rAMERICANACADEMY OFACTUARIES

VOLUME 24NUMBER 5

MAY 1995

THIS MONTH2 Academy Offers MSA Analysis

From a Guest President

3Pension Practice

Council News4

Actuarial Standardsof Qualification

5Key Senator Meets Academy

to6

Academy Assists NAIC

7Capitol Views

ENCLOSURESIncluded with this month's

issue of The Actuarial Updateare the following :

In Search Of

ASB Boxscore

ASB Annual Report

Jarvis Farley Service AwardReply Card

Volunteer Service Reply Card

Board of DirectorsNominations Reply Card

THIRTY

•334DYEARS

Serving the Actuarial Profession

Edwin Hustead (left), Academy MSA work group chair, and Andrew Shore, chief healthpolicy aide to House Ways andMeans Chairman Bill Archer (R- Texas) met on April 1 0.

0

n April 10 Academy mem-bers briefed key federalanalysts on the hottesttrend in health care reform :medical savings accounts

(MSAs) .MSAs-employer-funded

individual savings accounts formedical care spending-areexpected to be a key element inany health care reform legislationfrom the 104th Congress. MSAsare an untried idea, and interestin how they will work and theeffect they'll have on utilizationof health care services has beenextraordinary .

An Academy work group hasbeen studying the issue sinceDecember, and is almost readyto issue its monograph . Workgroup members Edwin Husteadand Mark Litow met with thepolicy analysts-many of whom

have participated informally inthe work group's deliberations-to give them an advance look atthe actuaries' findings . Workgroup chair Hustead answereddetailed questions about themonograph's major conclusions .

Health policy experts from thestaffs of House Ways and MeansChairman Bill Archer (R-Texas),Rep . Pete Stark (D-Calif.), andSen. Edward Kennedy (D-Mass .)participated in the meeting, asdid key staffers from the Con-gressional Budget Office, theCongressional Research Service,the Treasury Department, andthe Agency for Health Care Poli-cy and Research. Academy Exec-utive Director Wilson Wyatt,Director of Public Policy GaryHendricks, and Health PolicyAnalyst Michael Anzick also tookpart in the meeting.

NonforfeitureLaw to BoostActuarial RoleBy Donna Claire

is a brave new world. Theinsurance marketplace is morecompetitive , and consumers'needs are changing . A numberof insurance regulators recog-

nize that old ways of doing busi-ness no longer fit today's condi-tions. Therefore, at the Marchspring meeting of the NationalAssociation of Insurance Com-missioners , the NA1C Life andHealth Actuarial Task Force(LHATF) proposed investigatingmajor revisions to the life standardnonforfeiture law.

The LHATF working groupthat 's studying the issue hasdecided to go back to basics inretooling the law . Underlying theworking group's efforts is thebelief that continuing policyhold-ers should not be significantlyadvantaged or disadvantaged bypolicyholders who terminatetheir policies .

The LHATF working groupstarts with several basic premises .These include :

0 A minimum standard ofreturn to policyholders should beprovided .0 The development of new bene-fits and product designs shouldnot be unreasonably restricted .0 Basic equity and sound finan-cial management should hemaintained.

Continued on page 6

Participants thanked the workgroup and the Academy for pro-ducing a rigorous analysis thatwould provide a solid founda-tion for the upcoming policydebate. The monograph will beofficially released at a May 2press breakfast. 3;

FA41001111,N

T tai OrlinttiWlACTUARIES

PresidentCharles A . Bryan

President-ElectJack M . Turnquist

Vice PresidentsJohn M . BertkoHoward FluhrDavid P . Flynn

Paul F . KolkmanCharles Barry H . Watson

Secretary-TreasurerJames R . SwensonExecutive Director

Wilson W . Wyatt, Jr.

EXECUTIVE OFFICEThe American Academy

of Actuaries1100 Seventeenth Street, NW

7th FloorWashington, DC 20036

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

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THE ACTUARIALUPDATE

Committee on PublicationsChairperson

E . Ton! MulderEditor

Adam ReeseAssociate Editors

William CarrollRonald Gebhardtsbauer

Patrick J . GrannanManaging EditorJeffrey Speicher

74764,2620lmco mpuserve.comContributing Editor

Ken KrehbielProduction Manager

Renee Saunders

Statements of fact and opinion in thispublication, including act tarials and let-

ters to the editor, are made on theresponsibility of the authors alone anddo rol necessarily imply or representthe position of the American Academy

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

Paradigms, Boxes,and FiresBy Larry Baber

n the past several years,paradigm has become the mostfashionable word around. Theopening session of the 1991Conference of Consulting

Actuaries annual meeting wastitled "The Power of Paradigms."Former Society of Actuaries Presi-dent Steve Radcliffe spoke ofparadigms in his message to SOAmembers. Joel Barker'sParadigms, the Business of Discov-ering the Future is the book thatactuarial consultant and idea manBob Shapiro recommends mostoften. I am sure many of youhave become familiar with theconcept of paradigms in the lastcouple of years.

It is an interesting subject .But what is a paradigm? In Pow-ers of the Mind, Adam Smithdefines it as: "A shared set ofassumptions. The paradigm is theway we perceive the world; waterto the fish. The paradigmexplains the world to us andhelps us to predict its behavior ."

Paradigms touch us in everyphase of our lives. To complicatematters, new paradigms are sur-facing constantly. Theseparadigm shifts affect us all, bothpersonally and professionally .They affect our companies andfirms, and our professional orga-nizations. Paradigm shifts aremoves away from business asusual. They can and do happeneverywhere, but many people areunaware of them . People whorecognize paradigm shifts andrespond to them will havetremendous advantages overthose who do not, But it is notsufficient to recognize and reactto them; we must also learn tobring them about .

p~esidenr

Outside the Box

New paradigms do not comefrom a crystal ball. They comefrom innovation and anticipa-tion. So what do paradigms haveto do with boxes? I like to char-acterize the development of newparadigms as thinking outside thebox. You may have seen the puz-zle that consists of a nine dots inthree vertical and three horizon-tal rows.

You are asked to connect allthe dots with only four straightlines without lifting the pencil . Ifyou try to stay within the box, youcannot do it. Only by going out-side the box, can the puzzle besolved.

Another box puzzle is posed asa question: "How many sides arethere to a box? Four, five, six,seven , or eight? " Technically theanswer could be four if you arethinking of two dimensions; four,five, or six if you are thinking ofthree dimensions with or withouta top andlor bottom; seven oreight if you expand your percep-tion to inside or outside the box.

These puzzles illustrate howproblems can be solved or viewedif you are not hindered by conven-tional thinking , i .e . business asusual. The first has a specific solu-tion whereas the second has mul-tiple solutions depending on one'sperspective. Different paradigms,like different perspectives, mayend up with different, yet correctexplanations of what's happening .

We constantly hear about themany problems facing us as actu-aries : solvency analysis, policyillustrations, re-engineering theprofession, real and potentialunemployment of actuariesnational health care, a nation4retirement plan, the difficulties ofhaving five U .S . actuarial organi-zations. 'The list goes on . Tosolve this plethora of problems,we need more innovation andanticipation. We need some newparadigms, which can only bedeveloped by thinking outside thebox.

Are all of us capable of devel-oping new paradigms? Possibly,but not likely. Joel Barker says,

"Not everyone can formulatesuccessful new paradigms. Onlya few do that . But all of us can bemore open to looking for thechanges, exploring them for theirimplications, and creating a sup-port climate for the attempts ."

These, according to Barker,are the pioneers of newparadigms . We need more pio-neers thinking outside the box .

Inside the Fire

There are, however, several pfalls I must warn you about .First, human beings- even actu-aries-are naturally resistant tochange. We are comfortable withbusiness as usual. Second, actu-arial science is well founded onprinciples . In most cases, anynew ideas will have to conform tothese principles . Third, if youchoose to be an innovator or aleader and stand inside the fire,you must be able to take the heat .All new paradigms will attractcritics and nonbelievers ready tocriticize and discredit the inven-tors and the pioneers .

If actuarial science is going toremain the profession we believeit to be, we must be more willingto embrace new paradigms . Ourprofession, employers, and orga-nizations need people who arewilling and able to think outsidethe box and stand inside the fire .

Baber is president o f the Confereeof Consulting Actuaries. For thesolution to the box puzzle, seepage 6 .

2 The Actuarial Update ∎ May 1995

PENSION ,practice covucilNEWS

~fhe Future of Retirement

By Howard Fluhr

B y its very nature, the actuarial profession focuses on the long-term. The actuarial perspective therefore stands in sharpcontrast to most legislative and regulatory action, which is

geared toward patchwork remedies that attempt to solve prob-lems quickly but not effectively . Shortsighted answers in theform of quick fixes seem to afflict our entire society .

In the vital matter of pension policy, we must overcome thisshort-term syndrome. To ensure the financial security of ournation's elderly, we need a long-term approach . A comprehen-sive national retirement income policy-supported by govern-ment, employers, and pension professionals-must be at thecenter of that effort .

Actuaries have been a voice in the wilderness pointing out thenecessity of looking at the long-term. When interest rates rise,many say, "Obviously, the defined-benefit plans are too wellfunded, or too little is being contributed ." And when interestrates fall, we hear the opposite . "Everyone is putting away toomuch money and trying to beat the tax system ." Are theseobservers correct? No . These issues need a long-term, not short-term, perspective.

On the one hand, Congress has said we need to provide bene-fit security, and on the other hand we need to enhance tax rev-

enue. It seems that noone recognizes that pen-sion plan contributionsare not tax exemptions,but rather tax deferrals .Of course, because oursociety lives quarter-to-quarter, or fiscal year tofiscal year, the long-termis rarely even considered .

Over the past 30 years,policy makers have for-gotten national retirementincome policy . The lasttime it was addressed,during the KennedyAdministration, ultimate-ly led to the enactment ofERISA. Since then pen-sion legislation and regu-latory actions have pro-

Academy Vice President Howard Fluhraddressed the March 21 general session ofthe 1995 Enrolled Actuaries Meeting.More than 1,600 pension actuaries attend-ed this year's meeting in Washington, D.C.

duced rules of ever increasing complexity, beyond the reasonableunderstanding of even the most experienced actuaries . Enormousamounts of time, effort, and resources are spent dealing with thesearcane rules. The cost of complying with inscrutable regulationsputs a burden on employers and acts as a formidable disincentiveagainst plan formation. While the authors of ERISA were motivat-ed by the need to protect participants, in the past decade the driv-ing force behind pension policy has been increased tax revenue .

We have lost our way without a national retirement incomepolicy. To reestablish a sound policy academics, Congress, and

Continued on page 8

. Pension Practice CouncilHoward Fluhr, vice president(202-223-8196, ext. 253)

Key Issue Academy Objective Academy ActionRational Retirement income Policy Promote establishment of nonpartisan national commission Council contacted key members of Congress to encourage enabling legislation

Analyze long-term income replacement trends Academy task force will report on 40-yeartrends in retirement income

Improve Status of Pension Support ASB efforts to enhance pension actuaries role Pension Committee commented on draft ASP standard on economicActuaries with Policy Makers assumptions for pension plans

Council encouraging federal regulators to participate in standards process

Rurture cooperative relutiorrships with Washington Academy senior pens= fellow program established ; first fellow selected , short- term goals set,pension policy makers long-term goals being developed

Financial Status of Social Security Provide technical analysis to policy makers Social Insurance Committee : commented on Social Security Trustees' Report for keyand Other Social Insurance Programs

Regulatory Efficiency Analyze technical aspects of current policy proposalsand Short-term Pension Reform

Suggest technical changes to legislation and regulations

Impact of Proposed Tax Legislation Analyze technical aspects of legislative proposalson Non Funding and Benefits

Promote uniformity of state taxation of pensions

congressional committees ; continued to work on draft ASB social insurance standard

Pension Committee recommended: 1995 priorities to the IRSand the PBG(; implementation of GAIT pension provisions

Pension Committee : recommended reinstatement of IRS Rev . Proc . 85-29; advocated 6-monthextension for reinstated defined contribution plans ; drafted comments for IRS onRev . Rul . 95 .28 ; commented on pension simplification provisions for House Ways and Means

Pension Committee provided comments on Republican tax bill to House of Representativesand Senate Finance Committee

Article an variations in state lax policy in February Enrolled Actuaries Report

Pnclal Accounting Standards Provide technical support to Financial Accounting Standards Board , Pension Committee: peer-reviewed draft standard of pension cost accounting forPrivate and Government Plans Governmental Accounting Standards Board , and government contractors; commented on and discussed with FASAB draft standard for

Financial Accounting Standards Advisory Board federal government liabilities accounting

The Actuarial Update ∎ May 1995 3

Actuarial Standards of QualificationEARLEY AV'The 1995 Jarvis Farley

Service Award willhonor an individualwho has contributedoutstanding volunteer

service to theAcademy and the

actuarial profession .The award, named fordedicated Academyvolunteer Jarvis

Farley, to date hashonored Mary

Nardiman Adams,Jerome Scheibl, andDouglas C. Gorton .

All Academymembers-exceptcurrent Executive

Committeemembers-are

eligible nominees .To submit a

nomination, fill out thepostcard enclosedwith this month's

Update, providing abrief description ofyour nominee's

contributions to theprofession .

Nominations must bereceived by June 30 .The award will bepresented at the

Academy's AnnualMeeting onOctober 16 .

Attention Future FarleyWinners:

Academy volunteerservice cards are alsoenclosed with thisUpdate . Please

consider offering yourexpertise to help anAcademy committee

or work groupadvance ourprofession.

By Brian A. Jones

o you know which stan-dards you must meet tomake a public statement ofactuarial opinion? Do youknow which opinions fall

into the category of public state-ment?

These questions are answeredin an important document thatdeserves your attention: the

Brian Jones

Academy'sQualificationStandards forPublic State-ments of Actu-arial Opinion .The qualifica-tion standardsestablish mini-mum levels of

qualification for those offeringactuarial advice in the form ofpublic statements .

Qualification standards arenot just for Academy members .Precept 3 of the profession'sCommon Code of ProfessionalConduct makes clear that mem-bers of all United States andCanadian actuarial bodies mustcomply with qualification stan-dards when issuing public state-ments in the U.S .

All actuaries should becomefamiliar with the standards andbe aware that failure to complymight subject them to disci-plinary action .

What Standards Cover

Qualification standards applyonly to the issuance of publicstatements of actuarial opinion,which are

U opinions called for by law orregulation ;U opinions called for by a stan-dard of practice or a complianceguideline of the Actuarial Stan-dards Board ; orO actuarial communicationsmade for purposes of compliancewith standards of the FinancialAccounting Standards Board or

the Governmental AccountingStandards Board .

Qualification standards gener-ally do not cover calculations,demonstrations, drafts, and anal-yses that circulate only in-house ;trainees or actuaries workingtoward qualification in a specificarea may prepare these docu-ments without violating the qual-ification standards. (If this werenot so, it would be difficult tomeet the standards' experiencerequirements .)

Qualification standards fallinto two categories : general andspecific .

General Practice Standard

An actuary who makes publicstatements in any of the basicactuarial practice areas-life,health, pensions, and casualty-must meet the requirements ofthe general qualification standardin that area. An actuary whomakes public statements in mul-tiple areas must meet each area'srequirements separately.

Specific Qualification Standards

Currently, specific qualificationstandards apply to actuaries whosign statements of actuarial opin-ion submitted with the followingblanks of the National Associa-tion of Insurance Commission-ers: Life and A & H ; Fire andCasualty; Hospital, Medical, andDental Service or Indemnity Cor-poration ; and Health Mainte-nance Organization Statements .Again, these requirements aredistinct from each other andfrom the general requirements .However, when actuaries satisfyspecific requirements, they oftensatisfy general practice arearequirements as well .

The qualification standardshave three elements : basic edu-cation, experience, and continu-ing education .

Basic Education

in the words of the qualificationstandards, a member "preferably

The Actuarial Update ∎ May 1995

demonstrates satisfaction of thebasic education requirements ofthe general and specific qualifica-tion standards by successful com-pletion of the applicable actuarialexaminations" (emphasis added)There is also an alternativ"acquiring comprehensive knowl-edge of the applicable syllabustopics through responsible workand study." This permits actuar-ies to move into new practiceareas without going back to takeadditional exams . Actuaries whoopt for this alternative mustobtain and "be prepared to fur-nish" a written statement fromanother member qualified in thearea "regarding the member'sknowledge of the subject matter ofthe function ." Obviously, suchstatements should not be issuedlightly; they are a serious responsi-bility and could subject a memberto liability if improperly issued .

Experience

The standards require that anactuary have "relevant, recentexperience involving significantresponsibility . . . in, or relatedthe subject area ." It is the "ethicresponsibility of the member"(emphasis added) to evaluate thatexperience . In the three specificqualification areas, a minimum of"3 years under review by a quali-fied member" are required, butthis experience need not be recent .

Continuing Education

Continuing education helpsensure that skills are kept up todate. The requirements call foran average of 12 hours of studyper calendar year. Half the hoursmust be from organized activitiessuch as meetings and seminars,while the remainder may be fromactivities such as independentstudy for which there is writtendocumentation . Compliance ismeasured on a 2-year retrospec-tive basis .

There is no procedure tfor reporting of houryproviders or members ; ea hmember is responsible for main-taining records .

Qualification for EAs

An actuary who is currentlyenrolled with the Joint Board forthe Enrollment of Actuaries is"deemed to meet the [Academy]

Srequirements . . . with respect toany public statement of actuarialopinion for which Enrolled Actu-ary status is required." While thisstipulation covers all require-ments, not only continuing edu-cation, it is important to note thatit applies only where enrollment isrequired. It would not, therefore,cover an actuary doing other pen-sion work; an actuarial report ona state or municipal plan requiredby a state law that does not call forthe certification of an enrolledactuary is an obvious example .

Beyond Qualification Standards

Once an actuary is satisfied thathe or she has met the formal stan-dards for a particular actuarialtask, it is tempting to heave a sighof relief and complete the state-ment. However, this could wellbe a breach of the Code of Profes-sional Conduct . To see why, we

•ust look at Precept 3. It reads :"An actuary shall perform pro-

fessional services only when theactuary is qualified to do so andmeets applicable qualificationstandards" (emphasis added) .

Meeting the standards is,therefore, only a part of beingqualified under the Code-and,at least initially, the actuary is thejudge of his or her own qualifica-tions. Once the formal standardis satisfied, the judgmentbecomes subjective ; the actuarymust ask: Am I equipped to"fulfill the profession's responsi-bility to the public"?

Of course, other actuaries, theActuarial Board for Counselingand Discipline, regulatory bodies,and ultimately the courts mayquestion our judgment in a par-ticular case .

A Final Caution

blic Statement of Actuarialnion" sounds very formal .

of necessarily! All actuariesshould bear in mind that thepublic may treat their advice as a

professional opinion even thoughit is actually beyond their area ofexpertise. Where this is foresee-able, an actuary should be carefulto avoid such treatment. Clearly,not all such advice reaches thepublic-statement level. However,a comment such as "theseassumptions are clearly overlyconservative," from an actuarywho is not qualified under thestandards in the area would beimproper. On the other hand,words such as "even though thisis not my area of specialization,these assumptions seem veryconservative to me, and I wouldsuggest a second opinion from aspecialist" seem well within thebounds of the permissible.

The Academy Committee onQualifications stands ready tohelp all actuaries better under-stand the qualification standardsand their application to the actu-ary's professional life . Foranswers to specific questions or

Key SenatorMeets Academy0 n March 22 Sen. Robert

Bennett (R-Utah), newchairman of the SenateRepublican Health CareTask Force, hosted a group

of Academy representatives to dis-cuss ways the actuarial professioncan assist the task force .

Meeting the senator in hisCapitol Hill office were AcademyExecutive Director Wilson Wyatt ;Utah Insurance CommissionerRobert Wilcox and State HealthCommittee Chairperson BillBluhm, both members of theAcademy Board of Directors ;Academy member Peggy Pear-son; and Christine Cassidy,Academy assistant director ofpublic policy. Chip Yost, Ben-nett's chief health policy aide,also took part in the meeting.

Bennett told the group that histask force would not actually draftlegislation, but would instead sup-port the work of the committees

ATTENTION! IMPORTANT SURVEY ENCLOSEDThe Academy Committee an Qualification needs your help todevelop more specific guidance on how actuaries shouldprepare records verifying that they have met qualificationstandards . The committee has prepared the enclosedanonymous survey to learn more about members ' attitudestoward qualification standards and particularly the continuingeducation requirements .

Your candid response is essential to the survey ' s success.Please complete the survey and return it to the Committee onQualifications in care of the Academy by June 15 .

for further information about thestandards , contact the committeethrough the Academy's Washing-ton office .

Jones is a consulting actuary inNew York City and a member ofthe Academy Committee onQualifications. He is also amember ofthe bar in New Yorkand the District of Columbia .

of jurisdiction by educating sena-tors and building consensus .Wilcox noted that the Academy,as a source of unbiased informa-tion, was a perfect resource for thetask force's role. Wyatt brieflydescribed the types of assistanceavailable from the Academy andassured the senator that the actu-arial profession was eager to helpthe new Congress craft soundhealth care reform legislation .

Hill staffer Yost praised theAcademy's 1994 health carereform monograph series, and infact requested an additional set toreplace copies he'd distributedamong colleagues . He alsoexpressed keen interest in readingthe soon-to-be-released mono-graph of the Academy MedicalSavings Account Work Group .Yost predicted that medical sav-ings accounts will be a key com-ponent of any health care propos-al passed by the GOP Congressthis year.

The Academy and its FederalHealth Committee will follow upwith Bennett and his task forcelater this legislative session ashealth care emerges as a Senatepriority.®

The Actuarial Update • May 1995 5

Academy Helps NAIC on Many FrontsBy Jean Rosales

T

he National Association ofInsurance Commissioners(NAIC) requested technicalassistance from the Acade-my on life, health, and

casualty issues at the March12-15 NAIC spring meeting inMiami Beach .

LIFE

The NAIC Life & Health Actuari-al Task Force (LHATF) soughtAcademy technical assistance onseveral policy questions .

During 2 days of meetings, theLHATF asked the Academy to :

0 analyze and recommendchanges to the annuity valuationstandards of the current standardvaluation law. (This project willhe carried out by the newlyformed Annuity Valuation TaskForce, chaired by Doug Doll .)0 recommend issues that theNAIC project on codification of

NONFORFEITURE LAW,continued from page 1

0 The industry should be regulat-ed at the least restrictive level nec-essary to obtain the desiredresults.

The working group has alsodeveloped working principles .The most significant departurefrom current law: Althoughnonforfeiture values are stillrequired, cash surrender valuesmay be optional .

The working group is alsoexamining whether nonforfeitureamounts may be based on adynamic standard. The Academyhas been asked to study the issueand offer its recommendations tothe LHATF. Under thisapproach, actuarial certificationof life insurance probably wouldbe required . An actuary wouldhave to certify that policyholders

SAY/GAAP principles shouldexamine. (To be carried out by awork group of the Committee onProperty and Liability FinancialReporting.)0 recommend the appropriateunamortized expense from fundvalue deduction when determin-ing life nonforfciture benefits .(See Donna Claire's page 1 articlefor more on this issue .)

The LHATF also restated itsearlier request that the Academystudy reserving for guaranteeddeath benefits in variable annuityproducts. (To be undertaken by aCommittee on Life Insurancework group chaired by CraigRaymond.)

Life RBC

Recognizing a need for technicalsupport in its deliberations, theNAIC Life Risk Based Capital(RBC) Working Group last yearformally asked the Academy to

were being treated equitably atthe time of policy filing andannually thereafter .

While no changes have beendecided upon, the LHATF isworking on a fast track. If theworking group continues alongcurrent lines, the new standardlaw will remove artificial con-straints on product design in theU.S . and enhance actuaries'responsibility for the fair treat-ment of policyholders. TheAcademy is helping develop a lawto carry life insurance into the21st century.

Claire is president of ClaireThinking in 1)ix Hills, New Yorkand a member of the AcademyCommittee on Life Insurance .Informally, she also providesActuaries Online subscribers withcomprehensive reports on lifeinsurance issues from meetings ofthe NAIC.

create a task force to provide tech-nical assistance. The AcademyTask Force on Life Risk BasedCapital's first report, presented bytask force chair Cande Olsen atthe March meeting, focused onthe factor for mortgages in gooclwstanding, the Beta factor for com-mon stock, and the combinationof risks/covariance in the formula .

After receiving the Academyreport, the NAIC Life RBCWorking Group asked the Acade-my task force to study :

J the determination of the fac-tor for mortgages in good stand-ing and report to the NAICgroup at the June meeting .0 the property/casualty risk-based capital formula's treatmentof C-1 risk in subsidiaries todetermine if that method can beapplied to the life RBC formula .

Life & Health Standard ValuationLaw Manual

Several LHATF members citedthe usefulness of the Academy'sstate law compliance guide foractuaries, the Life & Health Stan-dard Valuation Law Manual .task force working group, wiAcademy participation, wilreview problems that actuariesface in complying with state reg-ulations and may consider draft-ing a standard law that wouldgive the manual official recogni-tion : Actuarial opinions thatconformed to state requirementsas outlined in the manual wouldhe deemed in compliance .

Genetic Testing

Members of the NAIC GeneticTesting Work Group showedstrong interest in a possibleAcademy-sponsored symposiumon genetic testing that wouldbring together regulators, indus-try and consumer representa-tives, and other interested partiesto discuss genetic testing's impacton life underwriting.

HEALTH

As part of its work on a guateed issue individual health insante model act, the LHATF asked

Continued on page 8

u The Actuarial Update ∎ May 1995

capitol~

On April3 the Boards of Trusteesf the Social Security and Medi-

care programs sent Congress theirannual reports on the financialstatus of the Social Security andMedicare trust funds. Thetrustees : predict that the. Medi-care Hospital Insurance (HI)trust fund will be exhausted in2002; find the SupplementaryMedical Insurance (SMI) trustfund actuarially sound; warn thatSMI cost increases show little signof abating; estimate that. the Old-Age and Survivors Insurance(OASI) trust fund will be able topay benefits for 36 more years,while the Disability Insurance(DI) trust fund could go bust in21 years. The combined OASDItrust funds are predicted to besolvent until 2029. The AcademySocial Insurance Committee willsubmit its analysis of the trusteereports to Congress later thisspring.

~Hate supporters of medicalMalpractice reform will use a

product liability reform bill as avehicle for their issue . The Senateproduct liability bill discarded themedical malpractice provisions ofthe more sweeping bill passed bythe House March 10. Sen. MitchMcConnell (R-Ky .) will offer Sen .Nancy Kassebaum's (R-Kans.)medical malpractice reform mea-sure as a floor amendment to theproduct liability bill . Kasse-baum's bill includes a cap onpunitive damages, but deliberate-ly excludes a cap on non-eco-nomic damages in order to mini-mize opposition . The amend-ment will face a stiff challengefrom Republican leaders, includ-ing Majority Whip Trent Lott (R-Miss.), who want a narrow prod-uct liability bill that can garner afilibuster-proof sixty votes . "Weare not going to take any crap onthis bill," said Lott . If

onnell's effort fails, malprac-reform supporters will look

to Senate Judiciary ChairmanOrrin Hatch's (R-Utah) civil lia-bility reform bill, which includes

a $250,000 cap on noneconomicdamages, or will wait until theSenate considers health carereform .

In Texas meanwhile, several tortreform bills that would benefitactuaries are pending before thestate House of Representatives .Combined, the four bills would :eliminate joint and several liabili-ty in most tort suits for defen-dants who are responsible for50% or less of a plaintiffs injury ;permit punitive damages onlywhere the defendant acted withmalice; sanction attorneys whofile frivolous suits; and prohibitforum-shopping . In a letter toTexas legislators, the Academyurged support for the reform ini-tiatives. The Academy has alsoinformed Texas actuaries of thelegislative developments andencouraged them to contact theirrepresentatives .

Following the recent SupremeCourt ruling in NationsBank v.VALIC, the U .S. Comptroller ofthe Currency has issued a pro-posed regulation to authorizenational banks to underwritecredit life, heath, and accidentinsurance by entering into debtcancellation contacts . Under theproposed rule banks not onlycould underwrite or reinsurepolicies sold through sub-sidiaries, but could also under-write directly as part of theirbanking operations . The pro-posed regulation would expandnational banks' authority beyondannuity brokering to include abroad range of credit insuranceactivities . The proposed regula-tion would not specificallyrequire national banks and theirsubsidiaries to meet the samereserving and regulatory require-ments that insurance companiesmust satisfy under state law. TheAcademy's General Counsel isreviewing the Comptroller's pro-posal, and anticipates filing com-ments to ensure that actuarialconsiderations are given dueweight before the proposed regu-lation is adopted .

Medicare beneficiaries wouldhave expanded options under

legislation being drafted byHouse Ways and Means HealthSubcommittee staff. In additionto the current fee-for-serviceoption, beneficiaries would beoffered a medical savingsaccount option, an employer andassociation option, and anincrease in managed careoptions. Under the employerand association option, Medicarebeneficiaries who turn 65 couldremain in plans sponsored bytheir employer or associations,which would be compensated bythe Health Care FinancingAdministration . SubcommitteeChairman Bill Thomas (Calif.) isexpected to introduce the pack-age shortly after spring recess . 15

ACABHNY W MA' MAIMHOUSE ItAL H B11Any federal reform of the group health market should includesell-insurers , the Academy Health Practice Council 's ERISAPreemption Work Group has told Congress .

The work group offered its comments to the House Educationand Economic Opportunities Committee , which is consideringH .R. 995 , a proposal to preempt state health insuranceregulations with federal market reforms . The bill would set up afederal regulatory structure with enforcing authority vested in theindividual states . The work group comments responded to arequest from Russell Mueller , Academy member and committeestaff actuary .

If self-insurers are not included in the reform proposals,employers will likely shift coverage to self-funded health plans inorder to escape the mandates imposed on traditional insurers,according to the work group . All group insurance providers mustoperate under the same regulations for the playing field to betruly level, the group added .

The work group also noted that :

© H.R . 995 's solvency standards appear to be adequate, but anexplicit full-funding requirement for reserves should be added .El Self-insurers ' reserves should be in an account separate fromgeneral operating expenses .U The bill's language on preexisting conditions is ambiguousand should be clarified .O Great& selection risk presented by people moving fromMedicare/catastrophic to full coverage may require somepreexisting condition limitations .U The bill' s prohibition on small-group denials will have animpact on health plan pricing .

Erisa Preemption Work Group rlembers Don Gasparro and JohnSchubert and peer reviewer Michael Sipos were the primaryauthors of the Academy comments .

The Actuarial Update ∎ May 1995 7

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NAIL, continued from page 6

the Academy State Health Com-mittee to determine issues relat-ing to a single rating approach forthe individual market, includingunwanted effects. In addition,the committee will study the indi-vidual market and analyze state-to-state differences . (Committeemember Donna Novak is chair-ing this effort.)

Health RBCIAt the Miami Beach meeting,State Health Committee chairper-son Bill Bluhm presented a letter

PENSION, continued from page 3

the professional communitymust work together more closelythan they have in the recent past .

Two opposing trends in retire-ment are operating. On the onehand, we see a trend toward earlyretirement, to some extent relatedto downsizing. But also there ispressure to continue employmentbeyond normal retirement age,resulting from changes in law anddemographics . We need to find away to deal with such conflictingtrends. If we focus on a singleissue to the exclusion of all otherswe will not be successful.

We have to look at the needsof the next generation . Workpatterns today are very differentfrom those in the past . Longevitycontinues to improve, and thereare many more women in the

to the NAIC Health OrganizationsRisk Based Capital WorkingGroup that clarifies specific provi-sions of the Academy health riskbased capital formula recommen-dations. The committee letterexplained : direct specific andaggregate stop loss ; the rateapproval adjustment ; the treat-ment of assessments; Medicareand Medicaid at-risk contracts ;increased risks associated withpremium guarantees ; reinsurancecredits; and the adjustment forincreased risk in C-2 . The NAICalso asked the committee to domodeling for the rate approvaladjustment provision .

work force than there were 10 or20 years ago. We need to designinnovative defined-benefit/defined-contributionhybrids that will meet the needsof participants better than eitherdefined benefit or defined contri-bution plans alone. We need tomake them easy to implement .Finally, we need to achieve a bal-ance between social adequacy andfiscal responsibility. We mustbegin now to make informeddecisions about the future ofretirement in the United States .

Fluhr is Academy vice presidentand chairperson of the PensionPractice Council . This article hasbeen adapted from his March 9testimony before the U.S. AdvisoryCouncil on Social Security.

What's the difference between a desertisland and the Actuarial Board forCounseling and Discipline? No, theanswer's not drinks with umbrellas .The tropical scene at left is from a newvideo that takes a light-hearted look atthe serious work of the ABCD . Thevideo, produced by the Academy Com-munications Department, has beendistributed to U.S. actuarial clubs andmajor employers of actuaries . For acopy to show your company or organi-zation, contact the Academy Commu-nications Department, 1100 Seven-teenth Street NW, 7th Floor, Washing-ton, DC20036.

CASUALTY

O The Academy's comments onguidelines for loss reserve dis-counting were adopted by theNAIC Casualty Actuarial TaskForce .U The Academy Committee o nProperty Liability FinancialReporting (COPLFR) recom-mended guidelines for actuarialopinions for mandated pools tothe task force, which is expectedto adopt them with few modifica-tions at its June meeting. Theguidelines were drafted under thedirection of COPLFR memberJan Lommele .

Property/Casualty Loss ReserveLaw Manual

Task force chair Dick Roth of theCalifornia Insurance Departmenturged state regulators to cooper-ate with the Academy in keepingthe manual up-to-date.

Academy Booth

A new Academy general informa-tion booth-designed to increaseactuarial visibility with state reg-ulators-made its debut at tMiami Beach meeting . On d1play were recent Academy policyreports, including the Life &Health Standard Valuation LawManual, the Property/CasualtyLoss Reserve Law Manual, theHORBC Task Force Report andRecommendations, the health carereform monograph series, and"Actuarial Support for SoundInsurance Regulation," a pam-phlet that details Academy pro-jects for the NAIC .

Academy Reception

On March 13, the Academy spon-sored a reception for NAIC andinsurance department staff mem-bers. The reception was hosted bythe Academy State Health Com-mittee, Long-term Care Commit-tee, Committee on Property andLiability Issues, Committee onProperty and Liability FinancialReporting, Committee on LifeInsurance, and Committee ofInsurance Financial Repor .The event drew more than €ttyattendees , including two stateinsurance commissioners. 3;®

81 The Actuarial Update- May 1995