Solvers at the Excruciating Level: Not many solvers this time around. I something, but for the most part, the dif- Dean Apps, Bates, Buckner & Zurhellen, know it’s a hard puzzle when my test ficulty in cryptic puzzles is untangling J&J Holloman, Jim Muza, Doug Szper solvers need to use reference sources! the wordplay. Difficult wordplay coupled The star that threw most people was with obscure answers would lead to mis- Solvers using some hints (or not Canopus. I didn’t know that one before ery, in my opinion. Because there aren’t saying): I started, either. It’s surprising how few enough commonly known celestial stars, Todd Dashoff, Sean Donohoe and Josh stars’ names are widely known. One of I used only seven (with apologies for Ca- DenHartog, dba T.O.C.E (The Thousand the joys of cryptic puzzles, as opposed nopus) and chose stars of a different sort Oaks Cryptic Enthusiasts), Bob Fink, to crosswords, is that they don’t deal in for the other seven. Solvers who realized Phil Gollance, Eric Klis, David Lovit, Tim arcana. A couple of solvers sent lists con- that early had a much easier time of it. Luker, Jerry Miccolis, David & Corinne taining some very obscure stars (Rana, “Lee ad” was the most common entry for Promislow Theta, Ensis). I don’t think these can be identifying the trick. anagrammed from one or two words; in order to get them you have to make par- TOM TOCE is a senior manager for actuarial services with Ernst & Young tial anagrams, which wasn’t the deal—or in New York and is a member of the Jeopardy Hall of Fame. Solutions may at least not the deal as I conceived it. I be emailed to [email protected]. In order to make the solver list, your try in my puzzles to avoid really obscure solutions must be received by Sept. 30, 2016. things. Okay, sometimes to fill out a grid

SEP | OCT.16 CONTINGENCIES 71 Crossword WARREN MANNERS Stockholm Visitors

1 2 3 4 5 5 6 7 8 9 10 11 12 13 2. 1990 winner W W W W W W W W W W W W W 3. Eaves dropper 14 15 16 4. Wrapped lunch again W W W W W W W W W W W W W 5. ____ nose 17 18 19 6. Normal muscle tension W W W W W W W W W W W W W 7. Saudi neighbor 20 20 21 22 8. 1990 winner W W W W W W W W W W 9. Upbraids 23 ` 24 25 26 27 10. Castigates W W W W W W W W W W W W W 11. Chess grandmaster 28 29 29 30 31 12. Calligrapher’s medium W W W W W W W W W W 13. Impaired sense of touch 31 32 33 34 35 24. ___-les-Bains W W W W W W W W W 26. You, to Goethe 36 37 38 39 40 29. 1985 winner W W W W W W W W W W W 33. Corrected 41 42 43 34. Infl. indic. W W W W W W W W W W 36. It might have many names 44 47 45 49 46 47 48 49 37. Tight wrapper? W W W W W W W W W 38. Overhauls 50 51 52 53 54 54 40. King David, to some scholars W W W W W W W W W W W W W 42. Tube top 55 56 57 58 59 43. Doc. certifiers W W W W W W W W W W 47. Medium medium 60 61 62 48. 1997 winner W W W W W W W W W W W W W 49. Shoves off 63 64 66 65 52. Hot compress W W W W W W W W W W W W 53. Norville Barnes inventions 66 67 69 68 56. Castigate W W W W W W W W W W W W 58. Celery follower

32. Dispossess Across Previous Issue’s Puzzle: 35. Naval CIA 1. Eastern title Blacktie Swan 36. Frontier friend 5. Plant opening 1 2 3 4 5 6 7 8 9 10 11 12 13 39. Kind of charge 10. Late-braking development? S T A M P O L A S S I S S 40. Rabbit relative 14 15 16 14. Awesome! C A N A L D I R T U G L I 41. PEI to Newfoundland dir. 17 18 19 15. Rover D O T C O M I C A L B L O T 42. Nationals 20 21 16. Generic term for 40 across D E N I R O P O P E 44. Check 22 23 24 25` 26 27 17. Energy bar B L E N D S T A U C R O D D 45. Earlier 28 29 30 18. Pacify A I R I E S T T I P I 46. Jerks 31 32 33 34 35 19. Drunk and dull endings S T A N D I N S S U M A C 50. ER setting 36 37 38 39 40 20. LIC governance board E A S E T A N E B O N 51. Opulent 41 42 43 44 36 46 21. Fleecing operation S E 7 E N W O O D V I S E 54. New parent craving 47 48 49 22. Captive Ins. Assoc. of big sky country 55. Drudge E W E R B R Y A L E S 23. Macro or micro follower; related to limbs 50 51 52 47 54 57. Musical stress C O L L E G E S L I L A C S 25. Ten or pen follower 55 56 57 59. Earthy deposit A L O E A B A T O R 27. Chance 58 59 60 61 62 63 60. On Vine St., say M D I V T U L I P B U B L E 28. Heat, informally 64 65 66 61. Only one of 53 down A I R E E R S E A D I E U 30. ____ Fit 67 68 69 62. Incan sun god 31. Fed. med. org. S E E N D Y A D L A N E S 63. Sports figures 64. 5-sided flag waver Solvers Solutions may be emailed to 65. Tam sporter Anthony Amodeo, Dean Apps, Andrew [email protected]. 66. A “beautiful” prize winner Boyer, Charles Chacosky, Joshua 67. i.e. DenHartog, J&J Holloman, Matt In order to make the solver list, 68. XXX Kranovich, Renee Kudrak, Timothy your solutions must be received Down Luker, Jim Muza, Zig Swistunowicz, and by Sept. 30, 2016. 1. Pitch Doug Szper.

72 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG Experiment with insurers’ BCAR scores under changing conditions

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Marbles in Boxes

I REALLY ENJOYED THE PUZZLE FROM MARTIN GARDNER that might try to generalize them even further was used as a warm-up in the May/June issue (“4x4”). The only concern or determine the minimum expected number of draws. was that it was relatively easy for this group. It led me to consider possible generalizations. Here are two generalizations of that problem that Previous Issue’s Puzzle: Mix and may be more challenging. The first increases the number of colors to Match three. The second stays with two colors but increases the number of 1. If the Truth Booth shows a match, what is the probability of a blackout? marbles in each box to three and the number of boxes to four. As one couple is a match, there are nine 1. Imagine that you have three boxes, A certain amount of chance is in- guys and gals left. Mark the guys as one containing a red and a blue marble, volved in both of these problems. That is, A, B, C, …, I, and the ladies A, B, C, …, one containing a blue and a green mar- the number of draws you need will vary I, where guy A and gal A are a perfect ble, and the third, one green marble and depending on things you won’t know match. Assume guy A picks a woman one red marble. The boxes were labeled in advance—how the boxes are (mis)la- who is not his match. There are eight for their contents—RB, BG, and GR—but beled, which boxes you select, and which women the guy could pick. Assume he someone has switched the labels so that marbles you pick from those boxes. Of selects woman C. Next, let man C pick every box is now incorrectly labeled. You course, the answer for each problem his match. If man C picks woman A, then are allowed to take (i.e., draw) one marble is the smallest over all possible values there are seven women and men left, and at a time out of any box, without looking of the unknowns. And to justify your each guy/gal has one forbidden choice. inside, and by this process of sampling answers, you must provide a single strat- However, if man C picks any of the sev- you are to determine the contents of all egy for each problem that en remaining wrong three boxes. What is the smallest number works no matter what choices (women B, of drawings needed to do this? the situation is. The D, E, …, I), that’s strategy can vary the equivalent of 2. Imagine now that you have four box- depending on the there being eight es, each containing three marbles. One knowledge gained guys and women with no black marbles, one containing from prior draws. left, where each one black marble, one with two black If you find guy and wom- marbles, and the fourth box, three black these problems an has exactly marbles. The remaining marbles in each too easy, you one forbidden box are white. The boxes were labeled choice (where for their contents—WWW, BWW, BBW, and BBB—but someone has switched the labels so that every box is now incorrectly labeled. You are allowed to take (i.e., draw) one marble at a time out of any box, without looking inside, and by this process of sampling you are to determine the contents of all four boxes. What is the smallest number of drawings needed to do this?

Solutions may be emailed to [email protected]. In order to make the solver list, your solutions must be received by Sept. 30, 2016.

74 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG man C’s forbidden choice is woman A). Recursively, the number of blackout Ad Index possibilities equals Dn = (n-1) * (Dn-1 + To add your company’s name to this list, call Jeff Rhodes, Network Media Dn-2). If you solve this recursively, D9 Partners at 410-316-9857, or email [email protected]. equals 133,496. As originally there are For links to these advertisers’ email addresses and websites, visit the 9!, or 362,880, number of match pos- Contingencies website at contingencies.org/linksto_advert.asp. sibilities, the probability of a blackout Actuarial Careers Inc.®...... 3 is 133,496/362,880=0.3679. This is the 914-285-5100 | actuarialcareers.com probability of getting a derangement. Actuarial Resources Corporation...... 63 2. If the Truth Booth shows not a match, 913-451-0044 | arcval.com what is the probability of a blackout? American Academy of Actuaries ...... 13, 17, 20 Before the results of the Truth Booth, 202-223-8196 | actuary.org from No. 1, there are D10, or 1,334,961 pos- AM Best...... 73 sible blackout cases, and 10!, or 3,628,800 908-439-2200, ext. 5311 | ambest.com total cases. Let’s assume guy A goes into Andover Research Ltd...... 7 the Truth Booth and comes away unsuc- 800-ANDOVER | andoverresearch.com cessful. Now, guy A only has eight, not DW Simpson...... C2 nine, possible wrong women to choose 800-837-8338 | dwsimpson.com from in the matchup ceremony. So we must multiply 1,334,961 by 8/9 to get EY ...... 21 the new number of potential blackout ey.com/us/insurance | [email protected] cases. Similarly, there is a 10 percent Ezra Penland...... 1, 67 chance that guy A would have correctly 800-580-3972 | ezrapenland.com selected woman A. So we can get rid of GGY Axis...... 11 these 10 percent of cases from the de- 877-GGY-AXIS | ggyaxis.com nominator (0.9*3,628,800=3,265,920). Hannover Life Reassurance Company of America...... 57 So the probability of a blackout now is 800-327-1910 | hannover-re.com 1,334,961/3,265,920, or 0.3633. Notice KPMG...... 44–45 how similar this answer is to the answer 416-777-8500 | kpmg.com/us/axis of No. 1! Oliver Wyman...... 69 3. What is the probability of a blackout be- oliverwyman.com/actuaries fore the show begins? Optimum Re Insurance...... C3 As there is a 10 percent chance of getting 214-528-2020 | optimumre.com a perfect match in the Truth Booth, the Pauline Reimer/Pryor Associates...... 25 answer is just 0.1 * [No. 1 answer] + 0.9 * 516-935-0100 | ppryor.com [No. 2 answer], or 0.3638. PolySystems Inc...... C4 312-332-5670 | polysystems.com Solvers RGA Reinsurance ...... 59 Robert Bartholomew, Bob Byrne, 636-736-7000 | rgare.com William Carroll, Samantha Casanova, Yan Fridman, Sean Fulton, Rui Guo, SCOR Global Life Americas...... 5 Philip Hughes, Chi Kwok, David 704-344-2700 | scor.com Lovit, Timothy Luker, Lee Michelson, Swiss Re...... 65 Paul Navratil, David Oakden, David 914-828-8000 | swissre.com Promislow, Noam Segal, Tomasz Willis Towers Watson ...... 9, 15 Serbinowski, John Snyder, Al Spooner. 416-407-3812 | willistowerswatson.com

SEP | OCT.16 CONTINGENCIES 75 End Paper BOB RIETZ

Sins of the Father

MY FATHER GAVE ME A DISEASE that is familiar to most people ticket broker, then sitting in literally the who live on the North Side of Chicago. Although it’s not genetic, it is worst seat in the upper deck … only to definitely passed from father to son. “Hi, my name is Bob, and I’m a have the game rained out. Then there was 2003. The Cubs were Cubbie fan.” Las Vegas had the Cubs as preseason favorites to win the leading the Florida Marlins three games 2016 World Series. Will this team break my heart like so many earlier to two in the NLCS and were ahead 3-0 squads? with one out in the eighth inning of the sixth game at Wrigley Field. Only five I have fond memories of attending I got excited in 1978 when the Cubs more outs to go! The Marlin batter lifted games in the Friendly Confines with acquired Dave Kingman, a prodigious a soft foul fly down the left field line and Dad in the 1950s and 1960s. Those were slugger. He hit three home runs on May Moises Alou was poised to reach over the brutal years for Cubs fans, though he con- 17, 1979, and the Cubs scored 22 runs in railing an grab it. But a fan reached out vinced me every year that the Cubs were that game. Unfortunately, the Phillies and caused the ball to ricochet off Alou’s only one good starting pitcher away from scored 23. mitt. Two batters later, Alex Gonzalez the World Series. I believed him until the I lived in Detroit most of my adult life, (who led the National League in fielding Cubs traded Lou Brock for Ernie Broglio and the 1984 World Series looked like it percentage that year) braced himself to in 1964, a trade that baseball historians would feature two Rust Belt teams, the field a potential double play ground ball. rank as one of the most lopsided trades in Cubs and the Tigers. I would be torn (not Inning over! Except he muffed the easy the sport. Brock helped the Cardinals win really) between my two favorite teams. grounder, and the Fighting Fish scored the World Series in 1964 and 1967 and What could possibly go wrong, especially eight runs to win Game 6. You could hear entered the Hall of Fame in 1985. Broglio after the Cubs won the first two games of the air escaping out of the Cubs’ balloon, pitched only two more years. the National League Championship Se- and they then lost Game 7, denied again The Cubs had the National League ries (NLCS)? But they lost the next three a trip to the Fall Classic. pennant sewn up in 1969. They were 9.5 games to the San Diego Padres. I still re- My father was born in 1916 and never games ahead of the woeful New York member the line drive in Game 5 that saw the Cubs win a World Series. But Mets on August 19. Leo Durocher had handcuffed Ryne Sandberg, who would hope springs eternal. Their record is 69 Banks, Williams, Santo, et al., firing on win nine consecutive Gold Gloves, and wins and 41 losses as we go to print in all cylinders—until they ran out of gas the easy grounder going through Leon early August, and they are in first place in September. The Amazin’ Mets won Durham’s legs. I was crushed. in the Central Division, 11 games up on the pennant by eight games and went I attended the first night game in the second-place Cardinals. Is this finally on to beat the Orioles in the World Se- Wrigley Field on August 8, 1988, with my the year? As Dad said every spring, “You ries. Afterward, the running joke was the daughter. Only a Cubs fan can appreciate gotta believe!” Cubs were moving to the Philippines and the irony of paying an enormous fee to a BOB RIETZ is a retired pension actuary would be renamed the Manila Folders. who lives near Asheville, N.C.

76 CONTINGENCIES SEP | OCT.16 WWW.CONTINGENCIES.ORG ance n Alli in Growt A h

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