THE~ ACTUARIAL

From the President

AMERICANACADEMY OFACTUARIES

VOLUME 24NUMBER 2

FEBRUARY 1995

THIS MONTH j -x Wilson Wyatt Named AcademyS

Practice Council Boxscore

411

6Anatomy of a Standard

7Capitol Views

1995 Life & Health Manual

ENCLOSURESIncluded with this month's

issue of The Actuarial Updateare the following.'

In Search Of

ASB Boxscore

0THIRTY

*330YEARS

Executive Director

Wilson W. Wyatt, Jr. hasbeen appointed Acade-my executive director .Wyatt's appointmentwas announced by

Academy President Chuck Bryanin a January 6 letter to the boardof directors and follows a 4-month-long search conducted bya blue-ribbon Academy task force .

Wyatt brings over 17 years'experience in corporate commu-nications and public affairs to theAcademy. Most recently, Wyattserved as senior vice president ofcorporate communications forthe Travelers Insurance Compa-nies, where he managed all com-munications and governmentrelations activities . While atTravelers he developed a commu-

Academy Executive Director Wilson Wyatt

nications strategy to improve thecorporation's credibility prior toits recent merger with Primericaand also directed its "America'sUmbrella" advertising campaign .

Sales Illustration Exposure Draft and HearingThe Actuarial Standards Board anticipates that at its April meet-ing it will approve for exposure a standard of practice for lifeinsurance sales illustrations . The ASB would then hold a hearingon this issue May 24 from 8 :00 a.m. to 1 :00 p.m. in New YorkCity, immediately following the Society of Actuaries meeting . Aspecial mailing of the exposure draft will be sent to members ofthe SOA Financial Reporting and Product Development Sec-tions. If you are not a member of these sections and would liketo receive the special mailing of the sales illustration exposuredraft, please contact Christine Nickerson at (202) 223-8196 .

As senior vice president ofcorporate and public affairs forPNC Financial Corporation, heparticipated in drafting bankingreform legislation for the U .S .Senate. His 13-year career withBATUS, Inc., an $8-billion U .S .management holding companyin Louisville, included 4 years asits Washington, D .C.-based vicepresident for public policy and 4years as vice president of corpo-rate affairs . Among his achieve-ments at BATUS was the designof a successful US communica-tions program to defend itsBritish parent corporationagainst a $21-billion hostiletakeover attempt by Sir JamesGoldsmith .

Wyatt began his career in 1965as a reporter with The Courier-Journal in Louisville .

In 1969 he was elected to theKentucky General Assembly,where he served as vice chair ofthe Appropriations and RevenueCommittee.

"We are enthusiastic aboutadding Wilson Wyatt to our teamof staff and volunteers," saidAcademy President Chuck Bryan ."He is a bold and dynamic leaderwith a proven record in publicpolicy issues . Wilson's aggressiveleadership will propel the Acade-my to even greater prominenceas the public policy voice of theactuarial profession, as outlinedin our 5-year strategic plan ."

Wyatt took up his Academypost January 30 .

KEY ISSUES AT A GLANCEPages 3-5 of this month's Updatefeature a boxscore of the AcademyPractice Councils' key issues for1995, the Academy's objectives in

taking on those issues for theprofession, and any action taken todate . We hope our readers find thisa useful reference guide. Academy

members with comments orsuggestions are encouraged to callthe practice council vice presidentsat the voice mail numbers listed in

the boxscore's left column .Serving the Actuarial Profession

AMERICANACADEMY OFACTUARIES

PresidentCharles A . BryanPresident-Elect

Jack M . TurriquistVice 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

MEMBERSHIPADMINISTRATION

Woodfield Corporate Center475 N . Martingale Road

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

THE ACTUARIALUPDATE

Committee an PublicationsChairperson

E . Toni MulderEditor

Adam Reese

Associate EditorsWilliam Carroll

Ronald GebhardtsbauerPatrick J . GrannanManaging EditorJeffrey Speicher

Contributing EditorKen Krehbiel

Production ManagerRenee Saunders

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

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

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

FROM THL J 1

pre iuuniNew Strategic Plan SetsAcademy PrioritiesBy Chuck Bryan

Academy has nowreached an important mile-stone on the way to becom-ing a more effective organi-zation for our members .

We have developed and imple-mented a 5-year strategic plan .The plan focuses the Academy'sefforts on a clearly stated dualmission of ensuring actuaries astrong public policy voice andmaintaining a high level of pro-fessionalism, including effectivestandards of practice and coun-seling and disciplinary structures .

Last year, 1993-94 AcademyPresident Dave Hartman ener-gized Academy strategic plan-ning. ning. Traditionally, the AcademyPlanning Committee consisted ofthe presidents-elect of the otherU.S .-based organizations. Wesupplemented that structure bycreating an operating committeechaired by Walt Rugland andincluding Bill Carroll, JanetFagan, Steve Goldberg, Jim Mur-phy, John O'Connor, JohnRadek, Carl Shalit, Tim Tinsley,and Larry Zimpleman to developa strategic plan. We also engageda facilitator, Ralph Kuehl, to helpus. After many meetings and dis-cussions, we agreed on a planthat our board of directorsapproved last September . It's anexciting plan, as you will see .

You can find the strategicplan's mission and general objec-tives in the 1995 Academy Year-book. If you have not yet read it,please spend time familiarizingyourself with the plan. We nowhave a very well articulated Mis-sion Statement which focusesyour Academy on two areas . Thefirst area is making sure that wehave a strong voice among legisla-tors, regulators, and the businesscommunity, including all thoseorganizations that affect our actu-

I arial work, During 1993 and1994, under the leadership of

Presidents John Harding andDave Hartman, the Academy wasvery effective in a number of pub-lic policy areas, including solven-cy, health care reform, risk-basedcapital, actuarial opinions, andmany others . But we cannot reston our laurels . We have agreedupon key issues for each of thefour practice councils and theCouncil on Professionalism . Onpages 3-5 of this Update, you willfind a list of the practice councilissues . If we can be successful inimproving the public debate anddecision-making on many of theseissues, then we can he even proud-er of our profession .

The second part of our missionis directly related to the first. Weare committed to strengtheningthe already excellent structures inplace to support standards ofpractice and counseling and disci-plinary procedures . Much of thisstructure is relatively new in ourprofession. In 1986 the InterimActuarial Standards Board wasestablished on a trial basis ; theboard became permanent in 1988 .Since then, dedicated actuarieshave refined a standard-develop-ment process that is becoming theenvy of other professional organi-zations. Even more recently, in1992, the Actuarial Board forCounseling and Discipline wasfounded to bring a professionwideapproach to professional guidanceand disciplinary matters . TheABCD is handling its responsibili-ties very well . Both these struc-tures are managed by the Acade-my on behalf of the entire profes-sion in the United States .

Our members should also beexcited about the Academy com-mittee structure that has beenevolving over the last severalyears in support of the strategicplan. We now have very activepractice councils in the life,health, pension and casualty areas

and for issues of professional-ism. Each practice council isheaded by a vice president whtakes an very active role in thaarea of practice . It is easy foryou as a member to relate to aparticular practice area and todecide how to provide special-ized knowledge, volunteer time,or other assistance. The prac-tice councils are tasked withachieving specific objectives ofthe strategic plan .

The strategic plan outlinesfive general objectives: publicpolicy interface ; professional-ism; interorganizational rela-tionships; communications;and resources . All Academygoals and activities are nowlinked to these objectives and acomprehensive staff plan isbeing organized to support eachone. We will make astoundingprogress toward achievingthese objectives in the near termunder the leadership of WilsonWyatt, the new Academy execu-tive director .

What does this strategic planmean to you as Academy me o

First, it means that we whave a much better feel for whatthe Academy is doing and how itis assisting us as a profession .Second, we are better able toinfluence key issues are thataffect actuaries and evaluatehow our dues and volunteer timeare spent . Third, sharpening theAcademy's focus increases itsinfluence in the public policyarea, which enhances the prestigeof all actuaries .

It is you, our members, whodeserve a thank you for yourongoing support for the Acade-my during this transition peri-od as it becomes focused on thenew strategic plan . If you haveany questions about the plan,feel free to direct them to me,to Academy staff, or to one ofour vice presidents. We can alltake pride in the achievementsof our Academy and, with thisnew plan, be confident thateven more achievements are inour future .

Cop he complete Acade*Strategic Plan are available fromthe Academy's Washingtonoffice .

si

2 The Actuarial Update - February 1995

Practice Council Key IssueCasualty 1 . Casualty Loss Reserve Opinionsave Flynnire president

(202-223-8196, ext . 2501

2. Redlining

3. Workers ' Compensation

4. Medical Malpractice Reform

5. Catastrophe Reserves andNatural Disaster Insurance Reform

6. Environmental Liabilities(including Superfund)

7. Reinsurance regulationand legislation

Health 1 1 . Contribute to the Health Care ReformJohn Bertko Debate in National and State Arenasvice president(202-223-8196, exi . 251 }

Academy ObjectiveAssist property/casualty actuaries in keeping abreastof stale loss reserve valuation Taws and regulations

Academy ActionProperty/Casualty Loss Reserve Manualmailed to 200+ subscribers in January

Conduct study of sources of potential Committee on Property/Liability Financial Reportingdeficiencies in industry reserves (COPLFR) reviewing responses to survey of companies

Assist NAIC Casualty Actuarial Technical Task Forcein drafting instructions for residual market pools

COPLFR subcommittee circulated draft ofinstructions for review at January meeting

Provide technical support to NAI( Task Forceon other loss reserve issues

Provide technical supped to stateand federal policy makers

Develop monograph on alternative treatmentsof WC in health care reform

COPLFR sent letters to Casualty Actuarial TaskForce on loss reserve discounting guidelines andrule for calculating unearned premium reserves

Committee on Property/liability Insuranceforming work group

Draft monograph completed

Develop written materials an other WC issues Work to begin as health care reform monographfor state policy makers nears completion

Provide technical support to stateand federal policymakers

(OPLI work group tracking developments in federallegislation; developing additional documents forcongressional staff ; reviewing status of major state initiatives ;developing technical support plan for slateand federal policy makers where appropriate

Provide technical support to state andfederal policy makers

Provide technical support to state andfederal policy makers

(OPILI work group to identify potential actuarial invole-ment and to produce one or more brief white papers

COPLI work group to identify potential actuarial invole-ment and to produce one or more brief white papers

Provide technical support to state and ! COPLI work group to identify potential actuarial invole-federal policy makers j ment and to produce one or more brief white papers

Practice council work groups will produce anddistribute monographs

Medical Savings Accounts Work Group is completingits first monograph ; second monograph is planned for spring

ER1SA Preemption Work Group is established and ispreparing a monograph

11 Community Rating Work Group is being established

Universal Coverage/ Guaranteed Issue Work Group isbeing established

Any-Willing - Provider Legislation Work Group is beingestablished .

Medicaid Fold-In Work Group will be established

Ensure Federal Health Committee 's timely Committee met with key congressional and administrationresponse to policy maker requests staff and set up technical resource groups to respond

to requestsIEnsure State Health Committee's (SHC) timely Practice council created two SHC subcommittees : State Healthresponse to policy maker requests Initiatives and NAIC liaison

The Actuarial Update • February 1995 3

Practice Council Key Issue Academy Objective

Health 1 . Contribute to the Health C are Reform Increase interaction with the NAI( and raise the Academy'sJohn Beriko Debate in National and State Arenas profile as a technical resourcevice president(202-223-8196, ext. 251)

LifePaul Kolkmanvice president

(202-223-8196, ext . 252)

2. Increase Public Visibility of the Profession Contract freelance technical writer to prepare finalVia Joint Academy/SOA report on 1994 Academy health care reform activitiesCommunications Committee

3. Set Goals and Priorities for theLong-Term (are Committee

1 . Life and Health StandardValuation Low Manual

2. Life Practice Notes

Assist appointed actuaries in complyingwith state law

Add health policy organizations and academics to thecontacts and monographs list

Develop a media strategy under Forecast 2000

Compile lists of key issues meriting Academy response,of potential Academy members who could serve as statecontacts, and of organizations to contact

Respond to federal and state legislation on LT( provisions.

Assist life & health actuaries in keeping informedon state valuation laws and regulations

Academy Action

SH( presented its recommendations on a risk -based capitalformula for health organizations and will continue toprovide technical assistance to the NAI( HORBCWorking Group as needed

SHC representatives monitored all relevant sessions at theNAIC December meeting and will do so atNAIC 1995 quarterly meetings

SHC is preparing and distributing background materialson NAIC issues to its subcommittee members .

SH( is cosponsoring a reception at the NAIC spring meetingwith Academy life and casualty committees

Final draft being completed

Names added

In progress

State Health Initiatives Subcommittee completed list of keystates is developing a strategy for communicating with them

Committee is preparing a statement on LTC provisionsin the House Senior Citizens ' Equity Act

401995 update materials for life & Health StandardValuation Law Manual mailed to 350+ subscribersin January; Committee on Life Insurance FinancialReporting ICOLIFR ) considering improvements to currentmanual and the timing of updates

Life Practice Notes 1-14 updated and mailedin December

3. Life Insurance Sales Illustrations Provide technical expertise to NAIC , states,and federal government on actuarial aspectsof this issue

4 . Life Nonfarfeiture Model Low

5 . Annuity Nonforfeiture Model Law

A5B is completing working draft of an actuarial complianceguideline; C ommittee on Life Insurance (COLD will providesupport to ASB and NAIC Life Insurance (A) Life InsuranceDisclosure Working Group

Provide technical expertise and assistance to NAIC Life Actuarial Task Force has temporarilyNAIC Life Actuarial Task Force in drafting model law suspended efforts to redraft law ; Academy may

be asked to assist when drafting resumes

Provide comments to NAI( committees as lawmoves through adoption process

NAIC Life & Health Actuarial Task Farce recommendedrevised draft be exposed by Life Insurance (A) Committeeat March meeting; COLT is monitoring progress of lawand will provide comments as needed

4 The Actuarial Update • February 1995

1994 Academy Public StatementsGeneral Academy Statements

TO: Darren F . Cook, Director ofFinancial Services,National Asso-ciation of Insurance Commis-sioners (NAIC)DATE: June 2, 1994DRAFTERS: Financial Report-ing Steering CommitteeRE: Proposed Statutory Account-ing Principles (SAP)REQUEST NO.: PS-94G-1BACKGROUND: The Academyrequested an opportunity tospeak at a June 10 hearingregarding the proposed StatutoryAccounting Principles (SAP)Statement of Concepts. In writ-ten comments on the Draft State-ment of Concepts for SAPincluded with the letter, theAcademy agreed that the primaryfocus of statutory accountingshould be solvency management.The letter also stated that, asactuaries, the committee mem-

rs were not proponents of aecific accounting system .

However, the committee statedits belief that the proposed use ofthe existing GAAP framework, tothe extent that its objectives coin-cide with the SAP objectives,makes sense . The letter also sup-ported a conservative approachto regulating insolvency risk .

TO : United States Court ofAppeals for the Fifth CircuitDATE: December 20, 1994DRAFTERS: Lauren M . Bloom,Counsel to the American Acade-my of ActuariesRE : United Teacher AssociatesInsurance Company v . Mackeen &Bailey, Inc v. The WhidbeeCorp.,Hoyt W.Whidbee,Jr ., andDavid M. MorganREQUEST NO .: PS-94G-2BACKGROUND: The UnitedStates District Court for the West-ern District of Texas declared thatactuaries are fiduciaries as a mat-ter of law in Texas. The Academy

Iramicus curiae brief argued argued~t the district court did not have

make such a sweeping declara-tion to decide the case, becausethe court had already determinedthat the facts of the case were suf-

ficient to demonstrate that a fidu-ciary relationship existed betweenthe parties and that the relation-ship had been breached. Further,the Academy argued that the dis-trict court erred in its analysis ofthe relationship between profes-sional standards and fiduciaryduty. The court's opinion sug-gested that a violation of profes-sional standards is significant onlyin the context of a fiduciarybreach . To the contrary, theAcademy wrote, professionalcodes imposed by associationsupon their members representcontracts between the associationand the members and may beenforced by the associationregardless of whether a memberhas breached a fiduciary duty tosome third party . The districtcourt's decision, if uncorrected,could seriously hamper theAcademy's authority to enforcethe code upon its members,according to the brief.

Casualty StatementsTO: Donna Imhoff, Counsel,Economic Matters Committee,Maryland House of DelegatesDATE: March 15, 1994DRAFTERS: Malpractice ReformWork GroupRE: Wrongful Death Non-Eco-nomic Damage Cap Bills(HB661, H13511)REQUEST NO .: PS-94C-1BACKGROUND: The work groupcommented on proposals toincrease the current $350,000 peroccurrence cap for noneconomicdamage to $500,000 in personalinjury or survival actions . Thework group concluded that theproposed changes would result inhigher loss payments .

TO: Members of CongressDATE: August 1, 1994DRAFTERS: Malpractice ReformWork GroupRE: Tort Reform ProposalsREQUEST NO . : PS-94C-2

BACKGROUND: The workgroup evaluated several studies oftort reform based on methodologyand actuarial experience and con-cluded: A comprehensive packageof reforms will be best able toachieve savings in malpracticelosses and insurance premiums ;an effective reform package shouldinclude a cap on awards fornoneconomic damages and someform of mandatory recognition ofcompensation from collateralsources; other reforms shouldinclude more restrictive statutes of ilimitations, limitations on expertqualifications, and frivolous suitpenalties; and poorly constructedtort reforms may actually increasemalpractice costs . [The HouseJudiciary Committee reversed itsopposition to these reforms after Istudying the work group's analy-sis .]

1994Public

Statements

TO: Selected Congressional StaffDATE: August 29, 1994DRAFTERS: Committee onWorkers' Compensation andHealth Care ReformRE : Workers' Compensationunder Health Care ReformREQUEST NO . : PS-94C-3BACKGROUND : The workgroup addressed the pros andcons of three major approachesto workers' compensation as partof health care reform: ignoringworkers' compensation, coordi-nating the medical componentwith other medical insurance,and merging occupational medi-cal compensation with othermedical insurance.

TO : Robert F . Lowe, CasualtyActuaries Inc .DATE: January 5, 1994DRAFTERS: Committee onProperty and Liability FinancialReportingRE: Line of Business Chart forAnnual Statement InstructionsREQUEST NO.: PS-94C-4BACKGROUND: The commit-tee responded to Lowe's suggest-ed addition of a line of businesschart to the Annual StatementInstructions . The letter recom-mended that another group, suchas the NAIC Blanks task force,review the proposal.

Continued nextpage

The Actuarial Update ∎ February 1995 i

TO : James F . Long, Commis-sioner, North Carolina Depart-ment of InsuranceDATE: February 15, 1994DRAFTERS: Committee onProperty and Liability FinancialReportingRE: Summary of State Laws andRegulations Pertaining to PICInsurance Company Loss and LossAdjustment Expense ReservesREQUEST NO.: PS-94C-5BACKGROUND: The committeerequested assistance in identifyingrelevant North Carolina laws, reg-ulations, circular letters, anddirectives for a possible summaryof state laws and regulations per-taining to PIC insurance companyloss and loss adjustment expensereserves. The summary wouldserve as a reference document foractuaries who prepare statementsof opinion on reserves.

TO : Robert W. Gossrow, IllinoisDepartment of InsuranceDATE: February 25, 1994DRAFTERS : Committee onProperty and Liability FinancialReportingRE: Implementation of TabularReserve DefinitionREQUEST NO .: PS-94C-6BACKGROUND: The committeecommented on a proposed transi-tion rule for implementation of thetabular reserve definition adoptedby the NAIC Blanks Task Force inDecember 1993. The committeesuggested that consideration begiven to implementing the defini-tion prospectively by allowingcompanies that gave tabular treat-ment to workers' compensationmedical claims to continue to doso for claims in accident years 1993and before . An alternative suggest-ed by the committee would be tophase in the changed definitionover a period of years .

TO: NAIC Cost DisclosureWorking GroupDATE: March 1, 1994DRAFTERS : Task Force on Illus-trationsRE: Life Insurance IllustrationsREQUEST NO.: PS-94C-7BACKGROUND: The Academytask force stated its opinion thatcurrent scale-the values a corn-parry is paying today consistentwith recent experience-is the

best basis for illustrating values .The task force recommended thatcurrent values, together with val-ues shown at an alternative lowerscale, be provided on a consistentbasis throughout the industry .The task force also noted that theActuarial Standards Board couldplay a role by issuing a standardof practice to support a regula-tion to require an actuary to cer-tify illustrations .

TO: David Lyons, Commissioner,Iowa Insurance Department ;Dwight Bartlett, Commissioner,Maryland Insurance Department;Jim Brown, Commissioner,Louisiana State InsuranceDepartmentDATE: March 16, 1994DRAFTERS : Committee onProperty and Liability FinancialReporting (COPLFR)RE: Summary of State Laws andRegulations Pertaining to Proper-ty and Casualty Insurance Com-pany Loss and Loss AdjustmentExpense ReservesREQUEST NO .: PS-94C-8BACKGROUND: The commit-tee requested assistance in identi-fying relevant laws, regulations,circular letters, and directives fora possible summary of state lawsand regulations pertaining to P/Cinsurance company loss and lossadjustment expense reserves . Thesummary would serve as a refer-ence document for actuaries whoprepare statements of opinion onreserves .

TO: James H. Dill, Commission-er, Alabama Insurance Depart-mentDATE: March 22, 1994DRAFTERS: COPLFRRE: Alabama Law (27-3-26 .1)REQUEST NO .: PS-94C-9BACKGROUND: COPLFRreviewed an Alabama law thatrequired all PIC insurers toinclude a statement from a quali-fied independent loss reserve spe-cialist on the annual statementsfiled with the commissioner. Thelaw defined an independent lossreserve specialist as "a person whois not an employee, principal,director, or indirect owner of theinsurer and is a member of theCasualty Actuarial Society, or hassuch other experience as is accept-

able to the commissioner to assurea professional opinion on the ade-quacy of loss and loss adjustmenexpense reserves ." The committeerecommended that the law beeither replaced by requirementsestablished by the NAIC or elimi-nated. [The Alabama law wassubsequently repealed .]

TO: Robert W. Gossrow, IllinoisDepartment of InsuranceDATE: March 22, 1994DRAFTERS: COPLFRRE: Asbestos/EnvironmentalReserve DisclosureREQUEST NO . : PS-94C-10BACKGROUND: The committeemade editorial suggestions to anAsbestos Environmental ReservesDisclosure that Gossrow had pro-posed to the NAIC Casualty Actu-arial Task Force as an addition tothe Notes to Financial Statementssection of the Annual Statement .

TO: Frank P. Dino, Chief Actu-ary, Corporate Affairs, ColoradoDivision of Insurance, Depart-ment of Regulatory AgenciesDATE: March 25, 1994 40DRAFTERS: COPLFRRE: Proposed Regulation 3-1-3REQUEST NO.: PS-94C-11BACKGROUND: The committeereviewed a proposed change inColorado's actuarial opinionrequirements. The committeerecommended that actuarial opin-ion requirement changes be takenthrough the NAIC, and adopted,modified, or rejected by the statesas a group . The committee alsooffered specific suggestions toimprove the proposed regulation .

TO: Bruce Patton, Staff Counsel,California Department of Insur-ance, Rate Enforcement BureauDATE: June 17, 1994DRAFTERS: COPLFRRE: Workers' Compensation RateFiling RegulationsREQUEST NO . : PS-94C-12BACKGROUND: The commit-tee made specific recommenda-[ions on the wording of compen-sation sation rate filing regulations andsuggested that the regulatio>definition of actuary specrAcademy membership as the solequalification criterion for publicstatements of actuarial opinion .

ii The Actuarial Update ∎ February 1995

Health Statements0: Thomas Foley, Chairman,

NAIC Ad Hoc Group on HealthInsurance Rating, Florida Insur-ance DepartmentDATE: January 13, 1994DRAFTERS: State Health Com-mitteeRE: Report of the Ad Hoc Groupon Health Insurance Rating aspresented at the 1993 WinterNAIC MeetingREQUEST NO .: PS-94H-1BACKGROUND: The committeecommented on the Ad HocGroup's report on health insur-ance rating . The committee statedthat guidelines for primary poli-cies must be distinguished fromsecondary policies guidelines .

TO: Mark Peavy, Life/HealthActuary, NAICDATE: March 31, 1994DRAFTERS: State Health Com-mitteeRE: Ad Hoc Working Group onHealth Insurance Rating March 6,

X994 Draft RegulationqjWQUEST NO .: PS-94H-2

BACKGROUND: The committeefocused on the scope, pooling, ratestructure, and frequency of rateincrease sections of the Ad HocWorking Group's draft regulation .

TO : Lowell Solomon, Sen .Edward Kennedy's OfficeDATE: August 11, 1994DRAFTERS: Federal HealthCommitteeRE: Employer-Size ThresholdImpact on Community-RatedPremiumsREQUEST NO.: PS-94H-3BACKGROUND: The committeeprovided estimates of the impacton community rating for varyingemployer-size thresholds underSen. George Mitchell's health carereform bill (S. 2357) .

TO: Selected Members ofCongressDATE: August 29, 1994DRAFTERS: Medical SavingsAccount Work Group? Medical Savings AccountsSAs)

REQUEST NO .: PS-94H-4BACKGROUND: The work groupaddressed widespread misunder-

standings of how MSAs wouldwork under a number of thehealth care reform proposalsbefore Congress . The work groupnoted that employers generallywould not realize enough savingsfrom replacing their low-deductible health plans with high-deductible plans to be able to con-tribute the full deductible amountto an MSA for all their workers .

TO: All Members of CongressDATE: April 1994DRAFTERS : Solvency WorkGroupRE: Solvency IssuesREQUEST NO.: PS-94H-5BACKGROUND : MonographFour, Actuarial Solvency Issues ofHealth Plans in the United States,addressed actuarial issues relatedto monitoring and regulation ofinsured health plan solvency .Proposed changes in the privateinsurance market raised the con-cern that many health care planscould become insolvent, particu-larly at the outset of health carereform .

TO: All Members of CongressDATE: March 1994DRAFTERS: Guaranteed Nation-al Benefits Package Work GroupRE: Guaranteed Standard BenefitPackageREQUEST NO.: PS-94H-6BACKGROUND : MonographFive, Actuarial Issues Involved inEvaluating a Guaranteed StandardBenefit Package Under HealthCare Reform, discussed the actu-arial issues involved in evaluatingthe design of guaranteed standardbenefit packages, with a particu-lar focus on the Health SecurityAct of 1993 .

TO: All Members of CongressDATE: April 1994DRAFTERS: Budget Develop-ment and Enforcement WorkGroupRE: Budget Development andEnforcement Under Health CareReform .REQUEST NO .: PS-94H-7BACKGROUND : MonographSix, Actuarial Issues Related toBudget Development and Enforce-ment Under Health Care Reform,examined the elements of the

Health Security Act of 1993 thatdesigned to control future healthcare cost increases . Specifically, itaddresses the actuarial implica-tions of using a premium cap andan assessment mechanism toachieve a global health care bud-get in the United States .

TO: All Members of CongressDATE: July 1994DRAFTERS: Cost EstimatesWork GroupRE: A Review of Premium Esti-mates for the Health Security ActREQUEST NO .: PS-94H-SBACKGROUND: MonographSeven, A Review of Premium Esti-mates in the Health Security Act,reviewed the assumptions andmethodologies used by the Clin-ton administration to developpremium estimates for the HealthSecurity Act .

1994Public

Statements

TO: All Members of CongressDATE: May 1994DRAFTERS: Mental Health Ben-efits Work GroupRE: Mental Health Benefits underHealth Care ReformREQUEST NO .: PS-94H-9BACKGROUND : MonographEight, Actuarial Issues in Design-ing Mental Health Benefits UnderHealth Reform, examined thebenefit design and cost issues forthe mental health benefits pro-posed under the Clinton admin-istration's Health Security Act .

TO: All Members of CongressDATE: June 1994DRAFTERS : AdministrativeCosts Work GroupRE: Administrative Costs forRegional Alliances and HealthPlans under the Health SecurityAct.REQUEST NO .: PS-94H-10BACKGROUND : MonographNine, Administrative Costs forRegional Alliances and HealthPlans Under the Health SecurityAct, focused on the functionsnecessary to administer healthalliances and health plans underthe Health Security Act of 1993 .

The Actuarial Update -February 1995 iii

TO: All Members of CongressDATE: July 1994DRAFTERS: Health Plan PricingWork GroupRE: Pricing Health Plans underHealth Care ReformREQUEST NO .: PS-94H-11BACKGROUND : MonographTen, Actuarial Issues Related toPricing Health Plans UnderHealth Care Reform, discussedthe methods currently used byhealth plan managers to pricehealth plans and how to sethealth plan premiums under areformed health care system .

TO: All Members of CongressDATE: August 1994DRAFTERS: ERISA ChangesWork GroupRE: ERISA Under the HealthSecurity ActREQUEST NO.: PS-94H-12BACKGROUND: MonographEleven, Actuarial Implications toERISA under the Health SecurityAct, addressed proposed changesto ERISA in the Health SecurityAct and the impact of thosechanges on employers currentlysubject to ERISA. The monographfocused on ERISA provisions thatemployers use in managing thehealth benefit plan costs throughself-insurance or through innova-tive arrangements with insurersand health maintenance organiza-tions.

TO: All Members of CongressDATE: August 1994DRAFTERS : Health AlliancesWork GroupRE: Regional Health AlliancesUnder Health Care ReformREQUEST NO.: PS-94H-13BACKGROUND: MonographTwelve, Actuarial Perspectives onRegional Health Alliances underHealth Care Reform, examinedthe intended purposes of regionalhealth alliances and discusses theimplications of various organiza-tional structures on these pur-poses. In addition, the mono-graph discussed the size andmembership of health alliances,health alliance structure, healthalliance administration, andalternatives to health alliances .

TO: All Members of CongressDATE: August 1994DRAFTERS: Transition RulesWork GroupRE: Transition Rules UnderHealth Care ReformREQUEST NO.: PS-94H-14BACKGROUND : MonographThirteen, Actuarial Issues Relatedto Transition Rules Under HealthCare Reform, identified issues tobe considered under proposedtransition rules and the possibleconsequences of those rules .While the monograph referred tospecific provisions of the admin-istration's proposal, the generalfindings in the monograph areapplicable to any major reformthat relies on the private market.

TO: All Members of CongressDATE: September 1994DRAFTERS: Health Risk Adjust-ment Work GroupRE: Health Risk Assessment andRisk AdjustmentREQUEST NO .: PS-94H-15BACKGROUND: MonographFourteen, Health Risk Assessmentand Health Risk Adjustment-Current Initiatives, offered anoverview of state initiatives in riskadjustment, focusing on NewYork and California . It alsoreviewed the risk adjustmentexperience of the Netherlands .The overview focused on lessonsto be applied when consideringrisk adjustment provisions in leg-islative reforms .

TO: All Members of CongressDATE: October 1994DRAFTERS: Medicare WorkGroupRE: Medicare Program Underthe Health Security ActREQUEST NO .: PS-94H-16BACKGROUND : MonographFifteen, Actuarial Implications forthe Medicare Program under theHealth Security Act, considersfrom an actuarial perspective thepossible consequences of Presi-dent Clinton's proposal on theMedicare program .

TO: All Members of CongressDATE: November 1994DRAFTERS : Long-Term CareWork GroupRE: Long-Term Care IssuesUnder Health Care Reform

REQUEST NO .: PS-94H-17BACKGROUND: MonographSixteen, Long-Term Care : Actuarial Implications of Health CarlReform, offered an independentreview of the issues associatedwith the financing of long-termcare and of the associated provi-sions in the Health Security Act.

TO: Robert Wilcox, Chairman,Health Organizations Risk BasedCapital Working Group, NAICDATE: September 9, 1994DRAFTERS : Academy HealthOrganization Risk Based CapitalTask ForceRE: Risk-Based Capital FormulaREQUEST NO .: PS-94H-18BACKGROUND : This reportcontains a new formula to modi-fy the existing risk-based capitalformula for life and health insur-ers and takes into account severalfactors in determining the sol-vency of health organizations .The proposed formula is to beused in setting risk-based capitalrequirements for a wide varietyof health organizations in.cludininsurance companies, HMO,Blue Cross/Blue Shield associa-tions, and any new hybrid entitythat might emerge as a result ofhealth insurance reform . Theformula was developed at therequest of the NAIC's HealthOrganizations Risk Based CapitalWorking Group .

Life StatementsTO: State of California Depart-ment of InsuranceDATE: April 18, 1994DRAFTERS: Committee on LifeInsurance Financial ReportingRE: Proposal to Amend Califor-nia Actuarial Opinion RegulationsREQUEST NO .: PS-94L-1BACKGROUND: The commit-tee commented on a proposal toadd a section to California Insur-ance Regulations that would haveprohibited appointed actuariesfrom including "exculpatory lan-guage" in a statement of actuarialopinion filed under the Califonia Standard Valuation law . TAcademy opposed the proposeamendment .

iv The Actuarial Update ∎ February 1995

TO: Robert Wright 111, Chairper-son, Life Insurance DisclosureWorking Group, Virginia Depart-ment of InsuranceDATE: June 1, 1994DRAFTERS: Committee on LifeInsuranceRE: Life Insurance IllustrationsREQUEST NO .: PS-94L-2BACKGROUND: The committeeoffered its assistance to the NAICeffort to solve life insurance illus-tration problems . The committeeenclosed a statement that ana-lyzed proposals made to date andthat compared the different basesof illustrations proposed . Thecommittee also identified certainproblems with illustrations andsuggested remedies .

TO: U.S. Supreme CourtDATE: September 7, 1994DRAFTER : Lauren M . Bloom,Counsel to the American Acade-my of ActuariesRE: NationsBank of North Caroli-na v. VALICREQUEST NO .: PS-94L-3

BACKGROUND: The Academy,,bmitted an amicus curiae briefin this case, which concernswhether national banks are per-mitted by federal law to act asagents in the sale of annuities .The banking industry is appealinga ruling by the Fifth Circuit U .S .Court of Appeals, which held thatnational banks' ability to sellannuities is limited by theNational Bank Act . The act pro-hibits banks in towns of morethan 5,000 residents from sellinginsurance. The Academy's briefrequested that the Court affirmthe appeals court decision thatannuities constitute insurance .

TO: Mark D. Peavy, Life/HealthActuary, NAICDATE: October 24, 1994DRAFTERS: Life and HealthActuarial Task ForceRE: Draft Second Life Nonforfei-ture LawREQUEST NO.: PS-94L-4BACKGROUND: The committeecommented on the draft Second

ae Nonforfeiture Law and coveremo dated September 19, 1994 .

TO: Mark D . Peavy, Life/HealthActuary, NAICDATE: October 24, 1994DRAFTERS: Life and HealthActuarial Task ForceRE: Draft Annuity NonforfeitureLawREQUEST NO .: PS-94L-5BACKGROUND: The committeecommented on the draft AnnuityNonforfeiture Law and covermemo dated September 19, 1994.

Pension StatementsTO: Committee on Ways andMeans, U .S. House of Represen-tativesDATE: April 19, 1994DRAFTERS: Pension CommitteeRE: Pension Benefit GuarantyCorporation Reform Legislation(H.R.3396)REQUEST NO .: PS-94P-1BACKGROUND: This testimonyexamined the administration'sproposal to reform the PensionBenefit Guaranty Corporation'ssingle-employer defined benefitplan termination insurance pro-gram. The committee providedadditional recommendations tothe PBGC proposal includingsuggestions for strengtheningfunding requirements, modifyingfunding requirements to smoothout volatility caused by actuarialgains and losses, and improvinginteraction between the actuarialprofession and federal regulators .

TO: Rep. Alan Wheat, U .S. Houseof RepresentativesDATE: May 10, 1994DRAFTERS: Pension CommitteeRE: Wheat's Pension SystemReform ProposalREQUEST NO.: PS-94P-2BACKGROUND: The committeeresponded to a request fromWheat's office to review his pen-sion reform proposal . The com-mittee concluded that the draftlegislation will not simplify pen-sion regulation in ways that aresufficient to encourage greaterprivate pension coverage. Thecommittee questioned whetherthe proposal would offer enoughincentive to employers whoalready have pension plans tobroaden pension coverage to all

workers and provide a minimumbenefit. The committee also stat-ed that the proposal's incentivesto employers that do not offerprivate pension programs areinsufficient to stimulate new planformation .

TO: Committee on Ways andMeans, U .S. House of Represen-tativesDATE: June 10, 1994DRAFTERS: Pension CommitteeRE: Cross-Testing Provision ofthe Administration's PBGCReform BillREQUEST NO.: PS-94P-3BACKGROUND: The committeeaddressed a proposal in the Clin-ton administration's PBGCreform bill to eliminate cross-testing. The committee acknowl-edged administration concernsabout potential abuses in thedesign and operation of profit-sharing plans that utilize age as abasis for measuring nondiscrimi-nation. However, the committeestated that any solution shouldencourage good plan design andnot cause termination of goodplans because of a limited num-ber of abuses.

1994Public

Statements

TO : U.S. Senate Finance Com-mitteeDATE: August 26, 1994DRAFTERS: Pension CommitteeRE: Cross-Testing Provision ofthe Administration's PBGCReform BillREQUEST NO.: PS-94P-4BACKGROUND: The committeeurged members to strike thecross-testing provision from thePBGC reform proposal and tosubstitute language identical tothat in the bill reported by theHouse Ways and Means Com-mittee in July (i .e., to drop theelimination of cross-testing, butdirect Treasury to study possibleabuses) .

The Actuarial Update ∎ February 1995 V

TO: Reporting and DisclosureWork Group of the ERISA Advi-sory CouncilDATE: June 22, 1994DRAFTERS: Pension CommitteeRE: ERISA Disclosure Require-mentsREQUEST NO .: PS-94P-5BACKGROUND: The PensionCommittee presented written andoral testimony to the Reportingand Disclosure Work Group ofthe ERISA Advisory Council. Thetestimony observed that the Sum-mary Annual Report in its currentform is of little or no value to par-ticipants . The committee furtherobserved that the Summary PlanDescription has evolved into alegal document, rather than thecommunication piece originallyintended. The committee urgedthat employers be shielded fromlegal risk resulting from innocentomissions, . The committee alsosuggested that a Flesch-type testwould help readability, much as itseems to have improved the read-ability of insurance policies .

TO : U.S. House Conferees onLegislation to Implement theUruguay Round Trade AccordDATE: August 19, 1994DRAFTERS: Pension CommitteeRE: Fixed Mortality StandardIncluded in the Administration'sPBGC Reform ProposalREQUEST NO .: PS-94P-6BACKGROUND: The PensionCommittee objected to the fixedmortality standard included inthe PBGC reform proposal . Theprovision would specify the mor-tality and interest assumptions tobe used in valuing a pensionplan's current liability. The com-mittee argued that the provisiondoes not serve plan participantsor the public at large . The com-mittee stated that the prescribedmortality table, based on the1983 Group Annuity Mortality(GAM) table, is inappropriate formany plans. A far betterapproach, the committee wrote,is to enhance cooperationbetween regulators and the pro-fession. The committee notedthat the ASB is actively develop-ing pension valuation standards .The committee also recommend-ed the establishment of an Officeof Government Actuary thatwould work with the profession

and the ASB in establishing andmonitoring standards of practiceas they apply to ERISA plans .

TO: Evelyn Petschek, Director,Employee Plans Technical &Actuarial Division, IRSDATE: November 8, 1994DRAFTERS: Pension CommitteeRE: Extension of RemedialAmendment PeriodREQUEST NO .: PS-94-P-7BACKGROUND: The committeerequested a 6-month extension ofthe remedial amendment periodwith respect to the qualificationrequirements of the Tax ReformAct of 1986 and other subsequentlegislation . [The extension wassubsequently granted.]

TO: Evelyn Petschek, Director,Employee Plans Technical &Actuarial Division, IRSDATE: December 13, 1994DRAFTERS: Pension CommitteeRE: Extension of Revenue Proce-dure 85-29REQUEST NO.: PS-94P-8BACKGROUND: The committeerequested reinstatement of Rev .Proc. 85-29, which permits auto-matic changes to and from certainfunding methods . Rev. Proc . 85-29 expired on December 31, 1993 .The committee argued that non-renewal of the revenue procedurehas been burdensome to smallerand medium-sized plans that havea continuing need for automaticchanges in funding methods. Thecommittee requested an extensionto June 30, 1995 . [The IRSdeclined to reinstate Rev . Proc .85-29 for the 1995 plan year, butindicated that reinstatement willbe considered in the future .]

TO : U.S. House Committee onWays & Means, Subcommitteeon Social SecurityDATE: November 15, 1994DRAFTERS: Committee onSocial InsuranceRE: Proposals to Restore SocialSecurity's Financial Soundness(H.R. 4245, H.R. 4275, and Rep .Timothy Penny's Proposal)REQUEST NO .: PS-94P-9BACKGROUND : This letter,which was also submitted to therecord for a Ways and Means

Social Security Subcommitteehearing on September 27,reviewed estimates prepared bythe Social Security Administra-tion's Office of the Actuary onthe effects of reform proposals .The committee concluded thatcomprehensive action to elimi-nates the long-range actuarialdeficit is preferable to a piece-meal approach .

TO: Actuarial Standards BoardDATE: December 30, 1994DRAFTERS: Pension CommitteeRE : Economic AssumptionsStandard-2nd DraftREQUEST NO .: PS-94P-10BACKGROUND: The committeecommented on the second expo-sure draft of the proposed Actu-arial Standard of Practice, Selec-tion of Economic Assumptions forMeasuring Pension Obligations.

TO : David R. Bean, Director ofResearch, Governmental Account-ing Standards Board (GASB)DATE: June 30, 1994DRAFTERS: Committee on Pedesion AccountingRE: GASB Draft StandardsREQUEST NO.: PS-94P-11BACKGROUND: The committeecommented on the followingGASB draft standards : Accountingfor Pension by State and LocalGovernmental Employers; Finan-cial Reporting for Defined BenefitPension Plans and Note Disclo-sures for Defined ContributionPlans; and Financial Reporting forPostemployment Healthcare PlansAdministered by Defined BenefitPension Plans. The committeeproposed that the following prin-ciples for accounting standardsinvolving public plans : publicplans should be allowed to adoptany acceptable actuarial costmethod, and the pension expenseand disclosures should be deter-mined consistent with thismethod; consistent standardsshould be applied to public plansand to employers participating inthose plans ; and standardsshould reflect the long-termnature of public plans, special trequirements of the govern10tal budget process, and the needto avoid short-term volatility.

vi The Actuarial Update ∎ February 1995

Practice Councilifeul Kolkman

ice president

(202.223-8196, ext. 252)

rPensionHoward Fluhrvice president

(202-223 8196, ext. 253)

Key Issue Academy Objective6. Quality of Asset Adequacy Opinions Improve the consistency of application

of Standard Valuation Laws

7 . Life Risk Based Capital

8 . SAP/GAAP

9 . Life Insurance Risk Classification

10 . Fair Value Accounting Project

1 . Developing CohesiveNational Retirement Income Policy

2. Improving the Status of PensionActuaries with Policy Makers

3. Future Financial Stales of Social Securityand Other Programs

4. Regulatory Efficiencyand Shorter -Term Pension Reform

5 . Financial Accounting Standardsfor Private and Government Plans

Develop recommendations for improving the quality ofactuarial opinions; identify concernswithin the profession about standards of practiceAscertain regulators ' perceptions of the utilityand quality of asset adequacy opinions

Educate regulators and companies on the use ofdynamic analysis of financial condition .

Provide analytical and research support to NAILLife Risk Based Capital Working Group

Monitor and review NAIC staff study of the impactof proposed changes in the RBC form ulas on insurers

Provide NAIL with theoretical study of C-1risk issues in Life RBC formulaComment on actuarial aspects of project

Educate policy makers and consumer groupson risk classification issues

Provide technical support to NAIL in developing positionson risk classification and genetic testing in life insurance

Educate FASB on actuarial aspects of the treatment of liabilities

Encourage establishment of a congressional commission

Analyze long- term trends in income replacement at retirement

Support ASH efforts to enhance pension actuaries' role

Develop more cooperative relationship with Washingtonpension policy makers/regulators

Provide technical analysis to policy makers

Analyze technical aspects of current legislative proposals

Provide technical input and suggestions far changesin existing and proposed legislation

Promote National Uniformity of State Taxation of Pensions

iiI Provide technical support to FASB , GASB, and the FASAB

Academy ActionNo action taken yet in 1995

COLIFR reviewing the possibility of a conferencefor opinion writers to discuss quality issues

Focus groups with regulators being considered

No action taken

Life Practice Council forming a Life Risk Based CapitalTask Force in response to request from NAIL group

NAIL study not complete

Action dependent upon NAIC decision toundertake this study

Financial Reporting Steering Committee and Committee onRelations with Accountants reviewing possible activities ;COLIFR monitoring Price -Waterhouse codification project

Committee on Risk Classification white paper forstate commissioners , consumer advocacy groups,and interested policymakers slated for June

Appropriate volunteers being added to Committeeon Risk Classification

Final report being reviewed for early spring release; COLIFRand Financial Reporting Steering Committee membersto discuss findings with FASO members; COLIFR toadapt study for broader audience

Practice council contacting congressional offices togarner support for such a commission

Established Academy task force to report on 40-yeartrends in retirement income security and produceone or more reports

Pension Committee commented on ASB economicassumptions for pension plans draft standard

Academy established position of senior pension fellowand began selection process

Committee on Social Insurance sent letter to House Waysand Means Committee on legislative proposals to correctSocial Security deficit; committee is working with ASBon social insurance draft standardPension Committee recommended 1995 priorities to the IRSand the PBG(; committee recommended implementationof GATT pension provisions

Pension Committee letter to IRS recommended reinstate-ment of Rev. Proc. 85-29; committee recommended 1995priorities to the IRS and the PBGC ; committee letter to IRSadvocated 6-month extension for restated definedcontribution plans.

Article appeared in February Enrolled Actuaries Report toraise awareness among the profession and policy makersof the effects of inconsistent tax policy

Pension Committee peer-reviewed draft of pension costaccounting standards for government contractors;committee commented to Federal Accounting StandardsAdvisory Board on draft standard for accountingfor federal government liabilities

The Actuarial Update ∎ February 1995 5

Anatomy of a Standard : The ASB Exposure Process

6 The Actuarial Update • February 1995

By Anne M. Rankin

cry writer faces some trepi-dation at facing a blank pageor screen. Yet actuaries whovolunteer to draft standardsor the Actuarial Standards

Board face a lot more than simplythe terror of the blank slate .Exactly what is involved in thestandards process? How does oneproceed from the very begin-ning-when the need for a stan-dard is determined-to the finalprinting of the small, teal greenbooklets? Here is the story of howthe Task Force on Rate of Returncreated the exposure draft, Treat-ment of Profit and ContingencyProvisions and the Cost of Capitalin Property/Casualty InsuranceRatemaking.

In many ways, the ASB Casu-alty Committee's Task Force onRate of Return-comprisingMark Whitman, chairperson,David Appel, Robert Bailey,Robert Butsic, Steve Lehmann,Claus Metzner, Michael Miller,and Richard Woll-is similar toother ASB subcommittees . Yetthis task force took a decidedlyindividual path .

The Need for Guidance

The process began where it usu-ally begins-when the need forsome form of counsel is felt inthe actuarial community . In thiscase, the ASB Casualty Commit-tee wanted to provide someinstruction for casualty actuarieswho were trying to follow theCasualty Actuarial Society State-ment of Principles RegardingProperty and Casualty InsuranceRatemaking. As Mark Whitmansaid, "The Casualty Committeewanted to provide guidance onappropriate techniques forincorporating the cost of capitalin ratemaking. The cost of capi-tal is one of the cost items enu-merated in the CAS Statement ofPrinciples that must be providedfor by a rate ."

In 1991 ASB Casualty Com-mittee Chairman LeRoy Boisonasked Mark Whitman to chairthe Task Force on Rate of Return

to develop a standard . Whit-man's selection as chairpersonwas unusual because he is not anexpert in this area. Yet his will-ingness to become involvedbrought a nontechnical perspec-tive to the group . As the taskforce deliberated, each task forcemember took a leadership role inthe discussions involving theirparticular areas of expertise .And, as Whitman admitted,"These guys . . . cared a lot aboutthis subject. They all had differ-ent areas of expertise . And itwasn't hard to keep them

The writing of the draft,like everything elseaccomplished in thisproject, was a matter

of give -and-take,

push-and-pull . Each

task force member had

his own opinion onvarious methods and

calculations .

focused." In fact, the passion ofthe task force members createdinitiative, drive, and energy .

Also unusual was the invita-tion to join the task force extend-ed to nonactuary Appel, a Milli-man & Robertson economist,who brought yet another per-spective to the project .

Debating the Issues

In the initial meetings , the groupstudied what a standard is andhow a standard is set up. Forthis, the group tried to focus onwhat represented a consensus ofopinions among practicing actu-aries . Basically, the group con-cluded that anything for whichthere was no consensus shouldnot be in the standard . Ofcourse, the task force also used

the question, "Do we need it?" a%another criterion for possiblesubjects to include .

What were some of the issuesthat the task force addressed? Atfirst, the task force was not surehow it would deal with contin-gency provisions . Although thissubject was not part of the origi-nal charge, the task force madean early decision to cover contin-gency provisions, as well as profitprovisions, in the standard .

Another issue that was dis-cussed throughout the draftingprocess was what comprises theprices that are charged in themarket versus the actuarialassessment of the costs . Often acompany will charge a price thatimplicitly includes a differentprofit provision than what theactuary will assess to be therequired cost of capital. Thisissue could have been difficult tohandle. However, standards ofpractice are not intended to coverpricing . Thus, the task fordetermined that this standashould focus on actuarial assess-ments of costs .

The task force struggled tofind a way to make it clear thatmethods to price products arenot covered by the standard,without limiting the actuary'srole in the pricing process . Thetask force believes the standard isnow clear on this issue .

Another issue that the taskforce grappled with was the actu-arial determination of a fair andreasonable rate of return . Whit-man noted, "Later on in the pro-cess we determined that we werenot determining fair or reason-able anything . We were justassessing costs. And when wekept returning to the issue ofassessing the costs, like the cost ofcapital, then we knew we weredoing better."

Spreading the Word

From the beginning of its worlthe task force was committecjpresenting its ideas, intenti-rand conclusions at professional

Continued on page 8

0

CapitolThe IRS has prescribed the mor-tality table employers must useto adjust benefits or limitationsunder Tax Code Section 415 andto determine the present value ofplan benefits under Code Section417. The IRS acted under provi-sions of the Retirement Protec-tion Act, which instructed theTreasury Secretary to prescribe amortality table used to determinecurrent liability. The prescribedmortality table is based on afixed blend of 50% of the malemortality rates and 50% of thefemale mortality rates from the1983 Group Annuity MortalityTable . IRS' ruling does notaddress other issues related toplan amendments, such as theextent to which employers mayreduce plan benefits or increasepotential reversions . The IRSwill issue future guidance on

ich mortality table should beed under Section 412 . Thecademy's Pension Committee

has recommended to the IRSthat the Section 412 mortalityassumption should be sex-dis-tinct and not incorporate anyprojection for future improve-ment.

In a major victory for banks, theSupreme Court ruled unani-mously on January 18 thatnational banks in large and mid-sized cities may act as agents forinsurance companies in the saleof fixed and variable annuities(NationsBank of North Carolinav. VALIC) . The issue arose in1990, when the Office of theComptroller of the Currency,which regulates national banks,approved a proposal by Nations-Bank's predecessor to sell annu-ities. The Supreme Court deci-sion overturned an appeals courtruling that annuities are a formf insurance and by federal law

1would not be sold by banks inANL with more than 5,000 resi-

sWts. In her decision, justiceRuth Bader Ginsburg wrote,"We respect as reasonable theComptroller of the Currency's

conclusion that brokerage ofannuities is an incidental powernecessary to carry on the busi-ness of banking . We furtherdefer to the Comptroller's rea-sonable determination that . . .annuities are not insurancewithin the meaning" of federallaw. The Academy submitted anamicus curiae brief in the casesupporting the appeals court'sruling that annuities constituteinsurance. The Court's decisioncould call into question states'authority to regulate annuities,and may lead to a reduction inthe need for actuarial services inthe development of annuityproducts .

Sen. Robert Bennett (R-Utah)has replaced moderate Sen . JohnChafee (R-R .I.) as head of theSenate Republican work groupon health care reform . After thegroup's first meeting on January26, Bennett announced thatmembers will seek new informa-tion from groups with a stake inhealth care because "we can'tdepend just on data generated onCapitol Hill ." Bennett last yearsponsored legislation to createtax-preferred medical savingsaccounts. Senate Finance Com-mittee Chairman Bob Packwood(R-Ore), Sen. Judd Gregg (R-NH), and Sen. Charles Grassley(R-lowa) are also expected to bekey GOP health players this year.

House Speaker Newt Gingrichhas announced that RepublicanHouse task forces will studyMedicaid and Medicare reforms,including possible budget reduc-tions. The task forces will notreplace regular committee delib-erations, but will write legislationfor the committees of jurisdic-tion . The new speaker favorssuch groups to form consensusbefore committee deliberationsbegin, and is expected to use thisprocedure to address other com-plex issues.

The Governmental AccountingStandards Board (GASB) hasissued three new standards con-cerning pension accounting andreporting for state and local

retirement and retiree healthplans. The first standard (State-ment No . 25) requires definedbenefit pension funds to publishfinancial statements that includeplan assets, employer contribu-tions, liabilities , net assets, andannual changes in net assets .Defined contribution plan state-ments will include a plandescription, a summary ofaccounting policies and informa-tion about contributions andinvestment concentrations .Statement No . 26 requiresdefined benefit plans that offerretiree health benefits to discloseplan net assets and annualchanges to those assets . State-ment No. 27 requires single andmultiemployer defined benefit ',sponsors to measure and discloseannual pension costs on anaccrual basis. The final state-ments incorporate commentssubmitted to GASB last June bythe Academy Pension Account-ing Committee .

An NAIC task force on insur-ance affordablity and accessibili-ty has recommended a list ofactions the insurance industryshould take to increase the avail-ability of insurance in low-income areas . The task forcereport favors free market, volun-tary measures to provide ade-quate insurance to urban resi-dents. However, the task forcewarns that the industry couldface regulatory intervention if itdoes not do enough on its ownto assure inner-city coverage .

States could no longer tax non-residents ' pension income underlegislation introduced by Sen .Harry Reid (D-Nev .) and Rep .Barbara Vucanovich (R-Nev .) .At present, retirees may berequired to pay taxes on pensionsdrawn in the states where theyspent their working years, despitethe fact they no longer reside inthe state whose services theirtaxes help to fund. Reid andVucanovich have introducedsimilar legislation in past Con-gresses, but expect betterprospects for final passage in theRepublican dominated 104th . ∎

The Actuarial Update • February 1995 7

ASH EXP08thst PROCESS,continued from page 6

seminars . For instance, task forcemembers Appel, Metzner, Miller,Whitman, and Woll attended the1992 CAS Rate of Return Semi-nar, where in a presentation anda question-and-answer sessionthey explained what a standard ofpractice is and how the standardsrelate to the CAS Statement ofPrinciples. The group also talkedabout some of the key issues itwas working on at the time andhow the group intended to reflectsuch issues in an exposure draft .Whitman stated that, "From ourperspective, the point was to getfeedback from the attendees. Arewe going in the right direction?"

1995 LIFE & HEALTH MANUAL

The Life & Health Standard Valuation Law Manual has beenupdated to reflect recent changes in state valuation laws andregulations . Included are changes in law in thirty-eight statesand two new regulations, No . 126 and No . 147, promulgated bythe New York State Insurance Department . Materials for the1995 updates were mailed to all SVL Manual subscribers inearly January . Academy members who wish to obtain theupdate packet should fax a request with a mailing address andphone number to the attention of Assistant Director ofGovernment Information Jean Rosales at (202) 872-1948 .Individuals wishing to purchase the Life & Health StandardValuation Law Manual, including the 1995 update material, for$80 per copy, may fax a request to the above number .

Many thanks are due the volunteers who helped reviewchanges in NAIC and state laws and regulations and preparedmaterials for inclusion in the update materials . Of particularnote are the efforts of Donna Claire of Claire Thinking, Inc .,Timothy Harris of Milliman & Robertson, and Anthony Spanoof ACLI .

Special recognition also goes to William Carmello of theNew York State Insurance Department, who conducted athorough survey of the New York sections of the manual andprovided extensive and helpful commentary on all of thematerials relating to New York laws and regulations .

The task force was especiallyhappy to receive input at confer-ences from regulatory actuaries .And one conference attendee,Bob Butsic, actually joined thetask force as an official memberat the conference! Whitmanremarked, "There was an unex-pected fringe benefit, I think, ofdoing these exposures. Wepicked up another committeemember ."

Drafting

During the process of receivingcomments, discussing issues, andattending meetings, the task forcebegan to write the exposure draft.Often, the group used informa-tion gleaned from input to nar-row the choices of material forthe proposed standard .

The writing of the draft, likeeverything else accomplished inthis project, was a matter of give-and-take, push-and-pull. Eachtask force member had his ownopinion on various methods andcalculations . As chairperson,Whitman found it helpful foreach member to occasionally gooff on a tangent and present hispoint of view for an extendedperiod of time .

Regarding this part of the pro-cess, Whitman had this to say:"We had to let this happenbecause during this process peo-ple found out that they were notusing the terms the same way . . . .You had to really listen to whateach person was saying ." Onlythis way could the membersunderstand each other's concernsand vocabulary .

Of course, now that the expo-sure draft has been printed anddistributed to Academy members,the process will continue . Whit-man is slated to do a presentationat the CAS Ratemaking Seminar,at which he will bring people upto date on what is happening withthe standard . And the task forcewill be doing another panel at theApril CAS Rate of Return/Proba-bility Seminar. These efforts at

communication and increasedfeedback should pay off in thelong run, in terms of composingfinal version of the standard .

The Profession's Response

Of course, all of this effort isintended to benefit the actuarialprofession . The task force hopesthat one benefit will be greateracknowledgement that return oncapital and the role of investmentincome in generating that returnis critical to profitability. Inaddition, as is stated in the expo-sure draft's transmittal memo-randum, the proposed standardwill assure users of the actuarialwork product that appropriateprocedures have been used todetermine the rate .

Whitman added that his taskforce "tried to keep [the stan-dard] fairly neutral in the sensethat the standard should provideguidance both to actuaries thatare working on rate filings as wellas actuaries that are preparinganalyses for their own company'smanagement or for their ovclient's management ."

It is now the actuarial profes-sion's responsibility to join theTask Force on Rate of Return inthe process of creating a stan-dard. If the profession respondswith the determination and ener-gy of the task force, the final stan-dard will truly reflect the consen-sus of the profession .

The comment deadline for theexposure draft, Treatment ofProfit and ContingencyProvisions and the Cost ofCapital in Property/CasualtyInsurance Ratemaking, has beenextended until April 17 . Lettersand comments should be sent to :Profit and Contingency Provisions,Actuarial Standards Board, 1100Seventeenth Street NW, 7th Floor,Washington, DC 20036 .

Rankin is standards editor for theASB .

0

is

8 The Actuarial Update ∎ February 1995