Financial Regulation Takes Cues from Crisis

Actuarial T

NOV 2 0 0 9 h e N e Financial Regulation Takes Cues From Crisis

year after the collapse of Lehman Wang used visual representations to track the infla H T N - O M S W Brothers and the subsequent stock market tion of the housing bubble earlier in the decade. The steep A meltdown, President Obama went to Wall Street to rise in home values, he explained, corresponded to lower prepare the financial industry for tighter regulation. With interest rates at the turn of the century and an increase Washington policymakers finally ready to address financial shortly after in overall loans issued by non-government- regulation and its role in preventing future financial crisis, sponsored enterprises—of which subprime loans consti- the Academy hosted a briefing Sept. 29 on Capitol Hill to tuted a disproportionate percentage. Insurers’ exposure to discuss lessons learned from the aftermath of the housing mortgages, the study concluded, didn’t change much over

bust and eventual economic upheaval. the past 15 years, but the quality of those mortgages may y l The Academy teamed up with the Society of Actuaries have, as government bonds and agency-guaranteed obli- (SOA) to present the results of an SOA study released earlier gations have given way to increased corporate bonds and in the month. The study, sponsored by the SOA’s Committee private-label or non-agency mortgage-backed securities. F O on Finance Research and the Joint Management Section of While some groups may have tended to generally in-

the SOA, Casualty Actuarial Society, and Canadian Institute vest more aggressively than others and some insurance of Actuaries, looked at the impact of the financial crisis on holding companies took on disproportionately large mort- H T insurers as a result of the industry’s mortgage investments. gage exposures through structured credit instruments,

During the briefing, Shaun Wang, professor at Geor- insurance regulations appear to have served the industry A e gia State University and coauthor of the SOA paper, con- and its consumers well throughout the crisis. firmed that the study determined the primary cause of the “The life insurance industry has always had significant ex-

financial crisis to be the “widely held belief that housing posure to mortgages,” Wang said, “but we found little evidence m

prices couldn’t decline significantly on a national basis.” that the industry as a whole chased the real estate bubble.” e

That misplaced confidence was exacerbated by second- Wang noted the paper’s finding that key regulatory struc N - A C I R ary causes such as a complex and ineffective regulatory tures protected the insurance industry, including strict regu- Update regime, incentive problems in the originate-to-distribute lation of derivatives developed by the National Association model for securitization, and overreliance on credit rat- of Insurance Commissioners that prevented some insurers ings by market participants and regulators. See hill briefing, Page 9 A

Antitrust Hearing Challenges Exemption D A C Academy Testimony Defends Consumer Protection Regulations

cademy member James Hurley testi- e

fied in an Oct. 8 House judiciary subcommittee m

Ahearing on the effects of removing health insur- y ance and medical professional liability insurance from an

antitrust exemption currently granted to the insurance F O industry. As a corollary to health insurance reform pro-

posals being debated in Congress, the House Judiciary A Committee’s Courts and Competition Policy Subcommit-

tee hosted the hearing to discuss a measure in the pro I R - A U T C posed Health Insurance Industry Antitrust Enforcement Act of 2009 (H.R. 3596) that would remove the exemption given to insurance companies from federal prosecution of antitrust violations for activities considered part of insurance business. The bill prohibits companies from engaging “in any form of price fixing, bid rigging, or mar- e ket allocations.”

James Hurley testifies to a House subcommittee on behalf of s the Academy’s Medical Professional Liability Subcommittee. See House testimony, Page 10

4 5 7 8 NAIC Wrap-up Show of Strength New Officers Refining Definition Revised standard valuation Outgoing president asks Academy officers join CAS syllabus change law passes at fall meeting actuaries to come together the board prompts concern over NAIC requirement c a l e n d a r

NOVEMBER 1-4 ASPPA annual conference, National Academy News Briefs Harbor, Md. 1-4 CCA annual meeting, Tucson, Ariz. 9-12 Life and Health Qualifications Annual Meeting Seminar (Academy, SOA), Arlington, Va. 12-15 IAA meeting, Hyderabad, India he Academy hosted its 2009 annual meeting Oct. 26 in Boston. At the meeting, 15-18 CAS annual meeting, Boston new Academy officers assumed their roles, including new President Ken Hohman, President- 19-23 NCOIL annual meeting, New Telect Mary Frances Miller, and Vice Presidents Henry Siegel (risk management and financial Orleans reporting), Ethan Kra (pension), and Art Panighetti (life). New Academy Directors Ron Gebhardtsbauer, DECEMBER Mary D. Miller, Dave Neve, and Tom Wildsmith were elected. (For a photo spread of the 2009-10 Acad- John Purple 2-3 Academy P/C Loss Reserve Opinion emy board, see page 6.) Meanwhile, the Academy handed out its Robert J. Myers Award to Seminar, Baltimore and its Jarvis Farley Service Award to Donald Segal. For in-depth coverage of the annual meeting, 2-3 ASB meeting, Washington check out the December Update. 5-8 NAIC winter meeting, San Francisco 8 Academy Executive Committee meeting, Washington ASB Clarification dard might require more for- bailout of the American 9 Qualification Standards audiocast The Actuarial Standards mal review. International Group. (Academy, CCA) Board (ASB) recently voted to 18 Academy webcast on ASOPs 36 and 43 add the word “significantly” Manuals Coming Bank Change January in Section 3.4.1 of Actuarial The Academy is now accept- The Academy has recently Standard of Practice (ASOP) ing orders for its annual moved its banking operations 25-26 Actuarial collaboration meeting, Washington No. 44, Selection and Use of Life and Health Valuation from Harris Bank in Chicago 27 Council of U.S. Presidents meeting, Asset Valuation Methods for Law Manual and Property to PNC Bank in Washing- Washington Pension Valuations, to make it and Casualty Loss Reserve ton. The move will result in 28 Academy Board of Directors meeting, clear that only significant bias Law Manual, reference tools increased services, reduced Washington needs to be disclosed. Since designed to help appointed costs, and enhanced systems March the ASB was clarifying the actuaries comply with integration. In addition to 3-6 IAA meeting, Capetown, South Africa original intent of the ASOP, National Association of other banking services, PNC 7-12 International Congress of Actuaries, rather than modifying it, no Insurance Commissioners will take over the Academy’s Capetown, South Africa exposure of this clarifica- regulations. lockbox and credit card pro- tion is needed, and given the cessing operations. The Acad- april deadline for pension reports, Derivatives emy’s new lockbox address is: 11-14 Enrolled Actuaries Meeting such exposure would be Scrutinized American Academy of Actuar- (Academy, CCA), Washington counterproductive. On Oct. 21, the House Agri- ies, P.O. Box 824093, Philadel- 15 Academy Executive Committee meeting, Washington ASOP No. 44 was issued as culture Committee passed phia, PA, 19182-4093. Addi- a new standard in September an amended version of H.R. tional dues payment details May 2007, with an effective date of 3795, which would move all and address change reminders 19 Council of U.S. Presidents meeting, March 15, 2008. Since then, trading of derivatives to a will be provided in the future. Washington practitioners using the new public exchange if the trades 20 Academy Board of Directors meeting, In The News Washington standard have done so in the are between financial institu- context of events that have tions. The Over-the-Counter An actuarial analysis of the August included an extreme market Derivatives Markets Act of Community Living Assis- 2-3 Acturial Collaboration Meeting downturn and the implemen- 2009 previously passed the tance Services and Supports 10 Academy Executive Committee tation of new federal pension House Financial Services (CLASS) Act, a proposed fed- meeting, Washington legislation. The ASB Pension Committee on Oct. 15 by a eral long-term care program, Committee had been observ- vote of 43 to 26. H.R. 3795 performed by a joint work ing and listening to reactions and H.R. 977, introduced by group of the Academy’s Feder- to the new standard by prac- House Agriculture Commit- al Long-Term Care Task Force titioners and other persons tee Chair Collin Peterson and the Society of Actuaries’ interested in the selection and (D-Minn.), were introduced Long-Term Care Insurance use of asset valuation methods in response to last year’s Section Council was discussed for pension valuations, and largely unregulated credit in a Sept. 3 Fortune article. Links to documents underlined in blue it will continue to do so in its default swaps trading that led Steve Schoonveld, a member are included in the online version of this issue at www.actuary.org/update/ responsibility to determine if to the fall of Lehman Broth- of the joint work group and index.asp and when any pension stan- ers and the Federal Reserve chief financial officer of Life

w w w. a c t u a r y. o r g Actuarial Update November 2009 2 Media Relations Activity Report—Third quarter, 2009 ➜ continued from Page 2

Plans Inc. in Waltham, Mass., Ohio radio show “Retire- Three-Year Quarterly Average was quoted. The analysis was ment Matters.” Todisco Third Quarter, 2009 also mentioned in the Sept. 1 discussed seven sources of issues of Agent’s Sales Journal retirement security: Social and Investment & Financial Security, traditional de- Advisor Monthly. fined benefit pension plans, personal savings including 41 30 Requests 24 24 Interviews 207 260 Placements The Academy’s Consumer- defined contribution plans, Note: A request is a media inquiry for more information (e.g., statistics, comments, work Driven Health Plans Work health and long-term care products, etc.) or for media credentials to an Academy event. An interview occurs when analysis the Academy is able to provide a spokesperson to meet a media request. When an inter- Group’s recent of financing, employment, view is fulfilled, it is no longer tallied as a request. A placement is an article containing an consumer-driven health plan housing wealth, and family Academy reference, quote, or attribution from an Academy spokesperson or the placement of an Academy-produced letter to the editor/op-ed. A pickup is the publication of studies was cited in numerous and community support. an Academy news release, media alert, or statement. A three-year quarterly average is the statistical mean of the past 12 quarterly totals for each category (requests, interviews, opinion pieces in September, He also noted the risks as- placements, and pickups). including those recently pub- sociated with each. lished online by BusinessWeek on Sept. 9 and Real Clear Poli- Academy Senior Health Fellow Economix blog entry on the ford Life in Simsbury, Conn. tics on Sept. 13. The analysis Cori Uccello was quoted in a Senate Finance Committee Campbell said the commit- was also cited in an op-ed in Sept. 9 Health Plan Week article health care reform bill also tee’s decision to pass the revi- the Sept. 15 issue of the Inves- regarding proposed health care quoted Uccello. She said that sions was a milestone toward tor’s Business Daily. reform legislation. She warned if premiums for high-risk in- implementing a principle- that a guaranteed-issue system dividuals do not adequately based approach. Academy Senior Pension Fel- would likely cause an increase reflect the costs associated The NAIC then voted on low Frank Todisco’s letters to in average medical services with the coverage, low-risk Sept. 23 during the executive/ FOX News Channel and Rep. utilization and would require individuals will “have to pick plenary session of its fall meet- Anthony Weiner regarding the an individual mandate to try to up the tab.” Absent an effec- ing to adopt the proposed revi- congressman’s appearance on reduce adverse selection. tive and enforceable mandate, sions to the valuation law. News “Your World With Neil Cavuto” Uccello also outlined the these low-risk individuals may reports surrounding the deci- were cited in a Queens Tribune Academy’s three principles for choose to drop coverage. sion, including ones in National article published on the web on actuarially sound health care Underwriter Life & Health on Sept. 10 and in print on Sept. reform in a Sept. 18 Bureau of Remarks by Donna Claire, Sept. 21, BestWire on Sept. 23, 16. Todisco wrote to clarify National Affairs article. She chairperson of the Academy’s and BestWeek on Sept. 28, cited inaccuracies about the process said reform should make sure Life Financial Soundness/Risk the Academy’s support. of determining cost-of-living that insurance attracts a broad Management Committee and adjustments for Social Security, cross section of risks, level president of Claire Thinking A Sept. 30 National Underwriter the subject of Neil Cavuto’s in- the playing field so that plans in Fort Salonga, N.Y., during a Life & Health article discussed terview with Rep. Weiner. competing for the same people Sept. 9 National Association an Academy comment letter to On Sept. 6, Todisco ap- abide by the same rules, and of Insurance Commissioners the NAIC’s Annuity Disclosure peared for the second time this reduce spending growth. (NAIC) Life Insurance and Working Group regarding an summer as the sole guest on the A Sept. 22 New York Times Annuities Committee confer- annuities illustration proposal ence call were published later by the American Council of risk management and that day by the Insurance Life Insurers. Linda Rodway, Financial reporting briefs Bellwether. In discussions chairperson of the Academy’s about passing proposed revi- Annuity Illustrations Work ➥ Denis Tauscheck, senior vice president and chief actuary sions to the standard valuation Group and a consulting actuary for National Guardian Life Insurance Co. of America in law, Claire said that the Acad- from Roslyn Heights, N.Y., was Madison, Wis., and Michael Lockerman, director for emy wholeheartedly supports quoted as the letter’s author. PricewaterhouseCoopers in New York, have joined the the proposal. The committee Among other suggestions, the Academy’s Financial Regulatory Reform Task Force. voted to pass the proposed work group proposed moving revisions, and subsequent the annuitization section to articles by BestWire on Sept. precede the cash value section, pension briefs 11 and LexisNexis Insurance since the purpose of an annuity ➥ Jeffrey Litwin, senior vice president for the Segal Law Center on Sept. 16 quoted is to provide income. Co.’s Sibson Consulting Division in New York, and Ellen the Academy’s Life Practice To find out about other ac- Kleinstuber, managing consultant for the Savitz Council Vice President Tom tuaries in the news and for Organization in Philadelphia, have joined the Academy’s Campbell, a vice president and external links, visit the Acad- Pension Committee. corporate actuary with Hart- emy’s newsroom. w w w. a c t u a r y. o r g Actuarial Update November 2009 3 2009 NAIC Fall Meeting Valuation Law Tops NAIC Actions

he National Association of Insurance Commissioners (NAIC) finally adopted a revised stan- Health Opinions Tdard valuation model law at its fall national meeting Sept. 23 The Academy’s Health Practice Financial in National Harbor, Md. More than five years in the making, the Reporting Committee has released a practice note on model law is a major development in the effort to improve the way the revised actuarial statement of opinion instructions for the life insurers calculate reserves held to protect consumers’ financial NAIC Health Annual Statement. The practice note was created interests in insurance products. to assist actuaries in understanding the new requirements “This significant action replaces static formulas with a principles- adopted by the NAIC. The changes to the opinion instructions based approach—using risk analysis techniques such as modeling and are effective for the 2009 annual statement filing. simulation to better capture the various risks inherent in establish- The revised health actuarial opinion instructions require ing adequate reserves,” said Roger Sevigny, NAIC president and New a qualified health actuary to be appointed by the board of Hampshire insurance commissioner. “Modernizing these methods pro- directors; prescribe language for each section, deviations vides regulators with better tools to protect insurance commissioners.” from which require notation in a “check box” section; and Pending adoption by individual states, the law will replace the require a supporting actuarial memorandum. The Academy calculation of insurance reserves based on static formulas that aren’t included discussion of these changes at the Life and Health Qualifications Seminar Nov. 9-12 in Arlington, Va. always optimal when matching risks to reserves. Specifically, the law will add reserves for certain benefits, options, and guarantees that involve significant risks but previously had little or no reserves On the capital side, the NAIC’s Life RBC Working Group received required under old formulas. The law will also improve reserve a final report from the Academy’s C3L ife and Annuity Capital Work calculations for products that consumers find beneficial but that Group on its recommendations for C3 Phase III risk-based capital required reserves in excess of reasonably conservative estimates. requirements. A companion to the revised law, the valuation manual, which In anticipation of the principle-based approach (PBA) rollout to is nearing completion by the NAIC, will provide specific guidance state insurance departments and legislatures over the next couple for each product to make sure life insurers hold correct amounts of of years, the Academy participated in an education session for regu- reserves to meet policyholder obligations. The manual is expected lators on the basics of PBA. Nancy Bennett presented on behalf of to be completed by the end of 2009, an intention noted in the NAIC the Academy, along with Larry Bruning and Philip Barlow on behalf Life Insurance and Annuities Committee’s September vote to ad- of the NAIC, on the history of PBA, details on how reserve and vance the valuation law. capital calculations work under PBA, and what steps are necessary The NAIC’s Life and Health Actuarial Task Force (LHATF) con- to fully implement PBA at the state regulatory level. tinued its work on the valuation manual at the fall meeting. Most of the major topics of discussion regarding the manual are issues to Life Notes be resolved within VM-20, a section in the manual that governs life insurance. Gary Falde and Alan Routhenstein from the Academy Life The NAIC’s Annuity Disclosure Working Group continued its con- Reserves Work Group’s Asset Subgroup presented the group’s results sideration of a model annuity illustration. Cande Olsen presented after evaluating alternative methodologies for prescribed default the Academy’s Annuity Illustration Work Group’s revised recom- costs on existing investments. Based on the presentation, LHATF mendations for changes to a draft model proposed by the American directed the Academy group to abandon an approach proposed by the Council of Life Insurers at the spring national meeting. New York Insurance Department and to focus on fully developing the In addition, Nancy Bennett participated in a public hearing of methodology proposed by the Academy’s Life Reserves Work Group. the Rating Agency Working Group on the use of rating agency rat- LHATF plans to have the valuation manual completed for at ings in state insurance regulation. Specifically, Bennett covered the least one type of product by the Dec. 31 deadline. At the meeting, the use of ratings in the insurance industry and detailed how ratings task force received a draft of VM-21, which would govern variable affect the determination of capital and other uses such as calculat- annuities and is planned to be a nearly word-for-word reiteration ing prescribed default costs and investment spreads. of Actuarial Guideline 43 (the commissioners reserve valuation method for variable annuities), which was passed in 2008 and goes Federal Notes into effect at the end of 2009. The draft will likely be deliberated on interim conference calls to meet the Dec. 31 deadline to have a The NAIC’s Government Relations Leadership Council sent Con- valuation manual completed. gress a suggested federal bill to modernize regulation of reinsurance At the fall meeting, LHATF also received a project update from through the states. The proposed Reinsurance Regulatory Modern- Tim Harris of the joint Academy/Society of Actuaries Valuation Table ization Act of 2009 would create two new classes of reinsurers in the Team, which will eventually be providing recommendations on mor- U.S., national reinsurers and port-of-entry (non-U.S.) reinsurers. The tality margins to be added when calculating principle-based reserves. bill would allow reinsurers the option of operating under the existing The task force also discussed economic scenario generators, and regulatory approach but would also allow national reinsurers to be Academy Senior Life Fellow Nancy Bennett presented an update from licensed through a single home state, while port-of-entry reinsurers the Academy’s Economic Scenario Implementation Work Group. would be certified through a single port-of-entry state. w w w. a c t u a r y. o r g Actuarial Update November 2009 4 Milestones, Millstones Call for Renewed Professional Commitment By John Parks

t’s been both an honor and certainly a challenge to cello, senior health fellow, as serve as the Academy’s president this year. I’d like to thank all part of the Academy staff. Ithe Academy volunteers and staff, especially Executive Director Collaboration continues Mary Downs, for their incredible dedication. The Academy’s leader- to be a priority for the actu- ship has had to deal with unfortunate and unprecedented litigation, arial profession. Two Capitol but I firmly believe our board of directors acted responsibly and Hill briefings on retirement deliberately in the organization’s best long-term interests. I also and the impact of the finan- firmly believe that we have an unparalleled opportunity to emerge cial crisis brought together from this turmoil a stronger and better Academy. SOA research and Academy policy work to update Hill staffers and But not all of our challenges this year have been internal. Our media on the latest information and trends. Collaboration was also country is in the grip of one of the most serious financial crises in an essential element in the development of TRACE, the new online recent memory. On July 20, the Academy stepped forward to help continuing education credit tracking tool for all actuaries, and in our nation respond to that crisis, hosting a financial summit that bringing to fruition the North American Actuarial Council’s profes- drew more than 60 members from all over the country to map out a sionwide search engine, developed and hosted by Mexico’s National strategy for how actuaries in general, and the Academy in particular, College of Actuaries. can contribute to solving the crisis. We even had the honor of being There’s much to be done going forward. One of the hard lessons joined by Assistant Secretary of the Treasury Alan Krueger. learned this year is that some of the Academy’s processes and pro- Along with the financial crisis, health care reform called for the cedures need to be re-examined. Many members have expressed nation’s and the Academy’s attention in 2009. In addition to hosting a desire for a more direct and transparent involvement with these briefings and meetings with congressional staff on Capitol Hill, the processes. We also recognize the need for improved communica- Health Practice Council issued and promoted a series of brief policy tion and feedback channels between leadership and members. statements, Critical Issues in Health Care Reform, to educate policy- Ken Hohman, my successor as president of the Academy, is exactly makers on underlying reform subjects, such as risk pooling, gender the person for the job. He is a healer, a unifier, and most important, a considerations, market reform principles, and actuarial equivalence. proven leader. With Ken at the helm, we will accomplish the goals we In the past few months, we’ve also passed significant milestones set at this year’s financial summit, we will add the voice of actuarial in a decade-long effort to establish and implement a principle-based expertise to the health care reform debate, we will honestly and impar- approach for life insurance reserves and capital. A revised standard tially analyze the financial consequences of proposed legislation, and, valuation model law was adopted in September by the National As- yes, we will overcome the rifts that have opened in our ranks this year. sociation of Insurance Commissioners. I congratulate the hundreds Thank you for allowing me the opportunity to serve as your of volunteers who have tirelessly worked on this effort. president of our prestigious organization. The Academy welcomed a new senior life fellow this year. Nancy John Parks became the Academy’s immediate past president on Oct. 26. Bennett joins Frank Todisco, senior pension fellow, and Cori Uc-

Seminar on Effective P/C Loss Reserve Opinions: Tools for the Appointed Actuary Westin Baltimore/Washington Airport Hotel Dec. 2-3, 2009 Baltimore, Md.

Following up on last year’s success, the Academy’s annual seminar on casualty loss reserve opinions will again be divided into two parts. The first day’s sessions will cover introductory issues, while the second day will focus on more advanced topics. Participants may register for either or both days of the seminar. The seminar is presented annually by the Academy’s Committee on Property and Liability Financial Reporting.

For more information, visit http://www.actuary.org/seminars/casualty/opinion09.asp.

w w w. a c t u a r y. o r g Actuarial Update November 2009 5 B oard of D irectors , 2009–2010

Ken Hohman Mary Frances Miller John Parks Bill Bluhm John Schubert Andrea Sweeny President President-Elect Immediate Past Penultimate Past Treasurer Secretary President President

Al Bingham Gary Josephson Ethan Kra Art Panighetti Kathleen Riley Henry Siegel Vice President, Health Vice President, Casualty Vice President, Pension Vice President, Life Vice President, Vice President, Risk Professionalism Management and Financial Reporting

Ralph Blanchard Larry Bruning Tom Finnegan Ron Gebhardtsbauer Roger Hayne Darrell Knapp President-Elect, CAS President-Elect, ASPPA President, CAS

Michael McLaughlin Mary D. Miller Dave Neve Cande Olsen Adam Reese Stephen Rosen President, SOA President-Elect, CCA

Donald Segal David Shea Lawrence Sher Annie Voldman Tom Wildsmith President-Elect, SOA President, CCA President-Elect, ACOPA

w w w. a c t u a r y. o r g Actuarial Update November 2009 6 New Academy Officers

The Academy’s Board of Directors has approved the slate of 2009 Academy officers put forward by the Nominating Committee. New officers assumed their duties at the Academy’s annual meeting in Boston Oct. 26. The new officers are:

Mary Frances Miller Service Award in 2008. Currently, he is vice president of the New President-Elect York Life Insurance Co.’s Office of the Chief Actuary in New York. He is a fellow of the SOA. Miller has previously served on the Academy board dur- Ethan Kra ing her term as president and Vice President for president-elect of the Casu- Pension Issues alty Actuarial Society (CAS). In addition to her volunteer Kra has previously served on work with the CAS, she has the Academy’s board as a regu- volunteered for the Academy lar director from 2003-2006. as a member of the Academy’s He has served in a number Casualty Practice Council, of volunteer positions for the Council on Professionalism, Academy, including as vice and Committee on Qualifi- chairperson of the Pension cations. She is also a member of the Actuarial Standards Board’s Practice Council, member of Subcommittee on Reserving and chairs the International Actuarial the Pension Committee, mem- Association’s Education Committee. Miller is a founder and senior ber of the Joint Academy/Soci- consulting actuary with Select Actuarial Services in Nashville, Tenn. ety of Actuaries (SOA) Pension She is a fellow of the CAS and a chartered property and casualty Finance Task Force, and as chairperson of the Joint Academy/SOA underwriter. She was also elected an honorary fellow of the U.K.’s Task Force on Financial Economics. He also served on the General Institute of Actuaries. Committee of the Actuarial Standards Board. Kra is a worldwide partner and chief actuary for retirement for Mercer Inc. in New York. He is a fellow of the SOA, a fellow of the Conference of Consulting Henry Siegel Actuaries, a member of the American Society of Pension Profession- Vice President for Risk als and Actuaries, and an enrolled actuary. Management and Financial Reporting Issues Art Panighetti Vice President for Life Issues Siegel has volunteered in numerous leadership positions within the Academy through- Panighetti has been serving as out his career, including as regular director on the Acad- chairperson of the Financial emy’s board since 2007. He has Reporting Committee and the served as chairperson of the International Financial Report- Life Tax Work Group and as a ing Standards Task Force. He member of a variety of Acad- has managed the Academy’s response to projects from the Interna- emy volunteer groups, includ- tional Accounting Standards Board and Financial Accounting Stan- ing the Life Practice Council dards Board. He has also held leadership positions with the Society and the Tax Reform Work of Actuaries (SOA), the Actuarial Standards Board, the Group of Group. He is also a member of North American Insurance Enterprises, and the Actuarial Society the Academy’s Public Interest of Greater New York, for which he served as president in 2006. He Committee and a member of the Actuarial Foundation’s board of is also an Academy representative to the International Actuarial trustees. Panighetti is a vice president with Northwestern Mutual Life Association. Siegel was the recipient of the Academy’s Jarvis Farley Insurance Co. in Milwaukee. He is a fellow of the Society of Actuaries. w w w. a c t u a r y. o r g Actuarial Update November 2009 7 Casualty news Academy Asks NAIC to Review Instructions

he Academy’s Casualty Practice Council tive to basic education set forth submitted a letter in September to the National Association in Section 3 of the Qualification Tof Insurance Commissioners’ (NAIC) Casualty Actuarial and Standards. Statistical Task Force concerning the task force’s definition of a The council also noted that “qualified actuary” with respect to statements of actuarial opinion the Qualification Standards (SAOs) for property and casualty annual statements. A qualified contain experience and con- actuary is defined in the NAIC’s SAO instructions as a person who tinuing education require- is either a member in good standing of the Casualty Actuarial Society ments. It opined that while (CAS) or a member in good standing with the Academy who has membership in the CAS is nec- been approved as qualified for signing casualty loss reserve opinions essary to be a qualified actuary, by the Casualty Practice Council. it may not be sufficient to meet The letter was prompted by the CAS board of directors’ recent all of the Qualification Stan- approval of changes to its syllabus for associate-level exams, which dards. The council suggested alternative language for the section will take effect in 2011. The U.S. actuarial profession’s current Quali- of Exhibit B to the NAIC statement of actuarial opinion in which fication Standards address basic and continuing education and ex- the actuary discloses the basis for one’s qualification. perience requirements for actuaries issuing SAOs. Specifically, the A related article co-authored by Mary Frances Miller and Da- council’s concern is that while membership in the CAS may meet vid Menning appeared in the August 2009 edition of The Actuarial the NAIC’s definition of a qualified actuary, future CAS members Review. The article alerted CAS members and candidates that the who complete associate-level exams in accordance with the new revised exam requirements for associateship in the CAS will not CAS syllabus may not have met the basic education requirements cover all of the exam requirements set forth in Section 3 of the specified in the Qualification Standards. Such members may need Qualification Standards for actuaries issuing the loss and expense to demonstrate that they have either completed the exam topics reserves actuarial opinion in connection with the NAIC property set forth in Section 3 of the Qualification Standards, which will not and casualty annual statement. have been included on their exam syllabus, or have met the alterna- —Lauren Pachman

life briefs casualty briefs

➥ Andy Ferris, senior manager for Deloitte Consulting ➥ Dennis Lange, actuarial services manager for QBE in Chicago, has joined the Academy’s Life Products Regional Insurance in Sun Prairie, Wis., and Robert Curry, Committee. assistant vice president and actuary for Insurance Services ➥ Martin Kline, senior director for Allianz Life Insurance Co. Office Inc. in Jersey City, N.J., have joined the Academy’s of North America in Minneapolis, has joined the Academy’s Property and All Other Lines Subcommittee. Life Settlements Work Group. ➥ Sean McAllister, consulting actuary for Milliman in ➥ Dean Miller, vice president for institutional products Wayne, Pa., and Bonnie Maxie, principal for Oliver Wyman for Jackson National Life Insurance Co. in Roseland, Actuarial Consulting in San Francisco, have joined the N.J., and Albert Manning, assistant vice president of Academy’s Workers’ Compensation Subcommittee. financial reporting for Jackson National Life Insurance ➥ David Spiegler, executive vice president and chief actuary Co. in Lansing, Mich., have joined the Academy’s Annuity for BMS Intermediaries in East Brunswick, N.J., has joined Reserves Work Group. the Academy’s Committee on Financial Soundness/Risk ➥ Roland Rose, associate actuary for Guardian Life Insurance Management. Co. of America in New York, and Robert Ellerbruch, ➥ Michael Angelina, chief risk officer and actuary for associate actuary for American Memorial Life Insurance Endurance Specialty Insurance Ltd. in Bermuda, has been Co. in Indianapolis, have joined the Academy’s Life Reserves named chairperson of the Academy’s Emerging Issues Task Work Group. Ellerbruch has also joined the Academy’s Force, and Eric Drummond-Hay, chief actuary for Liberty Reinsurance Work Group. Mutual Agency Markets in Seattle, has been named vice ➥ Barbara Snyder, senior vice president and chief actuary chairperson of the task force. for Guardian Life Insurance Co. of America in New York, has ➥ Michael Lu, assistant actuary for Farmers Insurance Group joined the Academy’s Tax Work Group. in Simi Valley, Calif., and Rebecca Williams, data analysis ➥ Jean Forrest, manager for Ernst & Young in Chicago, has manager for the North Carolina Rate Bureau in Raleigh, N.C., joined the Academy’s C3 Life and Annuity Work Group. have joined the Academy’s Natural Catastrophe Subcommittee.

w w w. a c t u a r y. o r g Actuarial Update November 2009 8 Pension news Analyzing Social Security’s Assumptions

hea Ac demy’s Social Insurance Committee ceiving benefits. Economic assumptions are used to project wages recently updated its issue brief Understanding the Assump- and the resulting tax income of the program, benefit amounts, and Ttions Used to Evaluate Social Security’s Financial Condition. the investment income on the system’s accumulated assets. To- Originally published in 2001 and previously revised in 2004, the gether, these assumptions underlie the projections of the program’s issue brief explains Social Security’s major assumptions, addresses short-term and long-term financial condition. how variations in those assumptions affect reform results, and Making assumptions is critical for evaluating the current status encourages policy advocates to disclose the assumptions underly of the Social Security program, as well as evaluating the various ing their reform proposals and to apply them consistently. proposals for reforming it. A number of different proposals for Every year, when the Social Security Administration’s board of Social Security reform are before the public. The issue brief en- trustees issues its report to Congress on the program’s long-term courages policymakers, when evaluating these plans, to be aware financial condition, the trustees base their projections on actuarial of the demographic and economic assumptions that underlie the assumptions. The assumptions used for Social Security’s financial analyses. In some cases, the potential advantages of a particular re- projections fall into two broad categories: demographic and eco- form plan may depend as much on the assumptions used as on the nomic. Demographic assumptions are used to project the future proposal’s actual provisions. Furthermore, policymakers should population, providing a basis for estimating the number of workers take care that assumptions are being used consistently across all paying into the system, the number of retired- and disabled-worker proposals that are being compared. beneficiaries, and the number of family members and survivors re- —Jessica Thomas Hill Briefing, continued from page 1

from adding leveraged exposure to the implosion of the housing market. He also highlighted rules enforcing compartmentalization of the industry that may have kept the housing bust from affecting policy- holders outside of the mortgage guaranty and financial guaranty lines. Lastly, he acknowledged the risk-based capital framework that dis- courages companies from investing in risky assets. “Insurance regulation did comparatively better compared to banking regulations,” Wang said. In order to better protect the public from this financial crisis and future crises, Jesse Schwartz and Robert Miccolis, chairperson and vice chairperson of the Academy’s Financial Regulatory Reform Task Force, laid out actuarial public policy recommendations for stem- ming systemic risk among all financial entities. They were joined by moderator Henry Siegel, who was recently named Academy vice president for risk management and financial reporting issues. S haun Wang, co-author of an SOA research paper examining the financial crisis, joins the Academy Effective regulation, Schwartz said, would establish limits on for a briefing on Capitol Hill. corporate actions that may create systemic risk, ensure functional regulation to assess the ability of companies to evaluate and manage their risks and to implement any necessary actions, and ensure es of risk and uncertainty under a principle-based system, especially rating agencies and third parties are transparent about their as- where there is a lack of information to quantify risk,” added Miccolis. sumptions, methodologies, and recommendations. Wang also stressed the need to create the right balance of rule- Schwartz also highlighted the importance of minimum capital based and principle-based regulation in order to protect against sys- requirements for companies whose investments, such as derivatives, temic risks, suggesting some form of an enterprise risk management have significant exposure to systemic risk.E ffective regulation, includ- approach. The good news, he pointed out, is that the very nature of ing higher capital requirements, is needed, he said, for risky invest- systemic risk requires some period of accumulation and thus gives ments by financial services companies in cases where high volatility policymakers a window of time to monitor and act. On the other of results is expected and/or the availability of information is limited, hand, picking out the right signals from mere noise is a challenge. making expectation of future returns speculative. He also stressed that For instance, he said that the real strength of the economy lies in derivatives have a place in managing asset/liability risk when used to how efficiently productive economic activities are carried out, not manage risk rather than to create it in an attempt to increase returns. just a snapshot of the stock market. “There is a need to understand the limitations of the models and as- As Miccolis observed, “Risk management is most effective when sumptions to protect the public from the adverse financial consequenc- used to prevent crises rather than manage them.”

w w w. a c t u a r y. o r g Actuarial Update November 2009 9 House Testimony, continued from page 1

In his testimony, Academy Medical Professional under the current system of regulation. Actuarial Update Liability Subcommittee member Hurley contended “Absent the use of industry information, [insur- that this proposal would seem to be a “non-event on ers and self-insuring companies] may be reluctant Associate Editors its face,” since engaging in those specifically prohib- to assume or retain this exposure,” he said. “Their William Carroll ited acts is already illegal based on state laws that decision not to provide coverage reduces competi- Patrick Collins Andrew Erman were enacted as a result of the McCarran-Ferguson tive alternatives in the marketplace.” Rade Musulin Act of 1945, the law that established insurers’ shield If the goal of the proposed act is to reduce medi- Geoffrey Sandler from federal prosecution. However, due to potential cal professional liability premiums, Hurley said, it Donald Segal interpretations of the proposal, Hurley warned that is more likely to have the opposite effect. Editor Tim Dougherty some could use the phrase “in any form” as justifica- Previous attempts to repeal portions of the ([email protected]) tion to try to prohibit the current practice by many McCarran-Ferguson Act included explicit safe

Design and Production medical professional liability carriers to collect and harbor recognition for specific company conduct, BonoTom Studio Inc. share analysis of claims data, a process that is cur- such as that of insurers, that is necessary for con- Designer rently overseen by state regulators, as stipulated in sumer protection. Ilene Knable Gotts, chairperson Paul Philpott the McCarran-Ferguson Act. of the American Bar Association’s Section of An- Marketing and publication Due to the low-frequency, high-severity nature titrust Law, questioned in her testimony why this production manager Cindy Johns of medical professional liability claims and the proposal would put a greater burden on health and long lags between events occurring, claims being medical malpractice insurance. American reported, and claim resolution, estimation of losses The Oct. 8 hearing was the first in a series that Academy of and premium rates can be more uncertain than in eventually included testimony from Senate Major- Actuaries other lines of insurance, Hurley explained, includ- ity Leader Harry Reid (D-N.V.) and Assistant At- President ing most health insurance. torney General Christine Varney, who heads the Ken Hohman “Analyses of aggregated data serve several pur- Department of Justice’s Antitrust Division. President-elect poses that align with the original intent of the McCar- As a result of the hearings, the House Judiciary Mary Frances Miller ran-Ferguson Act and assist state regulators charged Committee eventually adopted an amendment by Secretary Andrea Sweeny with overseeing the pricing of insurance coverage,” Rep. Dan Lungren (R-Calif.) clarifying that the bill

treasurer Hurley explained in his oral testimony. Reasons in- generally wouldn’t apply to the collection or dis- John Schubert clude allowing for companies to compile enough data semination of historical loss data, determination of

Vice Presidents to credibly base loss estimates and premium rates. a loss development factor applicable to historical Al Bingham Absent that data, Hurley explained, companies either loss data, or performance of actuarial services. On Gary Josephson would be forced to rely on their own limited data, Oct. 21, the committee approved the bill. The provi- Ethan Kra Art Panighetti which would likely increase volatility in rate deter- sions were incorporated into the health overhaul Kathleen Riley minations, or face greater likelihood of insolvency. bill (H.R. 3200) passed by the House Nov. 7. Henry Siegel House subcommittee chairperson Hank John- Executive Director son (D-Ga.) asserted in the hearing’s opening Mary Downs comments that the proposal would prevent health Qualification Standards Assistant Director for PublicAtions and medical malpractice insurers from using the Linda Mallon McCarran-Ferguson Act “as a shield for” price To whom do the revised Executive Office fixing, bid rigging, or market allocation, citing Qualification Standards apply? The American Academy of increases in general health insurance profits and Actuaries The revised Qualification Standards apply to all 1850 M Street NW premiums. Although Peter Mandell, former pres- actuaries who are members (associates or fel- Suite 300 ident of the California Orthopaedic Association lows) of one of the U.S.-based actuarial organ- Washington, DC 20036 in Burlingame, Calif., testified that there is little izations and who issue statements of actuarial Phone 202-223-8196 Fax 202-872-1948 evidence of commercial health insurers engaging opinion (SAOs) in the United States, and they www.actuary.org in price fixing, he asserted that industry consoli- apply to members of any actuarial organization

Statements of fact and opinion dation has restricted competition. that is not U.S.-based but requires its members to in this publication, including However, Hurley’s comments, which focused meet the Qualification Standards when practic- editorials and letters to the editor, ing in the U.S. They are not limited to Academy are made on the responsibility strictly on medical malpractice insurance, indicat- of the authors alone and do not ed that shared analysis in the industry enhances members. The U.S-based organizations are the necessarily imply or represent the Academy, the American Society of Pension Pro- position of the American Academy rather than restricts competition, encouraging both fessionals and Actuaries, the Casualty Actuarial of Actuaries, the editors, or the new competitors and new products. Medical pro- members of the Academy. Society, the Conference of Consulting Actuaries, fessional liability losses and rates, he noted, have ©2009 The American Academy of and the Society of Actuaries. Actuaries. All rights reserved. been flat or fallen in the past two to three years

w w w. a c t u a r y. o r g Actuarial Update November 2009 10