THIS MONTH2

From a Guest Chairman

3Letters to the Editor

3Actuaries Join Workers'Compensation Debate

61992 Casualty Loss Reserve

Requirements

Legal Lines7

Capitol Views8

Health Care Under Clinton

ENCLOSURESIncluded with this month's

issue of The Actuarial Updateare the following :

In Search Of

ASB Boxscore

Special Subject Supplement

Actuarial ComplianceGuideline No. 3

Appointed ActuariesSecond Exposure Draft

AMERICANACADEMY OFACTUARIES

VOLUME 21NUMBER 12

DECEMBER 1992

NAFTA and the ProfessionBy Paul McCrossan

n early September, the govern-ments of the United States,Canada, and Mexico releasedthe text of the North Ameri-can Free Trade Agreement

(NAFTA). Subsequently, Presi-dents Bush of the U.S .; Salinas ofMexico, and Prime MinisterMulroney of Canada signed thetreaty, which is to come intoeffect on January 1, 1994 afterbeing ratified by the three coun-tries' legislatures . President-electClinton has indicated generalsupport for NAFTA while wish-ing to negotiate side agreementsbetween the U.S. and Mexico on

several issues, including environ-mental ones .NAFTA expands on the

already existing Canada-U .S .Free Trade Agreement (FTA) intwo key areas of importance toactuaries: professional mobilityand financial services .

Professional Mobility

The FTA allows for Canadian andU.S. professionals to recognizeeach others' qualifications andrights to earn income across theborder. The Canadian Instituteof Actuaries and the Academy areon the verge of making such anapplication with respect to actu-

'Inventing the Future in Common'ablo Noriega, president ofthe National College ofActuaries, the largest orga-nization of actuaries inMexico, was in Washing-

ton, D.C. recently to attend theannual meeting of the Society ofActuaries . Noriega visited theoffices of the Academy andanswered a few questions aboutthe actuarial profession in Mexi-co and the implications for actu-aries of the recently signed NorthAmerican Free Trade Agreement(NAFTA) . What follows is a por-tion of that conversation .

THE UPDATE: Actuaries aretrained in a different manner inMexico. You follow a university-based system, correct?

NORIEGA: Yes. In Mexico, stu-dents spend 4 years in universitystudying specifically to becomeactuaries. They are trained indepth, without paying attentionto anything else whatsoever .They cover most of the materialthat an actuary everywhere else inthe world will cover. Then, theyspend up to 3 years preparing a

Continued on page 4

aries with the support of theAmerican Society of Pension

i Actuaries , the Casualty ActuarialSociety, the Conference of Con-sulting Actuaries , and the Societyof Actuaries .

NAFTA extends the opportu-nities in the FTA for professionalmobility among the three coun-tries by agreement among theprofessions subject to the follow-ing criteria:LJ There should be mutuallyacceptable professional standards .© Licensing should be objectiveand transparent.D Citizenship may not be a cri-terion after 2 years .

The six North American actu-arial organizations have decided inprinciple to discuss with the threeMexican actuarial organizationsthe addition of "actuary" to the listof professionals entitled to earnincome across national borders .

At a meeting of the presidents-elect of the six bodies in Wash-ington , the president of the Mexi-can National College of Actuaries(CONAC), Pablo Noriega, wasinvited to become a full memberof the presidents -elect planninggroup, the Working AgreementTask Force, for the next year, aswell as to be an observer at themeetings of the Council of Presi-dents.

Continued on page 3

Pablo Noriega, president of Mexico'sNational College of Actuaries .

AMERICANACADEMY OFACTUARIES

PresidentJohn H . HardingPresident-Elect

David G. HartmanVice Presidents

Howard J . BolnickStephen P . LoweWalter N . Miller

Richard H . SnaderLarry D . Zimpleman

Secretary- TreasurerJames R . Swenson

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 an PublicationsChairman

E . Toni MulderEditor

E . Toni MulderExecutive Editor

Erich ParkerAssociate Editors

William CarrollStephen A. Meskin

Charles Barry H . WatsonManaging EditorJeffrey Speicher

Contributing EditorKen Krehbiel

Production ManagerRenee Cox

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

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

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

FROM A

chairmanEmphasizing the `C'in the ABCDBy A. Norman Crowder III

n January, the Actuarial Boardfor Counseling and Discipline(ABCD) was established toprovide a central body toinvestigate complaints against

actuaries, and to counsel actuar-ies in the highest standards ofprofessionalism. Since theABCD was established, theAmerican Academy of Actuaries,the American Society of PensionActuaries, the Canadian Instituteof Actuaries, the Casualty Actu-arial Society, the Conference ofConsulting Actuaries and theSociety of Actuaries have autho-rized the ABCD to fulfill its func-tions with regard to their mem-bers practicing in the UnitedStates. The ABCD has developedrules of procedure and internaloperating guidelines, and hasbegun the investigation ofnumerous cases forwarded to itby its participating organiza-tions .

As chairman of the ABCD, Ihave been pleased with itsprogress toward the fulfillmentof its important role in support-ing the actuarial profession .However, I am troubled by whatI perceive to be a pervasive mis-understanding among actuariesabout the board's purpose. Weregularly receive inquiries, bothby telephone and at professionalmeetings, from actuaries whoseem to believe that the ABCDwas created primarily as a disci-plinary tool with which to pun-ish members of the profession.They are afraid to advise theABCD of professional breachesby their fellow actuaries, andseem to be convinced that a callto the ABCD will invariablyresult in public discipline of theactuary involved .

Their fearfulness is unwar-ranted, in part because the ABCD

has no authority to discipline anactuary. The board can onlyinvestigate a matter and, ifappropriate, recommend to theorganizations to which the actu-ary belongs that he or she bepublicly disciplined. It remainsfor the membership organiza-tions to act on the ABCD's rec-ommendation . I should alsonote that such a recommenda-tion cannot be made without firstaffording the actuary the fullrange of procedural rights,including a formal hearing on therecord, that are set forth in theABCD's Rules of Procedure .Although the ABCD's name con-tains a "D" for "Discipline," itsdisciplinary function is strictlyinvestigatory and advisory . Anydiscipline must come from theorganizations of which the actu-ary is a member.

The primary activity of theABCD is counseling; its investi-gatory and disciplinary aspectsare ancillary. Our role is to help,not penalize . Counseling isadvice given on a confidential

basis to assist the actuary inmaintaining a high level of prac-tice and professionalism. Coun-seling is not discipline, norshould the receipt of counsbe considered a disgrace. Caseling is nothing other than agood-faith effort to advise theactuary of what constitutes goodprofessional practice in a givensituation. It is hoped that anactuary who receives counselingwill practice at a higher level,having benefited from the advicereceived.

When the ABCD was formed,it was with the hope that actuar-ies would request guidance vol-untarily so that potential com-plaints could be averted before aproblem arose . The ABCD isalways pleased to respond to vol-untary requests for guidance, andconsiders guidance and counsel-ing to be its most importantfunction. For this reason, coun-seling is emphasized in everyphase of the ABCD's activities,with only the most serious viola-tions of professional standardsbecoming the basis for a recom-mendation that public disciplinebe taken by the memberorganizations . AlthoughABCD's name contains the "D"for discipline, it is the "C" forcounseling that is the mostimportant part of the ABCD'smission .

Crowder is the chairman of theABCD.

Profiling the Profession: An UpdateLast spring some 3,000 randomly selected Academy membersreceived a survey from a researcher in counseling and careerdevelopment. Over 50% of the questionnaires were returned .That's a fantastic response rate-so large, in fact, that it's takinglonger than expected to analyze the data and produce the indi-vidual profiles that were promised respondents . Rest assured,the computers are whirring away, and your profile will be in themail to you shortly after the beginning of the new year. Ourthanks to everyone who took the time to complete the survey .Through this research, we can all look forward to learning mo

0about ourselves .

2 The Actuarial Update • December 1992

NAFTA , continued from page 1

Since all six organizationsadopted slightly different versionso he Uniform Code of Conduct,

since the Mexican Code ofonduct is based on civil law

rather than common law, it wasagreed that the first priorityshould be studying the possibilityof adopting a more uniform code .

Financial Institutions

NAFTA extends "national treat- Iment" to financial institutions ofthe three countries with safe-guards recognizing the muchsmaller nature of the Mexicanfinancial industry. Canadian andMexican banks will be able to ioperate in the U .S . as if they wereAmerican banks. American andCanadian insurers will be able to IIoperate in Mexico as if they wereMexican insurers, etc .

As far as establishing newinsurance companies in Mexico,American and Canadian insurerswill be able to do so immediatelyafter NAFTA comes into force, aswell as to enter joint ventures .ey will be general market-

e limitations on these foreignmancial institutions in Mexicountil the year 2000; these limita-tions must be phased out by2007. Furthermore, if any coun-try extends a concession to anyother country in the area offinancial services, it must beextended to all NAFTA countrieson a "most favored nation" basis.

Financial service regulatorsfrom the three countries will meetregularly, and a special disputesettlement mechanism will be setup, allowing financial expertsfrom the three nations to resolvefinancial service trade disputes.

Since NAFTA was signed, oneCanadian bank, the Bank ofNova Scotia, has negotiated astrategic alliance with one of theMexican commercial banks .

Scope of Actuarial Recognition

Actuaries in Mexico appear toenjoy much stronger legal recog-

n in many more fields thanan in Canada and the

U.S. The professional designa-tion "ACT" is given upon com-pletion of a specialized university

education and the oral defense ofa thesis. Mexican actuaries func-tion in many more nontradition-al fields than do their counter-parts in the U .S. and Canada .For example, Mexican actuariesappear to be well recognized asasset-liability managementexperts inside the Mexican bank-ing industry.

The Future

NAFTA provides for the futureadmission of other countries tothe agreement on the originalterms, with the unanimous con-sent of the original members .Chile has already indicated itsfirm interest . Other countries arealso considering NAFTA mem-bership. Perhaps one day we'llsee professional mobility amongactuaries throughout North andSouth America .

McCrossan is past president of theCanadian Institute ofActuaries.

lollersTO THE EDITOR

I am highly cynical about theABCD and those who are urg-ing us all to be whistle-blowers .

The ABCD lacks any legal stand-ing to enforce its rulings or toprotect its records from disclo-sure to a litigious actuary whofeels his reputation has beenruined by a potentially libelouscomplaint.

Might I point out that theAcademy bylaws provide thatevery board member will be reim-bursed for all legal fees incurredin defending any suit filed in rela-tion to board membership. If theABCD really believes that it is abenignly benevolent body, it.should provide for legal fees to bereimbursed for all whistle-blow-ers who complain to it, in relationto actions taken against them as aresult of their whistle-blowing toABCD.

If this is too radical a step,then replace the current free legalwork for board membership suitsand the vacuum for ABCD whis-

ACTUARIES JOIN WORKERSCOMPENSATION DEBATEThe actuarial profession has joined the public policy debateheating up instates over troubled workers compensationsystems, Meetings in October i'.ith state legislators and staff inCalifornia, Missouri, and Kansas were pail of Forecast 2000,

e public information program cosponsored by the sixorganizations representing actuaries in North America .

On the eve of a California state legislature special session onOctober 8, Academy Executive Vice President Jim Murphy andconsulting actuary Michael McMurray of Milkman & Robertsonin Pasadena, Calif , met in Sacramento with Bob Scarlet, legalcounsel in the office of California Speaker of the Assembiy WillieBrown . They also met with the director of the office ofinsurance advisory in the governor's office, other assemblymen,arid state senators . Two proposals under consideration werebeing hotly debated in California : one Supportedby GovernorPete -Wilson, and a Democratic proposal approved by theAssembly and Senate . McMurray provided a nonpartisan,,objective analysis of the proposals, neither of which passed thelegislature in the 2-dav session .

Academy Director of Public Relations Erich Parker andElizabeth Kelley, vice president of Stephen K . Cook & Co . PublicRelations and Forecast 9000 account executive, accompaniedMurphy and McMurray to California In addition to theirmeetings with legislators and policy makers, they spoke toreporters from most major newspapers in the state , includingthe Los Angeles Times, Sari Francisco Chronicle, San FranciscoExaminer, Los Angeles Daily Nelvs, and Sacramento Bee.

On October 20-21, consulting actuary Tim Quinn ofTillinghast/Tower Perrin in St . Louis traveled to state capitals inMissouri and Kansas to speak with legislators about generalprinciples integral to any effective workers' compensationreform. In Jefferson City Mo ., Quinn addressed a workers'compensation advisory board comprising five labor leaders' andfive employers . He also met with the deputy director ofinsurance, and print and broadcast reporters In Topeka . Kans .,Quinn had meetings in the state insurance department and theworkers' compensation division of the department of insurance,as well as with Bill Morrissey . who is chairman of thegovernor's task force and assistant director of the workers'compensation division .

Workers' compensation is one ofin the 1992 Forecast 2000 program .

tle-blowers with the idea of cheapprepaid legal insurance availableto all board members and allpotential complainants .

Otherwise, I suggest youanticipate a brisk market in T-shirts bearing the slogan "I DIDMY DUTY AND SQUEALEDTO THE ABCD, NOW ALL ICAN AFFORD TO WEAR ISTHIS T-SHIRT."

Jan R. HarringtonNew York City

he fourtopics addressed

The Actuarial Update -December 1992 3

FUTURE, continued from page 1

written dissertation which mustbe defended in front of a com-mittee. As a final obligatory act,they swear to uphold a certain setof professional principles, abideby the code of conduct of theprofession , and defend the inter-ests of the nation. The Ministryof Education then issues a certifi-cate that serves as both universitydegree and professional certifica-tion. The professional certifica-tion paper must be shown whenperforming publicly as an actuaryin any of the regulated aspects ofthe profession .

Another difference is the age atwhich actuaries are trained. Onechooses a profession at 17 or 18 .The next 4 years are spent mainlywith other actuaries -in-training .You don't share your classroomwith other professions, other thanan occasional mathematician,physicist, or economist. Butmainly, training is done in anendogamous environment withactuaries. Most of the people whoteach the courses have been work-ing as actuaries or have beentrained as actuaries themselves .You complete your dissertationaround age 23 .

The fact that training is doneat a young age means that profes-sional networks are built at a veryyoung age. That gives us oursense of identity, which at thesame time is challenged by thefact that many actuaries in Mexi-co do not work in traditionalfields of activity .

Pablo Noriega in conversation .

THE UPDATE :You are a productof this training,but you also holda doctorate inmathematics fromthe university ofWisconsin. Howwould you rateactuarial educa-tion in Mexico?

NORIEGA: Thehigh quality of theactuarial scienceprogram is verywell acknowledgedin Mexico. Actu-arial science isconsidered to be

one of the hardest, if not thehardest, of all the undergraduateprograms in Mexico . It has somuch math, so much economics .It has a higher work load thanmany other specialties at theundergrad level and tends todraw a set of students that comefrom the highest ranking groupin each of the schools . There is apreselection of people who tendto perform successfully after-wards because of the harsh stan-dards. It also limits the numberof candidates.

However, more actuaries aretrained than positions are avail-able every year in the insuranceand pension and health fields inthe country. My estimate is thatonly three out ten actuaries workin traditional areas, while theother seven work in others-finance, investment , computerscience , and business manage-ment positions in private indus-try, as well as government.

THE UPDATE: So, graduates inactuarial science are eagerlyrecruited for employment out-side the traditional fields?

NORIEGA: Yes, because of theset of skills in which they aretrained. Not just because theyknow a lot of actuarial science assuch, but because they know howto deal with complex problemsand use different sets of tools .They know which tools best fitthe problem at hand . They areskilled at abstract modeling, butat the same time demand thatwhatever model they are usingworks in practice . So there's avery fragile balance between ahighly theoretical backgroundand a very committed practicalpursuit .

THE UPDATE: How wouldyou say young actuaries in Mexi-co compare to U .S. actuaries intechnical qualifications?

NORIEGA: They compare verywell. And the fact that they enterthe work force young, with tech-nical tools that become secondnature to them, allows them togrow into other areas . Otherskills that perhaps require a moremature person are learned after-wards in practice . I guess if you

look at the mass of actuaries inMexico you would perhaps notnotice that they are so concerneddirectly with technical issues.

THE UPDATE: But Mexactuaries master the same to -niques as their counterparts inthe U .S .?

NORIEGA: Well, the U .S . has amore sophisticated market, withproducts that involve more actu-aries . So the spectrum of specificactuarial techniques that we tendto master for everyday practice inMexico is probably smaller. Onthe other hand, in my countryyou see people doing portfoliomanagement or portfolio defini-tion, all sorts of complex statisti-cal or optimization models. So, Iwouldn't be sure the differencewas so much in depth of knowl-edge as in application.

THE UPDATE: Among the chal-lenges posed by NAFTA in thenear future will be agreement onthe qualifications of actuariespracticing outside their homecountry. Do you foresee difficul-ties in reaching this agreement?

NORIEGA: I understand totthe agreement being negotiatedbetween Canada and the U .S .under the bilateral Free TradeAgreement probably will statethat the level of Fellow is some-thing that will satisfy the techni-cal qualifications. I think thetalks involving Mexico will pro-duce something very much of thesame sort .

And then there are other non-technical, but important, qualifi-cations that also have to be certi-fied. It has to do with practice,how up to date you are, and howwell you know the legal and socialissues surrounding these actions .Uniformity in qualifications isnot something easy to achieve .

My own impression is that wewould probably look for a way ofcertification beyond the bachelorlevel in Mexico. For some of theregulated activities, at least, it willamount to something very muchlike the examinations thatrequired by the Canadian Itute of Actuaries or the Society ofActuaries and the Casualty Actu-arial Society. The practice super-

4 The Actuarial Update • December 1992

vision and the knowledge of thelaw that are also required andtested through the examinationsand other complementary

vices that are used in the StatesCanada are things that we'll

W ably also adopt . Actuarieswill have to be conversant in thelaw and practices of the country.We'll probably try to reach sym-metrical agreements . The letterof NAFTA will probably be satis-fied by agreeing to two phases ortwo stages on what shouldbecome the equivalent entranceexam or forms of certification .

I don't think we'll have anagreement ready by January 1,1994 when NAFTA takes effect,but it is something that we'llprobably be able to solve beforeany American or Canadian actu-ary considers it vital to be able tosign off on a regulated activity .

THE UPDATE: Do you see acloser formal relationship amongthe actuaries of the three coun-tries, then?

NORIEGA: It's the spirit that isthe important issue here .ether or not our conception of

rofession of actuaries is simi-lar, and how close we can evolvetogether. And, how do we attainthe establishment of a professionthat is truly equivalent in the deepsense and that professionals in theStates or in Canada are qualifiedenough to do things that actuariesare supposed to be doing in Mexi-co and vice versa in the long term?Within 2 or 3 years they should beable to have these things in place,or at least a very clear picture ofwhere we should be .

Mexican actuaries should beas competent technically asAmerican and Canadian actuar-ies. We know we are close to thatnow. We know that at the sametime we still have to do muchmore. Continuing education isone of the things we'll have toforce on our profession in orderto guarantee this equal level ofperformance. We will keep usingour academic system . We findthis a very quick and efficient way

armng actuaries. We don'tto lose our hard-earned

diversity. This prestige that wehave in Mexico and this liveli-hood that we have been able to

carve out are something that weare interested in preserving. Sothere are topics that will have tobe talked about and explored indepth because there are things wewouldn't like to lose.

But at the same time, we wantto be more similar to the actuariesin the Canada and the States. Wehave to work on getting a moresimilar code of ethics and sets ofstandards of practices. The codewe have in Mexico is too general .It doesn't address the same kindsof problems and issues that theAmerican and Canadian codes do,and it would be good for us tolearn and incorporate many of theelements that are present in theAmerican and Canadian codes .

THE UPDATE: Do you see asubstantial transmigration ofMexican actuaries coming here asconsultants to work, and NorthAmerican actuaries going southof the border as more and morecorporations begin Mexicanoperations?

NORIEGA: The opportunitiesare there. For instance, I wouldthink that it would be attractive tomany actuarial firms in Mexico tobring Americans and Canadiansdown because of their knowledgeof certain techniques, their con-trol of certain kinds of modeling,for instance. There will be atransfer of technology that couldbe managed by temporary orlong-term implantation of expertsinto Mexico. I also think that theinsurance industry in Mexico isgoing to be evolving very, veryquickly. It will be a very attractivearea for investment for Americanand Canadian companies, andinvestors will bring some of theirown experts with them,

The other way around, I thinkthere's also some chance of Mex-ican actuaries coming to theStates. The pool of talent inMexico has certain distinctiveelements that could be of interestwhen dealing with the Spanish-speaking market in the States, theSouth American, and perhapsthe European market . I thinkthat the most important way ofestablishing relationships will bethrough the joint ventures thatwill probably appear . Not only inthe insurance industry, but also

in the other areas of actuarialactivity. I have noticed a flurry ofactivity in joint ventures in thelast few months, and I wouldguess that would continue.These joint ventures will proba-bly force more close and frequentcontact between actuaries of thetwo countries. I think if I werean actuary in the States, I wouldperhaps consider it a danger thatsome actuaries from Mexicomight take some positions fromAmericans .

THE UPDATE: I think that anxi-ety exists .

NORIEGA: In order to set theirminds at peace, I would say thatthe job market for actuaries inMexico is very large . These arevery well-paying jobs, most ofthem outside traditional areas .Many of the good students whograduate as actuaries do not gointo insurance and pensions-not because they are not interest-ed, but because there are manyother very attractive jobs avail-able. There's no stigma attachedto being an actuary working out-side the traditional fields .

For some Mexicans, it mightbe attractive to come to the Statesand Canada, but I think-andthis is an impression, I don'tknow if I can make it objectiveand quantitative-that for mostof them it would be a temporaryexperience. Well-qualified pro-fessionals enjoy a tremendoussocial advantage in Mexico .Therefore, the quality of life anactuary can have in Mexico isprobably more attractive than inthe United States. So I thinkMexican actuaries would tend tocome to the States only for a fewyears-probably in a trainingcapacity or with the intention ofreturning to set up a business inMexico. I

As far as the long-term futureof the profession, which is theimportant question beyond allthese talks, I guess what is clear isthat we are going to be togetherfor many years . The trendtoward economic interdepen-dence is global and irreversible. Ilike to think we can all benefitfrom this process . We have thechallenge of inventing the futurein common. ∎

"I also think that theinsurance industryin Mexico is goingto be evolving very,very quickly. It willbe a very attractivearea for investmentfor Americanand Canadiancompanies, andinvestors will bringsome of their ownexperts with them ."

The Actuarial Update -December 1992 5

New Requirements for the 1992Casualty Loss Reserve OpinionBy Charles A . Bryan

Many new requirements have been adopted in 1992 forthe opinion on fire and casualty loss reserves .Appointment of the actuary by the insurer's board ofdirectors is mandatory, as is an opinion on gross andnet reserves (just as one was required in 1991). Com-

ments will be required on relevant topics, including : dis-counting; salvage and subrogation; loss portfolio transfers ;financial reinsurance ; reinsurance collectibility; and excep-tional IRIS values. An actuarial report that supports the actu-ary's findings must also be made. The report is to be kept bythe client and made available to regulatory authorities

The casualty actuarial opinion, first introduced on awidespread scale in 1990 and increased in scope in 1991, nowintroduces the term "appointed actuary ." The appointedactuary is named by the insurer's board of directors andmakes an annual report on the adequacy of the loss and lossadjustment expense reserves . This requirement will make theactuary much more visible to the board and require him orher to keep the board informed .

Another expansion in 1992 is found in the actuarial report .This report must follow actuarial standards requiring that suffi-cient documentation be provided so that another actuary prac-ticing in the same field can follow the logic used and determinehow the opining actuary arrived at the opinion . For manycompany actuaries, this may be the first requirement to preparea report complying with the Actuarial Standards Board's Stan-dard No. 9 .

An additional aspect of the 1992 opinions arises from theadoption earlier this year of a common code of professionalconduct by both the American Academy of Actuaries and theCasualty Actuarial Society. The code requires that an actuary,whether or not an Academy member, who provides a lossreserve opinion must meet the loss reserve opinion qualifica-tions standards of the Academy . Before agreeing to providesuch an opinion, every actuary should review the qualificationstandards for the statement of opinion on fire and casualtyreserves .

Data analysis requirements are also different in 1992 . Tra-ditionally, actuaries have reviewed the data for reasonable-ness, but now it is specifically required in the opinion that theactuary do so. Further, public accounting firms are chargedwith reviewing Schedule P-Part 1 to be sure data is presentedfairly and reconciles with the data used in the actuarial lossreserve analysis . This requirement plugs an important gap; inthe past, actuaries could say that their work was valid provid-ed the data were correct, but no one took direct responsibilityfor the data. It also will increase the need for ongoing andintensive coordination between auditors and actuaries, bothinternal and consulting .

Actuaries can be proud of the important role they are nowplaying in the evaluation of certain parts of financial state-ments, but at the same time these new requirements increasethe responsibility to do a thorough and professional job inrendering opinions .

Bryan is a partner with Ernst th' Young in New York City.

LegalLINES

Reducing AppointedActuaries' Risk of Suit

By Lauren Bloom

T he National Association ofInsurance Commissioners'(NAIC's) model standard val-

uation law (SVL) seeks to reducethe risk of life insurance compa-ny failure by requiring, amongother things, that each life insur-er file with the State Departmentof Insurance an annual opinionprepared by the insurer'sappointed actuary regarding theadequacy of the company'sreserves to meet its commit-ments to policyholders. WhenCalifornia adopted its SVL in1991, the state legislature depart-ed from the NAIC's model in acritical respect. The NAICmodel limits the appointed actu-ary's negligence liability to theinsurer and the insurancedepartment. California's SVLdropped the NAIC's limited lia-bility provision and substitutedthe following language :

"The [appointed] actuary shallbe liable for damages to any per-son caused by his or her negli-gence or other tortious conductfor any act, error, omission, deci-sion or conduct with respect tothe actuary's opinion ."

Under California's SVL asoriginally written, the appointedactuary could have been heldliable to lenders, investors, andother third parties who claimedto have been injured by theappointed actuary's alleged negli-gence. This potentially limitlessliability would have existed evenif the actuary did not intend toinfluence the prospective plain-tiffs or know that the prospectiveplaintiffs would rely upon theactuary's work .

Working through the Califor-nia state legislature, the Academysucceeded in modifying thethird-party liability provision ofCalifornia's SVL . The statutenow provides simply that "the[appointed] actuary shall beliable for his or her negligence or

other tortious conduct." Thisprovision should operate as asimple invocation of commonlaw, imposing upon the appoint-ed actuary no greater risk of thjlparty liability than other prsionals face when practicing inCalifornia .

Common law liability is deter-mined by the courts, and a recentdecision by the CaliforniaSupreme Court suggests thatappointed actuaries' liability tothird parties for alleged negli-gence will be significantly limit-ed. In Billy v. Arthur Young, theCalifornia Supreme Courtaddressed the negligence liabilityof public accountants to thirdparties, holding that a publicaccountant auditor generally maybe held liable for negligent per-formance of professional servicesonly to the client for whom theaudit was performed . Bily fur-ther holds that the accountantmay be held liable for negligentmisrepresentation in an opiniononly to third parties whom theaccountant intended to influence,and not to third parties whorelied upon the opinion withoutthe accountant's knowledgeconsent.

The Bily opinion contains anextensive discussion of thenature of public accountants'work that suggests significantparallels to the work performedby appointed actuaries under theSVL. Consequently, it is proba-ble that a court would look toBily when determining the scopeof an appointed actuary's third-party liability under the Califor-nia SVL. In that event, theAcademy believes that Bily andCalifornia's SVL, when readtogether, should limit appointedactuaries' liability for negligenceto the insurer, the regulator, andany other party whom the actu-ary intends to influence . Therisk of limitless third-party liabil-ity appears to have been signifi-cantly reduced .

Bloom is general counsel of theAcademy.

6 The Actuarial Update ∎ December 1992

Capitol

•rimentation in health care istaking place at the state level .Twelve states have received $8 .4million in grants from the RobertWood Johnson Foundation todevelop a wide range of plans toexpand health insurance coverageand contain costs. The proposalscontain many of the ideas forhealth care reform being talkedabout and studied, includingindividual health accounts, man-aged competition, play-or-paymandates on employers, and sin-gle-payer systems . After thestates develop their proposedreforms, they will be eligible toapply for up to 3 years of addi-tional funding to support theirefforts .

Oklahoma's new health care lawwill allow employees to changejobs without the threat of havingtheir new employers' insurancecarriers apply waiting periods orimpose any preexisting condition.ts on health care coverage .

new law takes effect January1, 1993 and affects all employersin the state who offer grouphealth insurance coverage toemployees. To ensure compli-ance, the new law requires allsmall group health insurers to filean actuarial certification annuallywith the insurance commissioner .

California Governor Pete Wilsonvetoed legislation providing uni-versal heath insurance to all stateresidents. However, the governordid sign small-group-reform leg-islation. The new law guaranteesissuance and renewability ofhealth coverage to all employerswith three to fifty employees . Itlimits exclusions for preexistingconditions and mandates a modi-fied community rating approachto spread the cost of coverage forseriously ill employees. Accord-ing to the bill's sponsor, the legis-lation is based on the concept ofmanaged competition, "in whichMket forces harness the compe-

n through regional purchas-ing pools that contract for healthcare for all residents within a spe-cific area ."

Auto insurance reform legisla-tion was proposed during a Bushcampaign speech. The proposalwould reduce insurance costs fordrivers willing to forego recover-ing "pain and suffering" damagesin crash-related lawsuits. Thoseelecting to waive their right to suefor non-economic damageswould purchase "personal insur-ance protection" under whichthey would collect economicdamages from their own insurerinstead of suing other motorists.The Republican administrationclaims this program would saveconsumers an estimated $20 to$30 billion in premiums nation-wide. The concept of "choice"has been around for some time,but this reform would implementit nationally. Republican mem-bers plan to introduce a bill toimplement "choice" in autoinsurance in the next Congress .

President Bush vetoed HR 11 onNovember 4, the day after losinghis bid for reelection . The presi-dent stated in his veto messagethat the urban aid provisions inthe bill bad been "submerged inbillions of dollars in giveaways tospecial interests ." The newCongress and the Clinton admin-istration are expected to movequickly next year to pass an eco-nomic growth package to replacethe vetoed legislation .

Several health care-related billsreceived last-minute approvalprior to the adjournment of the102d Congress. A mammogra-phy bill was passed requiring theDepartment of Health andHuman Services to certify allmammography facilities by Octo-ber 1, 1994 . The legislation alsoauthorizes the imposition of feesto pay for the annual inspections.States conducting inspectionsmay also levy fees to coverinspection costs. President Bushalso signed a bill requiring drugmanufacturers to enter into pur-chase contracts limiting drugprices on sales to the VeteransAdministration, the Departmentof Defense, and the Public HealthService. The bill is designed togive the agencies the same pricebreaks accorded in the Medicaidprogram . The Presidentapproved the FY93 Department

of Health and Human Servicesappropriation that includesslightly more than $ 1 .6 billion forMedicare contractors. The billcontains about $36 million lessthan President Bush requested,but provides for a 5 .3% increaseover FY92 funding. Congress didnot include money for the con-tractors ' contingency fund.

The IRS issued a notice of pro-posed rulemaking and temporaryregulations providing guidancefor applying the benefit plan dis-tribution requirements of theUnemployment CompensationAmendments Act of 1992 . Theregulations, which are in a ques-tion-and-answer format, areintended to address importantcompliance issues that requireresolution before the act's effec-tive date of January 1, 1993 .They are not intended to be com-prehensive .

The IRS also established atemporary, experimental pro-gram designed to allow employ-ers to voluntarily correct opera-tional qualified pension plandefects and obtain a compliancestatement from the IRS .

The IRS issued a notice ofproposed rulemaking thatamends regulations on the valua-tion of any annuity, interest forlife or a term of years, or remain-der or reversionary interest underSection 7520 . The proposedrules would amend present regu-lations under a number of codesections to provide that transfersof certain partial property inter-ests with valuation dates fallingon or after May 1, 1989, are val-ued'under Section 7520 .

The Pension Benefit GuarantyCorporation issued a final rulestating that employers who fail tomake a required contribution toa single-employer plan must file aForm 200, Notice of Failure toMake Required Contributions .The final rule adopts with minoreditorial changes an interim finalrule that was published inNovember 1991 .

For more information on theactions noted above, contactChristine Cassidy at theAcademy's Washington office.

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The Actuarial Update -December 1992 7

Health CareUnder ClintonBy Gary Hendricksand Stephen A . Meskin

CALMAR

Cauncitof Presidents MeetingJanuary 18

Actuarial StandardsBoardJanuary 20-21

Enroiled ActuariesMeetingMarch 8-10

wring the 1992 campaign,one of Bill Clinton's manypromises was his steadfastassertion that, if he wereelected president, all Amer-

icans would be assured access toadequate, affordable health care .He asserted he had a plan toimplement his health carepromise, which he would submitto Congress within 100 days ofhis inauguration .

Clinton stated repeatedly thathis overall philosophy would beto maintain the existing privatehealth insurance system and usethe federal government's clout toreduce costs for those who haveinsurance and provide access forthose who cannot now afford it .A broad outline of the plan'sdirection and some detail can begleaned from statements made byClinton and his top aides .

Assuring Access to Insurance

Clinton would require that allemployees and their dependentsbe covered by a core benefitspackage. Clinton and his chiefaides have tried to avoid callingthis required coverage an employ-er mandate and have denied thatthe president-elect's approach is

Reprinted by permission, Tribune Media Services.

"play-or-pay." Pre-surnably, someemployers wouldbe eligible for sub-sidies and, in somecases, employers oremployees wouldhave the option ofselecting participa-tion in a new publicprogram. Howev-er, unless the finalproposal departsdrastically fromcampaign rhetoric,employer-basedcoverage will bemandated, andthere will probablybe elements of a"play-or-pay" solu-

tion for some groups of workers .Individuals who fall outside

the employer-based system willreceive core benefits coveragethrough a new public programthat will also include currentMedicaid eligibles, Other groupscovered under the new programwill be the unemployed, the non-Medicaid-eligible poor, and someselect groups of employed work-ers. Medicare will be retained asan independent program andexpanded to cover more long-term care services .

There will also be privatehealth insurance marketingreforms. During the campaign,Clinton proposed communityrating and open enrollment,reforms that go far beyond thesmall-group health insurancereform proposals the Bushadministration and the Congressso seriously considered .

It is likely that only HMOs andlarge insurers (possibly just theBlue Cross and Blue Shield plans)could operate in such an environ-ment. Some Clinton advisershave stated that their goal is toreduce substantially the numberof health insurers and that thesurviving ones would be thehealth networks whose growththey wish to encourage as part oftheir cost-containment strategy .

Cost Containment

At the heart of Clinton's strategyfor cost containment is theNational Health Board, made upof consumers, providers, andrepresentatives of business, labor,and government . It would setannual targets for a global healthcare budget .

The impact of a national bud-i get depends on how it is imple-mented. One Clinton healthadviser has suggested that thenational budget would be allocat-ed on a state-by-state basis andthat each state would have theresponsibility to stay within itsbudget. States could do this bycontrolling the premiumscharged by the health net-works/insurance companies .

Such a budgeting/cost-con-tainment system could work .Canada has already implementedone . However, the impact of anational budget would depend

on how each state budget isdetermined and what happens ifmedical. expenditures for the stateexceed its budget .

Another function ofNational Health Board woulto determine what to includeinthe core benefits package. Clin-ton has stated that core benefitswould include ambulatory care,inpatient hospital care, prescrip-tion drugs, basic mental healthcare, and expanded preventivehealth care services,

A second major element ofClinton's proposal is encouragingmanaged competition throughthe development of health net-works.

Clinton also proposes con-taining costs by forcing reduc-tions in the prices of prescriptiondrugs. To cut prescription drugcosts, Clinton says he will elimi-nate tax breaks for those drugcompanies that raise drug pricesfaster than incomes are rising.

Finally, Clinton proposes con-taining costs by reducing admin-istrative costs and fraud, reform-ing malpractice insurance, andencouraging state experimenta-tion. However, it is hard to esion much room for state exmmentation once Clinton's insur-ance market reforms, employ-er/employee mandates, and newpublic programs are in place .

No matter how one viewshealth insurance reform, a fewthings seem clear. First, if Clin-ton follows through on his healthcare promise and pursues thedirections indicated to date,Congress will be debating a veryserious revamping of the currentsystem, with changes more dra-matic than those caused by enact-ment of Medicare .

Second, Clinton's proposal isfar from complete . Reform mayemerge from Congress, but it willlikely be much less far-reachingthan what Clinton has suggested .Much more analysis and carefulpolitical planning will be neededbefore the new president sendsCongress a proposal if that pro-posal is to succeed .

Hen- rickkss Academy DirectoloGovernment Information ; Meskinis vice president of The Segal Co . inWashington, D.C.

8 The Actuarial Update • December 1992