•Actuafcoe ial Update

VOLUME 16 NUMBER 1

In t

2

his issue

Notes and Comments

3 Letters to the Editor

3 Seeking Your Advice

4 NAIC Report

4 Help Us Complete OurCollection

5 Academy Appoints Two NewTask Forces

6 IASB Issues First Standard

7 Academy Analyzes CivilJustice Reform Proposals

7 Non-Routine Board Actions

8 Actuarial War Stories

8 Checklist of AcademyStatements-November 1986

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8 Testimony Before NAICWorking Group

EnclosuresIncluded in this month's issue of The

Update are the following :• Government Relations Watch• Special State Supplement• In Search Of . . .• IASB Boxscore• Recommendations Concerning the

Redetermination (or Determination)of Non-Guaranteed Charges . . .

• Exposure Draft : Recommendationsfor Actuarial CommunicationsRelated to Statement of FinancialAccounting Standards No . 87

AMERICAN ACADEMY OF ACTUARIES JANUARY 1987

EA Continuing Education ReportCalls for Voluntary Self-EducationFollowing almost a year spent exploringalternatives to the current voluntarysystem of continuing education forenrolled actuaries, the Task Force onContinuing Qualification for EnrolledActuaries has issued its report to LeslieS . Shapiro, executive director ofthe JointBoard for the Enrollment of Actuaries .Four members of the eight-member

task force recommended that the pres-ent system be maintained as is . Theycited the "increased cost, time and effort"beyond what enrolled actuaries arepresently doing on a voluntary basis asan unjustifiable burden . "The role of thegovernment is to require enrolled actu-aries to meet minimum standards, notto require all enrolled actuaries toadvance their knowledge under a rigidset of rules," reads the statement of thefour issued on November 18. 1986 .

The task force was convened in Feb-ruary 1986, at Shapiro's behest. Thepanel met three times with Shapiro andaltogether on seven occasions to con-sider the feasibility of adopting either :(1) a voluntary self-education programwith no requirements to any specificnumber of continuing education cred-its for renewal of enrollment status ; (2)a periodic proficiency examination ; (3)establishment of a peer review commit-tee; or (4) establishment of a formal con-tinuing education program of either acompulsory or voluntary nature .

Background

To achieve enrolled status, pensionactuaries, under provisions of theEmployee Retirement Income SecurityAct (ERISA) . must pass two initial exam-inations given jointly by the Joint Boardfor the Enrollment of Actuaries, theSociety of Actuaries (SOA), and theAmerican Society of Pension Actuaries(ASPA). Renewal is accomplishedthrough a process of formal application,but does not require re-examination norproof of continuing professional edu-cation. TheFederalRegister of January22, 1986 (51 FR 2875 ; 31 CFR Part 10)

contains regulations describing a pro-gram of continuing education that mustbe maintained by attorneys, certifiedpublic accountants, and enrolled agents,practicing before the Internal RevenueService. However, Gary D . Simms, theAcademy's general counsel, emphasizesthat although enrolled actuaries areincluded in the title page to this regu-lation, these requirements do not applyto enrolled actuaries .At the first general session of the

Enrolled Actuaries Meeting In February1986, Shapiro outlined the then newly-created regulations for enrolled agentsand Indicated that a decision regardinga continuing education requirement forenrolled actuaries would await the sub-mission of proposals from a task forcecomprising representatives from theAcademy, the SOA, the Conference ofActuaries in Public Practice, and ASPA .

The Report

In its report, the task force asserted thatthe "vast majority of enrolled actuariesalready voluntarily obtain significantamounts of continuing educationthrough formal and informal means ."The benefits of adopting a formal con-tinuing education program wereassessed in terms of enhancing thequality of the individual actuary's workand uplifting the profession by makingavailable "a structure and the best tal-ent to assist professionals who work inthis difficult and challenging environ-ment." -

(continued on page 3)

IASB Issues FirstStandardThe Interim Actuarial StandardsBoard has issued "RecommendationsConcerning the Redetermination (orDetermination) of Non-GuaranteedCharges and/or Benefits for LifeInsurance and Annuity Contracts."Story inside on page 6 .

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of Actuaries

PresidentPreston C. BassettPresident-ElectJohn A. FibigerVice PresidentsEdward H . FriendCommittees on Public Issues-EmployeeBenefits and Social InsuranceBurton D. JayCommittees on Accreditation,Qualification and Communication

W. James MacGinnitieCommittees on Public Issues-InsuranceMavis A. WaltersCommittees on Accounting andFinancial Reporting

SecretaryRobert H. DobsonTreasurerDaniel J. McCarthyExecutive DirectorStephen G. KellisonExecutive Office1720 I Street, N.W. 7th FloorWashington, D.C. 20006(202) 223-8196Membership Administration500 Park BoulevardItasca, Illinois 60143(312) 773-4204

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

American Academy of Actuaries17201 Street, N .W. 7th FloorWashington. D.C. 20006Statements of fact and opinion in this publication .including editorials and letters to the editor, are madeon the responsibility of the authors alone and do notnecessarily imply or represent the position of theAmerican Academy of Actuaries . the editors . or themembers of the Academy.

Notes

Colt ments

William T. Tozer

Non-Guaranteed Promises :A New Standard of PracticeAt the 1986 Annual Meeting of theAmerican Council of Life Insurance(ACLI) Chairman John Pearson stated:"Our products must do what we say theydo. Our companies must fulfill theirpromises . All the words in the world-the best government relations, the bestpublic relations-will not be enoughwithout performance ." In the January1987 issue of Insurance Forum . JosephBelth makes the statement : "In myopinion, life insurance sales illustra-tions are out of control. Furthermore, Iam not aware of any significant attemptsby any insurance organization or by theactuarial profession to deal with theproblem." At its December meeting . theAcademy's Board ofDirectors took stepsto "deal with the problem" by adopting"Recommendations Concerning theRedetermination (or Determination) ofNon-Guaranteed Charges and/or Bene-fits for Life Insurance and Annuity Con-tracts ."

There is hardly a life insurance com-pany in the United States today thatdoesn't sell some products that have non-guaranteed elements . They maybe uni-versal life, term insurance with non-guaranteed premiums, or annuities withcurrent interest rates . As a result, prac-tically every actuary should becomeimmediately familiar with these Rec-ommendations, which are part of thisUpdate mailing.The Recommendations give actuaries

the opportunity to provide the benefit oftheir expertise and, at the same time,properly limit their responsibility in thisvery significant area of non-guaranteedpromises . The Recommendations requirean actuary to give management an actu-arial report stating how the actuary arrivedat the recommended non-guaranteedcharges and benefits . The actuary is tostate what assumptions were used indeveloping these recommendations andthe significance of any deviations fromthose assumptions . The purpose of theactuarial report is to properly informcompany management of the variousramifications of their promises, so thatmanagement can make the proper deci-

The Actuarial Update

sions. Company management is wherethe final decision and responsibilityresides, not with an individual actuary .It is going to be the responsibility of company management to deliver on thepromises made, not the actuary .The Interim Actuarial Standards

Board (IASB) was established to enablethe profession to be more pro-active. Itis very significant that one of the firstareas the IASB has addressed is thisvery important area to the profession,the industry, and the buying public .The Academy board has appointed C .

Larry Edris to chair a task force to pub-licize these standards of practice to theprofession in the near future . Becauseof the importance of this topic, it isessential that actuaries and manage-ment know what is necessary to complywith these new standards of practiceand how the information provided willbe helpful to all parties .The Academy has also taken an addi-

tional pro-active position by recom-mending changes to the National Asso-ciation of Insurance Commissioners(NAIC). First, the Academy has recom-mended to the NAIC that the Life Insur-ance Solicitation Model Regulation bemodified to better inform the buyinpublic about the insurance company'redetermination policy. The NAIC hasagreed to expose these recommendedmodifications for comment . Second, theAcademy has recommended modifica-tion be made in the Model Life Insur-ance Advertising Regulation . Thesemodifications require more disclosureto the public, permitting more intelli-gent buying decisions. The modifica-tions also limit non-guaranteed illus-trations to those benefits currently beingprovided. The NAIC has appointed asubgroup to review the Life InsuranceAdvertising Regulation and referred theAcademy's modifications to thatsubgroup. Third, the Academy has rec-ommended changes in the AnnualStatement. The changes require anactuarial opinion, a description of thedetermination procedures for non-guaranteed elements, and the answersto a series of eight interrogatories .The NAIC Blanks Committee will review

these changes at their mid-March Meet-ing in New Orleans. If adopted, they wouldbe required for Annual Statements filedas of December 31, 1987 and after.

William T. Tozer chairs the Subcom-mittee on Dividends and Other Non-Guaranteed Elements of the Life Com-mittee of the IASB .

I

January 1987

0

Letters to the Editor

More on CommitteeVolunteers

In the October issue, one of our mem-bers reportedly wrote that he "would bemore likely to volunteer [for Academycommittee work] if I know to what I wasbeing asked to respond ." The editor'snote which followed was, in my opinion,unresponsive. Yet the question deservesan answer. So let me try again with aset of questions which goes through therational member 's mind :(1) How often (per year) is the com-

mittee expected to meet, when, and forhow long each time?

(2) Will I have to travel anywhere, and,if so, where, how often (per year), forhow long each time, and at whoseexpense?(3) What guarantees do I have that

my time and money will be productivelyspent? Do committees operate understandard written procedures designedfor the economical conduct of produc-tive, time-efficient, and democraticallyheld meetings? For instance, are meet-ings by conference calls encouraged? Arewritten agendas and minutes preparedand distributed regularly and on a timelybasis? Are there provisions for dissent(e .g., in committee reports)? Do proce-dures exist for the automatic expulsionand replacement of members who don'twork or don't show up?The days of benevolent and patron-

izing employers who would unre-servedly and fully underwrite the timeand expense involved in actuarial com-mittee work are, I suspect, fast waningaway. So who pays, and what guaran-tees are there the work will be produc-tive and worth the member's time, effort,and out-of-pocket disbursements?

These are questions that deserveexplicit answers . Until they are answered,many members without strong politicalambitions will remain wary.

Claude Y. PaquinFayetteville, Georgia

Editor's note : When one volunteers forcommittee service . one is offering timeand expertise subject to the conditionssurrounding that voluntary service .Such concerns as frequency of com-mittee meetings, length and location ofmeetings, meeting style and format(letter votes and conference calls, forexample), written agendas, minutes,and the like differ from committee tocommittee . These are conditions andconcerns that are discussed with thecommittee chairperson if one is askedto considerjoining a committee. Spacedoes not permit us to give that kind ofdetailed rundown for every Academycommittee, nor is that informationalways available at press time . Apro-pos of guarantees: there can be noguarantees, becausejudgmentsofwhatis a worthwhile expenditure of time arevery individual judgments. Regardingcost, committee members serve at theirown expense. 0

The Update welcomes letters from read-ers. Letters for publication must includethe writer's name, address, and tele-phone .number, and should be clearlymarked as Letters to the Editor submis-sions. Letters may be edited for style andspace requirements .

Seeking Your AdviceThe Academy's "Guidelines for Making Public Statements," which appear inthe yearbook, were issued in 1982 . Since that time, the Academy's publicinformation and government relations programs have expanded both in scopeand reach. The public statement guidelines are now being reviewed, with aneye towards possibly revising them to bring them in line with the requirementsof our current outreach programs. If you have any comments on the guidelinesas they are currently written, or suggestions on how they might be revised,we would like to hear from you . Please send your comments to General CounselGary D. Simms at the Academy's Washington office by Friday, February 6 .1987 .

3

EA CONTINUING EDUCATION(continued from page 1 )

Toward that end, the task force con-sidered but did not recommend a pro-posal to establish periodic proficiencyexaminations to test continuing quali-fications. The task force cited the diffi-culties inherent in designing and scor-ing such examinations, as well as thenecessity of creating a costly bureau-cracy to administer them .

The formation of a peer review com-mittee to identify a "minority" of indi-vidual practitioners who may be defi-cient in their practices was also evalu-ated. Establishment of the EnrolledActuary Practices Review Board, to whichenrolled actuaries would refer mattersof questionable practice or possibleincompetence, was viewed as more cost-effective than a compulsory programaffecting every enrolled actuary. But thetask force noted disadvantages to thisidea, including the anticipated reluc-tance of actuaries to "turn in" fellowprofessionals and the difficulty in defin-ing "acceptable" practices . Additionally,by concentrating on the negative aspectsof a few individuals, it was determinedthat this approach would not help upliftthe public's perception of the profes-sion .

Compulsory Education

The adoption of a compulsory continu-ing education program, to be under thedirection of the Enrolled Actuaries Con-tinuing Education Committee (thecommittee ), was explored and ulti-mately recommended by three membersof the task force. Under the proposedguidelines, the continuing educationrequirement would be satisfied by earn-ing twenty-four credit hours during eachthree-year period (or some variationgeared to the current five-year re- enroll-ment period ). The task force calculatedthat half of the current 4,000 enrolledactuaries already attend an average ofeight hours of meetings or seminars ayear. Under the proposed program, theother 2,000 would be seeking eight credithours annually for a total of 16,000 per-sonhours. The estimated cost of thisproposal was between $2.5 and $3 .5million. The cost to an individual actu-arywas set at between $1,000 and $2,500per year.While this compulsory program

promised to provide "meaningful edu-(continued on page 6)

4

NAIC Reportby Gary D. Simms

Actuarial Task Force presents newguidelines and exposure drafts . . .Health standards are delayed . . ."Dynamic solvency" emerges as newdiscussionfocus . . . Yield index expo-sure approved . . . Costing tort reformadvanced by ISO study announce-ment . . . AIDS underwriting guide-lines adopted . . . Academy qualifica-tions underscored in risk retentionmodel . . . Muhlelected newNAICpres-ident .These headline phrases concerning the

1986 Winter National Meeting of theNational Association of Insurance Com-missioners (NAIC) held December 7-11in Orlando, Florida illustrate theunusually large number of actuarialissues on the NAJC's agenda. Record-setting temperatures in central Florida,green, manicured golf courses, andMickey and his friends were unsuccess-ful at keeping meeting attendees awayfrom the business at hand .

Academy Briefing Session

The Academy's regular briefing sessionwas attended by more than thirty indi-viduals, including representatives frominsurance departments in California,Illinois, New York, Oregon, SouthDakota, Texas, and Wisconsin, togetherwith actuaries from consulting firms andinsurance organizations . AcademyExecutive Director Stephen G . Kellisonwelcomed the group and reviewed majorNAIC agenda items where the Academycommittees had issued public state-ments in recent months, includinghealth reserve standards., disclosurestandards for non-guaranteed ele-ments, comments on discounting of lossreserves, tort reform costing, and AIDS .Other reports, including information

detailed below, were received from TedBecker and John Montgomery concern-

Ing the work of the Life and Health Actu-arial Task Force, Stanley Dorf on thework of the Casualty Actuarial TaskForce, Robert Gossrow on the activitiesof Actuaries in Regulation (AIR), andCarl Ohman on the Academy's Com-mittee on Liaison with NAIC and devel-opments concerning the valuation actu-ary concept .

Life and Health Actuarial (EX5) TaskForceThe Life and Health Actuarial (EX5) TaskForce met December 6 and 7, prior tothe official start of the NAIC meeting . (Itshould be noted that the Saturday andSunday sessions of the task force andother task forces of the NAIC continueto grow In significance ; those with akeen interest in NAIC developments whoattend the meetings should seriouslyconsider being present on the precedingweekend to take advantage of detaileddiscussion at the task force level .)

The task force generated the followingreports and recommendations :• To the Life Insurance (A) Committee :

The task force recommended adop-tion of sex-blended smokers and non-smokers mortality tables and theadoption of Actuarial Guidelines XVIthrough XX. These guidelines, forinsertion in the Financial ExaminersHandbook, include : XVI-Calcula-tion of CRVM Reserves on Select Mor-tality and/or Split Interest; XVII-Calculation of CRVM Reserves WhenDeath Benefits Are Not Level ; XVIII-Calculation of CRVM Reserves onSemi-Continuous, Fully Continuousor Disconnected Continuous Basis ;XIX-1980 CSO Mortality Table with10-Year Select Mortality Factors ; andXX-Joint Life Functions for 1980CSO Mortality Table.The task force also recommended

that various projects now underwaydealing with valuation issues bemerged into a single project dealingwith a study to revise the StandardValuation Law (incorporating the val-

Help Us Complete Our CollectionThe library at Academy headquarters houses a complete set of yearbooks, savefor the year 1969 . That edition, we are missing. In an effort to complete ourcollection, we are placing this plea in The Actuarial Update : If you have acopy of the Academy's 1969 Yearbook and would like to donate it to our library,please contact Erich Parker, the Academy's director of public information, atthe Academy's Washington office . Our thanks to you will be made public inan edition of The Update .

The Actuarial Update

uation actuary concept) . These rec-ommendations were all adopted bythe Life Insurance (A) Committee .

• To the Universal and Other New Plans(A) Task Force : The Life and HealthActuarial Task Force submitted a draftamendment to the NAIC Universal LifeInsurance Model Regulation for expo-sure and for potential adoption at theJune 1987 meeting of the NAIC . Thetask force submitted a new revisionto the universal life nonforfeiture pro-visions of the current NAIC model,also for exposure and discussion inJune. Both drafts were adopted bythe Universal and Other New Plans(A) Task Force and the parent LifeInsurance (A) Committee for expo-sure at this time. It was noted thatthese are short-term measures, andthe task force has asked the AcademyCommittee on Life Insurance to sug-gest long-term revisions to the val-uation and nonforfeitures sections ofthe NAIC model .

• To the Accident & Health Insurance(B) Committee : The Life and HealthActuarial Task Force recommendedthat the Accident and Health Insur-ance (B) Committee adopt the revisedversion of the proposed revision tothe NAIC Reserve Standards for Indi-vidual and Group Health InsuranceContracts, which had been preparedby the Academy's Health Subcom-mittee on Liaison with NAIC andreported on in the January 1986 issueof The Actuarial Update . The Acci-dent & Health Insurance (B) Com-mittee decided to postpone consid-eration of the matter until the June1987 meeting of the NAIC, when finaldiscussion is anticipated. The Life andHealth Actuarial Task Force also rec-ommended that new Guidelines forFiling Rates for Individual HealthInsurance Forms be exposed for com-ment; the committee concurred. Anewproject by the task force concerninguniversal disability income wasapproved by the (B) Committee as well.

• Other Discussion Items: The task forcediscussed at great length the conceptof the valuation actuary, with a pri-mary focus on what was called"dynamic solvency." This conceptsuggests that, as an interim step alongthe way towards the adoption of thevaluation actuary concept, compa-nies that place greater reliance onactuarial opinions and are actingappropriately regarding reserveswould be permitted to maintainreserves at a level lower than the min-

January 1987

imum requirements of the StandardValuation Law. A working group on"dynamic solvency" has beenappointed and will report to the taskforce regularly.

Another matter that received muchattention was the need to deal appro-priately with reinsurance and itsimpact on minimum valuation stan-dards. A proposal by the task force'sadvisory committee to expand cur-rent guidelines was, however, not rec-ommended for approval. Additionalwork will be required, and the taskforce called for input from industrygroups and referral to the InterimActuarial Standards Board .

Actuaries In Regulation (AIR)

AIR, a constituent body of the CasualtyActuarial Society comprising actuarieswho work for state insurance depart-ments In the property and liabilityInsurance field, held its meeting onDecember 8. Their roundtable discus-sion included a call for consideration ofchanges to Schedules 0 and P, includ-ing a requirement for separate report-ing of reinsurance . The need to keep AIRalive and active was also discussed bythe group .

Casualty Actuarial (EX5) Task Force

The Casualty Actuarial (EX5) Task Forcemet on December 9. At its formal meet-ing, the task force appointed a subcom-mittee to review proposed changes toSchedules 0 and Pin the Fire and Casu-alty Blank, which are needed as a resultof the increased use of claims-made pol-icies, reinsurance concerns, loss reservediscounting, fronting, and other relatedproblems. The subcommittee is to reportback as soon as possible . In a relatedmove, the task force's advisory commit-tee was asked to draft a proposal forseparate reporting of claims-made andoccurrence policies in Schedule P in the1987 Blank as an interim step .The previous year's proposal regard-

ing increased reliance on actuarialopinions had been returned by theBlanks (EX4) Task Force for further con-sideration. A discussion ensued onmethods to describe appropriate qual-ifications for non-actuaries who areapproved as loss reserve specialists ; itconcluded with an observation that twostates (New Jersey and Florida) havealready adopted qualification require-ments at least as stringent as those sug-gested by the task force last year.

5

Academy Appoints Two New Task ForcesIn response to two important emerging issues the Academy has appointedtwo new task forces .

The first is the Universal Life Task Force . This task force is developingchanges for the valuation and nonforfeiture sections of the NAIC Model Reg-ulation on Universal Life Insurance . The chairperson is Douglas C . Doll ; thetask force reports to the Committee on Life Insurance.The second is the Task Force on Non-Discrimination Rules. This task force

is considering the valuation of plan benefits for health and welfare plansarising as the result of the Tax Reform Act of 1986 . The chairperson is RichardOstruw: the task force reports to the Committee on Health and Welfare Plans .

It was also reported that the costingof tort reform proposals, which has beenon the task force agenda for some time,was being shifted to the Legal LiabilityInsurance (D) Task Force, the groupwithin the NAIC most involved in theissue of tort reform .

Life Cost Disclosure (A) Task Force

The Life Cost Disclosure (A) Task Forcemet on December 8 and received a reportfrom the Yield Index Advisory Commit-tee, which included a draft Yield Indexto Life Insurance Disclosure Model Reg-ulation and a Technical Memorandumon the Development of the Yield IndexComputation Mechanism. The reportwas received by the task force as anexposure draft for possible adoption inJune of this year.

The task force also received a reportfrom William Tozer, on behalf of theAcademy's Subcommittee on Dividendsand Other Non-Guaranteed Elements,regarding sales disclosures for non-guaranteed life insurance and annuitypolicies sold by stock companies. Thereport was accepted as an exposure draft,and additional discussion is antici-pated this spring . A related submissionmade to the Blanks (EX4) Task Force byTozer needed to be reformatted and wasresubmitted on December 17 .

Legal Liability Insurance ID) TaskForceThe Legal Liability Insurance (D) TaskForce received a report from its Statis-tical Information Advisory Committeeon currently available statistical mea-sures regarding costs of liability insur-ance, profitability, and proposals for tortreform. The extensive report included astatement submitted by the Academy'sCommittee on Property and LiabilityIssues concerning the costing of tort

reform proposals. (The Academy state-ment is discussed more fully elsewherein this edition.)In a related development, a represen-

tative from Insurance Services Office(ISO) announced that the organizationwill sponsor two high-priority projectsconcerning the availability and cost ofcommercial liability insurance in orderto estimate the impact of tort reformproposals on claim costs . The first study,short-term in nature, is an evaluationof typical liability insurance claims . Itis expected to be completed in March1987. The second study, more compre-hensive and longer term, will analyzeabout 12,000 commercial claims andinclude cases from twenty-seven statesthat have enacted tort reforms . It willinclude both closed claims and openclaims in a effort to be as up-to-date aspossible. This second report is antici-pated to be out in late 1988 .

AIDS and Insurance

In an unusual joint meeting of the LifeInsurance (A) Committee and the Acci-dent and Health Insurance (B) Com-mittee, the report of the AIDS AdvisoryCommittee was received and debated .As recommended by the advisory com-mittee, the Life and the Accident & HealthInsurance Committees both approvedguidelines to assist insurors In formu-lating medical/lifestyle questions inapplications and underwriting stan-dards affecting both life and healthinsurance. In general, the guidelinesprohibit inquiries directed towards theassessment of an individual's sexualorientation and underscore that suchan orientation may not be used inunderwriting. Insurance support orga-nizations are also advised to avoidinquiry in this area. These guidelines

(continued ouerieaf)

6

will appear in 'a bulletin to be issuedshortly by the NAIC .The committees did not take a posi-

tion on whether testing for exposure tothe AIDS-virus should be permitted . Infact, the advisory committee had failedto reach accord on this issue . A lengthydebate regarding the propriety of test-ing for AIDS exposure followed, withoutdefinite conclusion . The guidelines thatwere adopted leave to the individualstates whether they will inquire aboutprior AIDS test results in underwritingor application processing .

Technical Services (EX5)Subcommittee

The Technical Services (EX5) Subcom-mittee met December 10 and receivedreports from both the Life and Healthand the Casualty Actuarial Task Forces,thereby endorsing their current agen-das. The subcommittee also received aninformation report from the Academy'sCommittee on Liaison with the NAIC,which noted the myriad activities nowunderway within the Academy on issuesrelating to the NAIC agenda. Carl Ohman,speaking for the Academy committee,announced that the Academy plans topublish all twenty current ActuarialGuidelines issued by the NAIC in theAcademy's 1986 Journal, providingready access to these important guide-lines for all actuaries in the United States .

Other NAIC NewsIn her farewell address as NAIC presi-dent, Oregon Insurance CommissionerJosephine M. Driscoll stressed the needto maintain a unified NAIC in the faceof increasing pressures for federal reg-ulation. She pointed with pride to suc-cess in defending the state regulatorysystem during the recent liability crisis .In the plenary session held on December10, Edward J. Muhl, insurance com-missioner for the State ofMaryland, waselected president of the NAIC for 1987 .Illinois Insurance Director John E .Washburn was elected vice president,and will succeed Muhl in 1988 .A major panel discussion also took

place regarding the continued need forinsurance industry antitrust Immunityunder the McCarran-Ferguson Act andwas led off by Daniel Oliver, chairmanof the Federal Trade Commission (FTC) .He made it clear that he would like tohave restored to the FTC the authorityto study the insurance industry, anauthority that was taken away by Con-

The Actuarial Update

IASB Issues First Standard

The Interim Actuarial Standards Board (IASB) has adopted its first standard ofopractice, "Recommendations Concerning Non-Guaranteed Elements in Life Insur-ance and Annuity Contracts," which is included in this mailing of The ActuarialUpdate. You will note that the final standard is a grey booklet ; from now on, allfinal standards will appear in grey booklets .

In addition, you will find an exposure draft in this Update mailing ; it is entitled"Recommendations for Actuarial Communications Related to Statement of Finan-cial Accounting Standards No . 87." The exposure draft is a light brown booklet, thenew color for all IASB exposure drafts .The Update will continue to publish quarterly IASB reports, following each meet-

ing of the standards board . These reports will include a listing of future meetingdates and sites. In addition, with this issue of The Update, the Academy beginspublishing a new newsletter insert : IASB Boxscore. Like the GRW, it will appearwith each issue of The Actuarial Update . The boxscore will give the status ofstandards in process ; that is, in quick reference format, you will be able to trackthe progress of a standard from its earliest discussion stages through exposuredrafts, comment periods, redrafting (when applicable), and final issuance . If youhave comments on this new service, please relay them to Standards CoordinatorEleanor Mower at the Washington office. A

gress in the early 1980s . He assertedthat the industry was "able to set pricesand agree on products to be sold." Otherpanelists, including representatives fromthe . industry and from the regulatoryarena, disagreed with 'the FTC chairman. A discussion regarding the rela-tive competitiveness of the industry fol-lowed, together with comments regard-ing the alleged impropriety of federalregulation .As a result of the recent passage of

amendments to the federal Risk Reten-tion Act (See The Actuarial Update,October 1986 ), the NAIC reformatted andamended its model Risk Retention Act .As is the case with the federal statute,the NAIC model act calls for "a statementof opinion on loss and loss adjustmentexpense reserves made by a member ofthe American Academy of Actuaries ora qualified loss reserve specialist . . . . . .

A

EA CONTINUING EDUCATION(conttnuedfrom page 3)

cation" for all enrolled actuaries, the taskforce agreed that such a program wouldnot guarantee the competency of enrolledactuaries. Moreover, it was pointed outthat several actuarial organizationsalready have in place or are developingcontinuing education programs . "Itwould be simpler to adapt one of theseprograms or to allow satisfaction of anypre-approved specified program orattendance at the Enrolled ActuariesMeeting to satisfy the continuing edu-

cation requirement," the report states .Another drawback mentioned was thepossible unavailability of classes foractuaries, from small firms or thoselocated In geographically remote areas .A voluntary formal continuing edu-

cation program, operated like the com-pulsory system, but without a mini-mum credit-hour requirement, wasadvocated by at least one task forcemember who argued that, "A voluntaryapproach leaves the task of assessingcompetence in the hands of the pur-chasers of actuarial services where itbelongs. This approach also avoids cre-ating a burden for already competentactuaries and providing a possible illu-sory badge of competence for someincompetent practitioners." Overall, thetask force was uneasy about the qualityof response a purely voluntary programmight engender.In conclusion, the task force reiter-

ated its recommendation to the JointBoard to continue with the present sys-tem ofvoluntaryself-education. "The vastmajority of enrolled actuaries comply ina satisfactory manner to all of their legaland professional requirements," statesthe report . "We believe that few actuar-ies prepare reports of questionablequality. The task force believes In thevalue of continuing education, and weencourage our fellow actuaries to availthemselves of the many valuable pro-grams grams currently being offered ."

The report of this taskforce is availablefrom theAcademy's Washington office.

January 1987

Academy Analyzes Civil Justice Reform ProposalsThe Academy's Committee onProperty and Liability Issues hasissued a statement that sets forthwhich of the proposed civil justicereforms have predictable impactson the cost of liability insurance .The committee released the state-ment at the December 1986 meet-ing of the National Association ofInsurance Commissioners (NAIC)In Orlando. Florida. (A completereport of that meeting appearselsewhere in this issue .)The statement suggests that a

claims file review can sometimesprovide the information necessaryto estimate the impact of proposedreforms on Insurance costs . Insuch a review, individual claimsfiles are re-examined by experi-encedclaims examiners. Based onan accumulation of such reviews,an actuary can in some cases esti-mate the expected impact on thecost of liability insurance .The committee emphasized that

the claims files review process is"expensive and has inherent dif-ficulties ." In anticipation that "theintent of these reforms may not besustained by the courts," the reportrecommends that "careful consid-eration should be given to poten-tial cost/benefit tradeoffs when aclaim study is proposed ."

The Academy's statement ana-lyzes the expected impacts of thefollowing civil justice reforms :

Restricting the application ofstrict liability doctrine-A claimsfiles review in this case "could oftenreveal those claims settled underthe strict liability doctrine," statesthe report .Restricting the application of

joint and several liability doc-trine-The impact of this reform,which would "in many cases" resultin lower claim costs, can also beestimated .Limiting the amount of non-

economic damages-This reformcould result in lower claims costswithout affecting the actual num-ber of claims . While a claims filereview could reveal a split betweeneconomic and non-economicdamages, the distinction is "notalways clear" and extra judgmentmust be applied .Providing for future periodic

payments of future damages-Because replacing lump-sum pay-ments with periodic paymentswould result in offsetting changes,this reform "will have no impacton losses and loss adjustmentexpenses," the report states .

Reducing awards by collateralsources ofcompensation receivedfor the same injury-Since infor-mation on collateral sources is notgenerally in claims files, estimat-ing the impact of this reformrequires making assumptionsabout the availability of medicalcoverage, workers' compensation,and salary continuation pro-grams. While this can be accom-plished, "the resulting estimateswill not be precise," the report con-cludes .Scheduling contingency fees-

Information on compensationreceived by the plaintiff's attorneyis not in the claims files and, fur-thermore, there is uncertaintyabout the impact such a reformwould have on the size of claims .Reducing the statute of limi-

tations on filing suits-If the timelimitations for liability claims werereduced, the number of claimswould also diminish . This infor-mation is available in the claimsfiles, and the impact of such achange could be estimated .

The statement in its entirety isavailable by contacting ChristineE. Nickerson in the Academy'sWashington office .

i

Non-Routine Board Actionsby Robert H. Dobson

At Its meeting on December 12, 1986,in Naples, Florida, the Board of Direc-tors of the American Academy of Actu-aries took the following non-routineactions. The board :• Authorized the submission of a bylawamendment concerningwaiver of duesto the general membership for a vote .The proposed amendment will bemailed in February.

.• Approved the appointment of WalterN. Miller by the Interim ActuarialStandards Board (IASB) NominatingCommittee to fill a vacancy on theIASB created when John A. Fibigerassumed the office of president-elect

of the Academy.• Authorized mailing to the member-

ship of guidance for dealing withFinancial Accounting StandardsBoard Statement No . 87. This itemwas distributed in December.

• Approved the IASB promulgation ofRecommendations Concerning theRedetermination (or Determination)of Non-Guaranteed Charges and/orBenefits for Life Insurance and Annu-ity Contracts, subject to establish-ment of an appropriate effective date .(That final standard is included inthis Update mailing .)

• Received a report of the Joint Com-

mittee on the Valuation Actuary andrequested that the joint committeeprovide additional information on thestrategic direction of the valuationactuary process .

• Discussed the current status of theActuarial Education and ResearchFund and moved to defer further con-sideration of this subject until its nextmeeting, at which time more infor-mation is expected to be available .

• Approved the appointment of RobertS. Miccolis as chairperson of the JointProgram Committee for Casualty LossReserve Seminar. 0

8

Yes, I'm Marrying OneMy wife never tires of retelling thisstory. Our wedding day fastapproaching, -,ac went to Chi-cago City Hall to procure amarriage license. As always,the municipal offices werequite busy, but we finallyreached the head of the longline . The clerk behind thecounter, a nice older woman,began firing questions as shefilled out the required forms .All was going well until we

were asked our occupations .My wife's response of "school teacher"was duly noted, but when I answered"actuary," the clerk remarked glibly, "Wedon't get many of them down here ."My wife's snappy rejoinder : "They don't

usually marry."-John Pierce

Bird BrainsWe were letting nearby college career placement centers know that we were interestedin hiring some recent math graduates. Most counselors asked for full details on theactuarial profession, so that the posted information could be complete and accurate .One counselor, however, stopped me in my tracks . "Oh yes," he exclaimed with

confidence, "I know what an actuary is. Aren't you the folks who watch birds?"I was perplexed . After all, how could one confuse an ornithologist with an actuary?

Then it came to me, he was thinking-aviary!-Joan S. Freed

Checklist of Academy Statements-Copies are available from the Washing-ton office .

TO : Financial Accounting StandardsBoard, November 3, 1986 . RE: Insur-ance accounting. BACKGROUND: Sup-plementary material submitted to FASBon accounting for universal life insur-ance.

TO: NAIC Loss Reserve Discounting{EX4} Study Group, November 19, 1986 .RE : Casualty loss reserves . BACK-

The Actuarial Update

Testimony BeforeNAIC Working GroupThe Academy's Committee on Propertyand Liability Insurance FinancialReporting, in the person of ChairmanStephen P. Lowe, testified November 19,1986 in Chicago, before the WorkingGroup on Loss Reserve Discounting ofthe National Association of InsuranceCommissioners . The testimony on dis-counting of property and liability lossand loss adjustment expense reservesfor statutory financial reporting pur-poses was one of ten statements deliv-ered by spokespersons for the Allianceof American Insurers, American Insti-tute of Certified Public Accountants,American Insurance Association, Med-ical Mutual Liability Insurance Societyof Maryland, National Association ofIndependent Insurers , ReinsuranceAssociation of America, Ernst & Whin-ney, PHICO, and State Farm . The major-ity of those who testified or submittedwritten statements opposed the conceptof loss reserve discounting for statutoryfinancial statements .

The Academy's statement reads, Inpart, " . . . the fundamental issue is notwhether discounting is'right' or'wrongbut whether the degree of conservatisminherent in the use of full value reservesis appropriate, or whether the publicpolicy objective of assuring insurer sol-vency can be maintained in a statutoryfinancial reporting system that permitsthe use of discounted reserves . . . Ourcommittee is not in a position to makea recommendation either for or againstthe use of discounted reserves for stat-utory reporting purposes." The com-mittee, instead, offered assistance inanalyzing financial implications of thiscomplex question .

November 1986GROUND: Testimony at public hearingon discounting casualty loss reserves .

TO: Financial Accounting StandardsBoard, November 21, 1986 . RE:Accounting for income taxes. BACK-GROUND: Statement in response toFASB exposure draft.

TO: NAIC Life and Health Actuarial (EXS)Task Force . November 21, 1986. RE:Health Insurance reserve standards .BACKGROUND: Expanded report con-taining final proposals .

TO: General distribution to a variety ofaudiences, November 24, 1986. RE: Lia-bility insurance. BACKGROUND: Whitepaper on estimating the impact of tortreform.

TO : NAIC Life and Health Actuarial (EX5Task Force, November 25, 1986 . RE .Universal life. BACKGROUND: Prelimi-nary report on revisions in valuationand nonforfeiture provisions in NAICmodel regulation. A