8
w et 1 C ~ , uar i alUpda~ .e VOLUME 16NUMBER9 AMERICANACADEMYOFACTUARIES SEPTEMBER1987 Int 2 hisissue From aGuest President 2 IRSSource ListSign-Up 3 LetterstotheEditor 3 CallforPapers 4 MilitaryRetirement ValuationResults 4 ChecklistofAcademy Statements-July1987 Actuaries andAccountants : TheDialogueContinues TakeNote TheAcademyhasrecentlypur- chasedafaxsimilemachine . Pleasenoteonthemastheadthe additionofafaxsimilenumber . Enclosures Includedinthismonth'sissueof TheUpdate arethefollowing : GovernmentRelationsWatch IASBBoxscore •InSearchOf . . . •SpecialSubjectSupplement : GuidelinesforMakingPublic Statements TheDisciplineProcess : UpholdingProfessionalEthicsandStandards byGary D .Simms Basedonthebeliefthatanessential purposeoftheAcademyistodefineand maintainstandardsofconductandprac- ticeforitsmembers,theBoardofDirec- torshasrecentlyadoptedanew"Disci- plineHandbook,"whichsetsforthin detailtheproceduresandprotections inherentinthedisciplinaryprocess . Thehandbookprovidesaclearand detailedexplanationofhowtheAca- demy'sdisciplinaryprocessoperates .It proceedsinasystematicfashionthrough themajorelementsoftheprocess,in- cludingdetailedexplanationsofthecom- plaintprocess,investigations,hearings, decisions,boardaction,andappellate processes .Mypurpose,here,istohigh- lightthemajorprovisionscontained withinthe"DisciplineHandbook,"which Icommendtoyourcarefulreadinginits entirety .Itisavailableonrequestfrom theAcademy'sWashingtonoffice . TheAcademy'sdisciplinaryprocessis basedonthreefoundations : •Thepublicandregulatorybodiesmust beabletodependonprofessionalcon- ductandpractice .Failureofthepro- fessiontoachievethatwouldeventu- allyresultinotherstakingoverthis process . •Themembersmusthaveknowledgeof whatconstitutesinfractionssothat theymayavoidtheminthefuture . Thestandardsinvolvemanygrayar- eas,andtheinvestigationofalleged infractionsservestosharpenpercep- tions . •Accusationsdeserveaclearandtimely decisionforboththepublicandthe member,andthatrequiresadherence tofair,complete,andtimelyinvestiga- tions . TheAcademy 'sJurisdiction TheAcademy'sdisciplinaryprocessap- pliesonlytomembersoftheAcademy .As aprivatebody,theAcademylacksau- thoritytodisciplinenon-members .How- ever,sincethevastmajorityofpracticing actuariesintheUnitedStatesaremem- bers,mostsituationsraisingquestions ofactuarial conductfallwithin thescope ofthe Academy'sjurisdiction ,exercised byitsCommittee onDiscipline . SourcesofComplaints Complaintsareacteduponwhenreceived frommembers,non-memberactuaries, governmentofficials,oranyotherper- sonorparty .Frequently,employersof actuarialservicesarethesourceofcom- plaintsaboutmembers'conduct .Inad- dition,theCommitteeonDisciplinemay initiateaninvestigationintoamatterby itsownmotion.Inkeepingwiththe pledgeofconfidentialityunderwhichthe disciplinaryprocessoperates,complaints (continuedon page4) AMERICANACADEMYOFACTUARIES DISCIPLINE HANDBOOK Thenewly-revisedDisciplineHandbookis availablewithoutchargefromtheAcademy's Washingtonoffice .

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wet1C~ ,uarial Upda~.eVOLUME 16 NUMBER 9 AMERICAN ACADEMY OF ACTUARIES SEPTEMBER 1987

In t

2

his issue

From a Guest President

2 IRS Source List Sign-Up

3 Letters to the Editor

3 Call for Papers

4Military RetirementValuation Results

4Checklist of AcademyStatements-July 1987

Actuaries and Accountants :The Dialogue Continues

Take NoteThe Academy has recently pur-chased a faxsimile machine .

Please note on the masthead theaddition of a faxsimile number .

EnclosuresIncluded in this month's issue of

The Update are the following :

Government Relations WatchIASB Boxscore

• In Search Of . . .• Special Subject Supplement :

Guidelines for Making PublicStatements

The Discipline Process:Upholding Professional Ethics and Standardsby Gary D. Simms

Based on the belief that an essentialpurpose of the Academy is to define andmaintain standards of conduct and prac-tice for its members, the Board of Direc-tors has recently adopted a new "Disci-pline Handbook," which sets forth indetail the procedures and protectionsinherent in the disciplinary process .The handbook provides a clear and

detailed explanation of how the Aca-demy's disciplinary process operates. Itproceeds in a systematic fashion throughthe major elements of the process, in-cluding detailed explanations of the com-plaint process, investigations, hearings,decisions, board action, and appellateprocesses. My purpose, here, is to high-light the major provisions containedwithin the "Discipline Handbook," whichI commend to your careful reading in itsentirety. It is available on request fromthe Academy's Washington office .

The Academy's disciplinary process isbased on three foundations :• The public and regulatory bodies must

be able to depend on professional con-duct and practice . Failure of the pro-fession to achieve that would eventu-ally result in others taking over thisprocess .

• The members must have knowledge ofwhat constitutes infractions so thatthey may avoid them in the future .The standards involve many gray ar-eas, and the investigation of allegedinfractions serves to sharpen percep-tions .

• Accusations deserve a clear and timelydecision for both the public and themember, and that requires adherenceto fair, complete, and timely investiga-tions .

The Academy's JurisdictionThe Academy's disciplinary process ap-plies only to members of the Academy. Asa private body, the Academy lacks au-thority to discipline non-members . How-ever, since the vast majority of practicingactuaries in the United States are mem-

bers, most situations raising questionsof actuarial conduct fall within the scopeof the Academy's jurisdiction , exercisedby its Committee on Discipline .

Sources of ComplaintsComplaints are acted upon when receivedfrom members, non-member actuaries,government officials, or any other per-son or party. Frequently, employers ofactuarial services are the source of com-plaints about members' conduct. In ad-dition, the Committee on Discipline mayinitiate an investigation into a matter byits own motion. In keeping with thepledge of confidentiality under which thedisciplinaryprocess operates, complaints

(continued on page 4)

AMERICAN ACA DEMY OF ACTUARIES

DISCIPLINEHANDBOOK

The newly-revised Discipline Handbook isavailable without charge from the Academy'sWashington office .

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2

of Actuaries

PresidentPreston C . BassettPresident-ElectJohn A. Fibiger

Vice PresidentsEdward H. FriendCommittees on Public Issues-EmployeeBenefits and Social Insurance

Burton D. JayCommittees on Accreditation.Qualification and CommunicationW, James MacGinnitieCommittees on Public Issues-InsuranceMavis A. WaltersCommittees on Accounting andFinancial ReportingSecretaryRobert H. DobsonTreasurerDaniel J. McCarthyExecutive DirectorStephen G. KelllsonExecutive Office1720 I Street, N.W, 7th FloorWashington, D.C. 20006(202) 223-8196FAX (202) 872-1948Membership Administration500 Park BoulevardItasca, Illinois 60143(312) 773-4204

ChairpersonCommittee on PublicationsCarl R. OhmanEditorCharles Barry H . WatsonAssociate EditorWarren P. CooperManaging EditorErich ParkerContributing EditorGeorge SoulesProduction ManagerM. Kathleen Crawford

American Academy of Actuaries1720 1 Street, NN 7th FloorWashington, D.C. 20006Statements of fact and opinion in this publication,including editorials and letters to the editor, are made onthe responsibility of the authors alone and do notnecessarily imply or represent the position of theArnerioarr Academy of Actuaries, the edi Lurs, or themembers of the Amdemy.

The Actuarial Update

Streams of change in the UKI am delighted to have this opportunityof writing a guest editorial for The Actu-arial Update as it comes at an especiallymomentous time for the whole of thefinancial services industry in the UnitedKingdom and, consequently, for the ac-tuarial profession . The talks I have hadover the years with actuaries from theUnited States and other countries at theannual council meetings of the Interna-tional Actuarial Association lead me tobelieve that what is now happening inthe UK has relevance elsewhere.There are two streams of change that

are converging into a major river of trans-formation. The first was mentioned as asubject under urgent consideration inthe guest editorial by my predecessortwo years ago. The reconstitution of theUK State Pensions Scheme is now legis-lated. Some of the more liberal benefitsunder the old scheme have been trimmed,but the more significant feature is theextension of the facility to 'contract-out'of the earnings-related element beyondthose schemes that could promise di-rectly comparable benefits (and thus weredefined benefit in form and so quite largein membership) to all schemes (using amoney purchase test) and, even further,to 'Personal Pensions'-a pension ar-rangement made at the employee's ini-tiative.There are several consequences : first,

a potential destabilizing of the member-ship of defined benefit schemes (madeworse by the contracting-out rebate ofState Pension contribution being a flatrate with no allowance for attained ageagainst a defined benefit) ; second, a sig-nificant increase in the numberscontracted-out (particularly among theyounger employees) : third, a breaking of

the monopoly previously enjoyed by theinsurance industry in personal pensionsprovision (the new players being the utrusts mutual funds, the banks and qWbuilding societies).The second stream is the comprehen-

sive legislation, now enacted but not yetin force, covering the whole financialservices industry and, in particular, themarketing of life assurance, pension, andunit trust products . Of relevance to thisdiscourse are the intentions :

(a) to 'polarise' the salesmen of theseproducts into those providing fully inde-pendent advice (and thus reviewing thewhole industry) and those selling onlythe products of their own (and no other)company or group,

(b) to cause all these products to befully described, both at the point of saleand in the cooling-off (free look) notice .The latter has been operated for most lifeassurance products for some years, butit is being extended to all products in-cluding pensions and unit trusts . Theinformation given for a life assurance orpension product must include a state-ment of the probable level of benefit thatwould accrue if contributions were ter-minated after each of the first five years(so as to indicate front-end loads) and, ifan indication of possible maturity befits is given (as it must in the coolingnotice), the projection must be on a to-tally standardised basis operating acrossthe whole industry.

(c) to eliminate 'product bias' such ascaused that salesman's remuneration ba-sis. This extends to requiring a sales-man for a company to have access to allthe products of that company.These changes are about to have a

profound effect on the marketing ar-rangements of most companies, sincedistribution channels will change, prod-uct choice will be modified, and therewill be new players to contend with . Theaspects of particular relevance to theactuary are : (a) the need to foreseechanges in business patterns, (b) theneed to review product design in thelight of the disclosure requirements, and(c) the special situation of with-profitsbusiness .

(continued on page 6)

IRS Source List Sign-UpThe Internal Revenue Service (IRS), Central Region, is in the process ofpreparing a solicitation mailing list, in essence, a source list of actuaries, to b .1used when the IRS requires the service of an actuary (for example, to review life,insurance policies and determine if the deductions taken are proper) . Qualifiedactuaries may send letters of interest to Internal Revenue Service, P.O. Box 5365,Stop 65 (Contracts), Cincinnati, Ohio 45201 .

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September 1987

Letters to the Editor

Preserving Integrity

As an enrolled actuary who performsthird-party certifications for a number ofclients, I read with interest Jack Turn-quist's article in your June issue on the"questionable practices of certain enrolledactuaries ."

I typically charge several hundred dol-lars to review or perform an actuarialvaluation and provide a Schedule B for asmall (ten participants) plan . I believethis is fair compensation consideringthe time involved by me and my staff toproperly provide such services, and Ibelieve my fees are typical for this type ofwork. Last year I lost one such client toan actuary who agreed to sign ScheduleBs for fifty, dollars per plan .

When I suggested that for fifty dollars,this actuary could only be signing the Band not reviewing the valuation, my cli-ent was not impressed .Anything that can be done to put these

individuals out of business and preservethe integrity of the enrolled actuary

mould be of vital concern to the entireWession .

H. Louis LeTourneauGrand Rapids, Michigan

Call for Papers

The 1989 CentennialCelebration

Do you think you could write an actuarialpaper that would stand up to scrutiny ahundred years from now? One that wouldamaze the actuaries of the Late-21st cen-tury with its insight and grasp of one oftoday 's actuarial problems?

The papers committee of the 1989 Cen-tennial Celebration invites you to respondto its call for papers. This gala 100-yearanniversary celebration of the actuarialprofession in North America , which youwill learn about in more detail through aspecial mailing scheduled for October1987, will be held in Washington, D .C .,

e 12-14, 1989 .are seeking papers on ten topics .

ich correspond to the meeting's break-out sessions . These topics and their ses-sion leaders are : (1) Asset Allocation-James A. Attwood and Carl R. Ohman,(2) Credit Risks-Daniel J . Gross, (3)

3

Education-Linden N. Cole, (4) HealthCare-Roy R. Anderson, (5 ) Liability In-surance-Daniel J . McNamara, (6) OldAge & Continuing Care-Barbara J. Laut-zenheiser, (7) Pensions-Paul H . Jack-son . (8) Product Design & Pricing-Dar-rell W. Ehlert and Donald W. Britton, and(9) Reinsurance-Kirk G. Roeser, (10)Valuation, Solvency-The Role of the Ac-tuary-R. Stephen Radcliffe .

The first two of these topics are de-scribed in more detail below. Other sub-ject areas will be described in subse-quent issues of The Update. In themeantime, for more details, you maywant to contact the leader of a session inwhich you have interest . The outline foryour paper is needed by the end of thiscalendar year.Asset Allocation . Papers can address

any aspect of asset allocation among dif-ferent classes of actuarial liabilities ofinsurance companies (life, health, casu-alty), employee benefit plans, or otherfinancial enterprises .

In this context, the topic "asset alloca-tion" is considered to include both in-vestment strategies for the investment ofnew funds and reallocation or reinvest-ment strategies to improve asset/liabilityrelationships of existing funds .

Papers may address implications ofasset allocation for the design and pric-ing of insurance products, the valuationof actuarial liabilities, and the many as-pects of asset sufficiency and insurersolvency. Also included, where applica-ble, is the continuing and emerging roleof actuaries in developing investmentstrategies and measuring investment per-formance .Credit Risk. The credit risk session

will focus on the impact of credit risk onboth the asset and liability side of insur-ers' balance sheets . On the asset side,many life insurers are making signifi-cant investments in lower-quality highyield investments . On the liability side,the financial guarantee insurance indus-try has had rapid expansion in numberof participants, volume of business, andtypes of issues insured .

Topics may include : actuarial aspectsof credit risks, investment aspects ofcredit risks, interrelationship betweenactuarial and investment aspects of creditrisks, pricing, valuation, and hedging ofcredit risks, and application of invest-ment models such as option pricing .

Innovative approaches are encouragedas are papers on any other aspect ofcredit risk. A

THE FAR SIDE By GARY LARSON

Accountant street gangsThe Far Side by Gary Larson . Copyright 1987. Universal Press Syndicate .

Reprinted with permission. All rights reserved .

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4

Military Retirement Valuation Resultsby Toni S . Hustead

Public Law 98-94 (currently Chapter 74,Title 10, U .S.C.) began funding the mil-itary retirement system, using an aggre-gate entry-age normal cost funding meth-od, starting October 1, 1984. The lawstates that the Department of Defense(DOD) will pay the normal cost of thesystem as a percentage of the monthlybasic payroll and that the Department ofthe Treasury will make annual paymentsfrom general revenues to amortize theunfunded liabilities .An independent three-member Retire-

ment Board of Actuaries was establishedunder the funding law. The board isrequired to review valuations of the mil-itary retirement system to determine themethod of amortizing unfunded liabili-ties, to report to the Secretary of Defenseeach year, and to report to the Presidentand the Congress on the status of thefund at least every four years . The DODOffice of the Actuary provides technicaland administrative support to the board .

The most recent valuation results as ofSeptember 30, 1986 have just been re-leased. The board determined that the ini-tial unfunded accrued liability of the sys-tem ($528 .7 billion) should be amortizedwith payments equal to 33% of the secondpreceding fiscal year's basic payroll . Thispayroll was used because It is the mostcurrent one available when the paymentmust be made . For example, the $11 billionpayment on the initial unfunded accruedliability made on October 1, 1986 for fiscalyear 1987 was 33% of the total basic payrollfor fiscal year 1985 . It was originally pro-jected that this method would amortize theinitial unfunded liability over sixty years .Current projections indicate that the pay-ment period will be slightly longer. Theunfunded accrued liability of the militaryretirement system will decrease in real dol-lars, but it will increase in nominal dollarsfor approximately 75% of the amortizationperiod. This situation occurs because theinitial payments are less than the intereston the unfunded liability .The retirement board also approved a

method of amortizing changes in the un-funded accrued liability. Changes in theunfunded liability are amortized over thirtyyears by payment that increase in absolutevalue at the same rate as the annual long-term basic pay scale assumption (currently6.2%). A separate payment schedule is setup for each benefit change . However, thereis one combined payment schedule for allassumption changes and one combinedpayment schedule for all experience gainsand losses .

The actual unfunded accrued liabilityon September 30, 1986 was $541 .6 billion .This was 4% lower than expected, produc-ing a fiscal year 1986 net gain of $22.5billion. The components of the gain in-cluded $23 .7 billion (4.2%) for unrealizedactive and retired pay increases, $1 .0 bil-lion ( .2%) for unrealized interest assump-tions, -5.2 billion (-.9%) for unrealizednoneconomic assumptions, and $3.0 bil-lion ( .5%) for 1986 benefit changes.

The aggregate entry-age normal cost per-centage (NCP) as of September 30 . 1986was 51 .3% of basic payroll . The projectedfiscal year 1987 total normal cost paymentis $18 .8 billion. There are three distinctnondisability benefit formulas (for threedistinct populations) within the militaryretirement system. Future new entrantshave the least generous formula. Conse-quently, the NCP is projected to graduallydecrease to 40.3% in the next twenty years,when the majority of the force is subject tothe new system.The fund balance on September 30,

1986 was $25 billion, which was equalto 70% of the basic payroll in that year.The fund is projected to be 4 times basicpayroll in the year 2000 and to level off at15 times basic payroll in sixty years .

The Department of Defense's Office ofthe Actuary produces two publicationsa year: a detailed summary of the val-uation process and tabulations of themilitary retirement system populations .They are available from the author ather yearbook address .

Checklist of AcademyStatements July 1987TO: GovemmentalAccountingStandardsBoard. July 7, 1987. RE: Pension ac-counting for state and local governments .BACKGROUND : Comments submitted inresponse to a request from the GASB .

TO: Variety of audiences, July 31, 1987 .RE: Unisex rating of insurance. BACK-GROUND: Statement prepared by Com-mitte on Risk Classification for distribu-tion to public policymakers.

TO: Task Force on Long-Term HealthCare, July 31, 1987 . RE: Continuingcare retirement communities . BACK-GROUND: Testimony presented to theHealth Care Financing Administrations'Task Force on Long-Term Health Care .

The Actuarial Update

THE DISCIPLINE PROCESS(continuedfrom page 1)

may be filed anonymously (provided tsufficient information is provided to en-able an investigation to be undertaken) .

Complaints should allege specific vio-lations of Academy Guides to ProfessionalConduct or Interpretative Opinions,which form the basis of ethical guidancefor Academy members . The processmakes clear the relationship betweenthese ethical standards and the stan-dards of professional conduct now pro-mulgated under the auspices of the In-terim Actuarial Standards Board (IASB) :it is an ethical imperative to ensure thatmethods employed are consistent withsound actuarial standards, and thesestandards include the Recommendationsand Interpretations published and main-tained by the IASB. While no specificformat is required for a complaint to beacted upon, to the extent that the com-plaint cites particular standards of con-duct or practice at issue, the investiga-tion can be more expeditiously pursued .Complaints can be filed either with thechairperson of the Committee on Disci-pline (at the yearbook address) or theAcademy's General Counsel .

Complaint ProcessingUpon receipt, the chairperson of the Coltmittee on Discipline undertakes an itial review and assigns an investigatorysubcommittee to review the matter. Thechairperson will screen out complaintsthat cannot be acted upon (e .g., com-plaints raised against a non-member orcomplaints not actionable on their face) .Further, several other kinds of complaintsare not deemed appropriate for the dis-ciplinary process. These include allegedviolations of Academy bylaws directedagainst staff, members of the Board ofDirectors, or committee members, whenthe matter arose out of the exercise ofofficial Academy duties . (These are re-ferred to the Academy's Executive Com-mittee for consideration.) Other com-plaints not generally deemed appropriatefor disciplinary processing include "class"complaints, allegations arising from con-stitutionally protected speech or expres-sions of political position, or situationsin which a firm or corporate entity isalleged to be a inalfeasor. Allegations inthe business sphere (predatory businesspractice, unfair competition) are also notdeemed actionable under the disciplary processes .

In addition, certain allegations willall cases be investigated . These includeallegations of the conviction of a felonyby a member, allegations of an improperwork product that played a role in an

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September 1987

insurance company insolvency, and alle-gations that a member has been sub-

WYlyted to discipline by another actuarial

or licensing authority.

Investigation and HearingThrough the investigatory process . thecooperation of the accused is requestedbut cannot be required. After initial in-vestigations, the committee will decidewhether further action is warranted . Ifsuch is the case, a formal statement ofcharges will be drafted and submitted tothe accused, and a hearing will be for-mally scheduled .

At the hearing, held before either thefull Committee on Discipline or a repre-sentative panel, the member under in-vestigation is provided with full due pro-cess rights, including the opportunity tohear and review all evidence, to provideany evidence or testimony relevant to thecase, to cross-examine all adverse wit-nesses, and to be represented by counsel(at his or her own expense .) Writtenbriefs may be filed at the request of themember under review.

Following the hearing, the Committeeon Discipline will make a decisionwhether or not the formal charges should

be sustained. if it votes in the affirmative(by at least two-thirds of its member-ship) a sanction may be imposed .

The SanctionsThe sanctions (penalties) imposed by thedisciplinary process fall into two catego-ries: private and public . if a private pen-alty is to be imposed, the member mayappeal that decision to the Board of Di-rectors. If a public penalty is to be im-posed, the matter is automaticallybrought before the board for its deliber-ations.

The private penalties include warn-ings or admonishments. A warning in-dicates that the member acted unprofes-sionally, butdid not realize that the actionwas unprofessional . Further, it was notlikely that at the time of the action themember would have known that the er-ror was. indeed, unprofessional . An ad-monishment, the more serious privatesanction, indicates that the memberacted unprofessionally, did not realizethat the action was unprofessional, butthat a reasonable person should haverecognized that the action was indeedunprofessional.

5

The public penalties include a publicreprimand, suspension, or expulsionfrom Academy membership. The publicreprimand is appropriate when the mem-ber acted unprofessionally and did so inthe knowledge that the action was inerror. The suspension is more seriousand indicates that a knowing error wasof such a magnitude that the individualshould be suspended for a specified pe-riod of time. Expulsion is appropriatewhen the individual is no longer deemedfit to be a member of the Academy .

AppealsThe handbook sets forth specific detailsfor an appellate process, both to theBoard of Directors and to the member-ship at large.

Procedures for reinstatement, confi-dentiality maintenance, and a lengthyseries of model communications formatsare included as well.

The Discipline Handbook is the workproduct of Gary D. Simrns, the Aca-demy's General Counsel, and the Com-mittee on Discipline.

oetuaries and Accountants : The Dialogue Continues

by Stephen G . Kellison

Over the years there has been extensivedialogue between actuaries and accoun-tants involving both policy issues andtechnical issues. Such dialogue is vitalfor both professions, since actuarial andaccounting concepts are closely inter-twined in financial reports for insurancecompanies, employee benefit plans, andsimilar entities (e .g. HVOs and self-insurance funds). The summer of 1987has witnessed significant meetings withboth the Financial Accounting StandardsBoard (FASB) and the American Instituteof Certified Public Accountants (AICPA),

Financial AccountingStandards BoardThe Academy held its annual meeting withmembers of FASB and its staff in June. TheAcademy was represented by nine commit-tee chairpersons, officers, and staff. Thiswas the first opportunity most of the actu-

wes had had to meet FASB's new chair-Dennis R. Beresford, who assumed

,. at position January 1, 1987 . The pur-pose of the meeting was both to discuss thestatus of specific projects as well as therelationship between the Academy and FASBmore generally.

In terms of specific FASB projects, fivewere on the agenda: (1) pensions, (2) post-retirement benefits other than pension, (3)insurance, (4) risks and uncertainties, and(5) income taxes. In addition, discountingwas identified as a sixth area in which aproject may soon be added to the FASBagenda. This article will not discuss thestatus of each of these projects, since suchreporting is handled each month throughthe "Government Relations Watch ." Howev-er, collectively, this list strikingly shows theextensive scope and breadth of topics be-fore FASB which involve actuarial concepts .

Perhaps the most significant aspect ofthe meeting was the insight into thenature of the deliberative process at FASBinvolving their handling of commentsreceived from interested parties. Al-though it was never articulated in oneplace as a list, the following nuggetscould be gleaned from comments of FASBand its staff:1 . FASB carefully considers all commen-

tary from whatever source .2. FASB evaluates input on its intellec-

tual content, not on the individual ororganization presenting it .

3. In reviewing testimony. FASB doesnot count votes .

4. FASB is seeking divergent points ofview and alternative solutions, withpros and cons for each .

5. Specific suggestions are more usefulthan general accounting .

6. Commentary that covers the entiresubject is given greater considerationthen commentary limited to Isolatedpoints .FASB staff did raise one issue of con-

cern in connection with FAS No. 87 (re-leased in December 1985) . They indi-cated that they are still being delugedwith inquiries from actuaries at an un-precedented high level for a standardeighteen months after its issuance. Theymentioned that there are numerous ex-amples in which actuaries in the samefirm are asking the same question mul-tiple times . They suggested that it couldbe beneficial to all concerned if actuarialfirms could internally circulate the re-sults of such inquiries in order to reducethe volume of multiple similar inquiries .The Academy representative gave a

progress report on developments withinthe actuarial profession to turn the In-

(continued overleaf)

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6 The Actuarial UpdateI

terim Actuarial Standards Board (IASB)into a permanent Actuarial StandardsBoard (ASB). Considerable interest wasexpressed byFASB in these developmentsand the type of actuarial standards thatwould be developed .

One final issue discussed was the de-sirability of getting relevant actuarial in-put to FASB staff at an early stage in thedevelopment of an accounting standard .The observation was made by some at-tendees that FASB might benefit if it hadan actuary on staff.The meeting was quite beneficial in

establishing a constructive dialogue on anumber of matters. It is clear that theactuarial profession will continue to bevitally interested in a number of FASBprojects and that early and continuedcommunication on such projects is vital .The meeting was also useful in betterunderstanding the decision process atFASB. All actuaries should be aware thatFASB is strongly committed to followingan independent path in the developmentof accounting standards, and that theyare not particularly motivated to achieveconsensus or universal acceptance oftheir pronouncements .

American Institute of CertifiedPublic AccountantsDuring June the Academy also held amajor meeting with representatives ofthe AICPA. Liaison with the AICPA ismaintained through the Academy Com-mittee on Relations with Accountantsand the AICPA Relations with ActuariesCommittee. These committees meetjointly three times a year to discuss top-ics of mutual interest .Actuaries interested in accounting is-

sues should be aware that in dealing withthe accounting profession, relationshipswith FASB and with the AICPA are increas-ingly two quite distinct and different activ-ities . On accounting issues, the AICPA candevelop generally accepted accounting prin-ciples (GAAP) that stand until FASB ad-dresses the issue. Once FASB takes on anissue, the AICPA is in the same position asanyone else apropos of providing input. Byno means does the AICPA have an "insidetrack" in dealing with FASB. In fact, repre-sentatives of the AICPA often complain thattheir "batting average" with FASB is nobetter than anyone else's . On auditing is-sues the situation is quite different, andthe AICPA retains total control of generallyaccepted auditing standards (GAAS) .The purpose of the two Academy and

AICPA liaison committees is to maintainhigh-level dialogue on policy issues andto identify areas in which liaison shouldbe established and maintained on tech-nical issues. However, the two commit-tees do not normally deal directly withthe substance of technical issues, butrather ensure that appropriate dialogue

between working committees in the twoorganizations takes place . Over the yearsthis process has significantly improvedrelationships and the content of variousdocuments in a number of instances .One specific and significant document

that did arise out of this joint committeeactivity is the standard confirmation let-ter for auditors reviewing pension plans(reprinted in its entirety in July's Actu-arial Update) . This standard confirma-tion letter is designed to improve theworking relations between the two pro-fessions by reducing or eliminating thediversity that exists in request for infor-mation by auditors .In order to show dramatically the

breadth and diversity of topics in whichthe two professions maintain dialogue,excerpts from the agenda for the Junemeeting appear below. Activity on theseissues is reported each month throughthe "Government Relations Watch ."

I . Employee Benefit PlansA. FASB Statements on pension account-

ing and implementation proceduresB. AAA Committee on Pension AccountingC. Proposed AICPA Task Force on Em-

ployee BenefitsD. Standard actuarial confirmation letterE. Congressional activity regarding pen-

sion legislationF. FASB Technical Bulletin 87-1, Account-

ingfor a Change in Method ofAccount-ing for Certain Postretirerneat Benefits

II. Insurance IndustryA. Projects of the AICPA Insurance Com-

panies Committee1 . Comment letter on the FASB's ex-

posure draft, Accounting and Re-porting by Insurance Enterprisesfor Certain Long-Duration Insur-ance Contracts and for RealizedGains and Losses from the SaleofInvestments

2. Proposed Audit and AccountingGuide, Audits of Property and Li-ability Insurance Companies

3. Draft Statements of Position, Ac-counting for Foreign Property andLiability Reinsurance and Account-ingfor Fronting Arrangements

4. Proposed Auditing ProceduresStudy, Auditing Loss Reserves ofProperty and Liability InsuranceCompanies

5. Comment letter on the ProposedStatement of Position, Accountingfor Prepaid Health Care Plans

B. AAA Committees on Financial Report-ing Principles1 . Life insurance companies2. Property and Liability insurance

companiesC. NAIC ActivitiesD. GASB Insurance Accounting ProjectE. Valuation Actuary Proposals

F. Taxation of Insurance CompaniesG . FASB Exposure Draft, Consolidation

of All Majority-owned SubsidiariIII. Other MattersA. FASB exposure draft, Accounting

Income TaxesB. AICPA issues paper on "Discounting"C. AICPA issues paper on "Continuing-

Care Contracts"D. Standards of Professional Conduct of

CPAs-The Anderson Committee andthe National Commission on Fraud-ulent Financial Reporting

E. AICPA Report of the Task Force onRisks and Uncertainties

FROM A GUEST PRESIDENT(continuedfrom page 2)

This last deserves greater explanation .First, the terms of the contract must befully described and this extends to thedistribution of surplus, which, in theUK is typically a complex amalgam ofreversionary, perhaps compounding, andterminal bonuses . Second, intermediar-ies are required to give'best advice' acrossthe whole market and, as bonus projec-tions are to be banned, more emphasisis likely to be paid to past performantables. Some attention will be paid to tstrength of companies. The informationavailable is not really suitable for thispurpose, though, and there is likely tobe a channelling of intermediary busi-ness into a smaller group of companiesthat will be under pressure to maintaintheir standing . The profession in the UKis aware of the difficulties and dangers,but time is not on our side . The withprofits policy that has so successfullyand for so long met the needs of so manypeople is being tested in an unsympa-thetic climate .I would not wish to end on so pessi-

mistic a note . There is in all these changesalso a great prospect for the profession .We have hitherto been mainly concernedwith life and general insurance and withpensions . Now, as the unit trusts, thebanks and the building societies enterthe longer-term contractual savings andinvestment markets, there is an in-creased need from them for the advicethat only an actuary can provide .

Finally, I would like to convey the greings of the Institute, and thank you Apthe courtesy of this space .

Marshall Field is president of the Brit-ish Institute of Actuaries .

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Special Subject Supplement to The Actuarial Update

September 1987une 19, 1987, the Board of Directors of the American Academy of Actuaries adopted a newly revised edition of "Guidelines for

'Wing Public Statements ." The guideline is reprinted here in its entirety . It will be included in the 1988 Yearbook for permanentreference .

Guidelines for Making Public Statements

What Constitutes a Public StatementA public statement is a formal, written statement on behalf ofsome Academy entity (board, officer, committee, etc .) to anexternal group. This does not include a statement represent-ing the views of an individual member . Public statementsinclude :1 . Statements to Governmental Entities, such as testimony or

other formal comments, submitted to regulatory, legislativeand investigative bodies at both the federal and state levels .

2. Statements to Professional and Other Groups, defined asorganizations that effectively have some regulatory powers,even if they are not primarily a regulatory body, e .g., theFinancial Accounting Standards Board, the American In-stitute of Certified Public Accountants, the National Asso-ciation of Insurance Commissioners, or the American BarAssociation .

3. Letters to External Publications, including letters to theeditor or other editorial and expository comments to news-papers and periodicals, are considered to be special forms ofublic communications that are not subject to the proce-

loural requirements of these guidelines . This special statusis in recognition of the fact that media deadlines preventthe utilization of the review procedures applicable to formalpublic statements. When letters or other media opportuni-ties (such as radio or television interviews) are anticipated,the spokesperson should consult with the Academy's direc-tor of public information for special guidance. It is generallyappropriate in such circumstances for the individual tonote that the views expressed are not necessarily those ofthe Academy. While the procedural requirements of theseguidelines are not applicable to such opportunities, thespokesperson is nevertheless expected to be guided by thesection below entitled "The Scope of Public Statements ."

The Scope of Public StatementsClearly, a public statement of knowledge unique to actuarialscience should be the primary focus in the profession's publicpronouncements. It is important to note though that ourtechnical expertise encompasses a broader spectrum than isreflected by the concerns of what normally would be consid-ered as pure actuarial science . There are numerous instanceswhen the actuary's knowledge is an invaluable addition to theinformation mix surrounding a given issue . It would be adisservice to all parties for the profession to make publicstatements only in the narrow areas where the actuary's

owledge is unique.ch situation must be evaluated on its own merits to deter-

We whether a public statement by the Academy is appropriate .The tone and nature of a statement must reflect the dignity andstandard of the profession . Statements should contain a balancedpresentation of the significant facts, including relevant benefitsand costs, in a clear, concise manner. A statement need not,however, limit itself solely to statements of fact .

It is also quite proper that statements be written in such amanner that inferences are drawn from statements of fact, solong as these observations remain valid and appropriate fromthe actuarial standpoint . To limit a public statement purely tofactual matters would deny the public the benefit of the fullrange of the profession's capabilities.

A public statement should reflect the profession's expert know-ledge. A statement generally should not take positions on thesocial and political implications of issues, however, in certaincircumstances it may not be possible to divorce social or politicalimplications from actuarial consideration . There may be someissues that have actuarial implications that are better dealt withby trade associations, Insurance companies, or individuals . Publicstatements that appear to be self-serving will be less effective, butthe Academy should not hesitate to speak out on matters thatinvolve legitimate, professional self-interests . In fact, the Academyhas a responsibility to do so .

Development and Delivery of Public StatementsAcademy officers, committees, and staff should generally followthe guidelines presented below in the development and deliv-ery of public statements. At times, these procedures may needto be modified in order to ensure timely and effective prepara-tion and delivery of statements.1. Identfication of Issues-Many people contribute to this

activity: staff, officers, committees, and individuals. TheAcademy's monitoring activities should be continued andexpanded using all available resources. When an issue isidentified by Academy staff, staff will contact the appropri-ate committee chairperson directly and copy the supervi-sory officer, unless there is a "jurisdictional" question to beresolved by an officer (see Statement (2) below) . Earlyidentification is critical to the Academy's development ofwell-prepared and timely statements .

2. Authority to Proceed-Staff and/or a supervisory officer willoften identify an issue that may warrant a public state-ment. They will agree on which committee is best able todevelop the statement . If there are areas of "jurisdictional"overlap or policy concerns, the staff and officers will decideon the committee assignment. If a committee identifies amatter that may warrant a public statement, the chairper-son will advise the officer and the staff . Absent any directionfrom the staff or an officer, the committee chairperson mayproceed in the preparation of a statement on his or her owninitiative . It should be understood that a committee is freeto develop a statement so long as it is consistent withwell-established principles of the profession .

3. Notice of Public Statement Preparation-Once an issue hasbeen identified and development of a statement initiated,notice to members will be accomplished by an announce-ment in the Government Relations Watch (GRW) . The GRWwill give notice of recent and possible committee action(s)on both new matters and on issues under continuingstudy, without any elaboration. Input from members will be

(continued overleaf)

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ii

solicited by suggesting that they contact the relevantchairperson . If an issue is still pending in successivemonths, subsequent issues of the GRW will report thesubject as an open matter. It is recognized that timeconstraints on statement preparation may conflict withand negate this procedure at times .

4. Development of Statements-The committee will preparethe public statement and any supporting backgroundmaterial in accordance with the following guidelines :

A. On specific issues, the chairperson should consider invit-ing other Academy members to participate in the prepa-ration of the statement in order to provide the neededexpertise or to gain access to diverse points of view. If thechairperson receives input from Academy members notserving on the committee, those individuals ought toreceive a reply, though not necessarily an individual one .

B. On major issues that are likely to be controversial withinthe profession, the chairperson and the supervisory officershould seek broader input from members, if time allows . Ifthis be the case, it is envisioned that the Academy expo-sure draft procedures will be followed . These proceduresmay be abbreviated if the need for a public statement ispressing. In fact, it is recognized that the need for a timelypublic statement will frequently foreclose the opportunityto gain broad input from members .

C. In some instances, it may not be practical to involve theAcademy staff directly in the statement preparation,although committee chairpersons are strongly encour-aged to do so . In other limited instances, Academy staffmay be called upon to draft a statement . The decisionto do so will be made by mutual agreement of theparties. Staff-developed statements must have the ap-proval of the committee chairperson and supervisoryofficer and should be used only when a very shortresponse time does not allow the committee to developa statement . Such statements should reflect previouspublic statements or policy decisions . Staff-developedstatements will be signed by the executive director .

D. No decision to involve outside counsel will be madewithout the concurrence of the president, upon therecommendation of the executive director.

E. Before taking a position, the chairperson should seek aconsensus of the committee members . If a consensuscannot be arrived at, the chairperson should considereither preparing a statement that includes the views ofany substantial minority or electing not to issue a publicstatement.

F. Statements are generally committee documents . How-ever, time constraints may prevent the entire commit-tee from deliberating in the preparation of a particularstatement, and the task for drafting the statement maybe left to the chairperson (or designee) without benefitof consultation with other committee members, Insuch cases, the drafter should seek maximum inputfrom available committee members. When a draft state-ment has been reviewed and approved by all membersof the committee, the statement may include the namesof all members of the committee; alternatively, thestatement may indicate that it has been submitted bythe chairperson "on behalf of the XYZ Committee of theAmerican Academy of Actuaries." If only a subset of thecommittee participated in the statement's preparation,

Special Subject Supplement

G.

H .

their names alone may appear. Committees retainflexibility in indicating authorship of statements inorder to satisfy requirements of special circumstannevertheless, readers of a statement should be ableclearly ascertain the author(s) of a statement .The chairperson should advise the supervisory officerof any substantial disagreement among committeemembers and present the views of this group forfurther discussion .Drafts of the proposed statement should be distributedfor review to the executive director, the general counsel,and the appropriate supervisory officer before beingpresented. This review should include consideration ofpolicy and legal issues .

I . The decision to issue the final statement generally

J .

rests with the committee chairperson . However, thesupervisory officer should seek a review and approval ofthe president if the issue is of major importance or thestatement involves substantial controversy .When deemed appropriate by the president, a proposedstatement may be submitted to the Board of Directorsfor review prior to issuance to the intended public . Inextraordinary circumstances, the board may modify ordisapprove a public statement if it believes such state-ment will not be in the best interests of the Academy.

5. Presentation of Statement-The committee or group is-suing a statement must clearly be stated: the XYZ Com-mittee, the Board of Directors . Blanket sponsorship by theAcademy is not to be implied. A public statement shouidentify its source as suggested in the following exam"This statement represents the consensus of views o

the (name) Committee of the American Academy of Actu-aries on (subject) ."Membership on the committee preparing these com-

ments has been drawn from a wide range of interests andperspectives so as to give a broad range of views on thematters in the (subject) . As with many other professionalorganizations, the structure of the Academy and the tim-ing required in responding to various public issues placesthe responsibility of preparing comments on such issueson its committees, on the assumption that they arerepresentative generally of the Academy's membership ."All public statements should be submitted in written

form, with an oral presentation as appropriate . Thesestatements should be submitted on Academy letterhead .Except when the Academy is well known to the audience,a formal statement about the Academy should be includedin the public statement . If an oral statement is to bepresented at a formal hearing, the committee chairpersonand supervisory officer will select the person or persons tomake the actual presentation .

6. Distribution of Statements After the statement has beenformally submitted, the final statement will be availablefor broader distribution . Notice of issuance of the state-ment will be published in the Government RelatioWatch and The Actuarial Update. Members will be invi>to request a copy of the statement by writing the Ac,demy's Washington office. At the end of each year, the textof all public statements presented that year will be pub-lished in the journal .