Task Forte on Papers Pension actuaries Clyangesto Mercenaríes or professíonds?

ímproveTSA by J. Bruce MacDonald

by f rancis P. Lemery n interesting and valuable early in our careers,and it was article by Étienne Brodeur possible to know ahnost everyone in ave you wanted to write in the December 1991 the Toronto actuarial community. a paper and publish it in Bdetin of the CanadianInstitute of 1 had the good fortune to work the 7kansactfonsbut Actuaries is tided “PensionActuaries: for the late N. Douglas Campbell,then were unsure about the processand Do They ServeEmployers or Plan Crown’s associateactuary, and bis your probability of success?Do you Membersl” This started me thinking boss, the late Frederick Hffl, the assis- e your Transactiohson a shelf about our profession in general,its tant general managerand actuary. r you receiveit becauseyou professionaland moral issues,and the (The CEO’stitle was general manager db uld not find articles that benefit question of for whom we really work. in those days.) Nothing 1 leamed from you in your practice? a look back other actuarieswho influenced my The Society’sBoard was con- When I graduated from university in careerhas led me to believe that cerned about the papers process,the 1949and began work for the Crown Campbelland Hffl were atypical in value of the Transactions,and other Life in Toronto. young actuarieswere their approach to the profession. Both issues.and it decided to do some- in short supply becauseof the war. were strong individualists: one might thing. At its January 1991meeting, Many potential actuarieshad enlisted. even consider them characters. the Board appointed a Task Forte on (Rememberthat the war for Cana- They taught me that an insurance Papersto addressthese issues. company’sprime responsibihty was The task forte addressed dians started in September1939, not December 1941.) Many ex-servicemen to its policyholders. While many of severa1concerns, including the need were not repared to settle into the the Canadian companieswere stock to simplify the arduous review grind of t Re actuarial examinations, companies.almost all issued partici- process,a need to standardizethe having already had severa1years pating policies. Under Canadianlaw, a acceptancecriteria, and a need to taken out of their lives. We had little minimum of 90%of the profits on improve communications with competition and were promoted . such policies went to the policy- authors. In addition. the task forte holders. The Canadianinsurance looked at the usefuh-iessof the rapidly if we passedexaminations. Z’kansacffonsto its members. We worked with senior actuaries Conlinued on page 3 column 1 The Society memberswho served on the task forte included members I In this issue: of the Board.t-he academic community, Penslon actuartes - Mercenaries SOA members prepare for IACA ‘92 those involved in the papers process. or professlonals? Mary Hardiman Adams 8 and past 2kansactfonsauthors. J. Bruce MacDonald 1 Risk aversion. rattonal insurance The task forte surveyedauthors Task Force on Papers- Changes to purchase in the long run who submitted papers during the past Improve TSA Tapen Sinha and two years.Their comments provided Francis R Lemery 1 Jay Sounderpandlan 8 EdItorial - Keeping up with Merger hfe: The mortgage option uable input and positive sugges- the economy Lloyd A. Foster 9 a s for improvements. Mary Hardiman Adams 2 The complete actuary - Effectlve The task forte submitted its final Timing of expense recognltion meeting management report to the Society’sBoard at its for retiree medical benefits Charles R. Haskins 10 Erlc F! Lofgren 4 October 1991meeting. The board On the ltghter side 12 approved the task force’srecommenda- Researchcomer 7 Letters to editor 15 tions, and its report was referred to Actucrossword 16 Contlnued on page 7 column 1 The Actuary--April 1992 2

Editorial Keeping up with the economy

by Mary Hardiman Adams Society of Actuaries VOLUME 26, NO. 4 ust about one ~ ~ APRIL 1992 year ago, I Editor responsible for this issue wrote an Mary Hardiman Adams editorial for The Actuary bemoaning that we were in an economy everyone (except the economists, up to a month earlier) considered recessionary. As a will these survivors act with respect pension actuary responsible for setting to voluntary separation from active the actuarial assumptions for plans service? What can the expectations be lot for which I am the enrolled actuary, for new entrants? Will these future Editor the economy posed enormous prob- participants move freely about the Linda B. Emory. FSA lems with the economic and demo- marketplace, with little more service Associate Editors graphic assumptions (especially with each employer than needed for Mary Hardiman Adams. ASA separations from active service). vesting? Will they stay with one Barbara J. Lautzenhetser.FSA employer until full benefits are Robin B. Leckie. FSA The quandary now is much the Michael E. McGuinness. FSA same, although the demographic payable? Will they retire when an AnthonyT. Spano, FSA assumption selection might not be early retirement benefit is most Competition Editor as difficult. Or is the selection valuable to them? It will be years John W. Keller,FSA more difficult? before answers are available. Meanwhile, we can use select Features Editor Demographic concerns Deborah Adler Poppel. FSA The downsizing of some pension and ultimate assumptions where Assistant Editors plans' memberships has created the downsizing information is available. Peter J, Bondy,FSA largest part of the demographic Long-term assumptions will have to Charles Habeck, FSA be analyzed and adjusted as any Curtis E. Huntington,FSA assumption problem. '~Nindow plans" Eric P. Lofgren,FSA that provide incentives for employees changing patterns emerge. This truly J. Bruce MacDonald, FSA to elect early retirement do not cause is long-term. Society Staff Contacts much long-term concern because of Economic concerns 708-706-3500 their definite time frames, groups of Each day brings different news about Cecilia Green employees, and selection of benefits the economy or of a certain writer's Staff Editor within the time frames. The value of view of the economy. Looking at daffy Judith Bluder Assistant Staff Editor a window as an amendment to a reports is of no use for the long-term. Linda M. Delgadillo pension plan is measurable. Of itself, Recent reporting can be of use if dear Director of Communications a window provides no surprises. short-term trend information is avail- Correspondence should be addressed The gradual downsizing by attri- able (we might at least have reliable The Ac~ary tion does cause some concern. Will select values). What use are headlines P.O. Box 105006 the probabilities of separation from such as, "Next It May Be Economy Atlanta, GA 30348-5006 service be affected by employees' Up, Stocks Down," (New York Times Copyright© 1992, Society of Actuaries knowledge of a decrease in the work- Feb. 16, 1992)? The Actuary is published monthly force? On one hand, employees may The best we can do is try to sort (except July and August) by the be afraid to move because of the lack through the daffy gyrations of the SOCIETYOF ACTUARIES, various investment vehicles and 475 North Martingale Road. Suite 800, of re-employment opportunities. On Schaumburg. IL 60173-2226. the other, they may look quickly at decide on the long-term horizon. Donald R. Sondergeld, President outside openings or receive generous Conclusion David M. Holland,VP and Secretary offers that are not part of an "official Are we better off now than we were James F, Reiskytl,VP and Treasurer window." This is a relatively short- Kenneth A. McFarquhar, Director last year at this time? We hope so. We of Publications term concern, and perhaps we can have become more used to the fluc- Non-member subscriptions: obtain information about the near- tuating economy. We might expect students, $6.00; others, $15.00. Send term prospects from the plan sponsor. long-term economic expectations to subscriptions to: Societyof Actuaries, The real concern is the long-term change very slowly even though day-~ P.O. Box 95668, Chicago, IL 60694. pattern of separation from active The Societyis not responsible for to-day conditions are uneven. The statements made or opinions expressed service. We have the survivors of question remains whether our conclu- herein. All contributions are subject to downsizing by incentive plans and by sions form a suitable basis for the editing. Submissionsmust be signed. attrition. As actuaries, we should not long-term projections inherent in ~) Printed on recycled paper have a problem with mortality or with pension plan actuarial valuations. well underwritten disability. But how The Actuary- Aprill992 3

Pensfonactuarles cont’d It has been suggestedthat if an becauseof “top hat” pension plans. actuary is paid from the pension They used overly conservativeassump- industry was very proud that no fund. even if retained by the com- tions, leading the authorities to believe licyholder had ever lost anything. pany, this makes the actuary an agent the plans were merely tax scams, l To paraphrasean oft-quoted of the members.which restricts the which some were. As a res&, per- remark, we believed that what was relationship with the sponsor.1 mission to set up plans primarily good for the policyholders was good would like to seea legal opinion on for significant shareholderswas for the company and the share- thh. If true, the position of the withdrawn on at least two occasions. holders. Eometimeswe were so con- actuary can be even more complicated. While ‘designated plans” may be estab- sciousof our moral rectitude that we 1 believe strongly that the actuary lished for shareholders,connected were not aware others did not regard has a responsibility to safeguardthe persons,and highly paid executives us so highly. interests of plan membersin the bene- now, their terms and actuarial assump- 5aOancing the interests of fits already eamed. Nothing must be tions are restxicted.As a profession. shareholders and policyholders done that would jeopardizethe we would have been better off being The interests of shareholdersand security of these benefits. This does more concernedabout what the tax participating policyholders may not not mean that a valmtion basis authorities regardedas the ublic good. . always be congruent, however. A rapid cannot be weakened, but merely hmits The confidentiahty of tax fil es prohi- expansion that reducesprofits in the the degreeto which this may be done. bited any complaints from being filed short run may benefit the share- Also, nothing should be done to with the CIAS discipline committee. holders. However, if it temporarily mislead plan members.Por example. Even when an actuary is in an reducesthe money availablefor they should not be persuadedto give adversarialposition, such as an expert dividends on policies. it does not up a valuablebenefit or option in witness, professionalismshould re- benefit the present generation of retum for something that may have strain advocacy In one casein which licyholders, although it may benefit more cosmeticappeal, but is Worth 1 was involved. the assumption for the %”ter cohorts. On the other hand. if a much less.This can destroy the credi- earnings lost through a fatal accident company increasescurrent profits by bility of the actuary. had an enhsted man retiring as a full not writing much new business,it will U%msionpolicies general. (1exaggerate only slightly.) stop growing and w~ll not keep. much Many of the problems Brodeur The judge heaped scom on this less attract, the best people.This discussesmight be simplified if the assumption. and it did little for the cannot benefit participating policy actuary insists that the plan sponsor other actuary’s credibihty. Judges holders in the long run. adopt a “pension policy.” Often this dislike advocacyin expert witnesses nsultants face special problems never is articulated. and often when it who are supposedto be unbiased and a en I entered the consulting busi- 1s.it is vague. helping the court. ness after 16 years of insurance Conservativeassumptions or Bhe implications of our advice campan work. 1 brought a lot of methods may have been used with As a rofession,we must be aware of mental Ll3 age with me. I had a httle discussion of their appropriate- the e!f ect our work has on parties concem for plan members.and my ness or ramifications. Devotion to other than those who pay our salaries mentors in consuhing, Denis George conservatismwithout consideration or fees.These include policyholders, and the late Cyril Woods. did not tell of all the implications may have pension plan members,plan sponsors me 1 was wrong. resulted in r advice to the sponsor, (if working solely for the members), Consulting pension acttraries especially,p” surplus is built up that taxation authorities. the judiciary, the have even more problems in deciding the sponsor is constrained from using. opposite side in advocacysituations. for whom they really work than Room hr negotiations and the public. Continual thought insurance company actuaries.Brodeur The actuary must not merely parrot about our ethical position is essential says it is clear for whom they work the sponsor’sviews. For example.a to maintaining their respect. if they are employed by a union or a sponsor may honestly believe that Our advice has broader implica- joint committee representingboth liberal vesting or indextng is wrong. tions beyond interests of whoever is the employeesand the plan sponsor The actuary may believe.however, paying us. If we wish to be regarded While I agreewith him. the actuary these featuresare too expensiveor as truly professional,we must be should not represent the members’ inappropriate in the particular plan or prepared to speak up, even if it means interest to the extent that the that other benefits have a higher prior- disagreeingwith our employers or pension plan becomestoo expensive ity. While it may appear that the clients. We must be prepared.if neces- for the employer to support. ghort- actuary agreeswith the sponsor.the sary,to res@ from an employee or term gains at the expenseof the actuary must oppose the concept on client relationship. To do otherwise continued existenceof the pension defensible grounds and not because will reduce us to the status of an plan are not worthwhile. Even when they are inherently “wrong.” Some arcanediscipline whose practicers are it is clear that a pension actuary is clients believe that pension plans merely mercenaries. employed by the plan members,the cannot be negotiated. It is difficult to J. Bruce MacDonald is a semi-retired g term always must be considered. maintain such an argument when pension consultant. s may mean making recommenda- almost everything else in labor rela- Bk ons that are not In the immediate tions is. interests of the members. The problems really occur when êredibility with authorities the actuary is employed by the com- SomeCanadian actuaries established a pany that sponsorsthe pension plan. bad track record with Bevenuemanada The Actuary- Aprill992 4 Tímíng of expense recognítíon for retiree medical benefíts-

by Eric f! Lofgren Table 1 FAS Ila6 SupposeFAS 106 1sIn effect for an Pay-As-You-Go employee’sentire career.The first step inancial Accounting Stan- (1) (2) (3) 1sto calculatethe EPBOat each point ncneflt dards NO. 106 (FAS 106) for Paymenb Balance in time, as m’Table 2. retiree medical accounting = Contd- Sheet Under FAS 106,the hability is changesthe Uming of the recog.niUon lee button” ~xpenre= (1) Liabditg” accruedfrom date of hire (age45) to of expense,but not necessarflythe 45-59 0 3.oOi 0 the age at which full benefits are avail- amount. This article will illustrate that 60 $ 3,000 $ 0 able (age55). As a result. there is a over the lifetime of a closed plan, the 5: ;:Ei ;g : servicecost (current year accrual)for total cumulative dollar amount of the the sampleemployee for only 10 expensein all years will equal exactly 6: 3.993 3:993 : years, from age 45 to age 55, though the sum of the cash payments tz 4%1.063 “#Z1.063 0 he or she isn’t expectedto retire until whether or not FAS 106 is adopted. age 60. FAS 106 simply forces the earlier z 1.1691,286 1.1691.286 i The calculation of the service costs and of the APBOare shown in accrual of some of the expense.As a 69 1.414 1.414 00 result. the actuarial present value of 70 0 0 0 Table 2. The developmentof the total the expense chargesover the plan’s expenseand of the corporate balance Total --$24.213 $24.313 NIA sheet hability also is shown. lifetime usually will exceedthe (l) Benefit payments are assumed to present value of the cash flows. accur on the last day of the year Note the pattern of expense, This simple example usesa one- tJro~~;~;& example for ease which is at its peak at age 54, just life plan to show the calculation of before full benefit eligibility. A second expenseand the balancesheet effect (‘) The balance sheet habU for the year but lower peak is reachedat age 60, under five approaches: equaIs the balance sheet ?ia bility for as benefit payments begin. The the prior year. plus any expense recog- balancesheet liability peaks at this m 0 Pay-as-you-go nized in the currentyear and minus sametime. 0 FAS 106 always in effect any current year contributions. 0 Year6 transition to FAS 106 (Age 50 J on Table 3) Table 2 0 Actuarial gains and losseseach year from assumption changes FAS 106 for Full Career 0 TransiUon to FAS 106 after a (1) (2) (3) (4) (5) (6) (7) (8) hd of Year purchase reservewas establisheda Bnd of SCIOiCC Balance few years earlier.but without gains Beneflt Bnd of Yeara of Year coat = Interest lbtr1 Sheet Payment = Year Compkted APBO (2)/lo. coa = FAS lo6 LiabUity or losses Contd- BPBO pre-55’ =(2)x in Plrat 8%1108% Expense = (8) Pdor Assunmptiorns & -butioo - at an -Service 1(3)110.1 10 Yerra x((4)-(91 = (5)+ (6) Year+ (7)- (11 Hire age: 45 Retirement age: 60 4546 0 $z% : $lE $598646 $48 O Ti $s981.292 First ehgible for Ml benefits: 55 47 0 $977 3 2:093 698 103 E 2,093 48 0 4 3.014 754 167 3.014 Retireehealth payments: Paid from 49 0 i139 5 4.070 814 242 1.056 4,070 age 60 until death at age 70 50 : 8.790 5.274 879 325 1.204 5.274 To simplify matters, assumethere are no plan amendments and no plan ;: 0 10.2539.493 s 8.2026.645 1.025949 422532 1.371lS57 6,6458.202 assets.Also assumethat the estimate 5: : 11.07311.959 109 ll.9599.966 1.1071.196 657797 1.7641.993 ll.9599.966 of the benefit payments under the plan is correct, i.e.. there are no true :z 0 12,91613.949 10 12.916 0 1,033957 1.033957 12.91613.949 actuaUalgains or losses.The calcula- tions use a discount rate of 8%,except s 0 15.06516.270 10 :;”16:270 .O0 1,1161,205 1.1161.205 15.06516.270 in the scenarioillustrating the effect of assumptton changes. E s3.d 17.57218.977 10 17.57218,977 0 1,3021.405 1.3021.405 17,57215.977 P~JKl!5-yQM-gQ 5: ;:Zi 17.25515.072 10 17.25515.072 0 1.2781.117 1.2781.117 13,95511.442 Under pay-as-you-go.the expense 2 3.9934,392 12.3579.033 10 12.3579.033 i :; 915669 t3g equals the contribution which equals the benefit payment In each year. No 2 1.z 4.3705.012 10 4.3705.012 Fi 371324 371324 4:0463307 balance sheet liability is ever recog- 67 1.169 3*572 3.572 265 265 2.403 nixed. This simple accounting 1sillus- zi 1,2861,414 2.5951,414 10:o 2.5951.414 B 192105 105192 1.309 trated in Table 1. 70 0 0 10 0 0 0 : Total $24.213 NIA NIA NI A $8.666 $15.547 $24.2:3 NI A The Actuary- Aprill992 5

Transition Po FAS 106 Next. supposeFAS 106 is adopted en our employeeis age 50, five e ars after bis hire. The servicecost Table 3 and interest cost components of the Transition to FAS 106 at Age 50 FAS 106 expense starting at age 50 (ll (2) (3) (4) (5) (6) will be exactly the sameas in Table 2. Hnd of Year However,a third expensecomponent, SMVICC Interetu Balance Sheet Colt after cort rfter lbtal Llability the transition cost. is needed to recog- Beneflt lkansltlon ltansltlon Itansltlon. Bxpense= = (6) Prior nize that no expensewas accrued Paymentr (from nble 2) (from mble 2) cont m+ m+ (4) Year+(5)-(1) from age 45 to age 49. Looking back 0 at Table 2. $4.070 should have been 0 $ 87; 8 32; $ 203.; $1.407.; $ 1,407.; expensedfrom age 45 to age 49. 2982.0 ’ Instead. the $4,070 will be recognized : 1.025949 422532 203.5 1.574.5L760.5 4.742.5 0 1,107 657 203.5 1967.5 in the transition cost over the next 20 %z years at a rate of $203.50per year. 0 1,1960 797957 203.5 %E 10:067:0 Alternatively, the full $4,070 could 0 0 1.033 203.5 1:236:5 11303.5 have been recognizedin the first year 0 0 1,116 203.5 1.319s 12.623.0 of FAS 106 compliance. 0 0 1.205 203.5 L408.5 14.031s Expenseand the balance sheet $3.OOi 0 1.3021.405 203.5 1,608.S1,505s 15537.0 14.1455 liability under this turn of events are 12.327.0 developedin Table 3. ;g 0 1.2781.117 203.5 1,481s10320.5 10.017.5 Effect ‘00 assumption changes 3:993 915 203.5 1.118.5 7.143.0 Assume that the discount rate varies 30623.5 wlthin a range of 6% to 10%in the ‘2 0Fl 669371 203.5 872.5574.5 3.232.0 1.063 0 324 203.5 527.5 2.696.5 1) pattem shown in column ( of Table 1.169 0 265 203.5 468.5 1.996.0 4. The development of expenseand 1.286 0 192 203.5 395.5 1.105.5 the balance sheet liabiltty in this 1,414 0 105 203.5 308.5 0 scenarioalso are shown in Table 4, 0 0 0 0 0 0 Contlnud on page 6 columu 1 $24,213 $5.156 $14.987 $4.070.0 $24,213 NIA l- -

pable 4 Effect of Discount Rate Changes (1) (2) (3) (4) (5) (6) (71 (81 (9) (10) (11) (Galo)/ Lors Bod of Bnd of Year Bnd of Year zatloo Total Uorecog Year BPBO l t Bod of UEd0g olzed Balance Dlmouot Bcoeflt Bate lo Year Serv1cc Interest ‘Ranrltioo lo% =(S)+(6)BXpeOSC (Galo)/ Shect Pate Pagmcntr (1) APIO coa Cost Cort Contdor +m+(J-v Loas Liabbllitp 8% 0 NIA NIA 0 8% $ 8.790 $ 5.274 $ ;g s z; $203.; 51.407.; 0 $ 1.407.; 10% 00 7.633 5343 203.5 1343.5 10% 8.397 6,718 840 203.5 5!; 1.545.5 J1:% 2,751.04296.5 8% 0 11.073 9.966 1.107 sn 203.5 0 1.967.5 ‘446 6.264.0 14.147 14.147 1.415 721 203.5 2.425.5 2.405 8.689.5 2 : 14.996 14.996 203.5 : 1.117.5 2,340 9.807.0 8% 0 13,949 13,949 i 1.” 203.5 1.236.5 10% 0 13,523 13.523 0 1,229 203.5 (1:) 1.418.5 GYlI ::fE; 10% 0 14,875 14,875 0 1.352 203.5 0 1.555.5 (1.381) 14:017:5 17.572 17.572 0 1.302 203.5 0 L505.5 14 15.523.0 Ei $3.Ooi 20.068 20,068 0 1.136 203.5 0 1.339.5 1.374 13.862.5 6% 18.092 18.092 0 1,024 203.5 0 L227.5 1.374 11.790.0 8% zi 15.072 15.072 1,117 203.5 1.3205 537 9.480.5 10% 3:993 11,978 11.978 0 1,089 203.5 0 1.292.5 (16) 6.780.0 10% 8.783 8,783 0 798 203.5 0 1.001:5 (16) 3389.5 8% “‘Z 5.012 5.012 0 371 203.5 0 574.5 234 2998.0 4.498 4.498 0 203.5 458.5 431 2.393.5 tifa 1.0631.169 3.641 3.641 0 2 203.5 3i 443.5 8% 1.286 2.595 2.595 192 203.5 z; 1.668.0777.5 10% 1.414 1.414 1,414 : 129 203.5 3oi 395.50 0 636.5 10% 0 0 0 0 0 0 0 N/A $24.213 NIA NIA $5.004 $14.73; $4.07: $24,213 NIA NIA .-. - ._ Note: Amounts In column I8) are amortized over a perlod from age at cahdatlon until age 69 for ease of illustration. The Actuary- Aprill992 6

Timing cont’d Table 5 assumingthe use of a 10% gain/loss Reflecting Putchase Reserve corridor. Although total expenseis (ll (2) (3) (4) (5) 16) (7) (8) (91 volatile, the gain/loss amortization in lbtal Goodwíll Bnd of Bar Bnd of Bar this scenariois negligible over the Servlce Iotemt lhutltlon OPHB Amorti- Balaoce GoodwUl course of the employee’scareer and cort cost cost of Expense zauoo lbtal Sheet Amet = Beoeflt (from (from s103.50 = (2)+ = $43 for Bxpeore= OPBB (9) Prior retirement. Unless there is a pattem ~ge Papmentr ‘hble 3) mble 3) a Year (3)+ (4) 40 Yerra (5)+ (6) Liablty Year- (6) of unremifflng gains (or losses)over 0 0 0 0 0 time, a 10% gain/loss corridor will ‘54;” : 0 0 eliminate most amortization expense. $ 13: 0 $ 135.: $4; S 178.0 1.855.0 (1:677) In the specialcase of a plan that : : : 145 0 145.0 43 188.0 2.000.0 i1.6344j finishes up and closesdown, the gain/ S 879 325 103.5 1307.5 43 1,350s 3307.5 (1.591) :: 0 949 422 103.5 1.474.5 43 1.517.5 4,782.0 (1.548) loss account must be recognizedin 1.025 532 103.5 1.660.5 43 1.703.5 6.442.5 expense in the last year. Becausethis ;9 0 1.107 657 103.5 1.867.5 43 1.910.5 8.310.0 is atypical, the $304 recognition of 1.1% 797 103.5 tB139.5 10.406.5 loss at age 69 probably should be z 0 0 9n 103.5 :iE 43 L103.5 11.467.0 ignored in interpreting the table. 56 0 0 1.033 103.5 1:136:5 6 1.179.5 12.603.5 The derivation of the gain/loss 1,116 103.5 1.219.5 43 lJ62.5 13,823.0 ; 0 : 1.205 103.5 1308.5 43 L351.5 15131.5 elements would involve four more 0 1,302 103.5 1.405s 43 1.448.5 16.537.0 columns in an already lengthy table. E s3.OOi 0 1,405 103.5 1.508.5 43 L551.5 15,045s and so is left for the enjoyment of 61 3300 0 1.278 103.5 1381.5 43 L424.5 13,127-O the reader. 62 3.630 0 1.117 103.5 1.220.5 43 1263.5 10,717.s Ptmbas@accQMnting . 0 915 103.5 1.018.5 43 1.061s 7.743.0 0 772.5 43 815.5 4.123.5 As 2 E 669 103.5 a final complication, assumethat g ;.066*966 0 371 103.5 474.5 43 517.5 3,632.0 everything is exactly as before (but 0 103.5 427.5 43 470.5 2.996.5 without assumption changes).except 0 ;$i 103.5 368.5 43 411.5 2.196.0 that a $1.720 purchaseaccounting 68 1:286 192 103.5 295.5 43 338.5 1.205.5 reservewas set up two years before 69 1.414 : 105 103.5 208.5 43 251.5 0 compliancewith FAS 106. Also 70-87 0 0 0 0 0 43lyr 43m 0 O/at assume the reserve increased over the age 87 next two years io $2,000. The $280 Totìl$24,213 $5156 $15.267 $2.070 $22.493 $1.720 $24.213 NIA NIA, increasewould have flowed through Notes: P&L. The existence of the purchase There 1san lnterest cost at ages48 and 49 equal to interest on the purchasereserve. This is reservehas two effects: calculated in the sameway as the interest cost on the APBO under FAS 106. l 8ecauseof the long amortization of goodwlll it will take much longer to expense the full 0 The $4.070 that was recognized amount. In fact. und the sample employee’sage 87. there wffl be a perslstlng goodwill asset. through the transition cost in the The net balance sheet effect is the sum of cohunns (8) and (9). last two scenarioswill be reduced by the $2,000 already on the books. The new transition cost will be a 20-year amortization of $2,070. 0 When the urchasereserve is establishJ , an offsetting $1,720 Seminar Schedule goodwill asset also is set up. The Understanding and Managing Aprill6 Waldorf = Astoria gwdwill would be written down U.S.Life Insurers’ New York over 40 years. Financial Strength The accounting is shown in Chief Actuaries Open Forum May 4-5 Hotel Inter-Continental Table 5. Toronto, Ontario CQtlChtSiQUt Intensive Courseon Cash Flow May 5-6 Hotel Inter-Continental A major puxposeof Statement 106 Testing for Wuation Actuarles Toronto, Ontario (and 87) was to introduce compara- bility into financia1statements. A SpeedReading May9 Metropolitan Chicago review of these fflmtrations may lead HealthcareCouncil one to question whether this objective ConferenceCenter has been satisfied. Immunization Theory May 14-15&ü MIT Facuhy Club Eric P. Lofgren, Chairperson of the SOA September23-24 Boston tnvestment Section, is senior conoultant and SpeedReading May 20 ChicagoHilton & Towers actuary, The Wyatt Company. Intensive Courseon Cash Flow June 2-3 Sheraton Society Hill Testing for Valuation Actuaries Philadelphia,Pa. Cash Flow Testing for June 10 Disneyland Hotel Product DevelopmentActuaries Anaheim, Cahf. For more information on seminars,call 708-706-3545. The Actuary-Aprill992 7

lid Forceon Píiperscont’d implemented to facilitate the review the CommunicationsPolicy Commit- process.Specific improvements and the PublicationsCommittee include: e r implementation. o Appointing vice-chairpersons The recommendationsof the task by specialties force were summarizedinto three g Recruiting additional reviewers * The pilot study of the Credit Risk majar areas: o Establishing review standards and Study on private placement bonds 0 The viability of the lYa~~sactlons proceduresto improve consistency and commercialmortgage loans is - The papers review process in the approvalprocess nearing completion. Preliminary o The solicitation of papers In addition, a Reviewers’Manual reports on the experienceof 1985 is being developedto help train to 1989 data will be availablebefore Transactions reviewers and to standardizethe the end of the second quarter of The task forte recommendedthe 1992. The study is continuing, with %fnsactions remain the premier review process. solicitation additional data being collected for journal of the Society.However. to 1990 and further updates for 1991 improve its usefiess to members. Solicitation of tlie four types of papers is essentialto the future successof to be requestedlater in the year. steps must be taken to expand its * The researchon SPDApersistency scope.A broader range of papers the ~ansactions. Ways to improve the solicitation processare being studied. has resulted in an interesting report appealing to a larger cross section of issued jointly by the SOA and the membership ís needed. The task forte believesthat by improving the papers review process LIMRA. Somepreliminary resuhs Pour types of papers were iden- were reported in the March Actuary tified as important to the profession: and by publishing an Authors’ Manual, potential authors will be and an announcement on the 0 Papersthat document researchin availability of the final report is actuarial science encouragedto submit papers. To ensure that the 2lansactions expected soon. 0 Papersthat further the education o A significant paper on the possible of actuaries is a more useful joumal for a broader cross section of our membership,the applications for fuzzy set methods l Papersthat are comprehensive in actuarial sciencealso has reviews of topics that appeal to a task forte recommendeda survey of the membership.The survey’spurpose been completed. large number of practitioners * A paper on “Corporate Bond Price 0 Paperson topics useful to is to ask for input on types of papers that the membershin believesare Discrepanciesin the Dealer and practicing acXuaries important for publi&.ion. A copy of ExchangeMarkets” by Professor It is important that future this survey is included with this issue Arthur Wargawas published in l editions of the 2’1xnsactfonscontain of The Actuary the December 1991volume of - these types of papers to be useful to The Joumd of Fixed Income, the membership. Summary A grant from the SOA supported As a guide for authors preparing The task forte recommendationsare this research.The investigauon papers for publication in the %vns- being carrted out by the Society’s will continue with research actions. an Authors’ Manual is being Communicationsstaff, the Communica- into the liquidity of various developedand will be published in Uons Policy Committee,the Committee investment types. late 1992.The manual will include on Papers.and the Publications Members are invited to make guidelines for submission of papers,a Committee.Some recommendations suggestionsto Mark Doherty, SOA description of the administraUve already have been implemented,while director of research,on issuesand process,the criteria for acceptance. others wtll be carried out in 1992.It is problems that they believe need prac- the appealsprocess, the structure of hoped the results will makeqtheIlkans- tical or theoretical research.Ideas will the Committee on Papers.and other actions a more useful joumal for more be presented at the ResearchPolicy information important to authors. A of our membersand make the papers Committee meeting for possible new mission statement for the Pans- processeasier for future authors. implementation as part of the SOAs acffonsalso will be included in the Survey researchprogram. Authors’ Manual. Included with this issue of The To promote papers acceptedfor Actuary is the survey that the task publication. executive summarieswill forte recommendedbe mailed to be published in The Actuaxy as soon members.Your ideas and comments after approval as possible. will be helpful to the various commit- The papers review process tees implementing the task force’s Submis&s must be signed Significant changesare underway to recommendations.In additlon. your The Actuary receivesseveral inter- improve the papers review process. re lies will provide input on the types esting letters and comment ieces The Society’sCommunications staff 0P papers you believeare important each year that are submitteCr anony- be more involved in the adminis- from a “usen+ standpoint. Pleasetake mously.This notice is a reminder that tive process.The Society staff will a few minutes to complete this survey submissionsmust be signed to be 6 ndle most communicationswith and give us your thoughts. consideredfor publication. authors. Authors will be better Francis P. Lemery, Vice-Chairperson of the SOA Publications Committee, chaired the informed about the status of their Task Forte on Papers. He is senior vice papers in the review process. president and actuary, Kansas City Life Changesin the structure of the tnsurance Company. Committee on Papersare being The Actuary-Aprill992 8 SOA members prepare Risk aversion, rational insurance /1 for IACA ‘92 mrchase in the by Mary Hardiman Adams 1ong gn

by Tapen Sinha preparations for the From the United States.papers and Jay Sounderpandian nnial meeting of the have been written by two former SOA emational Association of Prestdents.Thomas F!Bowles, Jr., Consulting Actuaries (IACA), May dtscussesthe role of the actuary as an he use of risk aversion 25 through 28. are truly an inter- arbitrator. JackM. Bragg’spaper ís an assumpUonín insurance ís national effort. update of a paper presented to AFIR widespread.The original Becauseof IACA ‘92’s location. in 1991and covershistorical real resolution of the St. Petersburg Vancouver,British Columbia, several interest rates and the insolvency crisis. paradox by Daniel Bernoulli ín 1738 Canadianactuaries head arrange- Other U.S.papers were relied on an implicit logarithmic utility ments for lodging, program planning, written by: function. It ís well known that such a and social activities. They include 0 E RogerAtkins. on FAS 87 utility function exhibits risk aversion. former SOA President Robín Leckie, assumptions for non-U.S.deferred In thts article, we investigatedthe John M. ChrisUe,and Kenneth T benefit plans long-run consequenceof risk aversion Ransby.Christopher J. White 0 Lawrence Mitchell, on the actuary on wealth distribution. (Australia) ís general chairman of the ín terms of the law, the attomep the Uextbook explanation of meeting. White. A. David Wilkie public, and the expert hIPanc@ pMrchase (U.K.).and 1 are membersof the 0 Kenneth G. Buffin and Josh G. Economicsof insurance starts with ProfesstonalCommittee. chaired by Windsor. on stock option and equity the assumpttonthat individuals Frank Livsey of Toronto. The Profes- participation plans from an intema- buying insuranceare risk averse.For stonal Committee is responsiblefor Uonal perspective example.ín Actuarid Mathematfcs, program content and papers. Q AnM Rappaport.on retirement Bowers et al. give a seriesof examples Most of the IACA meeting ís plans (defined benefit comparedto where insurers and insureds both hal? comprised of national reports and defined contribution) structure in concaveutility of wealth. They prove discussionsof papers. NaUonal reports the 1990s that a mutually advantageoustnsur- are expected from 16 countries. and 0 Robert Dymowski, an overview ante contract will ensue if the maxi- more than 30 papers are to be of nonpension employee mum premium the insureds are presented. Papersare discussedby benefit programs willing to pay ís at least as large as toptc ín formal sesstonswhere ít ís 0 David L. Hewitt, former president the minimum insurancepremium the assumedthat the material has been of the Conferenceof Consulting insurers are wilhng to charge.How- read in advance.The “opener” Actuaries, on the actuarial progress ever.long-run consequencesin wealth summarizesthe toptc and lists the in continuing care retirement distribution of such an arrangement discussion points. An open discussion communtties with notes con- never are explored. by sessionattendees follows. The cerning tensions among the Wisk-avetse,t-id-loving btdyets model “closet” who has the most difficult different professions Consider an economy wtth ‘three indi- job of all, summarizesthe debate and John J, Haley and Amold M. vidual%A, B, and C. Each ís endowed the conclustonsof the discussion. Malasky wrote the U.S.National with $100. A ís the insurer. He has no Canadianauthors and their Report, which provides an update on chanceof losing any wealth. but B and topics are: the general economy,the national C do. Therefore.B and C are potential 0 Peter Hirst. on the looming crisis ín social tnsurance systems,and current insurancebuyers. There ís an Canadianpension coverage consulting issues. exogenousrisk with the potential of . 0 J. BruceMacDonald. on the future All ís not work. however, at the losing $100 with probability of 0.50 cost of the Canadianpublic IACA meetings.One of the goals of ín the Brst Ume period by both B and pension plans the IACA sessionsís to allow for C. Let’s look at how the economy 0 Crawford E. Laing. on index-linked informal meetings to exchangeideas evolvesover time. investments ín Canada with consulting actuariesfrom around Let us assumethat B ís risk 0 David F. Howe and Paul Saunders. the world. Someof the most pleasur- loving and C ís risk averse.A. B, and on an intematfonal perspectiveon able moments include seeingold C all have $100 each ín period 1. A can pension surpluses friends who return to IACA every two offer an actuarially fair insurance Frank Livsey wrote the Canadian years. Sightseeing,the guest speaker policy at a premium of $50 each fs National Report. which includes a session.and farewell banquet are without a transactions cost. discussion of issuesof immediate other enjoyable events. Evol~tiooa ob cconomy interest and importance to Canadian Mary Hardiman Adams is consulting actuary B ís risk loving. He will buy licies actuaries.such as life insurance with Buck Consultants, Inc. and past presi- only if the premium ís less t r an $50. company tnsolvency,the new respon- dent of the Conference of Consulting Actuaries (formerly Conference of Actuaries Therefore,B will not buy policies sbilities placed on the appointed in Public Practice). Conthued on page 14 cofumn 1 actuar-y,and revisions ín the Code of ProfesstonalConduct. The Actuary- Aprill992

Merger lífe: The mortgage optíon

by Lloyd A. Foster

n recent months, many critics investment components.Pt and P, the mortgage (assumingG5 ís at least of the insurance industry have respectively.The product ís built equal to five years of mortgage tried to hnk the savingsand primarily for the mortgagemarket payments).the policyholder would be loan debaclewith the sittiatión now and generatesguaranteed values at paying a discounted mortgageamount facing life insurers. They believe life ft.reap~ervals. as shown ín the throughout the loan’s term. insurance compantesaheady may be Both the insurer and the mort- following their savingsand loan coun- gagor would benefit becauseof the terparts into the quagmire of insol- expanded chent-sharing facility that vency and ba.nkruptcy would result. An added bonut for It ís only natural that the insur- the insurer is the stability of funds ante industry would take pains to These values result from the net (with attendant investment advan- reversesuch an alarmist view. In doing investment of P, above.The simplest tages)that would accruefrom policy- so, however. life insurance industry caseís obtained when all the guaran- holders who adopt the mortgage leaders often emphasizethe differ- teed valuesare equal. option, since no withdrawals or loans encesbetween our businessand other At issue.the policyholder chooses would be permitted. branches of the financial services a mortgageoption that stipulates the This product approach could industry. This may be a tactically expe- guaranteedvalues go toward payment serveas one of many steps taken by dient move, but ít sends an unfortu- on a mortgageloan. For example, the insurance industry to build impor- supposeG, ís equal to four years of nate message- to other dep+tory -. . tant and l&ing relationships with compantes.Pos: other membersof the financial withsavingsan,-,, , r servicestndustry. bnks, & ,r.,rl,, e-- Lloyd A. Foster is an actuarial consultant’with panies ín hn: The Continuum Company. would be a ga trategy to fõl~. the next five years. surancecompanies By choosing the ould be wary’ of mortgageoption, the ai policyholder becomes taking the tactic of subject to the 27tb AwwuaU alienation too far. following conditions: One area where- - lResear&CodesetKe cooneration would 1 * The ontion ís The 27th Annual Actuarial Research be ~&tually beneficial cancelledif any loans 8r with- Conferencewill be conducted August ís ín product design gearedfor the drawals are made. 7-8, 1992,at the University of Iowa, mortgagemarket. This article * At issue,the policyholder must Iowa City. Anyone interested ín describesa new product approachthat specify the mortgagor and notify the presenting a paper on any topic of illustrates how this potential for insurance company of any changes actuarial researchshould write to mutual benefit could be tapped. ín mortgage-holder. Jim Broffitt, Department of Statistics Merger life concept An added administraUveburden and,Actuarial Science,University of The associationbetween life insurance ís the need to make payments to the Iowa, Iowa City, Iowa 52242. or call and mortgagelendtng companies mortgagor and to track the changes 319-335-0824s already works well ín many areas.One noted previously.This ís counter- of the main reasonsfor purchasing balanced,however, by the investment decreasingterm insurance ís the need gain to the insurance company.The to cover the financial obligations from guaranteedvalue ís paid over a period mortgageloans. The “merger life” of four or five years, rather than concept derives from a decreasing disbursed ín a lump sum. Errata Bar vonume 35 OO term tnsurancebase, with an added Advantages of mortgage option the Tratwac~ions layer of fixed-income investments. For the policyholder, this ís the most Onpge 778 of Vohune 35 (1983)of This concept ís not an innovation tangible ‘living benefit” from life insur- the l’kansactionsof the Socfetyof in itself. The design (term + annuity) ante to date, especiallysince a mort- Actuqies ís “Table AZ- 1982 Disability has appearedín various forms many gageusually representsa sisable Table-Males,Number Disabled,per times before. The utility of the product portion of the averagehousehold l.OOO,OOOLives Exposedat Each Age what makes merger life innovaUve. budget. In fact, the best casewould (Elimination Period = .233 month aI ow it worb be one where the policyholder takes [7 days]).” Pleasenote that the Elimi- Let us assumea 30-year merger life out the policy five years before nation Period should be “one month.” policy, with the annual premium, z! assumingthe mortgageobligation. broken down into its term and By using a merger life policy to fund The Actuary-Apd 1992 10

The complete actuary Effective meeting management

by Charles R. Haskins

know how to manage end meetings: ute an agenda,start on time, actively participáte, take minutes, follow up - no problem. Actuaries with managerialduties spend more than 25%of their time in meetings,with upper leve1managers spending more than 40%of their work day in meetings.The average professional spends 21 work weeks a year in meetings.six weeks of which are largely a waste of time or are actu- ally counterproductive. Too often we get trapped into a weekly meeting routine, “1 meet - Calculatethe cost of the meetíng -” Establisha meeting environment therefore I am.” We forget that, as to the organization. (style, location, room size.and GeorgeKieffer notes in The Strafegy sa~tinize any meeting held more seating)consistent with your goal. of Meetings, “It is not the quantity of than once a month. Your Officeis an ideal location for meettngsthat will get you to the top. : Consider voice mail, E-mail confer- small meetings,because you feel It’s the perceivedquahty of those ence calls, or brief encounters more comfortable,can control meetings.who attends them. and mstead of a meeting. accessto the phone, and can be m. what you are able to accomplish.” Consider sencbnga representative the gracíoushost. The major We owe it to ourselvesto avoid in your place. advantagein selectingyour nonessential meetings or to find other .’ Ask the ch&person if you may colleague’sOffice is that you can methods, such as voice mail, E-mail. attend only a portion of the meet- leaveon your schedule. and conferencecalls to handle minar ing. Consider staggeredattendance Consult in advancewith any issues.We should aggressivelywork ifyouarecallingameeting. participant or others whose cooper- to limit routine meetings so we can _’ Combine meetings with parallel or ation is necessaryto meet the goal. concentrate our energieson priority overlapping functions into one. Consider scheduhngmeetings at assignmentsand meetings. If you must call OI attend a meeting odd times (910 to 9:35) to achieve For many of us, a meeting is the Re sure you and your meeting prompt attendance. most important avenuewe have for partners are clear on the stated Circulate a detailed agendaand interacting with executiveswithin our goal and type of meeting (informa- written materials in advance.The company or with clients. We should tíon, problem-solving,creative, agendashould have a start and treat each meeting as a means to poky. training. recurring task, stop time noted with time hmits showcaseour analytical, managerial. or general). for each topic accordingto prlority. and leadership skills. Establish a specificstandard by .I;:’ Draft the agendawith minutes In the meeting environment. we which you will measuresuccess in mind. achieveour objectiveswhen the best or failure. Make sure your key item is early decision is made or when we avoid ‘- Assessyour basic relationship to on the agenda.but not first, decisions that have no chanceof suc- your meeting partner or partners: becausethe group will focus too cess.Reaching the correct decision in superior.peer, or subordmate. much attentton on tt and wffl be a group setting takes preparation and Evaluatetheir hkely personal inter- overly cxlticalof ít. Have alhes active participation by all attendees. ests and needs.and determine ready to speak on your items. fbaetipagchmklist what your personal objective is :c’- Form a tentatlve judgment on Keep these checkpoints in mind with each participant and the all issues. to help you increaseyour mastery group as a whole. . .” Count the votes for issuescritical of meetings. ’ Reducethe number of people to to you (if a vote must be taken). - Whether to call OI attend a meeting only those necessaryto accomplish At the meding :x’ Focuson what you want to accom- the goal. Often. others might be ’ If you are leading, prevent inter- plish by the end of the meeting. content just to receiveminutes. ruptíons (no phone calls or L’-’ Justify that the meeting 1sthe Reducethe number of issuesand messagesother than emergenctes). best use of your time and time tasks to only those necessaryto .’ ’ Arrive early and make contact of others. accomplishthe goal. with key players. The Actuary-Aprill992 ll

:+ Conduct a “stand-up” meeting ~4. Sharethe results with people who when the agenda.is short. need to know, including those who Early-releasecopies s Find the control positions at the have helped you prepare. table (ends of conferencetables ?< Follow up assignmentsquickly. of Z’SA papers l are best. with comers being Use a team approach where secondbest). possible to work on assignments The following papers have been i? Make sure someonetakes notes and to build a ‘huy-in” of your acceptedfor publication in Volume 44 and keeps time. conclusions. of the lbnsactions. Members who P If you are leading, start on time, fl Capitalixeon gains and recoup would like an early-releasecopy of a state the purpose, and estimate lossesby follow-up memos and TSA paper in a preprint before it is the time for completion. Restate brief encounters as necessary. published should send $5 for each the purpose periodically. This meeting checklist is from paper to the Rooks & Pubhcations v As the leader,separate facts from the Kieffer book, with additions from Department at the Societyoffice. beliefs. look for emotional build- the following books: “Barametric Models for Life Tables” ups. seek contributlons from all. 0 The Lftde Black Book of Busfness by Jaques E Carriere clarify agreementand disagree- MeeUngsby Michael C. Thomsett This paper is directed at actuarleswho ment, make people feel im ortant, = We’veGot to Start Meeting Lfke construct valuation life tables. It and protect the integrity oP the This! A Gufde to SuccessfülBusiness presents a general parametric model group and individual members. Mee Mamgement by RogerK. of mortality that is equal to a mixture ~4 As a participant, contribute Mosvic7 and Robert B. Nelson of Gompertz,Weibull. Inverse- early, clearly,and often - but 0 How to Make Meetfngs Work: Gompertz,and Inverse-Weibull thoughtfully The New Interactíon Method by survival functions. The paper also CQDivide big problems into sub- Michael Doyle and David Straus presents pardmonious specialcases of problems. and addressthem sepa- 9 Time for Success:A Goal Getter’s . the model that fit the pattem of rately whenever possible. Seek Sf-rategyby R. Alec Mackenzie mortality for the male and female 1980 multiple solutions outside the 0 What They Don? TeachYou at CSOmortality tables and the male and meeting. Don? forte a choice until Harvard BusinessSchoo~ Notes fiom female 1983Table a. Plots of the esU- analysis is complete. a Street-SmafiExecutfve by Mark mates of the valuation mortality rates :P Separatethe problems discussed H. McCormack are almost indistinguishable from the from the people discussingthem. valuatfon rates themselves.so the *x-’ If leading, at the end of the For more tips on effective paper concludesthat future valuation allotted time for a topic. meeting management,attend Session9 tables may be defined with reasonable 0 summarizedecisions, action steps. (1030 a.m.. May 21) at the Chicago spring meeting. mathematical formulas. individuals responsible,and dead- ‘The Birthday Rule and the Differ- lines, and have them recorded. Charles R. Haskins is executive vice presi- dent of product management, Family ence in Spouses’ Ages” by Bertram 14.’Whether you’re winning or losing Cuardian Life Insurance Company, and a M. kstenbaum your point, know when to quit. member of the Committee on Management Often the ‘birthday rule” is the basis i :<’ Look for every opportunity to and Personal Development. for determining whether the father’s show courtesy and respect.Re as insurer or the mother’s insurer has tactful as possible when asktng primary responsibility for children’s questions on any topíc. health benefits claims. Insurers need ic Summarizewhat was accom- to be concemed about the equity of plished in a positive wap and Maill alert this rule. The rule would be unfair to make people feel good about insurers with predominantly male their attendance. The first ballots for the Society’s1992 clients or predominantly female :& Set the date and place for the elections were mailed to ah Fellows clients if husbands’ birthdays tend to next meeting and briefly outline on March 24. If you are a Fellow and fall earlier in the year or later in the the agenda.Get in the habit of have not receivedthe first ballot. year than their wives’ birthdays. taking your appointment calendar pleasecall Marilyn Meier at the The paper points out that this to meetings. SocietyOffice, 708-706-3500. To be concem cannot be dismissedon intui- Aster the meeting valid. ballots must be returned to the Uve or theoretical grounds. For inde- 2’;;’Finish the minutes quickly, SocietyOffice by April24. pendently identically distributed including any decisions.names ’ random variablesX and Y the prob- of individuals responsible.and abilities for X > Y and for Y >X are deadhnes.Distribute them within the same.Birthdays of spouses.like 48 hours. their ages.are not independent one of &’ Minutes should not be a trans- Correction the other. The faimess issue therefore cript. They should include only must be addressedempirically date and time, attendees,agenda Due to an error made in the editing The paper produces empirical topics discussed,definition of process.the February article. “U.S. evidente for the fairness of the problems,altematives presented. statutory accounting - is it fatally birthday rule. flawed?” referred to the FASBas the solutlons agreedon. assigmnents Continueti on page 13 column 2 made and accepted,deadhnes, “FederalAccounting StandardsBoard.” and follow-up actions. instead of the “Financial Accotmting StandardsBoard.” We apologiaefor any confusion this may have caused. 12 The Actuary--April 1992

Question: What Is the hardest part of competing tn a pageant? Klene: Keeping yourself focused on reality and your goals. It's hard when you're always being compared with everybody else. I also learned you can't go by first impressions. Sometimes someone who seems so beautiful, talented, and wonderful will turn out to be the exact opposite. In Maine, It's hard to raise money and get the support necessary to compete. Miss Texas lives with her director (coach) for a year, and he controls her schedule. In the New England states, we do it all ourselves. Question: How Is Miss USA different Question: Did you practice for from the Miss America pageant? the interview? Klene: The Miss America competi- Klene: I practiced with Jim Rerily, an tion has a talent portion: It's always actuary I work with. I had a pretty in Atlantic City: and It awards schol- intense Interview with him when I Features Editor Deb Poppel recently arships. Miss USA has the state came to The New England. You don't spoke with Linda Klene, an actu- costumes portion, and the winner want to practice so much that you arial student at The New England goes on to the Miss Universe pageant. sound rehearsed. Linda, the reigning Miss Maine, Question: What were your days like Question: What did they ask you at recently competed for the tide of during the Miss USA pageant? the pageant? ~dlss USA" In a pageant televised Klene: We got up every day between Klene: Among other things. %Vhat Is from Wichita, Kansas. 5 and 7 a.m. Some days we made an actuary?" Question: Why did you start appearances around Wichita, or we'd Question: Ill bite, what did you say? entering pageants? have dothes fittings and learn the Klene: I said we're the people behind Klene: I entered the Miss Maine Teen songs. Toward the end of the 15 days. the numbers, that we have a strong pageant when I was applying to we'd rehearse from 8 a.m. to 5 p.m. math background in topics such as colleges. Unfortunately, after I entered We'd have about 20 minutes to get statistics, probability, and interest the pageant, I found out it didn't give ready for a (firmer or some other event theory. I explained I price small group scholarships. On the plus side, this and then get home after 10. insurance products so they would be was the only teen pageant that led to The last few days, you never affordable for the client and profitable a prestigious, nationally televised knew when they would videotape you, for the company. I think because they competition. Sixty-six girls were in so you had to be on your toes. You didn't know what actuaries are kind the Miss Maine Teen pageant, some also want to make a good Impression of hurt my standing. They zoned out of whom had been in it six times. I because you're representing your state. during my explanation. never thought I'd win, but I did, Through all that, a woman inter- Question: Did you meet Miss South My sophomore year at Tufts, I viewed us. so If we were one of the Dakota. Shawn Frerichs. who also said top 11 finalists, Dick Clark would entered Miss Maine, thinking it would she wants to become an acmars,? be nice to be the first person to win know what to ask us. Klene: She and I were In the back of You're constantly thinking, both the Miss Maine Teen and Miss the opening number because we had WVho's going to win: what's going to Maine titles. I was second runner up. huge state costumes. I was a pine tree Last year I entered Miss Maine again happen: I look fat; she has a nicer and she was a pheasant. We talked dress." You can drive yourself crazy. and won. for quite a while before I discovered Question: What was your prize for Question: It doesn't sound like much she wanted to be an actuary. My winning the Miss Maine pageant? [un. Is It? mouth dropped open. Klene: A year's supply of suntan Klene: It Is. You're there with some Question: What beauty tricks do lotion, a makeup case, and $3,000, wonderful women who are well- contestants use? Considering what I spent on dothes qualified and accomphshed. Klene: Almost everyone used teeth and travel, I broke even. Question: In which part o£ the wbAtening solution. There are false Question: Why did you continue to pageant were you the strongest? eyelashes and fake nails - I don't enter pageants? Klene: I have never been trained how think anyone had her own naris. Kiene: For the experience in inter- to walk and talk. I just try to be natu- Padding In their swimsuits. Everyone viewing and public speaking. I was ral. I work out a lot, but I'd never had a tan from a bottle. They put the type of child who couldn't call the sacrifice my health to look perfect tn hair spray on their swimsuits and dentist to make an appointment. a swimsuit. I loved my evening gown. mascara on their eyebrows to keep Pageants broke me out of my shell I hoped the Interview would be my them in place. very quickly. strong point, because that was the There's a running joke about only thing that was totally within having a good or bad hair day. The my control. The Actuary- Aprill992 13

winnet Miss California. was widely Questfon: How have your colleagues quoted as saying “1 was lucky. I had a at The New England reacted ro all Additions to d hair day.” of this? SOA library e uesUon: When they do the produc- Kiene: They have been incredible. 1 Uon numbers, do theyput the klutzy just started there in July 1991.1was women fn the back? almost in tears over all the letters and The following is a partial hst of addi- Kiene: The ones in front are the best electro& mail people sent and alI the tions to the SOA hbrary. Members dancers.The sponsorsknow that support they gave me. 1 never may borrow hbrary bwks or obtain a certain states have a lot of viewers - expected such a response. complete listing of additions by the contestants from those states also QuesUon:Are there simflaritfes calhng the library, 708-706-3538or are put in fiont. between the actuarial exams and 708-706-3575. QuesUon: Zs.Ir hard for rhe non- beauty pageants? AIDS Shelf hnahsrs ro put on b& smiles and Kiene: In both, you work so hard to AZDSBulleffn No, 5, Report from Insti- ger out rhere and dance in the prepare and think you know every- tute of Actuaries AIDS Working Party, productfon number afier the fínaústs thing you can, and then boom, who March 1991 are announced? knows whafs going to happen when êircldating Kiene: A couple of them almost didn’t you get there. Also the intense focus Chen, Andrew H., ed., Researchin go back on stagebecause they were 1sthe same.Finahy, just as some Ffnance,JAI Press.Vol. 7, 1988,Vol. 8, so upset at not making the top ll. It’s people take the sameexam again and 1990 (HG152.R4) like after an exam - when you’re again. some people enter the same Deskbook Encyclopedfaof +erican done, you’re so overwhelmed, reheved. pageant again and again. ZnsuranceLaw Data ResearchInc. happy, sad.We all went backstageand (KF1159.D47) ate fudge. That helped. Then you say EmployeeBenefit Plans Under ERISA, “There’sonly another hour and a half FederalRegulations. 1991 ed.. 2 Vols., left. and I’m going to get my face on Maxwell & Macmillan the cameraas much as 1 can. We’ve TSA papers cont’d rehearsedfor so long, we might as Fabozzi.Frank J., ed., Advancesin well have ftm.” Futures and Options Research.VoI. 4, “An Actuarial Layman’s Guide to Question: Are pageants attracting . JAI Press,1990 (HG3853.A3) Building Stochastic Interest Rate Goovaerts,M.J., EffecuveActuarial. more career-orfentedwomen? Generators” by James A. TiPley ene: Definitely To win now. you Methods, North-Holland Publishers. StochasUcinterest rate generatorsare 1990(uncataloged) a ve to go to collegeand have some central to assessingthe extent of a type of career.Ev& the quality of the life insurer’s C-3 risk. They are needed Press.Wihiam H., NumerfcalRecfpes: interview questions has improved over to price properly embeddedoptions The Art of Scientiñc Computing, the past few years. in interest-sensitiveproducts and to CambridgeUniversity Press,1989 Question: Dopeople who thfnk selectan appropriate creditíng rate (QA297.N866) jqgqgfinneyesexfst give you a strategy for such products. Arbitrage- Straub, Erwin. No& Insurance fiee interest rate generatorsare MathemaUcs,Association of Swiss Kíene: Nobody that knows me does. 1 needed to compute the dmations and Actuaries, 1988(HG878l.S75) know why I’m doing it. I’m in it for convexities (including Reitano’s“par- U.S.Dept. of Health and Human the opportunities it’s given me. tial” durations and convexities)of Services.Reducing the Healrh Conse- Questfon: Do you plan ro be In any many assets(mortgage-backed quencesof Smoking: 25 Yearsof Prog- more pageants? securities.CMOS, and callablebonds) ress, Report of the SurgeonGeneral Kiene: I don? think so. It’s Ume and many habihties (SPDAS,GICs, and 1989 (uncataloged) to focus on my career.My friends universal life). U.S.Dept. of Health and Human and family have been incredibly The academichterature on the Services,The Health Benefits of supportive, but this has been a subject of arbitrage-freestochastic Smoking CessaUon,Report of the strain on them. interest rate processesusually 1svery SurgeonGeneral, 1990 (uncataloged) QuesUon: How many exams have technical and beyond the grasp of all you taken? but a few practicing actuaries.This International Kiene: Tvvo.I’m taking all of the old paper does not assumethe reader has CanadianStandard OroYfnaryLife Part 3 this spring. any background in stochastic Experfence.1988 & 1989,Canadian Institute of Actuaries, 1991 Questfon: How drd you becomefnter- processesand makes sparing use of esredin actuarial work? equations and formulas. The paper Continuous Mortahty InvesUgaUon Kiene: When 1 was a freshman in focuseson key financia1concepts and Reporrs,No. 11,InsUtute of Actuaries college,I got a summer job working is targeted primarily to actuarleswho and Facuhy of Actuaries, 1991 for a pension actuar-y,and 1 was really want to understand how arbitrage-free CuadernosActuarial&, Asociaclon trigued by it. It’s a challenging paths of interest rates can be gener- Catalanadel Instituto de Actuarios reer with the flexibihty to go in ated and why they are needed to Espaoíiles,1991 emany directions. value interest-sensitivecash flows. The paper also servesas a primer for Gatenby,Peter, Long-tenn Care,Staple the mat.hemaUcaIlyoriented actuary Inn Actuarial Society,May 1991 who wants to build his or her own Continued on page 14 column 2 interest rate model. 14 The Actuary-- April 1992

Risk aversion cont'd governed by any underlying opti- Former Reagan offered by A even at $50, B is facing a mizing decision process, Should we geometric distribution of losses over take the textbook analysis of demand adviser to speak at time: loss of $100 in period 1 with for insurance seriously? probability 1/2, loss of $100 in period There is a cliche among insurance Chicago meeting salesmen: insurance is never bought, 2 with probability 1/22, etc. B may be ruined by a single strike of loss. As B but sold. Perhaps there is some truth does not participate in the insurance to it. game, his loss is independent of what Tapen Sinha, not a member of the Society, is an associate professor of finance at Bond Uni- happens to A or C. versity, Gold Cost, Queensland, Australia. Jay A and C will engage in a mutually Sounderpandian, not a member of the Society, beneficial exchange of risk. Suppose C is an associate professor at the University of has a utility function u(x) = (x) °'5 Wisconsin-Parkside, Kenosha, Wisconsin. Then it is easy to see that C will be willing to pay 75% of his total wealth D~ Beryl Spnnkel in premium no matter what the Library cont'd wealth level C has. (The result follows International Actuarial Association, from the assumption about the form Bulletin No. 13, Vol. 4, 1991, Index The American public, still grappling of the utility function. The assumption 1990-1991 with the 1991 recession that has spilled into 1992, is wondering how is made to simplify later calculations). Laboratory of Actuarial Mathematics, Several possibilities emerge. If no and when the country win get back University of Copenhagen, on its feet, Keynote speaker Dr. Beryl loss occurs in period 1, A will gain Working Papers: $75. If loss occurs in period 1, A will Sprlnkel. who served as chairman of #87 - A General Paslc Process and the Council of Economic Advisers end up with $75 ( = $100+$75 its Priorities, December 1990 -$100). Therefore, we can think of under the Reagan administration, #88 - A Boundary Crossing Result will address this issue at the Society the game restarting at period 2. The for the Browntan Motion, important point is that for C, it leads of Actuaries Chicago spring meeting, December 1990 May 21-22. at the Chicago Hilton to reduction of wealth with certainty: #89- Empirical Bayes Estimation C starts with $100; he buys an insur- & Towers. of the Binomial Parameter, Sprinkel will speak at the Thurs- ance policy for $75 and ends up with December 1990 $25. Then he spends another $18.75 day morning general session, discus- #90 - Select MortalIt T and Other sing prospects for economic recovery in the next round and ends up with Durational Effects Modelled $6.25 and so on. However, for A that in 1992 and the probable impact on by Partially Observed interest rates and other investment is not the case. At the end of period Markov Chains, 1, A will have a probability distribu- markets, He also will review monetary December 1990 and fiscal policy developments in an tion as follows P(A = $175) = 0.5 and #91 - Numerical Evaluation of P(A = $75) = 0.5. At the end of election year and analyze inflation and Markov T£ansition Prob- growth prospects. period 2, the probability distribution abalties Based on the is given by P(A = $193.75) = 0.25, In addition, meeting participants Dlscretizecl Product Integral, can attend any of the more than 50 P(A = $168,75) = 0,25, P(A = $93.75) December 1990 = 0.25 and P(A = $68.75) = 0.25, etc. sessions that will focus on pension, #92 - Linear Prediction and Credi- investment, nontraditional marketing, Note that the expected wealth of A bility in Continuous Time, increases from $100 to $125 to $131.25 and management topics. Sessions will December 1990 feature topics such as the future of and so on. In general, the wealth is #93- Hattendorff's Theorem getting redistributed from C to A. direct marketing, litigation risks of the Generally Stated, pension actuary, whether GICs and Is there any escape from this January 1991 other insurance company products are diabolical process? Mulcahy, Richard, Dealing with the still alive, what service excellence We condude that in the long run, the Earnings Gap, Staple Inn Actuarial means for actuaries, investment risk-loving person is mined because Society, April 1991 careers for actuaries, and how to hire of lack of insurance purchase. But the Report of the Committee on Profes- actuaries. Meeting participants are risk-averse person buying insurance encouraged to 'lVleet the Board" in an does not fare much better. He also is sional Surveys, Canadian Institute of Actuaries, 1990 informal setting during Friday's conti- losing wealth over time. The only nental breakfast. saving grace for C is that he never Taxation of Pensions, William H. Because the meeting hotel is cen- ends up with $0. The wealth is redis- Altken, paper presented at June 1991 trally located in the famous Chicago tributed to the insurer. meeting of Canadian Institute of Loop, attendees and their guests have The process is very general. We Actuaries, 1991 several shopping and sightseeing can show, arguing along a similar line, options. The Chicago Hilton & Towers that the wealth in such a model gets on Michigan Avenue overlooks Grant redistributed to the least risk-averse In memoriam Park and Lake Michigan and is within insurer. There does not appear to be R. Gordon Brown ASA 1925 walking distance of the Art Institute, any logical escape from this line of Paul W. Compecl( ASA 1925 Shedd Aquarium. and many shops and reasoning. A. Ross MacDonald FSA 1951. theaters along the Magnificent Mile, This begs the question of FCIA 1965, MAAA 1967 whether insurance purchase is actually The Actuary-Aprill992 15

tests, and I stncehave proveclthat any correct that impression. In 1920, results are vahd. 1 have not deter- shortly after Poland regained tts inde- Dear Editor: mined yet the full range of circum- pendence following World War 1,the stancesfor which the devicefails to Polish Institute of Actuarles was estab- a ashington’s deputy state produce a result. lished. My father, Dr. Tadeusz actuarycommetits - Maybe my method ís only a repe- Poznanski,was its founding member Funding and accounting practicesfor tition of a previously established and continued as its secretarygeneral private pension plans and public pen- relationship. If so. 1 am sure that untill939. sion plans differ greatly.The primary someonewffl bring this to my atten- 1 do not know how many justification given for the differences tion. If the relationshtp has not been members the Polish Institute of ís govemments’abihty to tax. recogntzedbefore. 1 am happy I could Actuaries had between the two World Although ít ís easy to lump contribute one small tool to the Wars, but its members were actfve not together all govemments,this can be mathemattcalworld. only in Poland but also on the interna- misleading.While the federal govem- Consider the following general tional scene.For examplp. Dr. ment can print more money, state and expressionfor an equation of degreen. Poznanskiwas a founding member of local govemments don? have that X” - axn-l - bx”-2 - =n-3 _ the Board of Comite Intemational capacity.Also. the federal govemment dxn-4-...-rx-s=o pour l’étude de l’assurancegrêle and has found a partial solution to tts servedas a secretaryof the 9th and budget problems by pushing programs where the coefficients.a, 6, c, d, .. . I; 10th IntemaUonal Congressesof down to the state leve1without accom- and s are any real numbers, positive, Actuaries (Stockholm 1930and Rome panying funds. negative,or zero. 1934 as well as a vice-presidentof the Various states have taxing limits, Begin the procedurewith n 11th Congressín Paris in 1937.A such as Califomia’s Proposition 13,or consecutivevalues of unity. These review of the Zw.wacffons of the Inter- balancedbudget requirementsin are the first n terms of a serieswe national Congressof Actuarles for which pension contributions become will generate. those years indicates that many Polish a balancing item. Also. impairment of The next term of the seriesís a actuarlesparticipated. contract clausesprohibit closing plans. linear compound of the first n terms. It ís good to leam that following It might be time to reconsider It ís cahlated as follows: the ravagesof World War II and more some of our perceptions of funding a(u,) + b(u,-,) + ch,-,) + d(u,-,) than 40 years of communism, the govemmental plans. + *.. + rh.4 + s(uJ = un,,. actuarial profession in Poland has Steven Bland The expression u, refers to the seen a rebirth. It ís pamcularly “n’th” term of the series. gratifying to me, and 1 am sure ít ccidental discovery Having calculatedthe term would be to my father. that Canadian, 0 U.S.,and other actuariesfrom the 1 spent 43 years in the actuarial field. h+~~o~o~~~~~~~~~h~-.~ a During the 9 years 1 have been retired, West are playing an important role in 1 have kept my finger in the actuarial ship. If the seriesapproaches a this rebirth. pie. Much of my effort has been geometric progressionwith a constant G.W. Poznanski devoted to researchthat is more ratio. the constant raUo ís the root we mathematicaIthan actuarial. However, are seelcing. Qther grofessions’ coMege 1 prefer to report the results of my Often. the terms of the serieswill requirements mathematicalresearch to an actuarial approacha geometric progressionafter Chuck Fuhrer’sletter against granting publication rather than a mathema- only a few terms. Or. the iteration exam credit for collegecourses in the tical one. may take severalhundred terms October 1991Actuary was interesting. By serendipity,mankind often before the constant raU ís closely 1 had never considered that angle of reachesunexpected results. 1 have approximated.Modem computers the question before. pursued a study of confidente limits simplify the calculation.even when a 1 can? help wondering, though, and Poissonprobability distributions, thousand or more terms are required. about the connection drawn between only to arrive at a result that seems In addition. devicesexist to accelerate recognizingcollege work and requiring far removed from either. the convergenceof the ratios. ít. Why do lawyers and accountants 1 always had been taught there ís What I report here representsa require collegecourses for admisston no known algebraicsolution for the marriageof two disciplines for a solu- to the Bar or as a CPA?1s ít because roots of a general polynomial of a Uon to a problem from a third disci- they set a ball rolling and couldn’t degreehigher than four. By Homer’s pline. By the combination of numerical stop ít, as ís implied ín Fuhrer’sletter? method that 1 studied in collegein the analysis and computer sctence,we Did expediency win over flexibihty? 193Os,ít ís posstble to sneak up on a solve an algebraicproblem. Or. ís ít becausethe people who hire real root. but this requtresat least a john H. Cook attomeys and CPAsgave preferente trial and error approach.1 have stum- to those with a collegeeducation, bled by accident on a straightforward Polish actuaries date back to ô920 eventually demanding ít? proach that. with certain excep- Whatever the answer to these gives dtrectly the real roots of 1 found the article, “Polar& first e ns, actuaries.”ín the January 1992 questlons, can we reasonablyexpect any polynomial. Actuary interesttng. as a profession to have com lete Becausemy discovery was acci- control over the standards tL t we dental I was not prepared to prove The article leavesthe im ression there were no actuarlesin Po8. nd work under? the validity of my results.The results Steve Malerich initially were supported by repeated before about 1990.1would like to The Actuary- April 1992 16 ACTUCROSSWORD by R. Gmham Deas Across Down 1. Unsatisfactorysource of moneyon tribunals using 8 (9,6) 1. Financiallysatisfactory save profit (7) 7. New form of river skis assumedby some of us (5) 2. Asinine, but not one disturbed. Silly, isn’t it? (6) 9. Shall repeatedself multiplication indicate strength of character?(4,5) 3. Formof punishmentwhich could easily producesweat (5) ll. How to makea mule an associationof adults (7) 4. Cmokedline in Africa (4) 12. Operatichemine that is disposedof internally (6) 5. Reverseriver back and fofward to a place (8) 14. Knockback silly vegetation(4) 6. Settersin wmng places(7) 15. Desertedspirit centers (5,5) 8. Valvefor weavinginstrument (ll) 18. Help me on an exceptionaltransformation (10) 10. Flow back, card game,the Frenchsound of admiration(4,7) 19. Steadycompany (4) 13. Faraway place as an Ameritan state is (4) 22. Bird’s octavecomposition (6) 16. Pmnounthe Spanishuntrustworthy person (4) 23. Don’t stay restful-becomeexcited (7) 17. Runyonwmte morethan this (8) 25. Be encouragedto choose a card (4,5) 18. Sea trip, changefor an Egyptian(7) 26. DiscoverEumpean city, for example,in untruth (5) 20. Foul displaysof ruder sotl in manuscriptform (7) 27. Third signs emendstate of sensibility (5,lO) 21. This Greekupset ll Duce (6) 23. A deft way to find what is in store (5) 24. State, but not of rain, in South America(4)

March’sSolution 100% SOLVERS- Jenuery D Baillie,J Braue,E Bmge,A Bmsseau,S Col- pi¡, P Mar& G&DMaza&, L Migotti, E Thompson,B Tomper,D Weill R?fmmy: A Amodeo,J Ballantyne,J Darnton,J Grantier,P Hepokoski,B&J Koch,D Leapman,T Luker& V Hosler,W Lumsden,R Martin,G Ramanathan, B lbmper

Sendsolutions to: CompetitionEditor, 269 N. Comanchelane, Waukesha,WI 53166