THEACTUARIAL

THIS MONTH2

From a Guest President3

In Appreciation

Appointed Actuary Booklet4

NAIC's Risk-Based CapitalF0 ormula for Life Insurers

5Standard Nonforteiture Law II

Wants You!6

NAiC Report10

Annual Committee Reports16

Changes to 1991 LossReserve Opinion Instructions

16Call for Nominations

ENCLOSURESIncluded with this month's

issue of The ActuarialUpdate are the following:

In Search Of

ASB Boxscore

Call for Nominations Card

AMERICANACADEMY OFACTUARIES

VOLUME 21NUMBER 2

FEBRUARY 1992

Appraisal Standard Calleda "Universal Conscience"by Alan Kennedy

n appraising the value of aninsurance company for mergerand acquisition (M&A) orother purposes, actuaries nowhave a standard that will

"make the work more defensibleand less arbitrary," says an invest-ment banker who commissionsmany actuarial appraisals. Actu-arial Standard of Practice No . 19,Actuarial Appraisals, released infinal form last month, "gives thewhole exercise a universal con-science," adds the banker, Lean-dro S. Galban, Jr ., of Donaldson,Lufkin and Jenrette, New YorkCity.

Galban's firm employs tenprofessionals full time on insur-ance-company mergers and

acquisitions and raising capitalfor insurance companies. Heparticipated as an interestedobserver (one of two investmentbankers) on the task force thatdeveloped the standard of prac-tice on appraisals for the Actuari-al Standards Board (ASB). Theactual drafting was done by thetask force's nine actuaries, mostof them consultants involved inM&A work for lifelhealth orproperty/casualty insurance com-panies.

"I felt that development of astandard was really for the benefitof buyers, sellers, and the invest-ment bankers who representthem," recalls Galban . "In thelarge-scale mergers and acquisi-tions of the 1960s and 1970s,investment banking companies

New StandardsBinders

Academy, should furnish youwith a complete set of actuarialstandards of practice, qualifica-tions standards for public state-

ou will soon receive a sec-ond actuarial standardsbinder which, in combina-tion with materials previ-ously sent to you by the

meats of actuarial opinion, andthe code of professional conduct .Separate booklets containing theprocedures for adoption of addi-tions and modifications to thequalifications standards and thecode of professional conduct arein production, and will be for-warded to you in the near futurefor inclusion in your actuarialstandards binders. Until youreceive these booklets of proce-dures, please assume that the pro-cedures for the development ofstandards of professional conduct

sought to commission actuarialappraisals as an aid to valuinginsurance properties and to facili-tating price negotiations. Bigfirms like Tillinghast and Milli-man & Robertson became adeptat the appraisal process. But atthe end of the day, you couldn'tbe sure that all parties to thetransaction were comfortablewith the process as a basis fornegotiation . You couldn't go to asingle source and find out whatthe actuary was supposed to do .It got so that if you mentioned`actuarial appraisal,' peoplewould say, `forget it.' That's howmushy the process had become."

In the background of thatmushiness, according to Galbanand actuaries on the task force,were two issues-client pressuresand competing philosophies.Robert D. Shapiro, a life-insur-ance consulting actuary whoheaded the appraisal standardtask force, agrees that "there isgreat pressure on people in con-sulting firms . Unless you haveclear standards, you may beencouraged by the selling firm totake careful note of what's goodabout the company and look lesshard at what's not good . Theother side, the prospective buyer,may push for the opposite kind ofevaluation . What I hoped todevelop in this standard was tomake sure that if people are goingto be pushed, there is a wallbeyond which they can't bepushed." Shapiro adds, "If an

Continued on page 9

and qualifications standards that-appear on pages 375-78 of theAcademy's 1991 Yearbook remainin effect. ∎

This issue unveils ourlong-.planned, much

labored over new design .We're well pleased withthe result, as we hope

you will be .

AMERICANACADEMY OFACTUARIES

PresidentHarry D . GarberPresident-ElectJohn H . HardingVice Presidents

Robert H . DobsonR . Stephen Radcliffe

Richard H . SnaderMichael A. Walters

Secrelary-TreasurerThomas D. LevyExecutive Vice

PresidentJames J . Murphy

EXECUTIVE OFFICE1720 I Street, NW

7th FloorWashington, DC 20006

(202) 223-8196Fax : (202) 872-1948

MEMBERSHIPADMIMSTRATRDM

Woodfield Corporate Center475 N . Martingale Road

Schaumburg, IL 60173-2226(708) 706-3513

TIME ACTUARIALUPDATE

Committee on PublicationsChairperson

Roland E. KingEditor

E . Toni MulderExecutive Editor

Erich ParkerAssociate Editors

Gary D . LakeStephen A . Meskin

Charles Barry H . WatsonManaging Editor

Jeanne CaseyContributing Editor

Ken KrehbielProduction Manager

Renee CoxThe American Academy of

Actuaries1720 I Street, NW

7th FloorWashington, DC 20006

(202) 223-8196Fax: (202) 872-1948

Statements of tact and opinion in thispublication, including editorials and let-

ters to the editor, are made on theresponsibility of the authors alone anddo not necessarily imply or represent

the position of the American Academyof Actuaries, the editors, or the

members of the Academy .

2

FROMAGUEST „rest entp

Looking Aheadby Ruth F. Frew

A s many of you know, theAmerican Society of Pen-sion Actuaries (ASPA) cele-brated its twenty-fifthanniversary last year. Much

was accomplished during our firsttwenty-five years. To give you alittle perspective, our member-ship has grown from three origi-nal members in 1966 to morethan 3,000 today. Our Educationand Examination Committeenow sponsors courses and pre-pares examinations for hundredsof students every semester . Therehas been similar dramatic growthin our government affairs activi-ties . . .Our conferences haveexpanded, not only in size, butalso in the variety and frequencyof offerings . Our annual confer-ence routinely attracts over 1,000individuals, with hundreds moreattending our other annual meet-ings : the eastern and westernregional conferences, telecast, andbusiness owners' conference.

As ASPA moves into its secondquarter century, I would like toacquaint you with some of itslong-term goals .

First of all, ASPA remainscommitted to the preservationand enhancement of the privatepension system . We have openedcommunication lines with severalkey members of Congress, con-gressional staffers, and executive-branch personnel in the employeebenefits area.

We believe that only by beingproactive can we truly have animpact on government policy . Anexample is ASPA's developmentof a benefit-security proposal,which we are currently discussingwith the Labor Department. Ifaccepted as the basis of legisla-tion, this proposal would enhancebenefit security for participants inqualified plans that cover fewerthan 100 participants, while plac-

The Actuarial Update ∎ February 1992

ing little, if any, additional bur-den on plan sponsors whoadminister plans responsibly.

Our Government AffairsCommittee is unique in that it iscochaired by an actuary and anattorney. Combining legal andactuarial expertise in one com-mittee has proven to be a veryeffective strategy. The actuarywho cochairs our GovernmentAffairs Committee also sits on theAcademy's Pension Council . Inaddition, one of the committeemembers serves on the Acade-my's Pension Committee to bet-ter coordinate joint efforts wherefeasible. Both of these liaisonsserve to enhance cooperationbetween the Academy and ASPAwith respect to pension actuarialissues andhave led to joint testi-mony and joint amicus briefs onseveral occasions .

As part of our commitment tothe private pension system, ASPAis committed to the developmentof a national-retirement incomepolicy. For the past two years, wehave been developing a series ofpapers that we expect to releaselater this year. These paperscover the various aspects of per-sonal savings, replacement ratios,work after retirement, the SocialSecurity system, and the privatepension system . We believeattention should be focused onthe need to establish a nationalretirement income policy, andASPA has chosen to take the leadin this effort . By setting forth oneversion of an integrated nationalretirement income policy, ourpapers will be an excellent start-ing point for discussion .

ASPA remains committed toproviding continuing educationto its members. We are proud tohave been the first actuarial orga-nization to have developed andimplemented a formal continu-

ing-education recognition pro-gram. The program began on avoluntary compliance basis Jan-uary 1, 1985 . As of January1991, satisfaction of the prograrequirements is mandatory for alwho become credentialed ASPAmembers after 1990 .

ASPA is also committed toexpanding basic educationalopportunities for members . Weare in the process not only ofrevising our existing pensionexamination program, but we arealso developing a program thatwill provide education opportu-nities in the health and welfarebenefits area .

ASPA continues to be com-mitted to strengthening the actu-arial profession by working withthe other North American actuar-ial organizations. We welcomethe opportunity to participate onthe Council of Presidents and tofoster the spirit of cooperation,which was institutionalized withthe signing of the . WorkingAgreement in 1990 . One ideathat has enhanced understandingand working relationships amongthe actuarial organizations is thidea of having the presidents aspresidents-elect of the CasualtyActuarial Society, Conference ofConsulting Actuaries, Society ofActuaries, and ASPA serve asmembers of the Academy's Boardof Directors .

ASPA's leaders recognize thatwe bring a unique perspective todiscussions with the other organi-zations, particularly in the pen-sion field, where we represent allretirement benefit areas, not sim-ply defined benefit pension plans .Our membership consists of actu-aries, consultants, and administra-tors. We believe this provides uswith the ability to serve fully thepension community.

During 1992, my goal is toensure that ASPA activities aredirected toward carrying out ourstatement of purpose: to educatepension actuaries, consultants,and administrators, and to pre-serve and enhance the privatepension system as part of thedevelopment of a cohesivecoherent national retiremincome policy.

Frew ispresident of the AmericanSociety of Pension Actuaries .

In Appreciationhe Academy bid farewell inmid-November to GeneralCounsel Gary D . Simms .After having served theactuarial profession for a

near decade, Gary has moved onto combine private law practiceand association managementconsulting.

Gary's tenure at Academyheadquarters in Washington wascharacterized by strong leader-ship and a number of significantachievements . While working asstaff lawyer, he directed for fiveyears the Academy's governmentrelations program, bringing itfrom its infancy to young adult-hood, at which time its growthand maturity, indeed, its success-es demanded the attention of asenior level staffer devoting full-time attention and resources tothe profession's government rela-tions activities . He was actingexecutive director during 1989,while a search committee inter-

wed candidates for the execu-vice presidency of the organi-

zation. Thereafter, he took onthe title of general counsel anddirector of operations .

Among his many work prod-ucts were our antitrust guide andthe numerous amicus briefs tostate supreme courts and the U .S .Supreme Court he filed on theAcademy's, in fact, the profes-sion's behalf. But those projectsthat make up the body of hiscontribution to the actuarial pro-fession in one way or anothertouch on professionalism .

He drafted several modifica-tions to qualifications standardsand continuing education poli-cies. Moreover, he drafted theestablishing documentation(bylaw amendments and imple-mentation procedures) for theActuarial Standards Board, aswell as its predecessor body, theInterim Actuarial StandardsBoard. He was the key stafferworking on the creation and

tion of the new code of pro-tonal conduct . And, he pro-

vided lead staff support duringthe creation and adoption of theActuarial Board for Counselingand Discipline .

"It is my work in the stan-dards and discipline area ofwhich I am most proud," Garyremarked recently . "My associa-tion with the actuarial professionhas provided me no end of per-sonal and professional satisfac-tion. I have thoroughly enjoyedthe work-not to mention theopportunity to make somefriendships I will always value ."

We know you join us inexpressing our thanks to Gary forhis dedicated service to the actu-arial profession. We wish himwell in this new direction hiscareer is taking him. ∎

AppointedActuary BookletA handy, four-page booklet,

The Role of the AppointedActuary in the United Statesfor Life Insurers in 1992, isavailable upon request

from the Academy's Washingtonoffice .

Actuaries in the United States,as in many countries, play severalroles in the financial managementof life and health insurance com-panies. In 1992, the United Statesjoins Canada, Australia, and the

Illustration by Andrew Toos

Gary D. Simms, former Academygeneral counsel.

United Kingdom in broadeningthat range of responsibilities bydesignating one actuarial positionset apart by legislation and prac-tice: the Appointed Actuary .

The Standard Valuation Lawnow requires life insurance com-panies to appoint an actuary whowill submit the annual statementof actuarial opinion on the ade-quacy of reserves . For manyinsurers, the appointed actuary'sopinion will "include considera-tion of the adequacy of the insur-er's assets that support thereserves ."

Life actuaries who may-need todiscuss their new statutory dutieswith their employers and staffswill find this booklet useful. ∎

The Actuarial Update • February 1992 3

I

NAIC's Risk Based-Capital Formulafor Life Insurers

The life risk-basedcapital formula was

pretested on adatabase of 674

companies before itspublic release,

December 8, 1991 .

4

by Jeanne Casey

Regulators now have in handa proposed formula to helpthem determine the totalcapital an insurance com-pany needs in light of the

risks it assumes . The NationalAssociation of Insurance Com-missioners (NAIL) received fortesting a risk-based capital for-mula developed by an industryadvisory committee to the LifeRisk-Based Capital WorkingGroup of the NAIC . Actuariesserved on the advisory committeeand were the chief architects ofthe formula . There is a com-parable industry advisory groupworking on a risk-based capitalformula that will apply to prop-erty/casualty insurance compa-nies.

The life risk-based capital for-mula was pretested on a databaseof 674 companies before its pub-lic release, December 8, 199) . Inthe months ahead, the advisorycommittee will continue to testthe formula using more completedata, some of which are not avail-able in the annual statement, anddevelop sensitivity tests for spe-cific factors included in the for-mula .

The risk-based capital conceptis not new . The premise is that acompany's capital and surplusrequirements should be linked tothe riskiness of its investmentsand products . Companies haveused such formulas internally toset capital and surplus for strate-gic growth and diversification .State regulators have used simpleformulas as diagnostic tools todetermine whether insurers havesufficient capital in light of theirsize and risk profile. Ratingagencies such as Moody's haveapplied risk-based capital mea-sures in the rating of companies .In fact, various risk-based capitalformulas have been used by com-panies, regulators, and ratingagencies for nearly a decade .

In 1982, Wisconsin adopted avery simple formula involvingonly four factors that were

applied primarily to premiumsfor different lines of business.The formula yielded what wascalled "compulsory surplus." Bylaw, an insurer would have tohave the greater of either thiscompulsory surplus or the mini-mum surplus indicated by theWisconsin regulation or bedeemed "financially hazardous ."Four years later, Utah followedsuit and adopted a similar for-mula that introduced additionalfactors for two broad categoriesof assets .

New York and Minnesota sub-sequently drafted more sophisti-cated formulas that incorporatedrisk categories developed in the1970s by the Society of Actuaries'Committee on Valuation andRelated Areas . These risk cate-gories had been defined as fol-lows: C-1, asset default ; C-2,adverse insurance experience ; C-3, interest rate fluctuations ; andC-4, miscellaneous business risk .

The NAIC working group'scharge to the industry advisorycommittee was to develop a risk-based capital formula based onthe Minnesota and New York testformulas and to identify andaddress the technical issues inher-ent in applying a single risk-basedcapital formula to all life insur-ance companies . The purpose ofthe proposed risk-based capitalformula is to help regulators dis-tinguish companies that areweakly capitalized from thosethat are not and, on that basis, totake appropriate regulatory steps .The formula is not designed todistinguish the relative financialstrength of strong companies; theadvisory committee insists thatthe formula not be used as a mea-sure for ranking or rating compa-nies .

To determine a company'srisk-based capital ratio, a compa-ny's "adjusted capital" is com-pared with the risk capitalobtained from the risk-based cap-ital formula. "Adjusted capital" isequal to capital and surplus plusmandatory securities valuationreserve (MSVR), voluntary

investment reserves, and half ofthe dividend liability . If adjustedcapital is below the formulaamount, the advisory committrecommends one of three leveof regulatory action, dependingupon the extent of the deficiency.(The trigger points for these reg-ulatory actions are yet to bedetermined.)

As a solvency measure, the liferisk-based capital formula isexpected to supplement the IRISratios and other regulatoryscreening tools already in place .

The committee decided thatthe formula should rely on statu-tory annual statement data asmuch as possible . The committeerejected alternatives such as usingmarket values or setting a com-mon minimum valuation stan-dard for all companies . Insurersolvency is determined on thebasis of statutory accountingstandards, so the committee sawno reason to have risk-based cap-ital requirements rest on anythingelse, or, in its words, to have theformula "compensate for real orperceived shortcomings or abusesof statutory accounting ."

In the same vein, the comnotee decided to rely on theappointed actuary's opinion andsupporting memorandum regard-ing reserves . The Standard Valu-ation Law now requires all butthe smallest companies to havetheir appointed actuary conductcash-flow or similar testing andconsider C-i, C-2, and C-3 risksin opining on reserve adequacy .Therefore, in most cases, if theactuarial opinion reports thatreserves in the aggregate are ade-quate, the risk-based capitalrequirement is simply the addi-tional amount needed to absorbcatastrophic losses or unusualvariations in experience.

Significant parts of the formu-la, for example the C-1 factors forbonds and the C-2 mortality fac-tors, were developed usingstochastic modeling with consis-tent assumptions . Advisory com-mittee chairperson StephenSteinig commented that the mod-eling techniques are believebe the most extensive and sopticated ever used to develop apublic formula .

The proposed formula adjustsfor concentration and diversity of

The Actuarial Update ∎ February 1992

risks. For example, mortality,morbidity, and bond factors arekeyed to the size of the compa-

's exposure to each risk . TheOrmula doubles the risk-based

capital requirement for a compa-ny's ten largest asset exposures toreflect the asset concentrationrisk .

The risk-based capital require-ments for C-1, C-2, and C-3 risksare combined in a way thatadjusts for these risks' covari-ance . All such losses do notoccur at the same time ; some sce-narios are mutually exclusive .Simply adding all the risk chargestogether overstates the compa-ny's total risk . To offset thiseffect, the proposed formula con-tains a "covariance adjustment."

Some data that the committeewanted to use in the formulawere not available from theannual statement. For example,information on a company's tenlargest assets, data required toassess a company's concentratedasset risk, is not currently report-ed in the annual statement .

The formula does not reflectuidity risks, the vulnerability

T a a company to a "run on thenk," at least not directly. Cer-

tainly, less liquid assets, such asreal estate and Schedule BAassets, have higher risk-basedcapital factors than many otherassets for purpose of the formula .But, as the report notes, "liquidi-ty risk is not the same as solvencyrisk ." A fully liquid company canbe insolvent and a very strongcompany may not be very liquid .

The advisory committee rec-ommends that once the formulais adopted, it be subject to ongo-ing review . The committeebelieves that for the formula tobe effective as an early warningsignal, the formula must be regu-larly updated to reflect changes inthe insurance industry, market,and regulatory environment .

Time Frame for Exposure

In submitting its report to theNAIC working group, the adviso-ry committee recommended thatOformula be tested more

dly in 1992, using 1990 and1991 year-end data during anextended comment period, "toget wider input from companies,regulators, and other interested

parties that were not directlyinvolved with the development ofthe formula." The advisory com-mittee's executive committee willbe working with the NAIC toevaluate comments and, if neces-sary, further modify the formula .The working group is aiming foradoption of a final formula at theDecember 1992 NAIC meeting .

StandardNonforfeitureLaw II Wants You!by W. Keith Sloan

t the December meeting,the National Association ofInsurance Commissioners(NAIC) exposed for com-ent the "Second Standard

Nonforfeiture Law for Life Insur-ance" (SNFLII) . The currentdraft, the eleventh in a series, isactually the second exposuredraft and incorporates someadditional "eleventh-hour"changes. As the Standard Non-forfeiture Law before it, itattempts to clarify various equityissues for life insurance products .However, given the changes justproposed, it seems to raise abroader issue: will actuarial equi-ty be determined by actuaries orlawyers?

A new Section 16, titled"Equity Considerations," wouldauthorize the state insurancecommissioner to promulgate reg-ulations "implementing rulesrelating to equity in nonforfei-ture values, dividends andnonguaranteed elements ."

The Standard NonforfeitureLaw always was based on thenotion of at least partial equityamong policyholders . But, in thepast the model law has had a lim-ited focus : the equity betweenpolicyholders who hold on toguaranteed benefits and thosewho cash them out . Becausesuch a large portion of today'sinsurance is supported by divi-dends and other nonguaranteedelements, which are not uniform-

The Academy Committee onLife Insurance Financial Report-ing expects to comment on theproposed formula and wouldwelcome your input .

To obtain a copy of the liferisk-based capital advisory com-mittee's report, contact theAcademy's Washington officeand request document 91-L-4 . ∎

ly regulated by other laws, regula-tors thought that the StandardNonforfeiture Law's focus shouldexpand .

The intent of SNFLII "is toachieve a degree of equitybetween terminating and persist-ing policyholders of a particularpolicy form ; and similarly toachieve a degree of equity amongall classes of persisting policy-holders who have the same formbut use the policy in differentways." (Section 1)

Other new concepts includedin the first exposure draft result-ed in only a few comments.These concepts include the fol-lowing :

-SNFLII includes an optionalprovision for adjusting cash sur-render values-not paid-up orextended term benefits-forchanges in the interest rate envi-ronment. Formulas for calculat-ing the adjusted cash surrendervalue must be filed andapproved, or, alternatively, a pol-icy provision stating how a fixedcharge would apply may beincluded in the policy. In eithercase, the policy must include anotice that such a provision iscontained. A regulation is pro-posed, so as to provide details .

-The required provision fordeferral of payment of cash sur-render values is changed torequire a company that choosesto exercise its right to do so on allpolicies containing the provisionafter first getting the commis-sioner's approval. If it does not,payment must be made withinfive business days after demand ismade. If an adjusted cash sur-render value is deferred, theamount to be paid is the greaterof either the amount beforedeferral or the amount at the dateof payment,

i Continued on page 16

As the Forecast 2000program enters yearq t r, ft i s h 5 i n sup-ported by a flea pub-lic relations tirniStephen K . Cook &arrrpany replacing

Edelnian Public Rela-tions Worldwide .

the primary targetaudience of the 1992program, I!euondForecast 2000, ispu':ili : policy makersNit herthan the pass .The program', actvi-

ry hoard once againchose four ::,ups tofoc-Cr_. 1J[_1 i n 19Defined benefithealth-care reformworkers oorntiensa-tion, and depositinsur .inrn .

At the end of1991 . a reoruesproposals :gas crrcu-laled to Se :era: rnalurpublic rekrtions firms .Six firrns nxpressrdinterest in thereque,t , -end fiveevent a .i~. s~. :bmittedproposals . Of thosefive, two made p!sentafions to Acade-my staff, and Conk N .Company,r"as chosenin Dec:eniberto repre-sent the actuarial pro-fession in NorthAmerica in 1992 .

Beyond Forecast1000 1, cnsnon goredby the 4merlranAcademy of Actuar-ies . the AmericarSociety of PensionActuaries, the Canadi-an Institute of ,Antuar-ies . the Casualty Actutrial Socreft, the Carpference of ConsultingActuaries, and theSociety of Actuaries,

The Actuarial Update ∎ February 1992 5

NAIC Report

The NAIC agreedto expose for

comment a revisedmodel nonforfeiture

law titled"Second Standard

Nonforfeiture Law forLife Insurance ."

n one of the most active ses-sions in recent memory, theNational Association of Insur-ance Commissioners (NAIC)adopted several major new

model laws and regulations, andapproved exposure of manyadditional proposals for com-ment . The meeting, held inHouston from December 8through 12, was highlighted byactivity in the life, health, andproperty/casualty areas .

Life Insurance Issues

The NAIC's Life and Health lActuarial (Technical) Task Force,chaired by John Montgomery ofthe California Insurance Depart-ment, began its two days ofdeliberations before the officialNAIC meeting began . The taskforce reported its recommenda-tions through the NAIC subcom-mittee and committee structure,and the following major initia-tives were approved :

-The model Standard Valua-tion Law, adopted in 1990, wasamended to clarify the intent ofSection 3 of the model . Asrevised, the model law requiresthat an actuarial memorandum isrequired only when an opinion isrequired by the law . A minorchange to the model ActuarialOpinion and Memorandum Reg-ulation was also adopted, andmakes provision for a commis-sioner to determine that the firstor second priority status of acompany has been resolved tothe commissioner's satisfaction,for purposes of the exemptioneligibility tests. The amendmentalso requires the commissionerto notify the NAIC Life andHealth Actuarial Task Force andthe NAIC central office in theevent such a determination ismade.

-A proposed actuarial guide-line titled "Guideline for theApplication of Plan Type toGuaranteed Investment Con-tracts (GICs)" was approved forexposure. The guideline specifiestwo conditions under which aGIC would be classified other

6 The Actuarial Update ∎ February 1992

than a Plan Type C annuity forpurposes of the application of theStandard Valuation Law. Thetest of Guideline AAA is as fol-lows :

For purposes of the applica-tion of the Standard ValuationLaw to Guaranteed InvestmentContracts (GICs) with benefitresponsive provisions, the with-drawal of funds at book value forthe purpose of redirecting anemployee investment shall beconsidered a withdrawal by thepolicyholder unless the underly-ing plan or GIC contain writtenprovisions that are designed toreduce the C-3 risk to the insur-ance company. Provisions thatmeet this criterion would includethe following-

-No direct transfer to com-peting funds. This provisionprohibits direct transfer of fundsfrom the GIG option to a com-peting plan option that offers aguarantee of principal . Anytransfer out of the GIC optionmust first go through an equityoption and reside there for atleast ninety days or three months .

-The plan participants can-not select the redirection of fundsfrom specified GICs crediting dif-ferent interest rates to distinctcontributed amounts .

In addition, the valuationactuary must be satisfied that theplan provisions designed toreduce the C-3 risk are beingadministered in the designedmanner .

Risk-Based Capital Formula .The Life Risk Based CapitalWorking Group's proposal tobegin testing its approach in 1992was approved by the Examina-tion Oversight (EX4) Task Force .The extensive testing of the risk-based capital formula for lifeinsurance companies will takeplace throughout 1992 . Underthe formula, a threshold of riskbased capital will be calculated; afailure to maintain this level willtrigger regulatory activity. Therisk factors cover all risks, bothrelated to assets and to liabilities .The formula is intended toencourage a higher level of capi-tal for companies with invest-ment portfolios of greater risk,and higher capital for companiesoffering riskier products . (Seestory on page 4 .)

Valuation of Securities. TheValuation of Securities (EX4)Task Force approved the replace-ment of the Mandatory SecuritiValuation Reserve ( MSVR) wiwthe new Interest MaintenanceReserve (IMR)/Asset ValuationReserve (AVR) combination.MSVR will continue to be report-ed for the first three quarters of1992, but the IMR/AVR will beused for the fourth quarter andthe 1992 statement. The IMRcaptures all interest-related real-ized capital gains and losses asthey occur. It is not subject toany maximum or minimum, butnegative values require an actuar-ial opinion stating that the policyand claim reserves reduced by thenegative IMR make adequateprovision for the liabilities . TheAVR captures all credit-relatedrecognized capital gains and loss-es. In addition, an annual contri-bution is made to each subcom-ponent equal to 20% of theexcess of (a) the maximum bal-ance for the subcomponent over(b) the current accumulated bal-ance in each subcomponent. Themaximum balance for each su}&component remains an oissue to be studied in coordina-tion with efforts of the Risk-Based Capital Working Group .

-The NAIC agreed to exposefor comment a revised modelnonforfeiture law titled "SecondStandard Nonforfeiture Law forLife Insurance ." (See story onpage 5 .) The Life and HealthActuarial Task Force indicated adesire to see its adoption at theJune 1992 meeting.

A previous draft of this pro-posed model law was exposed forcomment in June 1991 . Both theprevious and the current draftswould apply only to new lifeinsurance policies that are issuedafter some specific future date .One important differencebetween the June 1991 and thecurrent draft is that the currentdraft does not contain a detailedprovision on enhancements. Thecurrent strategy is to develop acompanion NAIC model regula-tion on enhancements .

-The Life InsuranceCommittee approved adoption ofa new Two-Tier Annuity ModelRegulation and the Two-TierAnnuity Disclosure Form . The

model covers annuities that havedifferent values depending uponwhether, at maturity, the value isaken from the contract as amp sum or left with the insurer

for periodic payment . The mod-els are intended to enhanceinformed choice by consumers.

-The NAIC will expose forcomment the report of the Actu-arial Advisory Committee on theRevision of Annuity Nonforfei-ture Law. The advisory commit-tee report addresses single premi-um deferred annuities (SPDA)and flexible premium retirementannuities (FPRA) that providecash values. The report does notaddress the features specific tovariable rate annuities or modi-fied guaranteed annuities . Thereport includes proposed rulesfor both SPDA and FPRA non-forfeiture values . In addition, itincludes conclusions and recom-mendations on the treatment offixed dollar fees, no-cash-valueannuities, CD annuities, andannuities with nongraded non-forfeiture values .

Property/Casualty Issues

ae Casualty Actuarial (Techni-cal) Task Force, the Blanks (EX4)Task Force, and the FinancialCondition (EX4) Subcommitteeplayed an intricate game of moveand countermove in a variety ofactions, some of which will affectthe 1991 annual statement .

-Three changes to the 1991annual statement were adoptedby the Blanks Task Force under aunanimous consent arrange-ment, dispensing with the nor-mal methods for consideration ofchange. These three revisions areeffective for the 1991 loss reserveopinion :

Any reference to audited datain Section 10 of the Annual State-ment Instruction 12 has beendeleted. Thus, the June 1991action that would have requiredreliance on audited data has beenrescinded for 1991 opinions .Members of the Blanks TaskForce agreed that the require-ment would cause timing prob-

as and that it would be betterave a group of representatives

from the Academy, NAIC, andthe American Institute of Certi-fied Public Accountants draftlanguage addressing the issue of

data integrity for adoption forthe 1992 opinion .

The amount of salvage andsubrogation recoverable used toreduce loss reserves is to be dis-closed in the 1991 opinion andsubsequent opinions . A newNote #17 to the financial state-ments will require companiesthat report reserves net of antici-pated salvage and subrogation todisclose the amount by line ofbusiness. This total is also toappear in the 1991 loss reserveopinion. However, it should benoted that the Blanks Task Forceexpects to allow latitude in caseswhere there is difficulty obtainingthis information from pools,associations, or reinsurancecedents. Finally, a study groupwas formed to review whetherthe annual statement instructionsshould be revised to requirereporting reserves net of antici-pated salvage and subrogation .

The amount of discount forthe time value of money used toreduce loss reserves (other thanthe tabular workers' compensa-tion discount) is to be disclosedin the 1991 opinion and subse-quent opinions. Note #16 to thefinancial statements is amendedby adding: Discounting of Liabil-ities for Unpaid Losses or UnpaidLoss Adjustment Expense Otherthan Statutory Discounting ofWorkers' Compensation TabularReserves. If the company isrequired to respond to this notein the affirmative, it must alsorespond in the affirmative toSchedule P Interrogatory #5 andcomplete columns #30 and #31 ofPart 1, Part la, etc., of ScheduleP . Finally, the amount of dis-count for the time value ofmoney is to appear in the 1991loss reserve opinion.

-The Casualty Actuarial(Technical) Task Force, chairedby Michael Lamb of Oregon,completed work on proposedlanguage for the establishment ofa reserve for retirement coverageunder claims-made professionalliability contracts. The Account-ing Practice and Procedures(EX4) Task Force had asked theCasualty Actuarial Task Force todevelop appropriate language ;having done so, the task forcereferred the matter back to theaccounting group for action.

-The Property and LiabilityRisk-Based Capital WorkingGroup reported to the Examina-tion Oversight (EX4) Task Forceon its activities, and its chairmanstated that the group was seekingto develop uniform levels of capi-tal for insurers. The require-ments are being formulated inrecognition of the fact that cur-rent fixed-dollar minimum capi-tal requirements are archaic .Testing on the preliminary for-mulas will be done privately .Many areas are still in need ofattention, including the determi-nation of an appropriate dis-count rate for reinsurers, how toaddress small companies andrapidly growing companies in theformulas, and relative asset fac-tors. The working group plans topresent a formula in June 1992,together with appropriate imple-menting regulations .

-The Statistical (D) TaskForce reported that the ClosedClaims Information WorkingGroup was in the process offinalizing its first study, whichshould be available in early Jan-uary. In the report to the Com-mercial Lines-Property andCasualty Insurance (D) Commit-tee, the working group noted ithad also begun work on the sec-ond closed-claim study. Thegroup envisions that closed-claims studies would be conduct-ed every two years.

Health Insurance

Action related to long-term care,small employers' access to healthinsurance, and a new proposedrate filing guideline were the cen-terpieces of action in the healtharea at the Houston meeting .

The Long-Term Care Insur-ance (B) Task Force adopted anumber of amendments to theLong-Term Care InsuranceModel Regulation . The amend-ments included the followingchanges :

Prohibition of attained agerating and durational rating. Anew subsection G to Section 6 ofthe regulation reads as follows :

"G. The premiums charged toan insured for long-term careinsurance shall not increase dueto either (1) the increasing age ofthe insured at ages beyond 65 ; or

Continued overleaf

Any reference toaudited data inSection 10 of theAnnual StatementInstruction 12 hasbeen deleted . Thus,the June 1991 actionthat would haverequired reliance onaudited data hasbeen rescinded for1991 opinions .

The Actuarial Update- February 1992 7

rmgrr1

VNVITATNI NTO READERS

The Updateeditors are

always lookingfor good ideas

for articles .Readers are

our best sourceof informationabout what'shappening inthe field . Ifyou have a

news item orstory idea,

please contactUpdate

Managing EditorJeanne Casey

at meAcademy'sWashington

office .

(2) the duration the insured hasbeen covered under the policy ."

New minimum standards forhome-health and communitycare. Specifically, if offered, thehome-health-care component ofa long-term care policy must beof a certain minimum level. Sub-section B of Section 9 of the long-term care insurance model regu-lation permits home-health-careand community-care benefits tobe counted toward the maximumlength of long-term-care cover-age under the policy but specifiesa minimum level of coverage . Inaddition, a drafting note suggeststhat fewer than 365 benefit daysand less than a $25 daily maxi-mum benefit constitute illusoryhome-health-care benefits .

Changes to the inflation pro-tection provisions. Changes toSection 10 (including new sub-sections E, F and G) require,among other things, offeringinflation protection and continu-ing inflation protection withoutregard to an insured's age, claimstatus or claim history, or thelength of time the person hasbeen insured under the policy .

In addition, the Long-TermCare Insurance Task Force agreedto expose for comment new trig-ger requirements linked to inabil-ity to perform two of five activi-ties of daily living (ADLs) andimpairment of cognitive ability .In addition, out for comment is aset of requirements dealing withinflation protection for con-sumers, and another proposalrelated to nonforfeiture benefitsunder such policies .

The NAIC adopted the "SmallEmployer Health InsuranceAvailability Model Act" that seeksto guarantee health insurancecoverage to employees of smallbusinesses . The NAIC endorsedtwo versions of the model law .One is based on a reinsuranceconcept; the other, on anassigned risk concept prevalent inproperty/casualty insurance .

The NAIC model law wouldrequire insurers to cover all eligi-ble employees and dependents ofa group, would require an insurerreplacing group coverage toinsure all employees and depen-dents that were insured previous-ly, and would prohibit insurersfrom requiring new waiting per-

iods for preexisting conditionswhen groups change carriers orwhen insured individuals changeemployers.

The Life and Health Actuarial(Technical) Task Force willexpose a revised draft titled"Guidelines for Filing of Premi-um Rates for Individual Accidentand Health Insurance Contracts ."Recognizing that the documentin current, form is "far from acomplete or refined document,"the actuarial task force recom-mended exposure for commentsat this juncture, with review inMarch. Small-group concernsremain a major focus of the doc-

The NAIC adopted the"Small EmployerHealth InsuranceAvailability Model Act"that seeks to guaranteehealth insurancecoverage to employeesof small businesses .

ument. The task force seeks itsadoption in June, 1992 . The pro-posed guidelines include a pre-filed option and a more detaileddelineation of the annual reviewof experience requirements. Rat-ing variations by policy form areto be controlled through a closedblock/open block maximum vari-ation, together with credibilitystandards. Controls on thefuture rates to be charged to poli-cyholders would be accomplishedthrough rate-increase caps, newloss ratio standards, and limita-tions on renewal compensation .

The Life and Health Actuarial(Technical) Task Force alsosought and received approval forthe adoption of a new guideline,"Statutory Claim Reserves forGroup Long-Term DisabilityContracts With a SurvivorIncome Benefit Provision." Theguideline was approved by theAccident and Health (B) Com-mittee. The guideline states inpart that a "suitable approxima-tion of the sum of the reserves forthe basic disability benefit andthe reserve for the survivor bene-

fit can be calculated by comput-ing the reserves for the basic dis-ability reserve at an interest rateless than the maximum valuatiointerest rate ."

Other NAIC News

-The NAIC/AAA/ASB JointCommittee on Standards andRelated Items met and discussedissues related to discipline,whether laws relating to actuarialconsideration should be part ofthe NAIC's program of stateaccreditation, and standards ofpractice in the life, health, andproperty/casualty areas .

-The NAIC elected its newofficers for 1992, selectingWilliam H . McCartney, Nebras-ka's Director of Insurance, as itspresident. Elected vice presidentwas Stephen T. Foster, commis-sioner of insurance of Virginia .David Walsh, director of theAlaska Division of Insurance, waselected secretary.

-In a major break with thetraditional warm gubernatorialgreetings usually seen at NAICconclaves, Texas Governor AnnW. Richards blasted insurancompanies for unfair legal tactiand for a lack of help in the leg-islative process, recognizing that"insurance long ago has become anecessity and not a luxury ." Thegovernor also had less than kindwords for insurance regulators,who labor in what she called"comfortable and cozy bureau-cracies ."-The NAIC approved the

requests of five additional insur-ance departments for accredita-tion, bringing the total to ninethat have demonstrated compli-ance with the NAIC financial reg-ulation standards, Approved inDecember were Iowa, Kansas,North Carolina, Ohio and Wis-consin, joining the four previouslyapproved states of Florida, Illinois,New York, and South Carolina.

-The Annual Robert DineenAward for outstanding service byan insurance department staffmember was presented to Assis-tant Deputy Superintendent andChief Examiner Terrence Lenrof New York.

Simms isformer general counselfor the Academy.

8 The Actuarial Update - February 1992

APPRAISAL SUMARO, from page 1

actuary has solid standards andn inspire confidence, everyonebetter off and ultimately hap-

pier." Shapiro notes that thescope of the standard applies to"facilitating the financial man-agement of an insurancecompany" and "determining thevalue of insurance companies,insurance marketing organiza-tions, or blocks of insurancecontracts for tax purposes," aswell as to mergers and acquisi-tions of companies or parts ofcompanies .

Patricia L. Guinn, manager ofthe life consulting actuarial groupin the New York office of Tilling-hast/Towers Perrin, says thatwith respect to M&A and man-agement valuations, ActuarialStandard No. 19 does "put up awall beyond which the actuarycannot go. So the actuary can bethe nice guy, and the standardcan be the bad guy. The standardwill help the actuary take a stand,if the actuary couldn't take astand before ." Guinn, a memberj~the drafting task force, had

Wed for strengthening thestandard on specific points suchas recognition of capital needsand use of stochastic methods .But her overall impression isthat "the exchange of ideasamong the members was veryvaluable, and the end result issomething I am proud to beassociated with ."

Competing philosophies thatcontributed to a credibility gapin actuarial appraisals couldhave been expected to surface inthe task force's deliberations,and they did, chairpersonShapiro says, in such areas as thedefinition of earnings, the treat-ment of required surplus, andtaxation. The end result of morethan two years of meetings andtwo exposure drafts was a com-promise approved without dis-sent by the task force and theASB. "The standard isn't per-fect," opines Shapiro, "but giventhe different viewpoints repre-

0d by top consultants withrent perspectives, it is an

accomplishment ."Another set of outstanding

issues addressed in the develop-ment of the standard were the

differences between life/healthand property/casualty disci-plines. "It was not easy for thelife actuaries, and harder still forthe P/C actuaries [on the taskforce] to bridge the gaps," recallsAllan M. Kaufman, P/C consult-ing actuary at Milliman &Robertson in New York and oneof the most active members ofthe drafting group. Develop-ment of the standard "forced usto create a framework for moreuniformity across disciplines,"he says . And since appraisalusers are generally not special-ized by line of business, the stan-dard "helps the users-invest-ment bankers, for example-tosee the why of actuarial workand makes it easier for us toexplain the differences betweendisciplines ."

One example of these differ-ences is in the treatment ofrequired capital. "P/C buyersand sellers have had an under-standing about capital needs-the rule of thumb was somethinglike $2 or $3 of premium to $1 ofsurplus, but, especially before'risk-based capital,' there wereno similar rules on the life side,"according to Kaufman . Afterlengthy discussions, the standardcame out prescribing that "theactuary should disclose themanner in which capital needswere considered" and addingthat the actuary "may include anestimate of the cost of such capi-tal ."

Another interdisciplinary dif-ference was in the degree ofdetail prescribed in the treat-ment of expense assumptions,for example . Because expensesare not normally a critical issuein P/C appraisals, task forcemembers got language insertedto make clear that long-termbusiness, more than short-term,was the main concern in thissubsection .

Overall, Kaufman thinks thestandard "won't make a changein accepted P/C appraisal prac-tice," but 'will focus actuaries'attention on what most needsdoing in an appraisal ." Also,actuarial studies prepared forinformation purposes that mayresemble appraisals but do notmeet the standard's definition ofan appraisal must now be called

something else . And Kaufmanlikes another of the standard'sdisclosure requirements-thatassumptions be characterized asto their level of reasonablenessand consistency with past experi-ence. This "won't eliminate dif-ferences in appraisal value, it willexplain to the user what generat-ed the differences ."

The genesis of the standardwas a request from the ASB,made by the board's then vicechairperson, now chairperson,Jack M. Turnquist, a veteran ofactuarial appraisal work. Turn-quist recalls that "some abuseshad been observed,"and "actuari-al credibility may have suffered asa result." The ASB asked HaroldG. Ingraham, Jr ., and Michael J .Miller, chairpersons respectivelyof the board's Life and CasualtyOperating Committees, to form atask force . In addition toShapiro, Guinn, Kaufman, andGalban, they chose life actuariesRobert L. Beisenherz, Robert L .Collett, Charles Carroll, and GaryN. See; casualty actuaries JamesA. Hall III, and Stephen P . Lowe,and investment banker ReubenJeffrey III,

The standard became effectiveon January 10 for actuarialappraisal reports dated on orafter that date .

Kennedy is standards editor for theActuarial Standards Board.

SFAS 106 GuidelineSome actuaries report theydid not receive a copy of theproposed actuarial compli-ance guideline on account-ing for postretirementhealth-care benefits, whichwas mailed with December'sUpdate, Others did receiveit. Readers should requestthe booklet from the ASB at1720 I Street NW, 7th Floor,Washington, DC 20006,(202) 223-8196. The dead-line for written commentson the draft is March 15 .

Competingphilosophies thatcontributed to a

credibility gap inactuarial appraisalscould have beenexpected to surfacein the task force'sdeliberations,and they did . . .in such areas asthe definitionof earnings,the treatment ofrequired surplus,and taxation .

The Actuarial Update ∎ February 1992 9

CasualtyCommittees

AnnualCommitteeReports

Committee on Propertyand Liability Issues

T he committee prepared num-erous statements and testimo-ny including :-Oral and written testimony

in California on proposed rulesfor implementing Proposition103, The testimony pointed outdepartures from actuarialratemaking principles and whysuch departures are almost cer-tain to increase the cost of bothgovernment administration andthe overall insurance system .

-A statement that discussedcauses of the personal automobileinsurance crisis and proposals forreducing costs .-A white paper on auto

insurance for the actuarial profes-sion's Forecast 2000 campaign .

In addition, studies are under-way on workers' compensation,McCarran-Ferguson, and prof-itability measures of the NationalAssociation of Insurance Com-missioners (NAIC) .

Robert V. Deutschchairperson

HealthCommitteesCommittee on Health

C ommittee activities focused onreform of the small-groupmarket, the uninsured, and

the need for and potential cost oflong-term care . Specific projectsincluded :

--An article for Contingencies(July/August 1990) titled "CanWe Afford Public Funding forLong-Term Care?"

-A white paper on the poten-tial long-run cost of a public pro-gram designed to finance long-term care .

-Testimony before the House

Committee on Propertyand Liability Financial

I, Reporting

T

he major activities focused onthe NAIC's requirement forthe actuarial opinion on casu-

alty loss reserves . Efforts in thisarea included:

-Correspondence and meet-ings with members of the NAICCasualty Actuarial Task Force .The task force adopted theappointed actuary concept thatthe committee recommended asdid the full NAIC .

-Discussions with the NAICon the relationship of the auditcompletion date of June 1 andthe statement of actuarial opin-ion date of March 1 .

-A survey of regulators on1988-90 insolvencies to helpdetermine the effectiveness ofcasualty loss reserve opinions .Preliminary evidence showsthat the largest number ofinsolvencies did not have anopinion signed by a qualifiedactuary.

-An analysis of reasons forhighly adverse development insituations where companies withlarge loss reserves had receivedclean opinions before the adverse

Energy and Commerce Subcom-mittee on Commerce, Con-sumer Protection, and Competi-tiveness for hearings on "TheRising Cost of Private HealthInsurance: The Rating System ."

-Testimony before theHouse Ways and Means Sub-committee on Health regardingimproving access and the afford-ability of health insurance forsmall groups .

-A short statement preparedat the request of members of theSubcommittee on Health con-cerning the impact of communi-ty rating on premiums for smallgroups .

-A discussion of the theprobable impact of H .R. 1565(Health Equity and Access ReformAct of 1991) at the request ofRepresentative Nancy Johnson,one of the bill's cosponsors.

development . This analysis ispart of a larger effort to develop aproposal for the Actuarial Stan-dards Board (ASB) on standarized wording for opinionsexceptional situations .

Additional committee activi-ties included :

-Preparing a statement toand testifying before the Finan-cial Accounting Standards Board(FASB) on its discussion memo-randum, "Present Value-BasedMeasurements in Accounting ."One of the committee's majorpoints was that using presentvalue-based measurements ispossible so long as the interestrate is risk-adjusted .-Following the NAIC's

progress in developing property-casualty risk-based capitalrequirements.

-Monitoring developmentsin the American Institute of Cer-tified Public Accountants(AICPA) and the Canadian Insti-tute of Chartered Accountantsand accountants' and actuaries'reliance on one another.

-Working with the AICPA toinclude proper references torole of the actuary in AICexposure draft on auditing insur-ance entities' loss reserves .

David G. Hartmanchairperson

In addition, committee repre-sentatives met with congressionalstaff to discuss various aspects ofsmall-group health insurancereform .

Edward J. Wojcikchairperson

Committee on Healthand Welfare Plans

T

he committee focused on abroad set of issues rangingfrom problems facing multi-

ple employer welfare arraments (MEWAs), to qualitions for health actuaries, thedevelopment of a credible healthdatabase , tax policy, and acc-counting for retiree health bene-

10 The Actuarial Update ∎ February 1992

fits. Specific projects included:-Working with interested

private-sector parties in findingays to allow self-insured

WEWAs to exist while safeguard-ing the financial security of par-ticipants .

-Commenting on proposedMEWA legislation both beforeand after its introduction inCongress. (Recent MEWA fail-ures have led to an understand-ing by outsiders of the importantrole actuaries can play in main-taining financially soundMEWAs.)

-Developing preliminaryqualification standards for healthactuaries, an issue that arose inthe context of Internal RevenueCode Section 419 and Statementof Financial Accounting Stan-dards (SFAS) No . 106, theaccounting standard for postre-tirement benefits that was issuedin December 1990 and reflectsmany of the committee's com-ments to FASB .

-Working with the AcademyCommittee on Qualifications tofind the correct method for dis-minating information on quali-ations for specific types of

health actuarial work.-Discussing the need for and

possible development of a credi-ble, widely available healthdatabase . Further action wastabled pending the outcome ofactivities underway in the Societyof Actuaries (SOA) Health Sec-tion .

-Meeting with congressionalstaff on legislation that wouldmake advance funding of retireehealth benefits more attractive .

-Continued monitoring anddiscussion with FASB staff onSFAS 106 .

-Preparing to com-ment on the new AICPAstatement of position onaccounting and reportingby health and welfare plans .-Submitting com-

ments to the House Waysand Means Subcommitteeon Health regarding H .R .3205, a bill that would seek

•to reduce employers'retiree health liabilities bylowering the Medicare eli-gibility age to sixty.

Jeffrey P . Petertilchairperson

Committee on StateHealth Issues

T

he committee continued toprovide technical support andto develop proposals for the

NAIC Life and Health ActuarialTask Force and working groupsclosely associated with the taskforce 's projects . In the area ofhealth ratemaking , the commit-tee provided the task force with:

-A report on issues concern-ing the proposed rate-filingguidelines , guidelines the com-mittee had initially drafted .

-Comments on proposedchanges to the model rate regula-tion .-A suggested form for

requesting data on major medicalexpenses from insurers , informa-tion that could be used in deter-mining appropriate loss ratios forthe new health rate -filing guide-lines .

The committee also workedwith a subgroup of the task forceon a new model law for MedicareSupplemental (MedSupp) poli-cies that was required by theOmnibus Budget ReconciliationAct of 1990 (OBRA 90) . Thecommittee :

-Submitted a report to LarryGorski (Illinois Department ofInsurance ) enumerating issuesrelated to OBRA 90 , includingloss ratios , uniform reporting,and refund -of-premium method-ology.

-Provided information onMedSupp loss-ratio complianceto assist in the development ofstandards required by OBRA 90 .-Submitted comments on

the calculation of refunds usingnationwide experience .

-Drafted a new Section 11 onloss-ratio standards and refundof premium to be included in therevised NAIC Medicare Supple-mental Model Law .

-Commented on the expo-sure draft of the Medicare Sup-plemental Model Law .

The committee also assistedthe NAIC by providing :

-Comments on a proposal toallow the use of lapse rates in set-ting policy reserves for return-of-premium or cash-value policies .-Comments to the NAIC

Health-Care Insurance Access

Working Group on its interimreport.

-Data on experience byduration on group major medicalconversions obtained from threecompanies. The report was for-warded to NAIC Actuary MarkPeavy.

Finally, the committee beganto monitor state health insurancereform initiatives, especially inthe small-group area . The com-mittee, most probably in con-junction with the Academy'sother health committees, antici-pates greater involvement in thisarea over the next year.

William J . Bugg, Jr.chairperson

Committee on ContinuingCare RetirementCommunities

In 1990-91, the committee con-tinued work on six major initia-tives :-Revising Actuarial Standard

of Practice No . 3 on ContinuingCare Retirement Communities(CCRCs). The revision should becompleted during the first quar-ter of 1992 .

-Working with the NAIC'sCCRC task force on the develop-ment of model NAIC regulations.

-Working with various stateregulators in designing and draft-ing individual state regulations .

-Working with legislatorsand other interested parties onproposed legislation by undertak-ing projects in Florida, Maryland,and New York-

-Reviewing the financialaspects of CCRCs seeking to gainor renew their accreditation withthe American Association ofHomes for the Aging and workwith the association in develop-ing financial standards for CCRCaccreditation.

-Gaining broader acceptancefor actuaries and actuarial tech-niques in the area of CCRC sol-vency.

I

Harold L. Barneychairperson

Continued overleaf

The Actuarial Update ∎ February 1992 11

Committeeon Risk Classification

T he committee expanded itseducational efforts using therisk-classification slide show

developed in 1989 by :-Developing a number of

case studies to illustrate pointsmade in the slide presentation .

-Preparing questions andanswers to be used as trainingmaterial for an expanded groupof presenters .

-Conducting training ses-sions on both the East Coast and

Life CommitteesCommitteeon Life Insurance

T

he committee continued towork closely with the NAILLife and Health Actuarial Task

Force in two key areas , sales illus-trations and the annuity valua-tion law. Specific activities forthe task force included:

-Developing and runningsmoothness tests for sales illus-trations for the task force's con-sideration . The objective is todetermine whether reasonabletests can be developed to detectpotentially manipulative illustra-tions.

-Examining the interrogato-ries on the NAIC blanks and therelated actuarial standards . Thecurrent interrogatories onnonguaranteed elements and div-idends are vague and open,which often leads to answers thatprovide little useful information .The committee will proposechanges and report to the NAICtask force and the ASB .

-Considered options forimproving the understandingand uniform interpretation of theactuarial standards on dividendand nonguaranteed elementdetermination . One optionunder consideration is an ethicscourse for actuaries responsiblefor answering statement inter-rogatories .

-Preparation of a paper on

the West Coast for actuariesinterested in presenting the slideshow on behalf of the committee .More than a dozen new presen-ters were trained .

In addition , the committeecommented on the Equal Employ-ment Opportunity Commission's(EEOC) proposed rules forimplementing the Americanswith Disabilities Act of 1990 .The response focused on fourquestions the EEOC raised on theeffects of risk classification oninsurance costs .

Jean M. Wodarczykchairperson

all known outstanding Commis-sioners Annuity Reserve Valua-tion Method (CARVM) issues . Adraft report was sent to the NAICtask force with a final reportedplanned for March 1992 .

-Organizing a 1992 valuationactuary seminar for state regula-tors.

Written reports on the com-mittee 's work on illustrations,interrogatories , and CARVMissues will be available in earlyMarch 1992 .

Philip K . Polkinghornchairperson

Committee on life InsuranceFinancial Reporting

T he committee's efforts focusedon activities of the FinancialAccounting Standards Board

(FASB) and the ASB . The com-mittee:

-Succeeded in urging FASBto consider the consistency of theaccounting on both sides of thebalance sheet as FASB continuedits deliberations on accountingfor debt securities, includingrequiring such securities to bereported at market values .

-Reviewed and responded toFASB's discussion memorandum,"Present Value-Based Measure-ments in Accounting."

-Reformatted the Academy'slife insurance financial reportingrecommendations and interpre-tations as standards of practice .

-Reviewed and responded to

ASB proposed standards relatingto actuarial appraisals and thecost of HIV-related claims .

Paul F. Kolkrnachairpersc

Joint Committeeon the Valuation Actuary

0

ver the past several years thecommittee has worked withthe NAIC to develop a more

meaningful role for the actuarieswho do valuations for life insur-ance companies . This effort hasresulted in :

-Adoption of changes to theNAIC Standard Valuation Law in1990 that embraced the conceptof the appointed actuary, who isnow required to opine on theadequacy of reserves reported bya life insurer in light of itsassumed risks and asset mix .

-Adoption in 1991 of anNAIC model regulation to com-plement the change in the Stan-dard Valuation Law .

-A requirement that theStandard Valuation Law chapbe adopted by states in orderbecome NAIC-accredited .

Having fulfilled its objectives,the joint committee was dis-charged. The Academy's LifePractice Council and appropriatecommittees will handle anyfuture work related to theappointed actuary.

Walter S. Ruglandchairperson

PensionCommittees

I

Pension Committee

T he committee continued tofocus on proposed InternalRevenue Service (IRS) regula-

tions on nondiscrimination andCongress's consideration of s'plified rules for qualified pensplans. Specific projects included :

-Testimony before the IRSon proposed 401(a)(4) nondis-crimination regulations .

12 The Actuarial Update ∎ February 1992

-Joint testimony with theAmerican Society of PensionActuaries (ASPA) on proposed

S regulations on separate linesbusiness .-Development of an initial

set of qualified-plan tax-simplifi-cation proposals .

In addition, the committee :-Testified before the ASB

regarding benefits upon involun-tary termination of an employeegroup .

-Prepared suggestions forthe Academy's Committee onQualifications concerning educa-tional requirements for public-plan actuaries .

-Considered various optionsfor establishing a pension actuar-ies' electronic bulletin board .The committee expects to make arecommendation to the actuarialorganizations during 1992 .

John B. Thompsonchairperson

Committee0 Pension Accounting

T he committee continued tofocus on the GovernmentAccounting Standards Board's

(GASB) proposed "Statement onAccounting for Pensions by Stateand Local Government Employ-ers," This statement will be thepublic-employer plans' counter-part to FASB Statement of Finan-cial Accounting Standards No . 87 .The committee worked withGASB:

-To develop appropriatestandards within the wide rangeof current funding practices. ( AGASB objective is to permit pub-lic employers to account for actu-al contributions to fund benefitsif funding is based on an accept-able actuarial cost methoddesigned to fully fund accruedbenefits over a reasonable period .

-To develop language thatwill be interpreted on a consis-tent basis among actuaries,

untants, and other users ofracial statements .-To develop a position on

appropriate actuarial assump-tions . GASB wants to avoiddefining explicit assumptions if

some outside standard is available .The committee has encouragedGASB to adopt the ASB standardon selection of economic assump-tions for pension plans if the ASSstandard is available in time .

-To respond to pension ben-efit questions from states thathave been generated by the pro-posed GASB standard .

Darrel J. Crootchairperson

Committeeon Social Insurance

I n the past, the committee hasfocused on the Old Age, Sur-vivors, and Disability Insurance

(OASDI) program under SocialSecurity. This year the commit-tee broadened its focus. Specificprojects included :

-Reviewing the reports of thethree technical panels appointedby the Social Security Advisory

Professional andAdministrativeCommitteesBudget and FinanceCommittee

D uring the past year, the com-mittee monitored the Acade-my's financial position. In

particular, the net costs of Con-tingencies, the Actuarial Stan-dards Board, and the expandedgovernment relations programwere reviewed .

The committee also :-Considered the results of

the Academy's annual audit andreported them to the AcademyBoard of Directors .

-Made financial projectionsfor the 1991-92 Academy year.-Recommended to the

board, on the basis of the projec-tions, a tentative budget and thedues level for 1991-92 .

Council. Committee Chairper-son Steve Kellison served on allthree panels .

-Developing and disseminat-ing among policy makers a majorstatement on measuring and dis-closing the financial condition ofthe Supplementary MedicalInsurance (SMI) program (i .e.,Meeting with the governmentactuary who works on unem-ployment insurance at the federallevel and discussing the past actu-arial involvement (or lack there-of) in unemployment insuranceand what role, if any, actuariesshould play in this area in thefuture .

- Developing a proposedASB standard on social insuranceand presenting it at the ASB'sOctober meeting.

- Maintaining ongoing liai-son with the SOA Committee onSocial Insurance, including com-menting on the SOA committee'sdevelopment of a professionalactuarial specialty guide .

Stephen G. Kellisonchairperson

-Continued to oversee theAcademy's investment programand the administration of theAcademy's dues waiver rules.

Thomas D. Levytreasurer

Committeeon QualificationsT he committee reviewed com-

ments received on the expo-sure "Revisions to Qualifica-

tion Standards," which had beenapproved by the Academy's Exec-utive Committee in July, 1990and implemented on an interimbasis. The final "Revisions toQualification Standards" was pre-sented to and adopted by theAcademy Board of Directors onJanuary 24, 1991 .

In addition, the committee:-Resumed work on a pro-

posed specific-qualification stan-dard for health statements ofactuarial opinion and then con-

Continued overleaf

The Actuarial Update ∎ February 1992 13

cluded that the development ofsuch a specific qualification stan-dard would inhibit flexibility andfreedom of movement in therapidly evolving health practicearea .

-Decided to issue informaladvisory memoranda to raise theconsciousness of Academy mem-bers with respect to their profes-sional obligation and ethicalresponsibility to be qualified intheir area of practice.

-Drafted advisory memoran-da relating to actuarial opinionsunder the account limit forhealth benefits under InternalRevenue Code Section 419 andunder accounting standardsissued by FASB and GASB.

In the coming year, the com-mittee will continue to developadvisory memoranda to provideguidance to members in deter-mining whether they are quali-fied to render various publicstatements of actuarial opinion .For example, the committee willexplore with representativesfrom the pension practice areawhether appropriate specificqualification standards can bedeveloped for actuaries of pub-lic-sector plans .

John K. Boothchairperson

Committeeon Publications

C

ontingencies continued to gar-ner awards for design , editori-al, and general excellence . In

only its second year of publica-tion, Contingencies received theaward for general excellencefrom the Society of NationalAssociation Publications (SNAP),competing against much largerassociations whose publicationshad been in production foryears. The judges praised theNovember/December 1990 Con-tingencies for its "effective use ofillustrations and graphics ; invit-ing writing style ; good leads ;[and] timely articles." TheSNAP award is the third majoraward the magazine has receivedsince beginning publication withthe May/June 1989 issue. Con-tingencies also won a 1991 Silver

Inkwell for excellence in four-color magazine writing anddesign .

The magazine continues toearn enough advertising revenueto cover the majority of produc-tion costs .

Silvio Ingui retired as editor ofthe Enrolled Actuaries Report aftera long and distinguished tenure .He was replaced by Richard G .Schreitmueller.

The results of the readershipsurvey for The Actuarial Updatewere evaluated. Since the profes-sion expressed satisfaction withthe newsletter, no major changesin editorial policy are planned .Nevertheless, The ActuarialUpdate will be given a new lookduring the coming year to makeits design more appealing andattractive .

Roland E. Kingchairperson

Task Forceon Actuarial Public Service

In 1990-91 the task force con-tinued to consider what couldbe done to increase the number

of qualified actuaries working inpublic service at the federal andstate levels .

At the federal level, the taskforce:

-Supported efforts by theChief Actuaries in Federal ServiceCoordinating Group (CAF-SCOG) to enhance the status andcompensation of actuaries in fed-eral service . Recent changes incompensation and related pro-grams for federal employees,such as the Pay Reform Act of1990, have significantly lessenedcompensation as a barrier to theconsideration of federal employ-ment by actuaries at the seniorlevel . At the entry level, thankslargely to the efforts of CAF-SCOG, a special pay scale hasbeen adopted that is competitivewith the private sector. CAF-SCOG is now pursuing a similarspecial pay scale for mid-levelactuaries in federal service .

-Ran a survey with the assis-tance of the NAIC central officein 1990, which indicates that theunderstaffing of state insurance

departments by qualified actuar-ies is the result of inadequatecompensation levels relative tothe private sector. It is not cleawhat can be done to alleviate thproblem in the short run becauseof the pressures on state budgetsgenerally.

The financial problems of theinsurance industry at presentwould appear to offer an oppor-tunity to highlight the impor-tance of having state insurancedepartments adequately staffedwith qualified actuaries to regu-late insurance company solvency .

-Encouraged the editors ofthe various professional actuarialpublications to run occasionalarticles that portray the role ofactuaries in public service .

At the state level, the task forceconducted a survey with assis-tance of the NAIC, which indicat-ed that understaffing of actuariesin state insurance offices is severe .It is not clear what can be done toalleviate this problem because ofpressures on state budgets gener-ally .

Dwight K. Bartlettchairpersa

Committee on ProfessionalResponsibility

The Committee on ProfessionalResponsibility is charged with"the promotion and encour-

agement of knowledge within theprofession regarding standards ofconduct, qualification and prac-tice, and suggesting ways andmeans for enforcement, compli-ance and monitoring of the effec-tiveness of those standards ."

The committee met five timesin 1991 in order to develop areport to the Academy Board ofDirectors. The committee :

-Recommended that, as aninitial step, each member of theAcademy would be asked annu-ally to affirm his or her familiari-ty and compliance with theAcademy's professional guiand qualification standarThis procedure is currently usedby the Chartered Financial Ana-lysts . The committee is seekingmore information on the success

14 The Actuarial Update - February 1992

of that program and is alsoinvestigating the administrativerequirements .

Discussed the public rela-ns challenge presented by the

recent failure/takeover of severallarge insurers . The committeeconcluded that the actuarial pro-fession needs to provide its mem-bers with some analysis andexplanation of these failures, orrisk seriously weakening effortsto promote professional respon-sibility.

-Suggested establishing aboard of inquiry to investigaterecent insolvencies, explain whattranspired, and then recommendappropriate changes in guides,standards, or responsibilities .This effort should not be con-fused with the counseling anddiscipline process, which will nodoubt proceed appropriately, in aconfidential manner . Such aninquiry might well result in sup-port for actuaries who have prop-erly discharged their professionalresponsibility but whose clientsor employers have nonethelessgotten into difficulty. While ourf mittee's focus is primarily on

own members, it observesfat an inquiry might also behelpful to regulators and legisla-tors, clients and employers, andthe public at large .

W. James MacGinnitiechairperson

Committeeon International Issues

Td d e committee was created in1990 as a result of recommenations from the Academy's

Task Force on InternationalIssues, on which many of the cur-rent committee members served .

During 1991, the committeehad a conference call to discusswhether the committee had adistinct role in view of the factthat there are committees cover-ing international issues or rela-tions within the Society of Actu-

W a(SOA) and the Casualtyrial Society (CAS) . Con-

sidering that the SOA and theCAS both" handle education andexamination and the Academyhandles qualifications and stan-

dards, we thought that our con-tinuance as an Academy commit-tee was warranted .

In addition, the committee :-Addressed the Academy's

role in helping other countries setqualifications and standards ofpractice. This discussion wasprecipitated by a request fromTaiwan for assistance in theseareas. Before responding formal-ly, the committee thought itshould first determine underwhat circumstances actuarieswith non-U .S. qualificationsmight be accredited to practice inthe United States . This will be ajoint effort with the SOA andCAS. The committee asked theAcademy's general counsel andthe ASB to respond to Taiwan'srequest in the interim .

-Worked on a backgroundpaper discussing procedures bywhich non-U.S. actuaries mightbe accredited to practice in theUnited States. The committeeplans to focus on this project in1991-92 .

-Discussed the Institute ofActuaries' (United Kingdom)proposal for the initial training ofactuaries; concluded that theSOA and CAS were the properbodies to respond in detail; how-ever, wrote a letter to the Institutevoicing support .

-Discussed the need torecruit a vice chair and a fewadditional members.

Margaret W. Tillerchairperson

Task Force to IdentifyActuarial Issues for Stateand Federal Guaranty Funds

re task force's original chargewas expanded in 1990-91because the federal govern-

ment began to evaluate its con-tingent liabilities for a broadrange of guaranty-type programsand sought input from the actu-arial profession . The task force'sactivities included :

-Commenting to Congressthrough the CongressionalResearch Service on a consultingfirm's report on the financialsoundness of the Federal Housing

Administration's (FHA) MutualInsurance Fund .

-Working with the assistantcomptroller of the FHA to ensurethat he understood the taskforce's comments and perspec-tive on the FHA fund .

-Reviewing studies of gov-ernment-sponsored enterprises(GSEs) by the U .S . Treasury,Office of Management and Bud-get (OMB), and General Account-ing Office (GAO) . Congressrequested these studies as part ofthe Financial InstitutionsReform, Recovery, and Enforce-ment Act of 1989 .

The GAO report called for theestablishment of a federal enter-prise regulatory board to overseethe activities of GSEs and calledfor improved capital standardsfor GSEs.

The task force has submittedits final report and recommenda-tions to the Academy's Board ofDirectors . The task force madetwo recommendations:

-If, in the opinion of Acade-my staff, Congress is likely to takeaction to create a federal enter-prise regulatory board, theAcademy should appoint a taskforce to track and participate inthis activity.

-The Academy should beinvolved extensively in the sol-vency debate at both the federaland state level . It seems vital thatthe Academy take part in thesediscussions, because they mayhelp to define the future of theactuary with regard to the solven-cy of insurance companies .

John C. Anglechairperson

Committee on Discipline

e committee took final

I action on a number of disci-plinary matters and prepared

to hand over outstanding cases tothe Actuarial Board for Counsel-ing and Discipline (ABCD),which began handling disci-plinary matters as of January 1 .(See the January 1992 Update fora report on the Committee onDiscipline's final actions.)

John A. Fibigerchairperson

The Actuarial Update ∎ February 1992 15

Changes to 1991 Loss Reserve OpinionInstructionsThree revisions to the 1991 annual statement instructions for thestatement of actuarial opinion on casualty loss reserves wereadopted by the National Association of Insurance Commission-ers (NAIC) at its meeting in December. These revisions aredetailed on page 7 in the "NAIC Report."

LM 1, from page 5

A major portion of the bill isconcerned with universal life .Definitions are included, andboth fixed-premium and flexible-premium forms have prescribedmethods and limitations for ben-efit calculation . The flexible-pre-mium limitations have beencharacterized as rate-fixing innature, in that there are limits onall elements, and none can be off-set by a change in another. Ahigher credited interest rate, forexample, will not offset a highermortality charge. Smaller (lessthan $10,000) policies are singledout for special treatment, with alower allowable per policy limit .

Values resulting from unsched-uled increases in amount ofinsurance are to be treated as ifthe change were a new policy,except for the per policy expense.This per policy charge may beindexed using the ConsumerPrice Index .

A minor change in thesmoothness test has resulted inmany of the comments receivedto date . This was the require-ment that no percentage after thelater of the second or the fifthpolicy anniversary (with allow-ance for those policies that donot develop values that early)could differ by more than 10%from that applicable in the pre-ceding period. To allow for the

The Nominating Cmmwnittee is seeking your nominations for the Academy's Board aDirectors . Nominations will be presented to the membership for election at the Acade-my's Annual Meeting next Septembe

Please forward your nominees names to Nominating Committee ChairpersonHarold J . Brownlee, in care of the Academy, using the postcard included in this mailingof The Actuarial Update . Please send your nominations promptly,

common provision of grading tothe full reserve at a specified year,the current draft allows such achange once during the life of tpolicy. The test, even withchange, has been criticized asfavoring high-premium policieswhile penalizing others.

In effect, there are twochanges to the exceptions sectionof the Standard NonforfeitureLaw with SNFLII . SNFLII wouldapply to group universal life,which was not included in theoriginal law (probably becauseuniversal life, group or individu-al, didn't exist yet) . SNFLII alsomakes clear that the "pureendowments" not covered arepure endowment policies .

The question of overall equity,whether prescribed by statute orby regulation as is mandated bySNFLII, is of concern to actuar-ies. Different aspects of equitywere implicit in the work of theActuarial Standards Board indeveloping standards of practice,such as those on risk classifica-tion and property/casualtyratemaking. Actuarial equity isnot solely a life insurance issu

The time to comment is nAddress comments to the NALegal Department at 120 W . 12thStreet, Suite 1100, Kansas City,MO 64105. Copies of the expo-sure draft are available uponrequest from the Academy'sWashington office .

Sloan serves on the NAICNonforfeiture Working Group."It isn't really a controversy," henotes, "but there are two possiblepronunciations of the acronymSNFLII. Whether you want to callit sniffly or sinfully though, youshould be sure to obtain a copyand express your opinions . "

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16 The Actuarial Update • February 1992