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VOLUME etlc20 NUMBER 11 uarAMERICAN ACADEMYIa! OF ACTUARIESUpd NOVEMBERe 1991
In this issue Politics of National Health Care Reform
2 From the ASB 3 Letters to the Editor 4 Metzenbaum Issues a Legislative Wake-up Call
1991 Annual Meeting 5 Program
Insurance Solvency s Regulation 6 Jarvis Farley Service Award 7 Current Pension Issues Actuaries Air Views on ASB Discounting Standard Representatives Pete Stark (left) and Bill Gradison (far right) debated national health care reform at the Academy's Annual Meeting, September 26. Simpson Leaves Them 9 Laughing at Annual Meeting by Alan Kennedy Luncheon One year after the Pepper Commission Commission on Comprehensive Health Forecast 2000 Actuaries challenged the nation to health care Care (the Pepper Commission), said 10 Blitz Pacific Northwest reform, congressional leaders on that issues that divided the commission commission say that nothing is likely to continue to get in the way ofconsensus . 1 ], ASPA Celebrates Its 25th happen soon. "The kind of plan which I would Anniversary Addressing the Academy's Annual prefer philosophically, but I'm having Meeting, House Ways and Means Health some trouble figuring out how to pay 1991 Annual Meeting Subcommittee Chairperson Pete Stark for. . .would be [a) refundable tax credit 12 Business Session (D-CA) and ranking minority member for people of modest income to let them Casualty Loss Reserve Willis D . Gradison, Jr . (R-OH) said buy their own health Insurance," stated 14 competing interests in the marketplace Seminar Report Gradison. acid lack of leadership from the White Stark said his own philosophy is House combine to make reform of the that (1) access to health care should be health care delivery system unlikely at a universal right, (2) providers of care the federal level this year or next. should be paid "in a reasonable Enclosures "I had thought that 1990 would be manner," (3) "we all ought to pay for Included in this month's issue of the year of the studies, and 1991 the care according to our ability to pay." The Update are the following: year of synthesis and analysis, and that But having said that, "everything • Government Relations Watch we would move toward some action in falls apart," he said, over issues such as • In Search Of . . . '92," said Gradison . "I was wrong ." For how to contain costs, how to provide one thing, he explained, some important • ASB Boxscore access for the uninsured, whether most studies haven't been completed, such health insurance should continue to be • Actuarial Standard of Practice as the American Hospital Association's. based on employment, and whether No. 18 As for the Bush administration, coverage ought to be mandated ; if it is, I Special Subject Supplement Gradison added, "1 don't know when or said Stark, there will be another battle Introduction and Table of whether the administration will come over allocating costs. Contents to Standards Handbook forward with a health plan." Stark, who with Gradison was a vice chairperson of the U .S. Bipartisan (continued on page 5) 2 The Actuarial Update
the ground could be adequately covered by exis ting standards with the addition American Academv of a current interpretation . of Actuaries In deciding when to take a proac* stance and how to respond to pu and professional concerns, the ASB President must walk a fine line. While the ASB Harry D. Garber by Walter N. Miller should not follow the dictates ofoutside bodies, be they public or private, It has President-Elect a duty to anticipate and respond John H. Harding Halcyon Days vigorously to emerging actuarial issues Vice Presidents As I complete my second term as and to take reasonable steps to help Robert H . Dobson chairperson of the Actuarial Standards enhance the role and scope of our R . Stephen Radcliffe Board (ASB), it's good to see the profession . Richard H . Snader increasing recognition of the ASB by I have been Involved in the standards Michael A . Walters regulatory bodies . For example, the movement since 1987 and believe that Larry D . Zimpleman instructions to the NationalAssociation the ASB has accomplished much in its short life. Looking ahead, I think the Secretary/ reasurer of Insurance Commissioners (NAIC) Thomas D . Levy Life and Accident and Health Blank ASB will continue to build on the now require that the actuary signing excellent work that has been done to Executive Vice President the statement specifically state that his date . Some of the issues that I think James J . Murphy or hermethods conform to the standards the ASB will focus on In the future of practice of the ASB . In addition, the include developing broader, more Executive office NAIC's model Standard Valuation Law general standards and working to 1720 1 Street, N.W. 7th Floor incorporating the concept of the ensure consistency of parallel Washington, D .C. 20006 standards in different practice areas. (202) 223-8196 valuation actuary requires that a FAX (202) 872-1948 qualified actuary's opinion be based on I'm retiring as ASB chairperson and ASB standards . Various state agencies will no longer be directly involved in Membership Administration have also turned to the actuarial the development of standards . Woodfield Corporate Center standards of practice when drafting However, I plan to continue to 475 N . Martingale Road regulations . For example, Actuarial participate in standards development Schaumburg, Illinois 60173-2226 Standard of Practice No . 3, Relating to in a way in which I would urge (708) 706-3513 Corttiruifrig CareRetfr rnent Communities, actuaries to participate: by revie* has served as the guide for regulation the exposure drafts and letting the board in several states . know what you think . Every comment This growing, real-world acceptance is given serious consideration, and the of the actuarial standards of practice standards that are finally promulgated promulgated by the ASB has reflected are improved and strengthened by your the board's determination to address . involvement. Working with the members of ASB Chairperson new areas of actuarial practice and to Committee on Publications tackle tough problems. Two current and its operating committees has been Roland E . King projects illustrate the attempt to a high point of my professional career . Editor provide guidance to actuaries working Again and again, I have been impressed E . Toni Mulder in emerging areas of practice . These by the work of the army of volunteers Executive Editor are the recently adopted standards on who support the ASB . The work Erich Parker long-term care insurance and on products of the ASB represent many, Associate Editors actuarial appraisals . Providing many volunteer hours . Gary D . Lake guidance in new areas of practice will Let me close by offering my sincere Stephen A. Meskin help to ensure that actuaries continue thanks to my colleagues who give so Charles Barry H. Watson to play a leading role in the analysis of freely of their time, energy, knowledge, Managing Editor financial systems and the evaluation and expertise, as well as to Christine Jeanne Casey of future risks. Nickerson and Alan Kennedy, our very Contributing Editor The ASB has demonstrated Its able staff people . Ken Krehbiel willingness to take on difficult issues . Production Manager For example, the board acted to clarify Jack M. Turnqulst will succeed Walter Renee Cox the responsibilities of actuaries in Miller as ASB chairperson in January estimating and providing for HIV- 1992. related claims . In dealing with this American Academy of Actuaries 17201 Street, N .W. 7th Floor issue, it also demonstrated flexibility to members' The Update welcomes letters from Washington, D .C. 20006 and responsiveness readers . Letters for publication mu : concerns . After exposure ofa proposed Statements of fact and opinion in this publication, include the writer's name, addres including editorials and letters to the editor, are made standard on recognizing the financial and telephone number, and shoul on the responsibility of the authors alone and do not necessarily Imply or represent the position of the implications ofHIV-related claims, the be clearly marked as "Letters to the American Academy of Actuaries , the editors, or the ASB responded positively to the Editoesubmissions . Letters may be members of the Academy. majority . of comments that a specific edited for styleand space requirements . standard was unnecessary because November 1991 3
Letters to the Editor 0 committees of the Academy and the All Invective Aside to certify "that the assumptions and Society of Actuaries, that the present- cost estimates used are reasonable." value approach is flawed because it Gregory The chief actuary of the Social Security in the September Update, "imputes" inappropriate interest Savord criticizes the two public Administration found the assumptions earnings . This is clearly a minority members of the Social Security and to be reasonable and said so in his view that was most recently rejected by Medicare boards of trustees for "an actuarial certification for the Old Age, the Social Security Technical Panel to Survivors and Disability Insurance attack on the professionalism of the . theAdvisory Council on Social Security program, Is he unprofessional or a chief actuary oftheHealth CareFinancing The technical panel Included four ." He went on to captive of the politicians? I think not . Administration (HCFA) actuaries , one of whom served as say, "Even though the public trustees As a final point, Mr . Savord notes chairman . The Social Security Act have no actuarial credentials, their that "the majority of the trustees requires the chief actuary to certify statement appears to be calculated to declined to join the two public trustees "that the techniques and methodologies pass judgment on the professional in their statement." The other three used are generally accepted within the judgment of the chief actuary and the trustees are Cabinet secretaries (of actuarial profession .' Can anyone say Treasury, Labor, and Health and Human actuarial profession ." that this is not true with respect to Obviously, the profession should be Services) who may have believed that present-value techniques and concerned about any such attack. What commentingwould be inappropriate . On methodologies? did the public trustees do? They dared the other hand, how do we know that Regarding the second point, the to suggest that the chief actuary's they were even asked to join in the technical panel recommended an qualification of the actuarial certification statement? In any case, they certainly assumption of 1 .0% annual real- for the Hospital Insurance (HI) program did approve the methodology and earnings growth . The trustees was unjustified and went beyond his assumptions used In the reports. considered this recommendation and statutory responsibility. Mr. Savord Like all professionals, actuaries have lowered the assumption of 1 .3% growth, to be careful not to suggest that our continued, "It takes great courage for used in the 1990 report, to 1 .1% for the chief actuary to qualify his on page 10) 199 1 . The law requires the chief actuary (continued tificatfon with regard to the odology and assumptions in the ace of this sort of pressure from 'big shot' political appointees ." Mr. Savord's praise of his boss notwithstanding, readers of The Update might be interested in the views of a more disinterested observer. First, they should know that the public trustees are not political hacks . The law requires that one be a Democrat and the other a Republican . They are appointed by the President to four-year terms, subject to Senate confirmation . The current trustees are a former Commissioner of Social Security and a former head of the Labor Department's Pension and Welfare Benefits Administration . They may not have actuarial credentials per se, but they are not completely ignorant of such matters, either. HCFA's chief actuary made two complaints in his actuarial certification :
1 . The long-range actuarial balance should be calculated using a modified average-cost method, rather than the current present-value approach . 2. The assumed 1 .1% annual real- ings growth is inappropriate, idering historical experience .
Regarding the first point, the chief actuary has tried and failed to persuade various groups of actuaries, including ""So, do you think I should increase my coverage?" Illustration by Andrew Too, 4 The Actuarial Update
1991 Annual Meeting Report I*
Metzenbaum Issues a Legislative that the IRC would not have regulatory authority over companies operating Wake-Up Call within the confines of only one state, however, because federal authority extends only to interstate commerce . by Anna Fierst Under the bill, the IRC would set federal standards in twenty-three areas, In a morning speech on September 26 commissioner." As a consequence, "they e.g., regulations for capital, surplus to Annual Meeting attendees, Senator don't intervene quickly enough ." He and limitations on involuntary transfers Howard Metzenbaum (D-OH) trumpeted also touched on the lack ofregulation of of policies by insurers, consumer many of the insurance industry's the reinsurance business and the fact disclosures, policy simplification regulatory flaws and the need for S . that more than 50% of reinsurance requirements . mandates for annual CPA 1644, the Insurance Protection Act of companies are offshore and are audits, and standards for evaluation of 1991. Metzenbaum looked back at the therefore unregulated by the states . real estate . Another major change would legislative history of the mid-1940s by Metzenbaum cited another example be uniform federal regulation of recalling his reaction to the McCarran- of a weakness in state regulation . reinsurers in a way that would apply Ferguson bill . At the time, Metzenbaum Venturing that the National Association equally to foreign reinsurers. was serving in the House, and it was of Insurance Commissioners (NAIC) Just as banks rely on a federal reserve may lack the will "to fund, under Metzenbaum's bill, insurers ac t force fully a nough, " would rely on a National Insurance he stressed the long Guarantee Corporation, presided over delays in the adoption by five presidential appointees , plus the of model acts . As one Secretary of Treasury and the example, the 1985 Comptroller of the Currency. Funds "Model Regulation to would be supplied by upfr Define Standards and assessments against all Inters Commissioners' insurance companies . Metzenbaum Authority for Com- suggested that the current bill could be panies Deemed To Be modified to authorize the fund to be in Hazardous Fin- drawn upon if an apparently healthy ancial Condition" has companyexperiences a panic run by its not (in large part) been policyholders . The other aim of this acted upon . In this national guaranty corporation is to instance, "no state become the official liquidator for has adopted this interstate insurers . Metzenbaum model, and only nine pointed out the lengthy delays imposed have passed what the by lawyers and accountants during NAIC defines as liquidations, and noted that legislation related to streamlining the process "would ." Senator Howard Metzenbaum the model law ." On probably lower the cost another issue , it took Hearings are expected to occur this apparent to him that while there was twenty years for all fifty states to adopt fall on 5 .1644: the bill has been referred the appearance of lending adequate some version of the Life and Health to the Commerce Committee and is state regulation, it "was really a mirage. Insurance Guaranty Association being studied by the Consumer . . . Once you looked through the veil, model act . Subcommittee under the guidance of you could see it was not adequate." These issues and others are behind Senator Richard Bryan (D-NV) . On the The 1980s, he noted, brought radical Metzenbaum 's recent introduction of House side, Representative John Dingell changes in the industry, but the S . 1644. This legislationwould establish (D-MI) is expected to introduce regulators didn't keep up. Citing the the independent insurance Regulatory legislation on federal solvency example of Executive Life's 1985 clean Commission (IRC), headed by five standards. In summation, Metzenbaum bill of health, Metzenbaum criticized presidential appointees to be approved acknowledged S. 1644's imperfections state commissioners for allowing by the Senate. The IRC would accredit and stressed his willingness to negotiate "gimmicks that mask financial states based on the states' adoption with groups such as the American problems ." The state regulation system and implementation of minimum Council of Life Insurance, associate lacks muscle because "many of the solvency standards. State accreditations for the property/casualty industry, regulators come from the insurance would be periodically reviewed and the actuarial profession . industry, and certainly [many] are selected companies examined in order expecting to return to the industry . . . to track the regulatory efficiency of a Flerst is editorial assistant for Contin- when they leave the position of particular state. Metzenbaum noted gencies magazine. November 1991 5
POLITICS OF NATIONAL HEALTH CARE REFORM •tinUed from page 1) American Academy of Actuaries
"I am convinced that employer-based 1991 Annual Meeting approach in its present form is useless and cannot be made to work," said (Agenda in Brief) Stark. Gradison recalled that both he and Wednesday , September 25 Stark objected to the Pepper
Commission's failure, in its September OPENING RECEPTION 1990 report, to say how its more than $66 billion dollars a year in additional Thursday, September 26 health care spending could be paid for . "Maybe we've been on the Ways and ANNUAL MEETING Means Committee too long, but our BusiNESS general view is that if you are going to GENERAL SESSION recommend something you ought to The Honorable Howard Metzenbaum pay for It." Insurance Company Solvency Regarding the health insurance The Honorable ) :ortney (Pete) Stark and Willis (Bill) Gradison, Jr . industry, Stark opined that It may not A Democratic and a Republican Perspective on Health Care Reform end up with a major role in the United States because "you guys are too expert CONCURRENT PANEL SESSIONS atwhatyou do"-an allusion to medical underwriting . If it is true that 80°!0 of Pensions health care costs are generated by 20% Moderator Larry Zimpleman of the population under 65, "I bet you Panelists: Phyllis Borzt, House Education and Labor could tell me what side of the head they Subcommittee on Labor-Management Relations part their hair on," Stark said jestingly . John Burke, Assistant Commissioner, Internal Revenue Service Carolyn Smith, Joint Committee on Taxation With underwriting practices that avoid uring people with higher costs, the Health Insurance ustry aggravates the problem of the Moderator Harry Sutton ninsured, he said . Panelists: Brad Kane, House Energy and Commerce Proposed health care reforms that Subcommittee on Commerce, Consumer would ban medical underwiting and Protection and Competitiveness institute community rating might turn Bonnie Hogue, Senate Special Committee on Aging the insurance industry into bill payers, Roy Ramthun . Senate Committee on Finance Stark said. On the other hand, he offered, "we might create a market of Insurance Solvency Regulation 200 million people for a new kind of Moderator: John Harding supplemental insurance that might be Moses Boyd, Senate Commerce, Science and very attractive . I would hope that that Transportation Subcommittee on Consumer would be the compromise we would Mark Peavy, National Association of Insurance Commissioners come to with the insurance industry." A Gary Slaiman, Senate Judiciary Subcommittee on Antitrust, Monopolies, and Business Rights James Swenson, former Administrator . Oregon Division of Insurance
Special Supplement LUNCHEON SPEAKER on Professionalism The Honorable Alan Simpson An Overview of the 102nd Congress Over the past few years, changes in the code ofprofessionalconduct, OPEN FORUM COUNCIL MEETINGS qualification standards (includ- ing continuing education re- Casualty Practice Council Chair: Academy Vice President Michael Walters quirements), standards of practice, and disciplinary pro- Health Practice Council cedures affecting Academy Chair: Academy Vice President Robert Dobson members have proceeded at a Life Practice Council rapid, if not bewildering pace . Chair: Academy Vice President Stephen Radcliffe 0 The special subject supplement Pension Practice Council on professionalism , included In Chair: Academy Vice President Larry Zimpleman this mailing, is devoted to Professionalism highlighting the thrust of these Chair : Academy Vice President Richard Snader changes . The Actuarial Update
One of the twenty-three proposed 1991 Annual Meeting: minimum standards is a requirement Breakout Sessions for annual analysis of insura companies by a qualified actu However, the draft bill does not contain Insurance Solvency Commission (IRC) consisting of five a definition of a qualified actuary . Regulation members appointed by the President . Slalman looks to the actuarial profession The bill provides for minimum to provide the subcommittee with the standards for state regulation . Slaiman definition. by E. Toni Mulder expects that the National Association ' One of the key authors of Senate Bill of Insurance Commissioners (NAIC) Congress s Historical Interest 1644, Gary Slaaiman (counsel for the would help to shape and frame what those standards should be . The IRC Moses Boyd , counsel for the Senate Senate Judiciary Subcommittee on Commerce , Science, and Transportation Antitrust, Monopolies, and Business cannot take away the license of an Committee' s Consumer Subcommittee, Rights), recapped much of what the Insurer, but it can go to states and gave a brief history . of Congress's bill's key sponsor , Senator Howard request action if it finds a company is not in good shape. Slaiman stated that involvement in insurance. The House- Metzenbaum , detailed in his morning specifically the House Committee on speech the federal government does not want . Energy and Commerce Subcommittee The legislation would create at the to be in the day-to-day regulation of the insurance business . on Oversight and Investigations-looked federal level an insurance Regulatory at insurance about four years ago and subsequently published the report "Failed Promises ," also known as the Dingell Report . Senator Bryan , head of the Consumer Subcommittee, held oversight hearings in the 102nd Congress . It was recognized , even by The Academy has established,thrthetirsttimeinlt twcrat`- lx 4r::arhistory, some insurance industry groups, that a service ',award to commemorate one of it, menila rs . 'Flic Jaivls Fancy there were weaknesses in the state Ser-%ice Av,and is dedicated to the numniorv of ar ris F~;rlry . ~!'ltc'~s r_tsrthirig regulatory system . The major committee volunteer work- and devotion tc the a0t_t,, rla .l piul :ssioti u -as truly conclusion of the Senate subcommit exemplary. was that regulators did not act quit Ja vis Fan cybegan serving onvarious Academy coral ritttr es Iit It)T2 . H~ enough. The NAIC task force o was a memberof the Committee on Financial Repc'r'tingl'rineiple?sfrom 1972 insolvencyand the certification program to 197G, and he chaired that committee in 191-3 . Upon the stablish.rncttl by states alleviated some of the concern . the two financial reporting; committees in 1t1 5 c n for life lnsrirate ccA, or :iee Then came Executive Life, Mutual for property/ltabili r,,insrn-ante 1w priarlcted leadership through lire general Benefit , First Capital , and Fidelity ttee for l a .~'o years . Bankers Life. Jarvis was in the. vanguard concerning cotrtintilug catc re .tirerment Congress then decided to look more communities (CCHCsl . Whe;ri tlrr'Acadrnry established its Corrurrillee on carefully at insurance regulation . In CCRCs, he lullr served that corrimittr, ,e and had rnzrjc}r responsibility for June , Senator Bryan added an drafting the actiracial stZAw1 artl of practice on CCRCS . (With his wife, amendment to the crime bill for federal Elizabeth, J,~r~,is was a resident of the North Hill retirement community in penalties for insurance fraud , hoping to Needhanr, M
(continued on page 11) November 1991 7
Current Pension Issues
Ip Christine Nickerson
The panel for the Annual Meeting pension breakout session included Carolyn Smith, legislation counsel for the Joint Committee on Taxation ; Phyllis Borzi, counsel for pensions with the House Subcommittee on Labor- Management Relations ; and John Burke, Assistant Commissioner for Employee Plans and Exempt Organi- zations, Internal Revenue Service (IRS) . The panelists' discussion focused on proposed pension simplification bills. insurance-provided annuities for terminated plans, and the IRS audit Annuities of Terminated Plans that sell annuities finance a national program. guaranty system for such annuities, Who bears the ultimate responsibility and making the employer liable for Pension Tax Simplification for paying a terminated pension plan's benefits in the case of an insurance annuities when the insurance company company insolvency. Borzi said that all Carolyn Smith described the basic holding those annuities becomes these approaches seem in one way or issues that various pension insolvent? This is a difficult issue, another to lead back to the PBGC . It is simplification bills are attempting to according to Phyllis Borzi. She said hard to predictwhat direction Congress address . These issues are taxation of that the framers of the Employee will take, she said . distributions, small-business access, Retirement Income SecurityAct probably IRS Audit Program ondiscrimination rules, and never thought an insurance company ,iscellaneous changes, such as would become insolvent . Borzi John Burke spoke to the group about simplifying the definition of "highly described recent hearings on the issue the IRS examination program . He said compensated employee ." and said the hearings left members of that when the IRS initiated a small- Smith said that all the bills attempt Congress with the clear impression that plan actuarial audit program for to clarify what portion of a distribution the problem is not over yet and that qualified defined benefit plans, the is taxable, liberalize rollovers, and other companies may fail . abuse focused on was overfunding. simplify the complex basis-recovery Borzi discussed the impact of such Burke acknowledged that, in addressing rules. The most controversial issue in failures on annuitants . When the state this problem, the IRS might have gone the distribution area is the special tax of California took control of Executive too far. He believes there is a need to treatment for averaging lump-sum Life, one of the state's first actions was balance enforcement better. distributions. The drafters of the to reduce the amounts being paid to In coming months, the agency will simplification bills do not believe that annuitants by 30% . Yet, it is unlikely move from the small plan audit program such income should be untaxed, nor that annuitants can ask a supermarket to something different, Burke said . He that lump-sum distributions should be checker to reduce their grocery bill by noted that a recent General Accounting encouraged, Smith said . However, she 30%, she said. Office report criticized the IRS for added, there is a fairness issue of taking Any attempt to address this problem focusing on overfunding and neglecting away a previously acceptable tax- must consider how to make the system problems such as underfunding . Burke planning device . better and how to help retirees, said said that as more aspects of plans are Access to pension plans has been Borzi . The Pension Benefit Guaranty examined, examiners will need more addressed primarily by extending the Corporation (PBCG) has taken the training to ensure that they are qualified option of establishing salary-reduction position that it is not responsible for for the work they undertake . New areas Simplified Employee Plans (SEPs) to guaranteeing benefits if the defined of focus will include looking at the plan employers with up to 100 employees . benefit plan. upon termination, has balance sheets to consider the true Nondiscrimination rules would be sufficient assets to pay all benefits, has market value of investments . Also, relaxed through a design-based properly computed Its benefit there maybe abuse problems having to approach to testing. Smith noted that obligations, and has purchased do with SEPs because there has been the government wants benefits to go to annuities from an insurer . Borzi does no enforcement in this area, he said . the rank and file, and the design-based not support this position; she believes Asked about the chance of a more proach may not encourage this that the PBGC does have ultimate generousversion ofthe audit resolutions tcome. responsibility. program, Burke said It would not be 4 oCommenting on the possibility of Some options currently being sweetened . It is "a fair and liberal congressional action on pension discussed to deal with the annuities offer," he said. simplification. Smith said that such issue Include federal regulation of the Nickerson is director of the standards action is unlikely because there will insurance industry, making the PBGC Program. probably not be any tax bill this year. the insurer of last resort, having insurers 8 The Actuarial Update
which Blanchard said "may force Actuaries Air Views on Discounting discounting of liabilities as a reaction to forced market valuing ofassets ." The Standard at ASB Hearing other FASB Initiative is a discussion memorandum, "Present Value-Base Measurements in Accounting ." "Discounting for GAAP may be only several years away," said Blanchard, and for this and other reasons, the ASB should have a standard . Support for an actuarial standard on discounting also came from Alfred O. Weller, chairperson of the Casualty Issues Committee of the Conference of ConsultingActuaries. The present draft, which Weller helped to develop as a former member of the ASB's Casualty Subcommittee on Loss Reserving, should be adopted, he said, because it requires documentation of the interest rate assumption and the method used, and consistency among assumptions . Representing the Casualty Actuarial ASB Hearing Panel . Michael J. Miller, Gary Corbett, Walter N. Miller, Jack M. Society (CAS) Committee on Reserves, Turnquist. James A. Faber, P. Adger Williams. Neil A. Bethel said the committee does not view the proposed standard as an by Alan Kennedy endorsement of loss reserve discounting, but feels strongly that the standard Seven of nine actuarial speakers at a of Insurance Commssioners (NAIC) to "must include a discussion of the September 25 public hearing voiced discounting in statutory statements, relationship of loss reserve discounting support for the issuance of an actuarial Robert J. Gossrow, casualty actuary and the amount of risk margin that standard of practice on discounting of for the Illinois Department of may be present in a reserve, eith loss reserves . There was some Insurance, said the NAIC was not implicitly or explicitly determined ." sentiment for delaying it until a standard opposed to the promulgation of the Bethel said his committee has invited could be developed on risk margins, proposed standard . He suggested only a research proposal on methods of which were recognized as unavoidably that the document might benefit by presenting risk margins in financial linked to discounting, but a risk-margin adding a statement to "discourage reporting, and the CAS Committee on standard could be years away from discounting in statutory financial the Theory of Risk has a prize-paper formulation, those at the hearing were reporting." program on the same subject. The told. Indeed, most proponents of the results of these Initiatives will not be The hearing was called by the standard appeared to view the need for out until perhaps early 1993, however, Actuarial Standards Board (ASB) on actuarial guidance on how to do and if the ASB delayed its discounting request, after letters of opposition were discounting as overriding any concern standard "until generally accepted received to the second exposure draft of about appearing to encourage the actuarial methods of determining risk a proposed standard titled Discounting practice. If the ASB does not margins were formulated," it might turn of Property and Casualty Loss and Loss promulgate a standard, "€t is likely that out to be a long delay, he suggested . Adjustment Expense Reserves. It was others will step in and state what But the chairperson of the Academy the ASB's second public hearing, the actuaries should do," warned Harold J. Committee on Property and Liability first having been held on a proposed Brownlee, a consulting actuary and Financial Reporting, David G. Hartman, pension shutdown standard last recent past president of the Academy . voiced a personal preference for having March . He mentioned the FinancialAccounting a standard on risk margins issued before One reason cited In the letters and Standards Board (FASB) and insurance a standard on loss reserve discounting . by one of the speakers for opposing the regulators as among the "others ." Hartman relayed to the ASB hearing a discounting standard was that it could Brownlee also suggested that the statement his committee presented to by its very publication encourage the standard could well be broadened to FASB on July 9, 1991, In response to Inappropriate use of discounting, apply to pensions as well as property/ the FASB discussion memorandum on though any intention to promote casualty reserves. present-value-based measurements . discounting was disclaimed in the FASB has in fact taken two recent The essence of his committee's standard. "This standard would be Initiatives that may lead to allowing statement, he summarized, is that seen by company management and discounting of reserves under generally "value-based measurements can accountants as defacto endorsement of accepted accounting principles (GAAP), applied to property/liability insura discounting," declared Daniel K . Lyons, said Ralph S . Blanchard III, speaking if the interest rate is risk-adjusted ." speaking for the actuaries at General for actuaries involved with the Issue at Joining Brownlee in urging that the Reinsurance Corp . Aetna Life & Casualty . One is an standard be broadened beyond the However, while reiterating the exposure draft titled "Disclosures about bounds of property/casualty loss opposition of the National Association Market Value ofFinancial Instruments," reserving was Jeffrey Petertil, another November 1991 9
consulting actuary. "Discount rates and present values are a basic part of Simpson Leaves Them Laughing at Annual most actuarial work," he said in a Meeting Luncheon 0"tatement. "Rules which fit for casualty work should also fit other insurance by Ken Krehbiel and benefit work . In addition, there is a growing need to place actuarial work in the larger context of financial and Hurrying from Capitol Hill to a hotel Although people are appalled by the economic calculations which use risk- and back can take its toll. One of the cost of health care, "if you look at the adjusted Interest rates to convey first things Senator Alan Simpson (D- possibilities," Simpson says, "theyreally market perceptions of risk ." WY) told the luncheon gathering of don't say much about it ." Walter N. Miller, conducting the attendees at the Academy Annual After Simpson' s speech, a question hearing as chairperson of the ASB, Meeting was, "Yes, I did sleep in this from Academy President Harry Garber replied that the board "agrees that suit ." returned to the health care issue. As standards should be as broad as Simpson then demonstrated why he for the prospects of legislative reform of feasible." has the reputation as one of Capitol the health care system, the Senator The final speaker of the day disagreed Hill's favorite and most entertaining said, "We will have some proposal," that a standard was needed . In fact, speakers. He peppered his luncheon which he then expects people to "tear Thomas J . Kozik, a senior research address with humorous anecdotes and apart." actuary at Allstate, declared that witty one-liners, but he also gave his Simpson told the actuaries In "discounting is too trivial a task to audience some food for thought on the attendance that Congress relies on them glorify with a standard. It is analogous health care crisis, which he called for truthful answers and not just the to having a standard for computing "bigger than bear meat . You knowwhat ones members want . He said , "All you compound interest ." Kozik also took bear meat is, don't you? It' s something have to do to get the right figur es is just issue with the exposure draft, saying that the more you chew, the bigger it wait ." Amid a ripple of laughter, he that it was inconsistent with financial gets." said, "That's the truth . That's not a theory. The health care crisis won't be easily cynical statement, that's true." About twenty persons attended the resolved, according to Simpson . He Another difficult balancing act any hearing in addition to the hearing panel . told the audience of actuaries, "You're legislator must perform Is Juggling which consisted ofthree other members going to have to guide us, especially if special interests and handling the of the ASB, Gary Corbett, Jack M . we get into health care." Part of the pressure of special-interest groups . rnquist, and P . Adger Williams : problem in health care now, Simpson Through the years, it's something ichael J . Miller, chairperson of the said, Is that "there are plenty of people Simpson has had plenty of experience ASB Casualty Committee, and James thriving on chaos. $673 billion per doing. He says interest groups "explain A. Faber, chairperson of its year . That's chaos ." and complain," but in fiercely protecting Subcommittee on Loss Reserving. To give some idea of how large a their own interests, they don't say, The reserving subcommittee, the billion is, he explained that a billion "We're willing to pitch €n.' That's the parent Casualty Committee, and the seconds ago Don Larsen pitched his part I never hear." ASB are all expected to play roles in perfect game (in the 1956 World Series), But special interests, politics, and deciding what steps are next . a billion minutes ago, Hannibal and his issues aside, the best speakers on the minions were crossing the Alps (218 dinner circuit still rely heavily on humor. Kennedy is standards editor for the B. C.), and a billion hours ago, the world And sometimes Simpson is his own Actuarial Standards Board. was a large solid rock. best target. He told a story about buying a fishing license . He and the woman selling the license didn't see eye-to-eye on an issue. Their discussion dragged on, and Simpson started to wonder if he was ever going to get to fish. Apparently, their conversation was as exasperating for her as it was for him, because after he left, Simpson noticed on his license that for hair color, she had written "glossy." (Simpson is balding.) As he left. Simpson fielded one last, fairly technical, question and his response quickly evolved into a self- deprecating admission : "A man should sometimes just say. 'I don't know.' "I don't know ." Simpson's speech was telecast nationwide in its entirety that night on C-SPAN.
Senator Simpson chats with Academy President Harry Garber. Krehbiel ispublic relations speciaiistfor the Academy. 10 The Actuarial Update
Forecast 2000 Actuaries assumptions as to future trends (as well as interpretations of past trends) Blitz Pacific Northwest that the trustees adopt, this does no reflect dishonorably on the actuary' by Ken Krehbiel professionalism as long as he or she can accept the results as being in the The busiest and most productive media tour of the 1991 Forecast 2000 public range of reasonableness . After all, in relations campaign took Academy Executive Vice President Jim Murphy and Rob connection with private pension plans, Brown, immediate past president of the Canadian Institute of Actuaries, to the actuaries often revise their assumptions Pacific Northwest October 1-4 . The week-long tour began in Portland, proceeded at the request of the plan sponsor if the to Seattle, and finished in Vancouver. resulting elements are still `reasonable ." Environmental risk, specifically how actuaries are becoming more involved in In the field of past real-wage changes, assessing environmental risks and helping businesses plan for them, was the one can get almost any answer that one subject of the media appearances . Brown and Murphy had twelve bookings in all, wants by choosing the "right" starting giving interviews to reporters for stories in newspapers and print media, and making and ending years . Mr. Kings statement appearances as guests on radio public-affairs programs . of actuarial opinion asserts that "There Wednesday's activity In Portland landed a feature story with photos of Brown has been virtually no net increase in and Murphy in the Portland Oregonian. Public affairs programs on three Portland real earnings during the last 22 years ." radio stations also had Brown and Murphy as guests . Using the series of estimated real The PR foursome, which included Academy Director of Public Relations Erich nationwide earnings (wages and self- Parker and Edelman Public Relations Senior Account Supervisor Elizabeth Kelley, employment income) ending with 1989 landed three more radio interviews on a busy day in Seattle . A produced piece on (the latest final data available), KISW-FM included the actuarial perspective on environmental issues along with compound annual rates of change are the celebrity activist views of musicians Sting, Bonnie Raitt, and Bruce Hornsby . as follows: 1967-89, +0.18% ; 1951- On the last day, in Vancouver, British Columbia, Brown and Murphy met with 89, +1 .11% ; 1973-89, -0.39%; and reporters from two daily newspapers, including the Vancouver Sun, and made three 1982-89,+1 .56% . So, take your choice! more radio appearances . Because the Canadian Institute of Actuaries cosponsors The ultimate rate of +1 .06% used by the Forecast 2000, each year's program has included a media tour stop or press trustees in Alternative II (intermediate) conference in Canada. assumptions-based on 5 .1% annual Forecast 2000 began in 1989 to celebrate the centennial . of the actuarial earnings increase and 4 .0% CPI rises- profession in North America and to look toward the year 2000 to publicize how does not seem unreasonable . actuaries would serve society in the next century . The program is cosponsored by As to the method of summarizing th the six major North American actuarial organizations . The main elements of this actuarial balance of the program, three year's program were three media tours, ten one-minute produced commentaries actuarial committees or panels have televised on Nation's Business Today (aired on cable's ESPN(, and general press expressed the belief that the present- publicity oforiginal research published in Contingencies magazine . There were also value method (as used by the trustees print media profiles featuring actuaries In nontraditional practices and data and and the chief actuary of the Social graphics distributed to print media on the relative risks of athletic and leisure SecurityAdministration) is appropriate . activities. Two of the three groups stated that Mr . King's modified average-cost method also had value, whereas the othergroups unequivocally came out for the present- . And it is important to LETTERS TO THE EDITOR an unqualified actuarial opinion in the value method note that the results of using the latter, (continued from page 3) 1991 Hospital Insurance (HI) Trust Fund report . He also brings out why he which produces about the same picture work is somehow above criticism or believes that the statement of the two of the financial insolvency of the HI that informed people from outside the public trustees that his actuarial program over the long run, are profession have no right to question certification was not only incorrect, but presented in the HI Trustees Report . our judgment . Many of us, including Improper was "an unprecedented affront Finally, there is the "otherside of the the chief actuary of HCFA. work for to the professonalism of actuaries." In coin." Based on Mr. King'sviews on the nonactuaries . Sometimes we are wrong the September Update, Gregory J . above two points, there is a challenge to and our bosses right . The case of the HI Savord, one of Mr.. King's staff, strongly the professional ability and judgment actuarial certification may be an backs up his viewpoint. of the chiefactuary ofthe Social Security example of that . I concur that actuaries should have Administration, who did not qualify his independence of professional action, actuarial opinion because of the two Bruce D. Schobel but I believe that there are limits to elements of real-wage changes and the New York, New York independence . This is the same as with present-value method of summarizing freedom of speech, which does not actuarial balance (or, for that matter, extend to crying "Fire!" in a crowded for any other reason) . Flip Side of the Coin theater as a prank . Further, we should recognize that other professions have a Robert J. Myer Roland E . King, chief actuary for the competence in some areas in which we Silver Spring, Maryland Health Care Financing Administration, deal, such as real-wage growth . If the discusses in the August Update letters staffs of the cabinet officials who are column why he was not able to provide trustees come up with different November 1991 11
INSURANCE SOLVENCY REGULATION from page 6) •ntlrlued Approval to Sign Casualty Loss address rate regulation, form regulation, and market conduct . He questioned Reserve Opinions how much all of this will cost, who will pay, and If there will be a benefit to the Members who intend to sign 1991 casualty loss reserve opinions payer. need to be approved as qualified by the Academy Casualty Practice Council, unless they are also members of the Casualty Actuarial Crisis of Confidence Society, or unless they received approval last year . In June 1990 , the National Association of Insurance Jim Swenson, former administrator for Commissioners (NAIL} adopted a requirement that property/casualty the Oregon Division of Insurance, insurers in all states submit loss reserve opinions signed by a acknowledged a "crisis of confidence" "qualified actuary." The NAIC defined a "qualified actuary" as a in the insurance industry . He pointed person who Is either a member in good standing of the Casualty out that the NAIC has stepped up the Actuarial Society, a member in good standing of the Academy who pace of addressing solvency issues . The has been approved as qualified for signing casualty loss reserve industry is trying to balance affordability opinions by the Casualty Practice Council, or a person who has and availability of insurance with otherwise demonstrated competency in loss reserve evaluation to solvency, he said . the satisfaction of the insurance regulator in the insurer's domiciliary Senator Metzenbaum, who addressed state . all meeting attendees earlier in the day, For the 1990 annual statement year, twenty-eight applications had cited shortfalls to the regulatory were requested, twenty-two were sent in . and nineteen were approved system . Swenson sees these as for various lines . challenges . He pointed out that the Academy members whose qualifications were reviewed and voluntary NAIC process needs more approved by the Casualty Practice Council last year need not reapply time to be worked out and should be for approval this year. However, those members who plan to seek given more time. The NAIC has added approval from the Casualty Practice Council for the first time need additional qualified examiners and to call the Academy for the latest forms and fill them out and send ngthened the central NAIC office, them in, along with a letter attesting to alternative education are staff has almost doubled . He attainment . The review process can take a month or longer, so cknowledged there may be a federal applicants should request the forms promptly. role in the examination of offshore reinsurers .
NAIC's Positive Steps
Swenson also noted that the NAIC already requires an annual actuarial certification on all companies, both property/casualty and life/health . He pointed to standards of practice, disciplinary procedures, and the valuation actuary concept (Oregon was one of the first states to adopt this legislation) as other positive steps . Swenson was pleased to note that the federal legislation proposes to work closely with the state regulators and not undermine the role of the commissioners . He noted that the NAIC is addressing many of the concerns of the federal legislators and questioned whether legislators might be under even more pressure than the state regulators .
The twenty-fifth anniversary of the American Society of Pension Actuaries ider is a consulting actuary and editor IASPA) was celebrated in Washington, D.C., September 29 to October 2 . The Update . Presidents or presidents-elect of the organizations represented on the Council of Presidents attended the opening session, bearing gifts. Above, ASIA President G . Patrick Byrnes (left) receives an engraved tray from Academy President Harry Garber. 12 The Actuarial Update
1991 Annual Meeting Report: Business Session
. President Mavis A. Walters : I would establishment of the four practice of Pension Actuaries like to call to order the 26th Annual councils, one each for casualty, health, And from the Actuarial Standards Meeting of the American Academy of life, and pension practice. These Board, the incoming chairperson, Jack Actuaries. Welcome to you all. practice councils, each chaired by an Turnquist is here . This past year has been a very busy Academy vice president, help to plan, Thankyou . Now it is time to ask Jim to come forward and give a and exciting one for the Academy. The coordinate, and monitor the activities MacGinnitie issues confronting the actuarial of the various committees in their report from the Nominating Committee . profession have become increasingly practice area. In the future, we will be Past President W. James MacGinnitie : complex, and we are very fortunate to looking to the practice councils to take a more active role in the public relations Good morning . The president- elect of have so many dedicated members who will assume area as well. the Academy, Harry Garber, are willing to donate their time and the job of president at the conclusion of effort to Academy activities . For taking on the assignment of running the practice councils, I want to this Annual Meeting. While we have a very fine staff Yesterday the Board of Directors, in headed by Jim Murphy. the Academy thank our fourvice presidents during the pastyear as well as all the committee accordance with the bylaws, elected could accomplish very little without the the slate of officers for the coming year. volunteers. chairpersons who have served on those hard work ofour committee And I am pleased to report that our new They really are the heart and soul of the practice councils . president-elect is John Harding . We professional Another important change made in Academy, and without their have three new vice presidents : Larry expertise the Academy would be but an the pastyearwas the decision to appoint Zimpleman for pensions, Steve Radcliffe empty shell. the president and/or the president- elect of each of the other U .S. actuarial for life insurance, Dick Snader for I believe we have put In place a very . organizations to the Academy Board of professional affairs fine, workable structure to help us deal Tom Levy, our hard-working trea- issues. Directors. I believe that is going to be with important public policy surer, will be given the duties of sec- The Academy is well positioned to deal very helpful in strengthening the ties retary in addition this coming year, with all its audiences, whether they be between the other organizations and a result of a change to the bylaws. members of Congress, representatives the Academy, and it certainly is going to promote an ecumenical spirit among We are nowat the point in the meeti~' of the states, the National Association where we elect the directors for the of Insurance Commissioners (NAIC), or all the organizations . coming year. The nominating committee the media . Yet without substantive I would like to recognize some of the presidents and presidents-elect of the is pleased to submit the nominations positions developed by the experienced, for six individuals for three-year terms other organizations : Mike Toothman, knowledgeable professionals, the as directors of the Academy: Jack Academy simply couldn't be effective . president-elect of the CasualtyAetuarial Byrne, Bob Gossrow, Walter Miller, Ken I'm very grateful to all those Academy Society; Ray Cole, president of the Porter, Dave Flynn, and Bob Guarnara . members who have worked so hard Conference of Consulting Actuaries ; Don Sondergeld, president-elect for the In addition, we have two one-year during the past year . to be filled because of Society of Actuaries ; and Ruth Frew, terms that need One of the structural changes that I the election of vice presidents Steve president-elect for theAmerican Society believe has worked very well is the Radcliffe and Larry Zimpleman . The Nominating Committee would like to place nominations for those two spots : Ruth Frew and Walter Rugland .
President Walters: Thank you, Jim, for your report. Are there any other nominations from the floor? Hearing none, may we have a motion to elect the candidates selected by the nominating committee?
A Participant : So moved. Ms. Walters: Second?
A Participant : I second .
Ms, Walters: All in favor please sa~ "Aye ." [Simultaneous ayes .] Ms . Walters : Opposed? [No response .] Thankyou . And congratulations to our new board members . Thank you very president, Mavis A . Walters . Harry Garber is handed the gavel by outgoing much, Jim . And now it gives me great, November 1991 13
great pleasure to pass the gavel of office to our new president, Harry Garber . I ow he is going to be an outstanding sident. It has been an absolute Blight working with him during the year, and I know he is going to do a terrific job . Congrat-ulations, Harry, and good luck.
President Harry Garber: Thankyou . I will be mercifully brief, because Senator Metzenbaum is on the way here. ]just want to say that I am very honored to be selected for this office . It is not an office I sought or expected, but I cherish it ; it is a challenge that I accept and look forward to . The Academy is surely growing in purpose and effectiveness . That is really attributable to the leadership over its whole term, but particularly to the leaders over the past few years . Mavis has done a great job during her term . I essentially, but will then look to the drafted, exposed, and promulgated think we ought to give her a round of other institutions, the committees of eighteen actuarial standards ofpractice, applause. [Applause .] the Academy, and probably to the CAS and as many as fifteen more are in the As Mavis said, the Academy's and SOA to provide a lot of work on pipeline . And, as far as professional effectiveness cannot be attributed to these issues. Insurer solvency Issues standards anddiscipline are concerned, the leadership alone, but to everyone are critical to our profession, and we the Academy has worked In concert who has worked for the Academy, either look to John to provide great leadership with the other organizations, and we on committees or in other roles . And for that effort . nowhave some key structures in place . without all of you, we wouldn't get the It will be a challenging year, but the For example, the Joint Committee done. I will do my best to continue fun of life is in challenge. At the end of on the Uniform Code of Professional W this tradition of growth in nextyear, the profession will have moved Conduct has drafted a model code of effectiveness, and I know I can count on a few more steps ahead . And that will conduct, which was exposed to all of all of you as well. be due to me in part, but principally to the members in April of this year . At the Three topics covered in today's all of you. board meeting yesterday, this code was program exemplify the challenges that So 1 look forward to working with adopted for the Academy. are ahead for us : insurer solvency. you. And at this point I will turn the Each of the other organizations now health care, and pensions . These are program over to Jim Murphy. has the opportunity to adopt the code industries and institutions that have as it is, or tailor it to their particular developed largely in the private sector Executive Vice President James organization. in this country, and which have served Murphy: Thank you, Harry. And I too And the Actuarial Board for hundreds of millions of Americans . look forward to working with you over Counseling and Discipline (ABCD), Clearly, these are the institutions or "the coming year, as we have begun to formally established by your vote this Industries in which members of our work together this year. I think we have summer, will now be responsible for profession have been most involved . a very important year ahead of us. reviewing cases where an actuary's So, we have a great interest in their If Jack Morehead were here and professionalism has been called into wellbeing . At this point, these industries writing a sequel to Our Yesterdays, I question . Counseling and recom- are under great pressure as a result of wonder how he might characterize the mending disciplinary action where social and economic changes. last three years . I have a chapter appropriate will be the ABCD's distinct A couple of decades ago, our heading to recommend : "The Spread of charge. profession might have stood around Professionalism." These developments are important and watched all these developments When I took the post of executive milestones, and Jack Morehead could with detached interest. Today, through vice president, about three years ago, probablywrite awhole chapter on them . the Academy (and that means you and the professionalism movement within But the professionalism movement isn't me), we will have an active role in the actuarial profession had gained just one chapter in the history of the establishing public policy and in some real ground . actuarial profession . Its roots go all the strengthening these institutions that In 1988, Academy members had way back to the founding of our are so Important to our nation and to voted to establish the Actuarial profession in North America. u rprofession . Standards Board . And the Joint Task And certainly, our efforts to ustyesterday, the board established Force on Strengthening the Actuarial strengthen professionalism today will k force - a "blue ribbon" task force Profession had just made its initial benefit and be the mainstay of our Cunder the leadership of John Harding, recommendations. In the past three organization and its health in the future. our new president-elect to look Into the years, the professionalism movement Ofcourse, professionalism is not simply area of insurer solvency . has not slowed down a bit . The task force will define the issues The Actuarial Standards Board has (continued on page 16) 14 The Actuarial Update
McCartney offered a rebuttal to the expressed need for and the advisability Casualty Loss Reserve Seminar Report of federal solvency regulation . He noted that the content of the proposed fedelft bills is not significantly different frdOW Solvency Viewpoints : regulation of insurance . He noted that that of the National Association of this new legislation was prompted Insurance Commissioners' (NAIC) State and Federal primarily by problems in the life- model laws drafted several years ago. insurance sector. In Slaiman 's view, He further doubted that the federal by Michael A. McMurray there is a crisis in confidence in governmentwould be anymore effective insurance regulation . He stated that than the NAIC in dictating uniformity The Casualty Loss Reserve Seminar the quality of state regulation is not among states . From his standpoint, general session on Solvency Viewpoints, uniformly good and that federal the federal government can only provide September 22, provoked a lively oversight can address this issue . another layer of bureaucracy to exchange among the panelists regarding The specific bill that he described insurance regulation, not meaningful state versus federal regulation of has the following characteristics : improvement. insurance carrier solvency . The McCartney did admit that the state panelists Included John H. Snyder, vice • It would establish a federal guaranty fund structure could be president of A.M. Best Company; Gary insurance regulatory commission to improved . In particular, he cited the Slaiman, majority counsel for the Senate accredit state insurance departments need for a prefunding mechanism Judiciary Subcommittee on Antitrust who meet minimum standards . whereby assessments would be based Monopolies, and Business Rights ; and • The minimum standards would on the relative riskiness of each carrier's William H . McCartney, insurance address capital requirements, consumer underwriting and investment portfolios . commissioner for the state of Nebraska . disclosure, and reserve setting- He did warn that the existence of Snyder set the stage by guaranty fund assets could summarizing the results of a entice raiding by study of property/ casualty governmental entities to company insolvencies re- finance non-insurance cently published byA. M . Best . obligations. He thought that This study focused on the 372 this would be a special property/casualty in-sura ne e concern for a national company insol-vencies guaranty fund, given tllft occurring since 1969 . federal government's tra The A .M . Best study record with Social Security concluded that the property/ and Medicare. casualty insurance industry In conclusion, he stated fared better than most other that federal intervention financial industries in terms would be counterproductive of company failures . How- and further impede effective ever, insurers should be held insurance regulation. He to a higher standard given the encouraged Congress to look role they play in society, said instead to the NAIC for Snyder. regulatory improvements The study also revealed that and to support those efforts . the frequency of insolvencies In response to a question tended to vary inversely with fromtheaudience, McCartney state regulatory budgets and stated that it was not always with the age of the company. Commissioner McCartney and Counsel Slaiman share mike. in the public and policy- Stock companies had a much holders' best interests to call greater insolvency frequency than did including statements of opinion from for any early liquidation of a troubled mutuals. In the 1970s . insolvencies qualified actuaries . company. He did indicate that the were most frequent among personal- • Minimum insurance department NAIC's risk-based- capital working lines carriers: whereas, the 1980s were resource requirements, including groups are working to better the era of commercial-lines carrier actuarial support. would be set . discriminate between companies that failures. • Reinsurance would be regulated can be rehabilitated and those that Snyder identified the major reason at the federal level. can't. for company insolvencies as inadequate • A national guaranty fund would Responding to the same question, reserves, inadequate prices, rapid be established. Slaiman cited congressional findings growth and reinsurance failures . He The proposed guaranty fund would that companies have not been stopped also cited fraud, but noted that white- be prefunded through company fast enough in the past . He offered collar crime did not appear to be the assessments and would preempt state Executive Life Insurance Company as same problem for insurers as it has guaranty funds . It would oversee recent example. been for the savings and loan industry . liquidations on a national basis and Next, Gary Slaiman summarized the could also be used to assist carriers key aspects of the Metzenbaum bill who could survive if given a prudent McMurray is a consulting actuary with calling for federal oversight of state cash infusion. Miliiiman & Robertson . November 1991 15
others. including many actuaries, FASB's Dictums on Discounting advocated a systematic approach to a risk-reflecting process or parameter Jeffrey P. Kadison risk. Upton also expressed concern that some respondents believe that the use A session titled "New Developments in 3. the adjustments to be made for ofpresent-value measurements should FASB's Position on Discounting" was risk, If any; and not proceed until the question of risk is held at the Casualty Loss Reserve 4. the method ofselecting the interest resolved. This suggests that pensions, Seminar. The session focused on the rate. other postretirement benefits, and life Financial Accounting Standards Board's insurance should all use undiscounted (FASB) discussion memorandum titled The Issue of adjusting for risk has measurements. Depsitetheimperfections "Present Value-Based Measurements raised the most concern . Accounting ofthese measurements, their relevance In Accounting," Issued in December procedures assume that observable is greatly enhanced when financial 1990 and the subject ofpublic hearings marketplace measurements reflect risk. statements are presented on a present held in August 1991 . (See Stephen FASB has received approximately value basis. Kellison's article in the February 1991 120 responses to the discussion FASB's next steps have not been ActuarktlUpdate.) Panelists were Wayne memorandum . The notion of a risk Upton (project manager for the FASB) discussed to date . Upton believes that adjustment elicited the most interesting the discussion memorandum should and Allan Kaufman (a consulting comments . Some respondents believe address problems of present-value- actuary with Milliman & Robertson) . that any consideration of risk should based measurement in a general sense The panel was moderated by Bertram be prohibited, citing FASB Statement A. Horowitz . before considering specific industry of Financial Accounting Standards No . applications . Any resolution to the Upton discussed the five factors that 5 and Its prohibition of contingency issue does not appear to be imminent . prompted FASB to address the issue of reserves . Others stated that the interest present-value measurements : rate selected should reflect risk . Still (continued on page 16)
1. High interest rates have increased the importance of investment income in the assessment of an insurer's performance . 2. Distinctions between classes of Professional Standards Wets and liabilities (monetary and on the Witness Stand non-monetary) may not be as relevant as they once were . by David S . Powell 3. The representational faithfulness of financial reporting that does not The Casualty Loss Reserve Seminar reflectpresent value-based measurements included a presentation on professional has been questioned. standards . Instead of the customary 4. The Implementation of present- panel discussion, the presentation took value-based measurement varies the form of a mock trial . A hypothetical considerably among accounting set of facts was introduced concerning pronouncements . an insurance company that had become 5. FASB has relied on recent studies insolvent. The insolvency was due, in by other organizations as a foundation large part, to a misperception of the on which to build . insurer's past profitability. The misperception was due to an allegedly The reflection of present values has improper reserve review performed bya Judge Roxanne Roxannadanna been opposed by some who argue that, consulting actuary. The reserve review The cross examination demonstrated since the amount and timing of future was based upon erroneous data that cash flows are subject to considerable the plaintiff claims should have been how a plaintiffs attorney can create the uncertainty, accounting standards detected if the actuaries involved had appearance of ineptitude by exploiting should ignore the time value of money. adequately performed their functions . seemingly innocuous departures from standards, lack of adequate file This argument stresses reliability of The facts did not include any blatant documentation, extraneous file material the measurement over the relevance of actuarial errors, but rather a series of the estimate . (Upton implies that the "shortcuts," file documentation and even the qualifications of people present-value- based measurement is problems, and less than perfect working on mundane tasks . more relevant .) adherence to published standards . A special guest appearance was made by the Honorable Judge Roxanne Advocates of present-value-based The presentation consisted of the measurement focus on four issues : cross examination of the actuary (me) Roxannadanna (Jane Taylor) visiting from an earlier thespian effort, "Cut My by the plaintiffs attorney, (Walter Rate," a musical produced last year by . the future events to be included Bardenwerper, who graciously agreed #1the cash flow estimates; to step out of his customary role as the Casualty Actuarial Society. 2. the extent to which joint inputs . general counsel for the Wyatt Company interaction and grouping may affect the to appear on the plaintiffs side of the Powell is an actuary with Tillinghast/ estimates ; courtroom) . Towers Perrtn in Dallas. 16 The Actuarial Update
BUSINESS SESSION And I looked a little expectant, and be just going to say, [ wish he knew. But (continued from page 13) said . As a matter of fact. I'm sorry I how do we know? Maybe he does . won't be able to see you for quite a Thank you . accountability to minimum standards . while." And I waited . And he said, "I'm President Garber: This award It is spirited striving for excellence and going to have to study." Well! I was symbolized by a silver bowl on display heartfelt commitment to one's stunned . in the Academy office . We will have the profession. Here was this graduate of Harvard name of the person who receives the Professionalism has many faces University, magna cum laude, Phi Beta award each year inscribed on the bowl . within the Academy. In three short Kappa, telling me he could not have years [since the ASB was established], another date with me for a long time And then the individual will receive a . nearly 200 members have contributed because he had to study . 1 said good replica of the bowl [To Mrs . Farley] We wanted to give time and considerable effort to ASB night, and went in the door . you a bowl that will be similar to the one standard writing . Easily 200 more Well, needless to say, that was-how that will be received byall the recipients have actively drafted public statements many?-fifty -three years ago. And he of the Jarvis Farley Service Award in or given testimony to public policy did study , and he kept on studying . makers . And he served the actuarial profession . future years. I estimate that all together committee I was so interested to hear this last Mrs. Farley; Oh, thank you so much. members donated approximately 8,000 report [by Jim Murphy], because one of That's wonderful. hours to this work last year . Certainly the things that Jarvis did do while he we can be proud that so many of our was active was to be very interested in President Garber: As my first official members are actively involved In maintaining the high actuarial act as president of the Academy, I professional activities with the standards of practice . I have been declare the business meeting adjourned . Academy, the Actuarial Standards going through his files, and I see these But don't go away, because we are Board, and the other membership references . expecting Senator Metzenbaum any organizations as well. Jarvis was a keeper too, and there minute . This year, the Academy's Board of are lots and lots of files that I am going Something I hope you all picked up Directors decided that an award should to go through . But the other thing was when you registered, is the Issues be established to honor volunteers who his service , and he blazed a trail when Digest, published by the Academy. It are truly extraordinary in their service he started trying to establish ABFA, gives a fairly good background and to the Academy and the profession . actuarial based financial accounting, picture of the key issues that we have This idea came about because we and that took quite a lot of doing. been and will be addressing in our wanted to honor one such truly I just want to thank you very much government information program extraordinary member of our profession for honoring him in this way . I was very year. who passed away this summer, Jarvis moved when I heard about it, and, I was Farley. Jarvis was a fellow of the Casualty Actuarial Society since 1940, and a charter member of the Academy . He had served on Academy committees since 1972. He had been active in the FASB'S DICTUMS ON DISCOUNTING 2. Actuarial science will determine standards movement from its beginning . (continued from page 15) how to calculate riskadjustments, since Jarvis epitomized the truly committed accepted methods don't exist today . volunteer . Allan Kaufman discussed the 3. The interest rate used to discount We honor him this year by setting up Academy's response to FASB on the reserves must depend on asset this award . In future years we will discussion memorandum . Kaufman valuations used in the balance sheet . honor individuals who reflect a similar listed three requirements of all Bonds must be valued at market value, spirit of service, by awarding them the accounting systems : not amortized value . Jarvis Farley Service Award . We are honored to have with us 1 . The system should not allow Finally, Kaufman presented the basic today Mrs. Jarvis Farley, as well as two artifical gains to be realizable . accounting rules that state: If cash of Jarvis and Betty's daughters, 2. Insurance company decision flows are reliable, discount them . if Penelope and Pat . Mrs. Farley has making should not be distorted . cash flows are not reliable, don't consented to share with us a few of her 3. Adequate reserves should be discount them. reflections on this occasion . encouraged, not discouraged. An alternative view of the accounting rule may be appropriate for property/ Mrs. Farley: I was deeply moved when These requirements must be reflected casualty reserves. Although the reserves I was told about the Jarvis Farley Service in any modification made to the current are not necessarily reliable, discounting Award . Jarvis was very proud of being accounting system . The Academy still may be appropriate with an an actuary. I reminisce back to the statement made three key points: adjustment to reflect risk factors . time when I had my first date with Jarvis, and when it came time to end 1 . If a present -value method of the evening he turned to me and he accounting is adopted, a risk Kadison is managerfor PriceWaterhora said, "I've really enjoyed this evening ." adjustment is necessary . in Hartford.