THEACTUARIAL

THIS MONTH2

From the President3

AcademyMeets with FASB

3Letters to the Editor

6Standards Outlook

• Capitol Views7

NAIC Meeting Summary

sPBGG Q & A

ENCLOSURESIncluded with this month's

issue of The Actuarial Updateare the following:

In Search Of

ASB Boxscore

Exposure Drafton Pension Assumptions

ASB Memorandum

Casualty Loss ReserveTranscript Order Form

AMERICANACADEMY OFACTUARIES

VOLUME 21NUMBER 9

SEPTEMBER 1992

Close-Up on John HandingJohn H. Harding will assume the post of president at the Academy's AnnualMeeting on September 30 . Harding is president and COO of National LifeInsurance Company in Montpelier, Vermont. He met recently with Updateeditors to discuss his presidency and his vision for the Academy .

THE UPDATE: What goals haveyou set for your Academy presi-dency?

HARDING: Recognizing thatthere are very real limitations builtinto a 1-year term of office, I havenarrowed my focus to four key ini-tiatives, First, I will devote asmuch time and energy as necessaryto see that the Actuarial Board forCounseling and Discipline(ABCD) is in place and fully oper-ative . The ABCD is an importantelement in the profession's years-long move toward embracing allthat it means to be a profession .As such, its demands of me will bea top priority.

Incoming President John H. Harding

Second, I want to continueworking to advance the Acad-emy's insurer solvency agenda,which got a good start during my

Academy Testifies on Pension BenefitsBy Christine Sand

Pension plan terminationshave increased at anextraordinary rate since theenactment of the TaxReform Act of 1986,

reported Academy Secretary-Treasurer Thomas D . Levy inAcademy testimony on August 4before the Labor Subcommitteeof the Senate Committee on

Labor and Human Resources."Last year there was one newplan for every twenty plans beingterminated," he stated . Levy'scomments were based, in part, onthe Academy's survey of enrolledactuaries-results of which werereleased on June 24 at a Forecast2000 news conference at theNational Press Club in Washing-ton, D.C. (See August Update.)

The Academy testified at the

term as president-elect with theposition statement developed byour blue-ribbon task force .

Third, I will do whatever I canto strengthen the practice coun-cils, both in terms of their innerworkings and their relationshipwith other actuarial organiza-tions. The practice councils willbe at their most effective whenthey are the means, the conduit ifyou will, for an ongoing dialoguebetween the Academy and theother U.S. actuarial bodies .

Finally, I think we must paymore attention to the Academy'ssometimes neglected publics .Historically, the Academy hasplayed an effective role in shapingpublic policy dialogue at thenational level; we need to devotemore resources to playing a strongrole at the state level, especially onregulatory matters. Insurancecompany leadership needs to hearmore from the Academy, particu-larly company managers who arethemselves actuaries .

THE UPDATE: You mentionedstrengthening our efforts at thestate level. Do you envision thatbeing accomplished by enhanc-ing our involvement with theNational Association of Insur-ance Commissioners (NAIC) oractually working directly withstate legislators?

HARDING: Given the size of theAcademy staff, I believe the best

Continued on page 4

invitation of Senator HowardMetzenbaum (D-Ohio), subcom-mittee chairman, who opened thehearing quoting the Academysurvey results, to which he addeda call to restructure our privatepension system . Levy, who wastestifying on behalf of the Acad-emy's Pension Committee, wasaccompanied by committeemember Jeff Schwartzmann .According to the survey, Levyexplained, more than 30,000employers have terminated theirdefined benefit pension plans

Continued on page 8

AMERICANACADEMY OFACTUARIES

PresidentHarry D . GarberPresident-ElectJohn H . HardingVice Presidents

Robert H . DobsonR . Stephen Radcliffe

Richard H. SnaderMichael A . Walters

Larry D . ZimplemanSecretary- Treasurer

Thomas D . Levy

Executive VicePresident

James J . Murphy

EXECUTIVE OFFICEThe American Academy

of Actuaries1720 I Street, NW

7th FloorWashington, DC 20006

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

MEMBERSHIPADMINISTRATION

Woodfield Corporate Center475 N . Martingale Road

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

THE ACTUARIALUPDATE

Committee on PublicationsChairperson

Roland E . KingEditor

E . Toni MulderExecutive Editor

Erich ParkerAssociate Editors

Gary D . LakeStephen A . Meskin

Charles Barry H . WatsonManaging EditorJeffrey Speicher

Contributing EditorKen Krehbiel

Production ManagerRenee Cox

State Fnents of fact and opinion in thispublication, including edderials and let-

ters to the editor, are made on theresponsibility of the authors alone anddo not necessarily imply or representthe position of the American Academy

of Actuaries, the editors, or themembers of the Academy .

2

FROM

'presitlontNarrowing in onAcademy Effectivenessby John H . Harding

n this era of consumerism,most successful organizationshave learned that listening tocustomers is fundamental totheir success. The focus of

that listening must center onunderstanding customer expecta-tions and then meeting orexceeding them.

Only a slight translation fromthis general theme needs to bemade in the context of a mem-bership service organization,such as the Academy . As theorganization whose primaryfocus is public interface, wemust look to our own member-ship from several differentpoints of view . It is most impor-tant that we know your expecta-tions, so that we can do our bestto meet them . We must alsolook to you as key participantsin the process of meeting thoseexpectations .

Many of the same people formanother set of customers, theleadership of the other NorthAmerican organizations that. rep-resent actuaries . Are we workingon the right issues, and are weworking together in the mosteffective and efficient manner?

Much has been done in recentyears to address the expectationsof these organizations, and thefeedback process has been posi-tive and consistent.

It is time, however, to makesure that we understand theexpectations of our membership .To this end, we have begun aprocess of listening. This sum-mer, 3,000 actuaries receivedquestionnaires that included anearly probe to begin to define theissues . Similarly, I have asked theleadership of the other organiza-tions to help me understand thefeelings of their membershipconcerning their expectations .

The Actuarial Update - September 1992

Of course, the range of theexpectations of Academy activityis perplexing . To some, weshould be doing far less . Toothers, we should be doing farmore. Part of this range existsbecause of varying personalbeliefs about the role of theAcademy as an interface organi-zation. Another part comes fromdiverse ideas about the impact onpublic issues that an organizationlike ours can have, in the contextof many other organizations thatreflect competing points of view.

I believe that, in order for theAcademy to be effective, we mustbegin to narrow the range ofthose expectations .

For example, the guidelinesfor making public statements, aspublished in pages 44-47 of the1992 Yearbook, provide a reason-able framework for the scope ofsuch statements and the processfor developing them. However,they give evidence of the broadrange of possibilities:

0 "Clearly, a public statement ofknowledge unique to actuarialscience should be the primaryfocus in the profession's publicpronouncements." From thisstarting place, it does permitstatements beyond the narrowareas where the actuary's knowl-edge is unique. Question: Whatshould be the limits to thisextension?0 "A statement generally shouldnot take positions on the socialand political implications ofissues; however, in certain cir-cumstances, it may not be pos-sible to divorce social or politicalimplications from actuarial con-siderations." Question : Arethere times when we shouldbecome advocates, rather thanadvisers?

D "There may be some issuesthat have actuarial implicationsthat are better dealt with by tradeassociations, insurance compa-nies, or individuals . Publicstatements that appear to be selfserving will be less effective, butthe Academy should not hesitateto speak out on matters thatinvolve legitimate, professionalself-interests." Question: Towhat extent should the Academybecome an advocate for a largeractuarial role in some issues?0 There is considerable pro-cedural language that defines thedesired process for developingand exposing for comment apublic statement, but how oftendoes the public arena allow for adeliberate process? However,there is exception language thatallows for timely response, whenrequired. Question: Should notthe process assume that timelyresponse is the rule, rather thanthe exception?0 There are countless issues thatcould be commented upon byour profession today . As wework toward effective use of ourresources, should we try to makestatements regarding a high percentage of them, or should w1Wtarget our efforts to a smallernumber of critical issues? Ques-tion: If we target, how should weinvolve the membership in pick-ing the issues?

The answers to these questionscome in a wide range of grayshades. The effectiveness of theAcademy in the eyes of its mem-bership must come through nar-rowing the range.

This editorial is the first of three byincoming Academy PresidentHarding that will appear in thesepages.

Rte Update welcomes lettersfrom its readers . Letters for

publication should besubmitted to the "Letters to the

Editor" section, and mustinclude the writer's name,address and telephone

number. Letters may be editedfor style and space

requirements .

Academy Meets with FASB0By Christine Nickerson

A ctuaries and accountantsdiscussed a number of top-ics of mutual interest at a

lirecent meeting of membersand staff of the Financial

Accounting Standards Board(FASB) and representatives of theAcademy and the Actuarial Stan-dards Board (ASB) . The groupmet at FASB's headquarters inNorwalk, Conn. on June 25 .

Present-Value-Based Accounting

FASB has undertaken the exami-nation of accounting measure-ments based on the present valuesof future economic benefits orsacrifices (interest methods) .FASB project manager WayneUpton reported that after theAugust 1991 public hearing onthe project, there was not muchaction. The project is now mov-ing again, he said, and FASBplans to issue a preliminary viewsdocument because more detailsand clarification are needed .FASB is looking at the topic com-prehensively, he said . The boardis not focusing on insurancealone, but insurance is an impor-tant part of the inquiry .

Upton said that the objectiveof measurement is fair value-present value that reflects marketvalue and interest rates. Whenasked if FASB plans to do a fieldtest, he said that would dependon reaction to the preliminaryviews. He said FASB hopes to bewell into the drafting of the pre-liminary views document by theend of the year.

Market-Value Accounting

FASB project manager RobertWilkins outlined the develop-ment of this project . FASB hasbeen moving toward additionalmarket value information infinancial statements . In Decem-ber 1991, SFAS 107, DisclosuresAbout Fair Value of FinancialInstruments, was issued. This

.new statement will require foot-note disclosure of the fair value offinancial instruments, with someexceptions. Currently, FASB isworking on a limited-scope proj-

ect dealing with the recognitionof the fair value of financialinstruments . This project couldrequire mark-to-market account-ing for most debt and equitysecurities that are held as assets .FASB is also considering how toaddress mark-to-market account-ing for certain liabilities that sup-port such assets . In the currentproposals, insurance liabilitiesare not required to be reported atfair value .

Academy representative Bar-bara Snyder discussed the need toaddress both sides of the balancesheet. She said that the Academyhas followed the development offair value accounting over the lastseveral years, and she believesthat fair value accounting forassets only would be inappropri-ate . She volunteered the skills ofthe actuarial profession to assistin this project, saying that actuar-ies have the tools and training tovalue liabilities, especially thosekinds of contingent liabilities thathave appeared most difficult to

lettersTO THE EDITOR

Forecasting a Fiasco

T

he Actuarial Update (July1992) reports that the Acad-emy is calling for "reforms

that would minimize the risk ofinsurance company insolven-cies." This is a laudable effort, tobe sure, that could minimize dis-appointment for thousands ofpolicyholders, as well as preservethe long-term credibility and via-bility of the institution of insur-ance. And it is an appropriateuse of the actuary's unique skillsto evaluate the future financialconsequences of promises beingmade today .

But why aren't actuaries usingtheir analytical skills to evaluatethe largest "insurance company"of all time, the one that is themost likely to default on its

FASB. Academy representativeDavid Hartman reminded thegroup that there are differencesbetween property and casualtyinsurance and life insurance thatmust be kept in mind as FASBcontinues its discussions of fairvalue reporting .

Postemployment Benefits

FASB is monitoring questionsarising from the issuance of SFAS106, Employer's Accounting forPostretirement Benefits OtherThan Pensions . FASB staff per-son Ken Dakdduk reported thatthere are no plans to issue a Q &A document because of the suc-cess of the field test, which wasincorporated into SFAS 106. Thefield test helped anticipate ques-tions that could arise . Also the Q& A documents for SFAS 87 and88 (pension accounting) shouldbe helpful, he said. The standarditself has a large section on "basisfor conclusions" that providesguidance, he added. Dakdduksaid he is taking questions frompractitioners about applicationof SFAS 106. Interpretative guid-ance will come from staff-these

Continued on next page

promises: Social Security,including Medicare . This pro-gram now costs 15% of payroll,and will eventually cost between33% and 50% of payroll .

The greatest insurance fiascoin history is going to occur in the21st century when we are forcedto admit that the children of thebaby boom generation cannotproduce enough to fulfill thepromises that Social Security ismaking to their parents, the babyboomers. Can't we foresee thesocial and economic conse-quences of this debacle? Are wewaiting for some other profes-sion to reveal this truth?

There is no need to accept myview, or the dissenting views ofothers, about this impending dis-aster . Each actuary is well-equipped personally to evaluatethe scenario based on readilyavailable information. Why notinvest a few hours of your timeand do it?

A. Haeworth RobertsonWashington, D.C

CALMAR

1992 ValuationActuarySymposiumSeptember 17-18

Casualty LossReserve SeminarSeptember 20--22

Academy"Annual MeetingSeptember 30

Actuarial StandardsBoardOctober 7-8

Conference ofConsultingActuariesAnnual MeetingOctober 19-20

American Societyof PensionActuariesAnnual MeetingOctober 25-28

Society of ActuariesAnnual MeetingOctober 25-28

Casualty ActuarialSocietyAnnual MeetingNovember 15-18

The Actuarial Update • September 1992 3

1IARDING, continued from page 1

use of our resources is stepping upour NAIC involvement . But thereare other selective opportunities,as well. We need to build betterbridges at the top levels of theAmerican Insurance Association,the American Council of LifeInsurance, the Insurance Informa-tion Institute, and the HealthInsurance Association of America,to name just a few off the top ofmy head. The Canadian actuariesdo this kind of interaction withcounterpart and constituent or-ganizations particularly well . Theyare a good model for us.

"The relationshipbetween regulators

and industryis one of cops

and robbers . . -that's the history

we've got tostop fighting ."

THE UPDATE: Describe for usyour style of leadership .

HARDING: My leadership styleis to be equal parts compass andcommunicator; that is, I articu-late a direction. Once we're allheaded down the same path, I amvery involved to the extent that Imake sure we stay on the road toour destination. I haven't beeninvolved in trenches actuarialwork for some 14 years, so I'vehad plenty of time to perfect this!

FA$B, continuedfrom page 3

are "unofficial" responses, hesaid. A formal, official interpre-tation would have to come fromthe board, he said, but such amove is not contemplated.

FASB board members asked ifthe necessary databases are avail-able for small groups . TheAcademy responded that suchdata are a real problem---they arenot always available. With largegroups, many approximationsare used, and in time thisapproach may be applied to smallgroups .

GASB/Accounting

Penny Wardlow, research man-ager for the GovernmentalAccounting Standards Board(GASB), discussed progress onGASB's projects on pensionreporting and on accounting forpublic employee retirement sys-tems. She said the board believesthat pension accounting for gov-

THE UPDATE: Why did you firstbecome active in the Academy?

HARDING : I got involved prob-ably the same way most of us do .I was interested in a specific issueand got active in the Academy inorder to address that issue. Oncedrawn in , I became enthused bywhat the Academy can and doesaccomplish when it's operating atits most effective level.

THE UPDATE: In your case,what was the issue?

HARDING: It was putting inplace standards of dividend prin-ciples and practices for mutuallife insurance com anies which

ples and practices standard got meinvolved in debating larger issuesof standard setting, updating, andenforcement. The establishmentof the Actuarial Standards Board(ASB) was a logical outgrowth olothose discussions; and I ampleased to have played a part inthat landmark development .

THE UPDATE: Would you callthat the greatest stride that theactuarial profession has made inthe last decade or more?

HARDING: Without question,it's one of several critical, evenwatershed, events for the profes-sion over the last. 10 years.

Pwere adopted by the Academy 1, THE UPDATE : And the others?Board of Directors in 1980 onHalloween .

THE UPDATE: Is there somesignificance to that date?

HARDING: I never reallythought about it, but you know, Ibecame president of my companyon April Fools' Day, so whoknows? On a more serious note,my work on the dividend princi-

ernmental entities should be asconsistent as possible-but thatthere are difficulties with respectto statutory requirements . She

1 said GASB is looking at imple-mentation problems. The boardplans to issue exposure draftsthat will incorporate changes toGASB 5. Wardlow asked aboutthe current status of the ASBstandard on selecting economic

1 assumptions for measuring pen-sion plan obligations, saying thatthe board is interested in citingthis standard .

Other discussion items includ-ed FASB's project on accountingfor reinsurance. Academy repre-sentative Diane Wallace said thatthere is a need to clarify timing ofincome provisions and to consid-er the question of risk transferrequirements . The group alsodiscussed the project on pensionplan accounting for governmen-tal investment contracts . FASBmember Bob Swieringa askedabout the experience of actuariesin this area. ∎

HARDING: The establishment ofa uniform disciplinary processwith the ABCD as a central el-ement is another important stridefor the actuarial profession . Per-haps none of this would have beenpossible, though, had the profes-sion not been successful at devel-oping and cementing a strongrelationship among the six organi-zations representing actuaries ithe United States and Canada .

THE UPDATE: As an insurancecompany president, what is yourview of the relationship betweenthe actuarial profession and theinsurance industry?

HARDING: I think the role actu-aries play within the insuranceindustry has deteriorated some-what over the last two decades .We don't play the predominantrole we once did, and the insur-ance industry has sufferedbecause of it . We need to re-assert the legitimate place of actu-aries within the industry. I'm notsure this makes good interviewcopy, but I believe it to be so .

THE UPDATE: It's great copy.By all means, continue.

HARDING: There was a storyrecently in Probe, written as Irecall by an agent, that illustratesmy point . The author, AlaAlPress, in addressing insurer insol-vencies posed the question :Where were the actuaries whenall this was going down? Walt

4 The Actuarial Update ∎ September 1992

Rugland, among several others ofus, wrote a thoughtful response,which concluded with the tellingstatement that "Actuaries wereout of the game ." That says it all .

Wn essence, as company manage-ment moved from traditionalways of managing the insurancerisks, other professions, legiti-mately so, began to play a muchlarger role. Historically, the actu-ary was both a specialist (tendingto the details of risk assessment)and a generalist (looking over thesolvency management processthroughout the company) . Withthe involvement of other profes-sions, that generalist responsibili-ty became very much playeddown. Actuaries were, inessence, "out of the game."

THE UPDATE: Are we makingup that ground, in your view,with our work on professional-ism issues like standards and theuniform counseling and disci-plinary process?

HARDING: Absolutely . There isa perceived void, and our work inthese areas is going a long way

•oward filling that void.

THE UPDATE: Is the insuranceindustry leadership accepting ofwhat the profession has beendoing?

HARDING: Far more so than 5years ago. Today, most life andcasualty insurance companyCEOs recognize that enormousdamage can be done to the insur-ance industry by some other CEOnot managing company solvency.They are far more receptive todayto mechanisms being put in placethat help manage insolvency risk. . . and the same is true of theregulatory community.

That takes me to what hasalmost become a theme recently.Whether you're talking aboutinsurance regulation or the regu-latory system in general in theUnited States, we face a seriousproblem . The relationshipbetween regulators and industryis one of cops and robbers. It'sof that way in Canada, the

Wnited Kingdom , Japan , or Ger-many. In those countries it's amuch more collaborative rela-tionship , more of a partnership .

And that kind of relationshipcan have several very beneficialresults. First of all, we're going tosee continuous unpredictablechange, certainly for the rest ofmy career. Our current regula-tory system simply cannot copewith fast change . There must bea far more effective mechanismwith mutual trust and one withan understanding that the funda-mental question is not whethersomething is legal, but whetherit's right. We can't do it all bysimply changing the insuranceindustry, but that's not a badplace to start.

THE UPDATE: Perhaps some ofthe recommendations in theAcademy's insurer solvency state-ment will have some impact onwhat you are describing.

HARDING: I hope so. I've beenintrigued and pleased so far withthe response by both some mem-bers of company managementthat I've exposed this to-because I haven't exposed itbroadly in company managementyet-and also by the regulatingstates, where they do understandsome of the issues. Right afterarticulating that understandingwhat you will next get is a warstory saying why cooperationdidn't work. And why youcouldn't trust those guys . Thatcould be from the company orfrom the regulators. The point isthat's the history we've got tostop fighting.

THE UPDATE: On to a morepersonal question . What is yourideal weekend not spent in youroffice?

HARDING: I don't spend manyweekends in the office . In fact, Irarely take paper home with me .I take ideas home with me . It'smy preference to work on ideas,not paper. The best paper time Ihave is on an airplane, becausegenerally speaking it's uninter-rupted .

THE UPDATE: Tell us about theprocess involved in "working onideas." Do you set aside a specifictime to problem solve, or is itback-burner thinking that goeson all the time?

HARDING: Thereare a couple ofways I do it. Firstof all, for good orevil, I have multi-channel thinking .It's rare that I con-centrate on justone thing at atime. There's fore-ground thinkingand backgroundthinking, but it'sall going on upthere . I workedout somethingwell over 40 yearsago that is a bighelp. Just before I go to sleep atnight, I think of a complex, diffi-cult problem-one that is notemotionally loaded. When I wakeup in the morning, I think about itagain. I exercise first thing in themorning for about 45 minutes,during which time I try to recallwhat's been churning around inmy head all night. And usually, Ifind my thinking and my problemsolving associated with that issuewell advanced . That makes for avery productive 45 minutes .

Another thing that helps is toget away from it all occasionally .I have a camp that is just a fewminutes from my home on a lake.It's very quiet. Even for Vermont,it's quiet . So quiet, I didn't evenknow it was there, although it isonly 10 minutes away. My wifeand I live out there for about 6months every year and on mostweekends. It's just a time to setaside the high-speed activity ofthe day, change gears, and getthings back in context .

That kind of setting allows meto indulge in what I call direc-tional thinking .

THE UPDATE: Directionalthinking?

HARDING: Let me explain byexample. Most jokes are writtenstarting with the punch line ; thesetup is then crafted to get you tothe laugh. In essence, it's tacklinga problem, all the while knowingwhere you want to come out.That's the opposite of inside-outthinking, where you doggedly fol-low and search a path to whateveroutcome presents itself. Direc-

Continued on next page

John Harding shares alight moment.

The Actuarial Update ∎ September 1992 5

tional thinking I do best when Ihave sufficient quiet time .

THE UPDATE: Is there anythingelse, any other message youwould like to convey to the mem-bership of the Academy eitherabout yourself personally or yourvision of the organization?

HARDING: I want to strive tostay in touch with the Academymembership as much as possible,to get a better understanding of

Standards Outlookby Christine Nickerson

ighlights of the ActuarialStandards Board's (ASB)July 14-15 meeting includeapproval to release expo-sure drafts of proposed

standards on data quality and onselecting economic assumptionsfor measuring obligations .

Data Quality

The proposed standard on dataquality was first released as anexposure draft in April 1991 . Itwas developed by a task force ofthe Specialty Committee of theASB. The proposal addressedthe responsibility of the actuaryto select reasonably among alter-

The American Institute of Certified Public Accountants (AICPA)and the Academy are cosponsoring a conference on theimplementation of SFAS 106, Employer's Accounting forPostretirement Benefits Other Than Pensions . The conferencewill-focus-specifically on the implementation problemsconfronting' both auditors and actuaries . The conference seeks_to further define the important working relationship of theactuary the auditor , and corporate management. Theconference will present useful planning techniques used byboth the actuary and the auditor-techniques you can use inyour own practice . Learn how to reach the conclusions ofSFAS on a real-time basis .

The conference will be on November 10, at the HyattRegency O'Hare in Chicago . For further information about theconference, please call Rachel Dichter, Project Manager,AICPA, at (201) 938-3567 .

what they expect and need fromus. I want to know how well weare meeting those expectations .Perhaps members have someexpectations that are unrealistic,some we may never be able to sat-isfy. If so, we've got to find thatout and work together to con-structively narrow that range. Orbroaden it, as the case may be . Iget into this more in my editorial(See page 2), but suffice it to sayhere, there is something more wecan do, and that something more

native types and sources of data,the actuary's responsibility whenrelying on data supplied by others,and the actuary's responsibilityto disclose deficiencies in data .The ASB received thirty com-ment letters on the draft . Thesecomment letters raised a num-ber of questions and concernsabout the proposed standard .Issues raised included the defini-tion of data, accuracy and com-pleteness of data, reliance onothers, and documentation andreporting.

The task force revised the pro-posed standard in light of thesecomments and suggestions . Taskforce chairperson Phil Miller toldthe ASB that the task forcebelieves the revised proposal hasbeen substantially improved as aresult of these changes . At thesame time, he said, the changeswere deemed significant enoughto require a second exposure ofthe proposed standard . Theboard suggested clarifying andstrengthening several sections ofthe standard, including adding aprovision that the actuary shouldconsider whether data are so inad-equate that they cannot be used tosatisfy the purpose of a study.

Pension Plan Assumptions

Mary Adams, chairperson of thePension Committee of the ASB,told the board that the proposedstandard on the selection of eco-nomic assumptions for measur-ing pension plan obligations rep-resents more than 3 years ofstudy, discussion, and drafting bythe committee. She said that thePension Committee considers theproposal to be a foundation for astandard-a foundation whichitself could change in the course

is listen . Like any good consumercompany, we've got to listen . Andthen we've got to communicatewhat we're doing with what we'velearned. That can only make thAcademy better, stronger, an*even more effective .

THE UPDATE: Thank you, John,for your time this afternoon.

HARDING : I've looked forwardto this for some time. It's beenenjoyable. ∎

of exposure, comment, anddebate. The topic it addresses ischaracterized by so many com-plex issues and divergent actuari-al approaches that obtaining con-sensus has presented the commit-tee with extraordinary difficulties,Adams said .

As stated in the standard, itspurposes are: to provide addi-tional guidance to actuaries whoselect economic assumptions formeasuring obligations underdefined benefit pension plans; toamplify provisions of Section 7 ofActuarial Standard of Practice(ASOP) No. 4, Measuring PensioObligations, and to modify thWprovisions of Subsections 7.1 and7.3 of ASOP No. 4 relating to theselection and use of implicit eco-nomic assumptions; and toenhance a user's understandingof the actuarial communicationthat documents the process andthe results of a measurement ofobligations of a defined benefitpension plan .

The ASB reviewed the pro-posed standard and suggested sev-eral clarifications . The board dis-cussed at length the recognition ofthe effect of income tax (the taxpremium) on the investmentreturn assumption. The proposedstandard contains an illustrationto explain this concept . The stan-dard also contains other illustra-tions that provide examples of themethods and approaches outlined .The board approved exposure ofthe proposed standard, and rec-ommended that hearings on it beheld in conjunction with the fallactuarial meetings .

If

The ASB will hold its next meetingin Dallas on October 7 and 8 .

6 The Actuarial Update ∎ September 1992

Capitol•ension provisions are included

in the Unemployment Compen-sation Amendments Act, whichwas signed into law on July 3 byPresident Bush. The provisionspermit any portion of a distribu-tion from a qualified pension orannuity plan or a tax-shelteredannuity to be rolled over tax-freeinto an individual retirementaccount or another qualifiedemployer plan. The new lawrequires a trustee-to-trustee trans-fer and a mandatory withholdingrequirement for those distribu-tions that are not transferreddirectly, thereby eliminating thecurrent 60-day limitation on tax-free rollovers to IRAs. Any trans-fers to qualified employer planswould be contingent on the spon-sor's agreement to accept the dis-tribution . The new law alsoimposes a 20% withholding taxon distributions that are eligible tobe rolled over, but are not trans-ferred directly to eligible plans . It

estimated that this withholdingWroposal will raise $2 .1 billion for

unemployment insurance over 5years. Under the Act, the planadministrator is required, reason-ably soon before making an eli-gible rollover distribution, to pro-vide written explanation of thetransfer, rollover, and withholdingprovisions, as well as informationon lump sum income averagingand any new unrealized apprecia-tion. The Department of Treasuryis directed to develop a modelnotice. Although the Act encour-ages money to stay in the pensionsystem, it also adds complexity forboth employers and employees .Operational compliance with thenew provision will be required asof January 1, 1993. Plan amend-ments will not be required untilJanuary 1, 1994 .

An effort at pension simplifica-tion is included in the RevenueAct of 1992, an urban relief taxpackage. The package, H .R. 11,ontains a simplified definition

Woo highly compensated employ-ees, more timely determinationof cost-of-living adjustments,safe harbors for 401(k) discrimi-

nation compliance, retrospectivetesting approach for 401(k)deferral percentages, availabilityof 401(k) plans to not-for-profitentities, clarified application ofSection 415 limits to governmen-tal plans, and uniformity in thevesting rules for single employersand multiemployer plans. In aletter to Congress, the AcademyPension Committee praised themembers for their efforts, butstressed that this movementtoward simplification needs to becontinued. The bill is now in theSenate. (Request PS-92P-5) .

Comments on the Federal Insur-ance Solvency Act of 1992, H .R.4900, were prepared by theAcademy's Life Insurance Finan-cial Reporting Committee andProperty-Liability FinancialReporting Committee. Represen-tative Cardiss Collins (D-Ill .),chairperson of the Subcommitteeon Commerce, Consumer Protec-tion and Competitiveness of theHouse Energy and CommenceCommittee requested the com-ments to clarify the diverse actu-arial issues that congressional staffmay address during further con-sideration of the bill. On August4, the full committee approved abill requiring federal agencies tostudy the financial health of thenation's insurance industry .(Request PS-92G-3) .

Decisions on the small-planaudit cases before the UnitedStates Tax Court were handeddown by Judge Clapp on July 14.The court upheld the use of 5%pre- and post- retirement interestrate assumptions in both cases(Wachtel, Lipton and Vinson &Elkins), and a retirement ageassumption of 55 in one case and62 in the other . The opinionsstate that "each of the . . . chal-lenged assumptions was reason-able, and the actuarial assump-tions and methods used were rea-sonable in the aggregate ." There-fore, the IRS is precluded fromrequiring a retroactive change ofassumptions .

For more information on theregulatory or legislative actionsnoted above, contact Christine Sandat the Academy's Washington office.

NAIC MEETING SUMMARYThe premier of Bermuda, Sir John Swan, evoked the beauty of hiscoral island in his keynote address to the National Association ofInsurance Commissioners (NAIC) summer meeting , held at theWashington Sheraton Hotel June 7-11 . The following is asummary of the many topics of interest to the actuarial professionthat were discussed by the more than 2,300 attendees .

The Life and Health Actuarial Task Force recommendedexposing proposed changes to the NAIC model "Actuarial Opinionand Memorandum Regulation ." A new model regulation,"Regulation for Valuing Life Insurance Policies," will be exposed .

In addition, the task force recommended, and the LifeCommittee approved, exposing four new actuarial guidelines forcomment .

The :Long-Term Care Insurance (B) Task Force is consideringthe issue of nonforfeiture benefits for long-term care insurance .The Ad Hoc Actuarial Group led by Bart Munson submitted itsreport to the task force. Commissioner Earl Pomeroy of North.Dakota thanked Munson and the group, and said the task forcewanted to expose a draft of a specific nonforfeiture approach atthetal€ NAIC meeting in Cincinnati .

The Risk-Based Capital Working Group discussed an outlineof a model risk-based capital formula for life and health insurance .Cande Olsen of the industry advisory committee presented severalversions of an annual statement schedule to reflect the risk-basedcapital . results, and Terence Lennon of New York, chairman of theworking group, indicated that the formula's application tofraternals and Blue Cross/Blue Shield plans would be looked into .An exposure draft of the formula will be issued by September .

The risk-based capital formula for property/casualty insurersis not quite as far along and may not meet the Septemberdeadline for exposure and December adoption, according to -Vincent Laurenzano of the New York Insurance Department, theworking group's chairman . David Harttman, who gave thepropertyicasualty industry advisory committee's report to thetask force, noted that there were differences between theproperty,icasualty formula's and the life/health formula's assetrisk factors .

The Casualty Actuarial Task Force voted to recommend to theBlanks (EX4) Task Force that the 1992 annual statementinstruction language on "reliance" he amended in accordance withlanguage developed by the Academy and the American Institute ofCertified Public Accountants (AICPA) . The Blanks Task Forcesubsequently adopted the recommended language. Following therecommendations of the actuarial task force and those of itsBlanks Task Force, the NAIC Financial Condition (EX4)Subcommittee approved the changes in the annual statementinstructions for actuarial opinions .

The casualty actuarial task force also discussed developmentsundertaken by its advisory committee to determine whether therecan or should be a common definition of allocated lossadjustment expense .

Warren Cooper. advisory committee chairperson explainedthat there are different definitions for financial statement reportingand for raternaking, and that definitions even vary amongratemaking organizations. Task force members are particularlyinterested in developing a consistent definition so that v,,hen dataare published, accurate comparisons can be made betweendifferent states, between different lines . and between differentcompanies .

The Actuarial Update % September 1992 7

ACADEMY TESTIFIES , continued from page 1

since January 1990. Forty percent of these employers have notreplaced their plans, Levy stated, leaving their workers withoutemployer-provided pension coverage . Of those employers whodid replace plans, 90% of these were defined contributionplans .

At the conclusion of his remarks, Levy was asked why largeemployers had shifted to defined contribution plans . Hereplied: . "It is primarily due to increased regulation . Prior to1986's Tax Reform Act, an employer could have one actuarialstudy of the plan every 3 years . Today, a large plan cannotfunction with fewer than five different sets of assumptionsevery year to comply with the regulations ." Levy thenexpounded upon the frustrations of dealing with an endlessparade of regulations. "A plan sponsor cannot get the changesmade for one set of regulations before new rules are set inplace," noted Levy.

Chairman Metzenbaum referred to defined contributionplans as "do it yourself" plans ; he asked Levy to explain whydefined benefits provide a better level of retirement. Amonghis remarks, Levy stressed the security provided by a definedbenefit plan, which has benefits that are used strictly for retire-ment rather than for current consumption .

The Academy urged the adoption of its three-part plan tohelp restore choice to the private pension system . Labor Sub-committee members expressed a good deal of interest in workingwith the Academy as Congress continues to deliberate the prob-lems facing retirement income security.

The survey of defined-benefit plan terminations was theresult of an 18-month effort by the Academy . Academy gov-ernment relations staff put the survey reports in the hands ofimportant public policy makers, and public relations staffworked to publicize survey results through the actuarial pro-fession's Forecast 2000 public relations program. Levy's com-mittee testimony received same-day television coverage onCNN and CBS's Washington affiliate ; nationwide publicity ofsurvey results included stories in the Wall Street Journal, USAToday, the Washington Post, and the Chicago Sun-Times.

Copies ofthe Pension Committee 's testimony can be obtainedfrom the Academy's Washington office by requesting PS-92P-6 .

PBGC Q & AJames B. Lockhart, executive directorof the Pension Benefit GuarantyCorporation, recently responded toseveral questions posed by the Acade-my regarding the problems and chal-lenges facing his agency. A portion ofthat exchange is printed here.

The PBGC is on record : It

Q. will not guarantee pensionfunds invested in annuities in theevent of insurer insolvency .However, if employers were will-ing to pay an extra premium tohave the PBGC guarantee suchannuities, might the PBGCreconsider its position? What ifthe law mandated that the plancould buy an annuity only frominsurers that are domiciled instates with guaranty funds orhave quality reinsurance?

A The PBGC has determined4 that ERISA does not autho-

rize it to guarantee benefits pro-vided under irrevocable annuitycontracts purchased from insur-ance companies, in the event thatthe insurer is unable to makepayments under such contracts .In addition, the PBGC is opposedto the establishment, by legisla-tion, of a federal guarantee ofannuity contracts.

The regulation of the insur-ance industry and guarantee ofannuity contracts historicallyhave occurred at the state level .Establishing a federal guarantysystem for an industry that is notnow regulated by the federal gov-ernment could lead to the kindsof moral hazards that resulted inthe savings and loan bailout .

Further, the design of a soundprogram for the federal guaranteeof annuities would involve com-plex, contentious, and probablyintractable issues. The PBGCbelieves that, through efforts bythe states, guarantee funds, andinsurance industry, the necessaryprotection can be achieved with-out the need for federal involve-ment.

Q What are the PBGC's pro-# posed changes to the mini-mum funding rules? What is thePBGC's rationale for thesechanges?

Thomas D. Levy testifies before the Senate Labor Subcommittee,flanked by Employee Benefits Research Institute President Dallas liSalisbury. Academy Pension Committee member Jeff Schwartz-mann is at the left.

A Minimum funding changess would speed up the pensionfunding process so that under-funded plans will be fully fundedin 10 to 20 years rather than the30 years it now takes

. A spans

of an underfunded plan wouldrhave to pay the highest of threecalculated amounts: the amountunder the original 1974 rule, astronger version of the 1987deficit reduction contributionrule, and a new solvency mainte-nance rule .

The new solvency maintenancerule would require a sponsor'spension contribution to equal theamount paid out in benefits plusinterest on the underfunding . It isdesigned to correct the problem ofrapidly dwindling assets createdby an increasing number ofretirees and a shrinking activework force, and would be phasedin over 5 years to prevent undueburden on companies .

As to the rationale, eventhough companies follow existingfunding rules, their pensionunderfunding is growing. In just1 year , total underfunding indefined benefit plans increasedfrom about $30 billion to $40 billion. Of that total, $13 billioncompared to $8 billion the previ-ous year-is associated withfinancially weak companies andrepresents a serious risk to thePBGC.

Some actuaries think thatQ . only underfunded plansshould be required to makequarterly contributions. Doesthe PBGC have a stake in requir-ing that plans funded beyondtermination liabilities make con-tributions quarterly?

A For underfunded plans, thea quarterly contribution re-quirement protects the interestsof plan participants and thePBGC. The quarterly contribu-tion requirement will increasecollections from companies thatmight otherwise miss an entireannual payment . Missed quar-terly contributions by under-funded plans serve as an earlysign that a plan sponsor is ifinancial difficulty . Requirin~overfunded plans to make quar-terly payments adds little to thePBGC's security. ∎

8 The Actuarial Update ∎ September 1992