:etlc~,uarial UpdateVOLUME 16 NUMBER 12

In this issue

2 from a Guest President

Checklist of AcademyStatements-October 1987

3 Letters to the Editor

3 Call for P2p ers: The 1989Centennial Celebration

5 AERF RFP

6 Legal Lines

6 CCRC Media Tour

7 Correction

71987 Annual Meeting

8 Non-Routine Board Actions

10 1987 Casualty Loss ReserveSeminar

Special Subject11 Supplement: 1986-1987

Committee Reports

EnclosuresIncluded in this month's issue of

The Update are the following:• Government Relations Watch• In Search of . . .• IASB Boxscore

AMERICAN ACADEMY OF ACTUARIES DECEMBER 1987

An interview with David WalkerAssistant Secretary for Pension and Welfare BenefitsUnited States Department of Labor

David M. Walker was nominated to thepost of assistant secretary by PresidentReagan on August 4, 1987 and con-firmed by the Senate on October 20 ofthis year. His responsibilities include over-seeing over 900,000 pension plans, with$1.5 trillion in assets, as well as over-sight of four and one-half million healthand welfare plans. He is the department'sprincipal advisor in the areas of em-ployee benefits and national retirementincome policy.He served as deputy assistant secre-

tary of pension and welfare benefits fromAugust 1985 to May 1987, at which timehe became acting assistant secretary Healso served as the Department of Labor's(DOL) liaison with the Pension BenefitGuaranty Corporation (PBGC) duringthat time. Walker was deputy executivedirector of the PBGC from October 1983to March 1985 and served as its actingexecutive director from March to August1985 .Walker is a certified public accountant

and a member of the American Instituteof Certified Public Accountants . Prior tohis government service, he was employedby Source Services Corporation, a humanresources consulting firm, and Coopersand Lybrand . Walker recently spent some

time with Update staff, responding toseveral questions of interest to our read-ers .The Update; The Academy has estab-lished the Interim Actuarial StandardsBoard, the I-A-S-B, as it's called, to pro-mulgate professional standards of prac-tice ; and, in 1988 there is every likeli-hood that a permanent actuarialstandards board will be inaugurated . Doyou view this as a positive development?Walker: Without question, I think it isa positive concept, and one that shouldbe actively pursued . As you know, I'm acertified public accountant, and CPAsand actuaries are both very important inassuring that the private pension sys-tem works for its intended beneficiaries .CPAs have had a viable self-regulatoryorganization for a number of years, andthis has been one of the primary reasonsthere has not been much governmentregulation of our profession . [ think thatthe self-regulatory concept and the IASBapproach are very positive steps to as-sure some degree of consistency withinyour profession, to maintain quality andprofessionalism, and to minimize director indirect government regulation of theactuarial profession.

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NollrALNE-11 E~~PresidentJohn A. FibigerPresident-ElectW. James MacGinnitieVice PresidentsPhillip N. Ben-ZviCommittees on Public Issues-EmployeeBenefits and Social InsuranceBurton D. JayCommittees on Accreditation,Qualification and CommunicationJoseph J . Stahl, IICommittees on Public Issues-InsuranceMavis A. WaltersCommittees an Accounting andFinancial ReportingSecretaryVirgil D. WagnerTreasurerDaniel J. McCarthyExecutive DirectorStephen G . KellisonExecutive Office1720 1 Street, N.W. 7th FloorWashington, D.C. 20006(202) 223-8196FAX (202) 872-1948Membership Administration500 Park BoulevardItasca, Illinois 60143(312) 773-4204

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

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

The Actuarial Update

From aGuestPresident

by William M . MorrisonPresident, Faculty of Actuaries inScotland

De-regulation andSelf- ,lationI am looking forward to meeting many ofthe friends of The Faculty of Actuaries inthe United States at some time duringmy tenure in office. Meanwhile I welcomethis opportunity to draw attention tosome of the matters that are exercisingthe minds-and trying the patience!-ofScottish (and English) actuaries at thepresent time .

The policy of Mrs . Thatcher's govern-ment in deregulating financial marketsand encouraging private pension provi-sion has had a considerable impact . The"big bang" on the stock exchange in thefall of 1986, which introduced dual ca-pacity, negotiated commission, and per-mitted ownership of the traditional stock-broking partnerships by outsidecorporations, had a direct effect on thoseactuaries who are engaged in stockbrok-ing. Paradoxically, however, the majorityof actuaries have been affected not somuch by deregulation itself as by itsdirect opposite : the creation of new reg-ulations designed to protect the inno-cent investor from the cowboys of themarketplace.The new regulatory regime has been

heralded as one of "self-regulation ." askeleton of legislation fleshed out by rulesestablished and monitored on behalf ofthe government by five or six organiza-tions representing the different sectorsof the Investment market . This approachis intended to ensure that the rules arekept relevant to the real marketplace,but there seems to be a tendency for the

self-regulators to justify the government'sconfidence in them by using a bitoverkill .Many professional people, notably ac-

countants, consulting actuaries, and law-yers, are involved in investment transac-tions or in giving investment advice.Whenever this goes beyond what is anecessary part of their normal profes-sional activities, the new regulations re-quire them to be authorized . This hascaused the actuarial profession muchheart-searching and has resulted in theFaculty and Institute [British Institute ofActuaries) choosing to adopt differentapproaches-the Institute seeking spe-cial status as a professional body recog-nized for this purpose, and the Faculty,with many fewer consultant members,relying on its members achieving autho-rization in other ways .A high proportion of members of the

Faculty is employed in life assurance,where one of the most popular contractsis the "with profits" endowment assur-ance with its reversionary bonuses. Al-though frequently used to repay housemortgages, this contract has, quite prop- .erly, been recognized as an investmeeand so the life assurance world has '``come involved with the vast array of newregulations that apply to the selling ofinvestments . Many of these, of course,are not strictly actuarial, but the profes-sion is directly concerned in a couple ofissues. The requirement that insurancebrokers and other independent interme-diaries must give "best advice" whenrecommending one life office rather thananother means that the criteria usedmust stand up to scrutiny. Some arestrictly factual, like the history of bonus-es, but any judgment about the relativestrengths of life offices requires actuarialguidance about the significance of valu-ation bases and the like . Because of theirduty to advise the life offices on suchmatters, actuaries are concerned also toensure that illustrations of possible ma-

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Checklist of Academy StatementsOctober 1987TO: General distribution to a variety of audiences, October 1, 1987 . RE: The propertyand liability insurance underwriting cycle . BACKGROUND: This report was develoto provide public policymakers with a basic knowledge of the cyclical nature of tproperty and liability insurance industry.

TO: Senator David Pryor, October 21, 1987 . RE: Small Business Retirement andBenefit Extension Act. BACKGROUND: This statement was submitted to offer com-ments on this bill and related pension issues. A

December 1987

hers to the EditorBoard of Actuaries andEconomists

The dispute concerning the cost esti-mates for the catastrophic care proposal,described in the lead article of the October1987 issue of The Actuarial Update, is adeplorable situation . It appears that policy-makers in Washington. D.C. are unwillingin the present circumstances to rely exclu-sively on cost estimates produced by theHealth Care Financing Administration's(HCFA) actuaries . Not being a health actu-ary, I cannot critique HCFAs cost estimates,but I would certainly like to see steps takento assure that HCFA's cost estimates are asreliable as possible and also have full cred-ibility with the policymakers .

I believe both of these objectives wouldbe advanced if a board of actuaries andeconomists were created for the SocialSecurity and Medicare programs, simi-lar to the boards that already exist for theCivil Service Retirement System and theMilitary Retirement System .I recommend that this matter be an

ANy 1988 agenda item for the Academy'sA;,mittee on Social Insurance.

Dwight K. Bartlett, INNew York, New York

Call for Papers :The 1989 CentennialCelebrationIn the September edition of The Actuar-ial Update, the papers committee of the1989 Centennial Celebration issued acall for papers. The committee is seekingpapers on ten topics, which correspondto the meeting's breakout sessions . Thesetopics and their session leaders are : (1)Asset Allocation-James A. Attwood andCarl R. Ohman, (2) Credit Risks-DanielJ. Gross, (3) Old Age & Continuing Care-Barbara J. Lautzenheiser, (4) ProductDesign and Pricing-Darrell W. Ehlertand Donald W. Britton. (5) Pensions-Paul H. Jackson, (6) Healthcare in the21st Century-Bartley L. Munson, (7)Education-Linden N. Cole, (8) LiabilityInsurance-Daniel J. McNamara, (9),Wnsurance-Kirk G . Roeser, and (10)Wation, Solvency: The Role of the Ac-tuary-R. Stephen Radcliffe.The first two of these topics, asset

allocation and credit risks, were describedin more detail in the previous announce-ment. The next four subject areas are

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detailed below. Inquiries should be ad-dressed to Gene Bates or Fred Kilbourneat their yearbook addresses . The outlinefor your paper is needed as soon afteryear's end as possible .Old Age and Continuing Care. Since

this topic involves merging issues andsolutions in all actuarial specialtyareas-casualty, health, life, and pen-sions-perspectives from each will beessential. Equally, if not even more ben-eficial, would be papers jointly authoredbypersons from different specialties . Thiswould bring the concepts, foundations,and tools, both past and future, of theirspecial expertise to bear on the issue in acoordinated, cohesive fashion . Specifi-cally, demographic issues, chronic dis-ease incidence, and their effects shouldbe of interest.

This topic is of international concern.Accordingly, papers describing, compar-ing, or critiquing old age and continuingcare systems in different countries areencouraged .

ProductDesign and Pricing . Papers couldaddress such items as :(1) the role of thepricing actuary in product design . (2) newnon-traditional product designs-new pri-cing/profit methods, and (3) current vs.new pricing methods. Under (1) above, pa-pers might address (a) faulty design-theactuary's obligation? (b) pricing actuarystandards and principles---qualification? (c)unpriceable products, and (d) governmen-tal insurance programs . (2) above couldinclude (a) spread pricing vs . ROl or per-cent of premium, (b) claims-made vs . in-curred claims, and (c) financial guarantyproducts, (d) deductible/limits changes forP/C . Item (3) might include (a) risk theoryutility and (b) market research-economictheory utility.Pensions. The pensions breakout ses-

sion will focus on the evolution of pen-sions over the 100-year history of actu-aries in North America . Prospects for thelong-term future, growth in coverage,and change in character will round out

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"Before you launch in, Maynard, is this a major policy speech?"Drawing by H . Martin ; 91987The New Yorker Magazine. Inc .

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WALKER INTERVIEW(continuedfrom page 1 )

The Update : Attention is currently beingfocused on the catastrophic health insur-ance legislation now under considerationin Congress. However, most people seem toregard long-term health care for the elderlyas the more significant issue, an importantcomponent of which is employer-providedretiree health benefits. How does the Ad-ministration intend to address this area?In a period of budget deficits, is it reason-able to anticipate that there can be signif-icant new tax incentives to help pay retireehealth costs?Walker: I think that health benefits, ingeneral, and retiree health benefits inparticular, are probably one of the big-gest challenges that we face in the em-ployee benefits area. We have huge andgrowing liabilities, and we have an agingsociety. These liabilities represent a tick-ing time bomb that must be defused . Wealso have to recognize that there's a limitas to how much government can do, andwe need to find ways to encourage em-ployers and individuals to do more forthemselves .

This is a difficult issue, there are manycomplex problems that need to be sortedout: social, economic, and tax policy is-sues. The Administration tried to take apositive step, albeit a modest one, in ourtermination and funding proposal cur-rently before the Congress . Specifically,we recognize that there are huge sur-pluses in many defined benefit pensionplans, and we think it would be a posi-tive step to allow access to certain ofthese surplus assets to fund retiree healthbenefits for current retirees on a tax-favored basis . Unfortunately, for a num-ber of reasons, it is highly unlikely thatthis proposal will be included in any finalpiece of legislation and that, in my judg-ment, is a mistake.

It will probably take a couple of years ofadditional data gathering and analysisbefore the Congress will be ready to dealwith retiree health benefits in the way itneeds to. We're encouraging the Con-gress to take some incremental steps inthe interim . The bankruptcy treatmentof retiree health benefits, for example .We're also dedicated to working with theCongress to try to develop some broad-based solutions for the long term .The Update: You've recently spoken outon the major Administration proposalsfor changes in minimum funding re-

quirements and PBGC premiums . Whatwould you characterize as the majorpriorities of the Administration in thisarea?Walker: With regard to the legislation,we're pleased that all four committees ofjurisdiction have reported bills and thatall four of these proposals will be going toconference . These bills contain a num-ber of common denominators that are inaccord with the Administration's pro-posal put forward in February 1987 . Fbrexample, all the bills recognize the needfor tougher and more targeted minimumfunding standards, the need for employ-ers to have continued access to surplusassets (but on a more restricted basis)the need to improve employers' account-ability and liability for pension promisesthat they make, and that the PGBC needsadditional revenue to meet its currentobligations and those it is likely to as-sume in the future.

I think there are about six main issuesthat represent the battleground for whenthis goes to conference . These are allimportant issues, and in some casesthey relate to fundamental philosophicaldifferences regarding the private pen-sion system . First, several issues relat-ing to terminations and overfunded pen-sion plan issues : (1) the need foradditional protections for plan partici-pants and the PBGC-specifically, theneed for controlled group restrictions,cushions, and appropriate sales andtransfer rules ; (2) whether limited with-drawals are preferable to adjusted termi-nations as a means of accessing certainexcess assets from overfunded pensionplans. and (3) whether or not all or se-lected participants should receive awind-fall in the case of an overfunded pensionplan termination .The next issue is the PBGC premium .

Everybody agrees that the PBGC needsmore revenue, but the Administrationbelieves that it's important that we fun-damentally change the way that burdenis assessed, and this is an importantissue. We are proposing a variable ratepremium. The third issue is minimumfunding standards and related transi-tion rules . Everybody agrees that we needtougher and more targeted standards,but I think the philosophical approach issignificant here. We need to go for thestandards that make the most sense . Inaddition, any transition rules should betemporary.

The Actuarial Update

The next Issue is plant shut-down ben-efits . It's clear that adjusting the mmum funding standards alone will nosolve this problem . Very large liabilitiescan arise, they are unexpected, and evenwith tougher minimum funding stan-dards, these liabilities are likely to befunded after the event occurs . Therefore,we will seek a more appropriate way ofhandling them: through separate ac-counting, through shorter funding peri-ods after the event occurs, and throughpossibly adjusting the PBGC's guarantyphase-in to more closely approximate howthese benefits are actually funded .

A fifth issue relates to floor/offset plansthat rely heavily upon employer securi-ties to meet defined benefit promises . Aswe've seen with the recent stock marketdecline, these can represent a significantthreat to benefit security and the PBGC .Not only the general market risk, butalso the specific risk that relates to theviability of the plan sponsor and how itmight perform . Both of these risks relateto the lack of appropriate diversificat'to back-defined benefit promises .

Finally, we need to deal more effectivelywith distress terminations and signifi-cantly underfunded plans . We stronglybelieve, as the Duncan amendment re-flects in the House Ways and Means Com-mittee proposal, that merely filing forChapter I1 should not automatically en-able an employer to dump its pensionplans, thereby imposing losses on planparticipants and on the PBGC insurancesystem .

We believe that for significantly under-funded plans, defined in the Ways andMeans proposal as plans funded less than70% of termination liabilities, there mustbe a safety net of protection for plan partic-ipants and the PBGC . Most specifically,what they propose is that if a plan is fundedless than that 70% percent level, for exam-ple 50%, then a security interest wouldarise for the difference, or 20%, that wouldserve as a safety net In the event the planwas terminated on an underfunded basis .That's very important, both to reduce theput option on the PBGC and to prosincentives to fund all promised benefits .With regard to the upcoming conference,

we plan to take an issue by issue approach,looking at all four of the bills, to come upwith the best overall package .

December 1987

The Actuarial Education and Research Fund (AERF) has announced a requestfor proposal (RFP) to write a comprehensive monograph on the fundamentalconcepts (the intellectual foundations, if you will) of the actuarial profession .

Essentially, this project (sponsored by AERF for the Interim Actuarial Stan-dards Board) is to identify and delineate the precepts and concepts common toall areas of actuarial practice . The monograph is to include sections oneconomics of risk, time value of money, random variables, individual insurancemodels, conservatism, adjustments, collective or individual balance, and classi-fication-with additional concepts added as deemed appropriate . A detailed RFPis available from the AERF office at 500 Park Boulevard, Itasca, Illinois 60143 .The telephone number is (312) 773-3010 .

Proposals will be accepted until January 31, 1988. A review draft of themongraph must be completed by November 1, 1988 . AERF intends to publishthis work by June 1989 .

We want a final bill that ensures benefitsecurity, improves the stability and cred-ibility of the private pension system, andhelps to assure the long-term financialintegrity of the PBGC, while avoidingprovisions that could have very counter-productive consequences for our privatepension system.The Update: The changes that you're

making about would seem to representWe biggest changes to the private pen-sion system since the enactment ofERISA. Do you think it's appropriatethat such changes are included as partof a large budget reconciliation bill?Walker; In my view, from a benefit se-curity perspective, this is clearly the mostImportant piece of legislation since ERISAwas enacted in 1974. It is comprehen-sive; it is complex. And, some wouldargue that it might be preferable to han-dle it on its own, rather than as part ofthe budget reconciliation process .

We believe, however, that it's of utmostimportance to take action now. We mustseize the opportunity to make sure thatour pension system works for its in-tended beneficiaries . We have made everyeffort to assure that all the committees ofjurisdiction and all interested parties havehad access to the information necessaryto offer comments . As you know, Con-gress has held several public hearings .In addition, [ have made several speecheson the subject and met with a number ofinterested parties, to ensure that we de-

0,a proposal that gets the job done.

So, while one might prefer that thisissue be handled on its own and outsideof budget reconciliation, I think that it'sbeen addressed responsibly even thoughit is part of the budget reconciliation

package. The important thing is that weget a piece of legislation that makes sense .TheUpdate: Current legislativepropos-als relating to pensions have focused to alarge extent on the relatively few plansthat are chronically underfunded . Is itnecessarily appropriate to suggest wide-ranging proposals that have an impacton all plans. or should the approach bemore carefully targeted?Walker: Our approach is a comprehen-sive proposal. Some would argue that weshould be concerned only with under-fundedplans or with the PBGC . I stronglydisagree with that premise and, moreimportantly, the Administrations tronglydisagrees with that premise, as evidencedby the proposal we submitted to theCongress . Our objectives were threefold.We want to ensure the benefit security ofall plan participants and beneficiaries-not only pensions, but also health bene-fits; not only guaranteed benefits, butfull promised benefits. Second, we hopeto improve the stability and credibility ofthe private pension system. Termina-tions that are undertaken merely to ac- -cess surplus assets can serve to, amongother things. undermine the stabilityand credibility of the private pensionsystem. Third, we want to ensure thelong-term financial integrityof the PBGC .Take, for example, overfunded pension

plans. There's no question thatoverfunded pension plans don't repre-sent a direct threat to benefit security-it's a problem I'd like to have more fre-quently-however, current law does . Cur-rent law, whereby employers can accesssurplus assets from one plan while main-taining a number of other significantlyunderfunded plans, makes no sense. Anaggregation concept is fully appropriate .In addition, current law requires that an

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employer terminate a plan, which is verycostly and very disruptive . That doesn'tmake sense either.Also, after a termination, plan spon-

sors can take every last dime of excessassets out . This undercuts the princi-ples embodied in the minimum fundingstandards and decreases the possibilitythat participants will receive future ben-efit increases or ad hoc cost of livingadjustments . Therefore, we believe thatit's appropriate not only to look at theproblems of today, but also to try toprevent tomorrow's problems . As a re-sult, we have proposed comprehensivetermination and funding changes .Frankly, we're also tired of throwing

money at the PBGC . We want to get tothe root of the problem, and the root ofthe problem is the termination and fund-ing provisions of ERISA. In addition, wewant to see some structural reforms forthe PBGC, including additional protec-tion In the bankruptcy area.The Update: You refer to overfundedplans; with the recent drop in the stockmarket, this may be less of a problem . Ithas also demonstrated that there can bemajor and sudden shifts in the value ofasset portfolios. With this in mind, canthere ever be a situation where an on-going plan is "overfunded?"Walker : Overfunded is in the eyes ofthe beholder. It depends upon the per-spective that you have . Let's talk aboutthe stock market for a minute . There is aperception that because of the signifi-cant and unprecedented decline in thestock market, overfunding is no longeran issue. Well, that is an inaccurate per-ception. The fact is that when we wentpublic with our termination and fund-ing proposal last February, we estimatedthat there was approximately $220 bil-lion in net excess assets in the pensionsystem as of December 31, 1986 . As ofyesterday, October 28, after a significantmarket decline, we estimate that therewas approximately $200 billion in netexcess assets in the pension system .

People forget that even after the recentdecline, the market is up 137% fromAugust 1982, and before the decline ofthis year, the market was up 44% toAugust 25. Also, pension plans have di-versified investment portfolios whichserve to moderate the downside risk. Inaddition, our evidence shows that manypension plans had reduced their assets

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Legal Linesby Gary D. Swims

Insurance LitigationContinues to RaiseNovel IssuesOne might assume that after more thantwo hundred years of American jurispru-dence, all possible issues would have beenresolved . Such an assumption, however,would underestimate the ingenuity of thelegal profession in raising new and novelmatters for judicial opinion rendering.

Demonstrating the increasing complex-ity of international insurance trade andcoverages, a major dispute has arisenbetween courts in the United States andGreat Britain concerning the jurisdic-tion of a lawsuit. The matter involves anAmerican company, E .I. duPont & Ne-mours, which was on the losing end of aproduct liability lawsuit in Illinois . Inaddition to the award of $13 .2 million incompensatory damages, the plaintiff wasalso awarded $26.1 million in punitivedamages, subsequently reduced to $13million. duPont filed suit in Englandseeking an interpretation of its indem-nity coverage, to ascertain whether ornot the British insurer covered the puni-tive damage portion of the award . du-Pont favors hearing the lawsuit over poI-leyinterpretation in England, where thereIs no public policy concerning indemni-fication for punitive damages . The in-surers, however, want the case heard inthe United States, where they maintainthat public policy considerations dictatepayment of punitive damages from thedefendant, and not from the defendant'sinsurer. The United Kingdom Court ofAppeals ruled in July 1987 that the Brit-ish courts indeed have jurisdiction . TheIllinois courts, however, have entered aruling declaring that they, the Americantribunal, has jurisdiction over the inter-pretation of the insurance contract . As aresult, both cases are going ahead tohearing. And in the meantime, the plain-tiff in the original suit against duPonthas died before ever receiving the firstcent of his award .In perhaps a more significant chal-

lenge, the question of whether punitivedamages violate the prohibition againstexcessive fines in the 8th Amendment tothe U.S. Constitution will be argued be-fore the U.S. Supreme Court shortly. Thecase, Bankers Life & Casualty Company

v. Crenshaw (No . 85-1765) had its gene-sis in a personal injury case when theplaintiff, Crenshaw, had his foot injuredin a garage accident. He submitted aclaim for $20,000 to the insurer. Hisclaim was rejected. After suit, the juryawarded Crenshaw the $20 .000 paymentand also awarded punative damages inthe amount of $1 .6 million. After a closelydivided Mississippi Supreme Court up-held the awards, an appeal was taken tothe U.S. Supreme Court.The 8th Amendment to the Constitu-

tion states in part that " . . . excessivebail shall not be required, nor excessivefines imposed, nor cruel and unusualpunishments inflicted." Bankers Life willargue that the imposition of a $1 .6 mil-lion punative award is violative of this8th Amendment prohibition . Interest-ingly, the case will be one of first impres-sion for the Supreme Court . meaningthat in its long history, it has not at-tempted to define the parameters of this8th Amendment prohibition In commer-cial litigation .

A major issue at stake in the litigationis whether the 8th Amendment prohibi-tion against excessive fines is limited tocriminal matters, as one might assumegiven the context of the phrase (betweenexcessive bail limitations and the prohi-bition against cruel and unusual pun-ishments.) On the other hand, manyobservers of the constitutional . scenewould maintain that punitive damagesare designed to inflict a societal measureof sanction and, hence, are similarenough in nature to criminal lines as tomerit protection under the aegis of the8th Amendment .

The case may well have an impact onmany state statutes of recent vintagethat attempt to place a ceiling or someother limitation on punitive damageawards. Given the current state of thedebate on "tort reform" and the "insur-ance crisis," parties in all sides of thecontroversywill be following the Supreme .Court's handling of this matter veryclosely indeed .

Simms is the Academy's general counsel.

The Update welcomes letters fromreaders. Letters for publication mustinclude the writer's name, address,and telephone number, and shouldbe clearly marked as Letters to theEditor submissions . Letters maybe edited for style and space require-ments .

The Actuarial Update

CCRC Media Tour:An. OvernightSensationEveryone, or almost everyone, in thismedia mad country yearns to be a star-that is, to appear, at least once, on atelevision or radio show. This desire,,which is now almost taken for granted,has been immortalized by the late AndyWarhol's pronouncement, the one abouteveryone being famous for at least fifteenminutes. Of course, some would say thatbecoming famous is too fatuous a de-scription for what happens when an ac-tuary is thrust for the first time into themedia limelight .

Be that as it may, gaining exposure andnot celebrity was the primary intent of theAcademy's public information staff when itrecently undertook to book a "media tour,"as it's called in the public relations busi-ness. Staff sought out an Academy spokes-person, or several individuals, who couldappear on television and radio public af-fairs programs nationwide to talk aboutwhy actuaries are needed in the financiplanning ofeontinuing care retirementmunities (CCRCs) . Three members of tAcademy's Committee on Continuing CareRetirement Communities, Hal Barney,Jarvis Farley, and Barbara Snyder proceededto distinguish themselves before the cam-eras and the microphones as CCRC ex-perts .Snyder kicked off the media tour with

an interview on KMNY's Money Radio inLos Angeles. Next, Barney appeared on atelevision talk show, "New Jersey Forum,"on WPHL-TV in Philadelphia, Pennsylva-nia, followed by a live radio show, "Mon-day Night Talk," in Plainfield, New Jer-sey. Barney, incidently, in addition tobeing an actuary, is a former disc jockeyfor a popular New York area radio sta-tion. The next day, Farley appeared onthe program "Caring," featured on WIP-AM radio in Philadelphia. Barneywrapped up the tour in the media capitalof the world, New York City, on a showcalled "Community Concerns," aired overprestigious WOR-AM .The CCRC media tour was a hit, we

are pleased to report. After it was over,Barney consented to yet another inter-view-to talk about the experience a>public speaking in general .The Update: What was your greatestconcern about doing these interviewsbefore going on the air?Barney: The fear of being asked a ques-tion for which I didn't have an answer.

December 1987

There's always that fear that you're goinga draw a blank, or you're going to get a

uestion where you know you read some-thing about it just the other day, butdamned if you can remember it.The Update: You weren't asked that ba-sic question, "what is an actuary?," wereyou?Barney: No, and I think that's one ofthe toughest questions you can get . Howdo you answer that without putting peo-pie to sleep? If the readers have somegood ideas, I'd sure like to know .The Update: in reviewing the tape ofthe television show, how would you haveprojected yourself differently?Barney: I wish I'd : sat up straighter!But I was pleased with the way I used myhands, which adds life to it. You want tohave expression . In fact, and this comesfrom working in radio, when you're talk-ing on the air you want to exaggerate theexpression in your voice .The Update: What kind of overall im-age did you try to project while repre-senting the profession?Barney: Well for starters, I wore the

ical actuary's power suit with a blueirt. Perhaps I went slightly overboard

on the conservative side; I could havedressed a little more casually.As far as broader image is concerned . I

think it's important for the actuary to beperceived as a human being first, not asa funeral home director. One of my life'sgoals is to change the public image of theactuary, to have the public see us as aperson with unique training and back-ground. Just as a doctor is the kind of

person you go to with a certain type ofproblem, I want people to recognize thatactuaries have a certain expertise in solv-ing certain types of problems .The Update: Were you successful in get-ting that message across?Barney: If I appeared at ease, then tosome degree t was successful . If I ap-peared capable of laughing, of being per-sonable, then I was successful . If I ap-peared esoteric or too technical, then Ienhanced the wrong image .The Update : How did you prep yourselfmentally for these shows?Barney: I had a friend ask me everyquestion she could think of based on thebackground articles that staff sent me .She let me struggle with an answer, andthen we reviewed and critiqued my re-sponse. It's like taking an actuarial ex-am: the more questions you take beforethe exam, the easier it is to be convinc-ing when you get a question you've al-ready answered.The Update: What kinds of forebodingsdid you have concerning the various hostsyou had to face on these programs?Barney, You don't know going in if thehost has a hidden agenda and will try toframe you into saying something thatsounds different from what you intendedin order to make his or her point . Clearlythe woman on "New Jersey Fbrum" (hostDoric Lenz] had an agenda. It was notone I was averse to, it was just not theone I would have liked her to have had .The Update : In retrospect, what is thedifference between being interviewed onTV as opposed to radio?

7

Barney: Obviouslyyourphysical appear-ance is more important on television-your mannerisms, whether your handsare rubbing your forehead or your eyes .On television, you know people can seeyou, and if you've got spinach betweenyour teeth, TV is going to magnify thattwenty-six times. Television is a toughermedium to perform in because of thelights and the artificial set . In a radiostudio you're sitting there with one per-son across the table, and it's like havinga friendly discussion .

On TV you've got the blinking camera,the monitor, the lights shining down onyou, the make-up, and so you're muchmore aware that you're not just talkingto the host, but to millions of viewers.The key is to put that aside and pretendyou are talkingjust to the host .The Update: As an overview, what wasaccomplished by this CCRC media tour?Barney: Two things . It raised the visibil-ity of the actuary and his place in societalproblem-solving. I believe getting actuaries

(continued overleaf)

Correction

The November issue of The Actu-arial Update contained a typo-graphical error in the copy entitled"Radio Roundup ." This radio scriptdid not go out to three-thousandtalk show program directors withthe word actuarial misspelled. Thatunfortunate misspelling was con-fined to The Update reprint .

P/C Topics Top List at Academy's1987 Annual MeetingTheAcademy's 1987Annual Meeting washeld in conjunction with the CasualtyActuarial Society's fall meeting in SanAntonio, Texas. The centerpiece of theAcademy-sponsored portion of theprogramwas a panel discussion entitled : "The CASand the AAA : Working Together." The dis-cussion was moderated by Mavis A. Wal-ters, pictured far right. Other members oftier panel were, from left to right: Albert J .Beer, who chairs the Committee on Prop-erty and Liability Issues ; M. StanleyHughey, representing the standards move-ment; and Stephen P. Lowe. who chairsthe Committee on Property and LiabilityInsurance Financial Reporting . Picturedin the background, left to right are Acad-emy officers Virgil D . Wagner, secretary.John A . Fibiger. president, and Daniel J.McCarthy. treasurer.

8

into the media is extremely important sothat people begin to recognize the role weplay on a much broader level. The secondobjective, with respect to CCRCs, we hadan opportunity to point out an existingproblem and a solution. And to the extentthat one community takes a long rangeview of their commitments to their resi-dents--and hires an actuary to do that-then we've perhaps saved 300 to 400 resi-dents from having their dreams of securitygo up In smoke. If we can avoid this situa-tion, one that's arisen forty or fifty times inthis country; then we've served a very use-ful purpose.The Update : Thanks a lot for your time .Barney: No problem. I look forward tomy next media tour! Let's think big . . .the Donahue Show . . . Good MorningAmerica . . . Oprah Winfrey . . .

A media primer entitled " Winning inthe Public Eye" is available on requestfrom the Academy's Washington office .It is packed with useful tips on how tohandle yourself in situations like theones Barney and his colleaguesfoundthemselves in.

WALKER INTERVIEW(continued from page 5)

allocated to equities, expecting some-what of a market correction, albeit, notas large a correction as we got. So, over-funding is still very much an issue .

I think that the market decline and therelated volatility does reinforce the needfor comprehensive pension reform legis-lation. Such legislation must provide ap-propriate restrictions on the ability ofemployers to access surplus assets . Itmust provide for tougher and more tar-geted minimum funding standards thatare geared towards underfunded plansthat truly represent a risk. And it mustprovide appropriate restrictions on abil-ity of employers to have so-calledfloor/offset arrangements that are backedlargely, if not entirely, by employer's se-curities .

[ also think the stock market declineserved as a sobering reminder to partic-ipants in defined contribution plans thatthey bear the risk of investment perfor-mance and the need to diversify one'sinvestments in order to moderate therisk to one's retirement savings .

The Actuarial Update

FROM THE GUEST PRESIDENT(continuedfrom page 2)

turity benefits are realistic in relation tothe investment return which may beearned .The government has taken major steps

to encourage individuals to provide theirown pensions by allowing a new "per-sonal pension," which can be offered bylife offices and certain other financialinstitutions. An employee may opt out ofhis employer's pension scheme and setup his own personal pension instead ;and, of course, he may take a personalpension if his employer has no scheme .He may also use a personal pension tocontract-out of the state earnings-relatedscheme. Employees who are members ofan employer's scheme may make addi-

tional voluntary contributions quite sep-arately from the scheme. Any employwho leaves pensioned employment hto be offered either a preserved pension,indexed within limits to the cost-of- living,or an equivalent transfer value . In allcases, full tax relief is granted on contri-butions and the accumulation of assets ;at the same time, however, the InlandRevenue has imposed additional restric-tions on maximum permissible pensionand lump sum benefits and has takensteps to curb any excessive build-up ofsurpluses within schemes . It goes with-out saying that actuaries are deeply in-volved in the turmoil that these changeshave created in the British pension world .

There seems little likelihood of actuarialunemployment for some time to come. 0

Non-Routine Board ActionsAt its meeting held on October 14 and 15, 1987, the Academy Board of Directorstook the following non-routine actions :• The board elected the following individuals to serve as officers for the

coming Academy year : W. James MacGinnitie, president-elect ; Philip N.Ben-Zvi, vice president ; Joseph J. Stahl, Il, vice president; Daniel J.McCarthy, treasurer ; and Virgil D. Wagner, secretary.

• The board received a report from the Standards Organizing Committee andendorsed the creation of the Actuarial Standards Board in 1988 .

• The hiring of a director of government relations for the Washington officewas approved .

• The 1988 dues level will remain at the 1987 dues level .• The board accepted a report of the Task Fbrce on Contributions of Actuarial

Profession to the National Health Care Debate and endorsed the recommen-dations of the task force.

• A report of the Joint Committee on the Valuation Actuary was approved .

The Update : The tax writing committeesrecently approved proposals that changethe full funding limitation for defined ben-efit plans. A contribution would nut bedeductible to the extent that plans assetsexceed the full funding limitations, or theplans assets exceed 150% of the plan'stermination liability. This appears to us tobe strictly a revenue raiser. Would you com-ment on whether this proposal is consis-tent with current concern regarding mini-mum funding standards and the PBGCpremium?Walker: The Administration has not yettaken a position on this proposal . I will saythis: the Administration remains commit-ted to employee benefits as a top priority,and we look at employee benefits, especiallypension benefits, as an investment for thefuture. I believe that when Congress con-siders revenue measures having an effecton employee benefits, it's critically impor-tant to structure such measures in a man-ner that does not adversely affect overall

coverage, the type of plan, for example,final pay plan vs . career average pay plan,the level of benefits provided, or overallbenefit security.

This specific provision would raise somerevenue, and that's why Congress is look-ing at it . If viewed in the context of thethree principles I just articulated, depend-ing upon the level that is chosen andwhether or not there is appropriate flexi-bility to deal with the demographics of theplan, it is possible to structure a provisionthat does not adversely affect coverage, plandesign, benefit levels, and benefit security.Let's keep in mind that this targets onlyoverfunded plans and so, the key is whatlevels would be chosen in this regard . I alunderstand that both the Congress anthe Treasury Department have attemptedto obtain input from the actuarial profes-sion as to the likely effect of this provision .I believe the preliminary feedback with re-

December 1987

~ard to the 150% limit was that a vastcity of plans would not be affected . In

act, it might only affect a very small groupthat might otherwise choose extremely con-servative actuarial assumptions as a means ofputting extra money in the plan.

Ill have to wait until I get more informationas to the reasonableness of these target levels .But, potentially it could be something thatcould be structured so that it wouldn't ad-versely affect coverage, benefit design, or ben-efit security. While I might prefer that it nothappen. I want to make sure that anythingthat does happen in the revenue area doesn'tcut against those three principles .The Update : Senator Heinz has intro-duced a proposal that would basicallycreate a separate guaranty program forsteel plans . This is a fairly recent propos-al, but do you have any thoughts aboutsuch an approach?Walker: I haven't reviewed the latestdraft of the proposal, but it is my under-standing that it would create a separatesteel authority outside of the PBGC, anew government bureaucracy. I'm not

ciclod with any new government bu-r But more importantly, it

doesn't go to the root of the problem .The root of the problem is how did the

steel industry get into a situation thatcaused such large losses, not only to thePBGC, but also to plan participants andbeneficiaries . It is our belief that, froman employee benefits perspective, theHeinz/Metzenbaum proposal is a step inthe wrong direction. It would establish anew government bureaucracy, and it is,in essence, a bailout of the steel indus-try-a $7 billion bailout of the steel in-dustry.

It is also a dangerous precedent. I canthink of other industries that would liketo have this type of assistance. Further-more, nobody knows with certainty whatthe distressed companies or industriesof tomorrow will be. This is all the morereason why we need the minimum fund-ing rules to ensure that adequate contri-butions are made before a company orentire industry gets into distress . Forexample, in the fifties, some of the com-

ies that are currently distressed werestrial giants, they were extremely

s ng. That's why we're trying to take acomprehensive approach, a preventativeapproach, to ensure that the system willwork for all Industries and in all kinds ofmarket cycles .

The Update : Fbr several years the Acad-emy has called for the development ofnational policy on pensions and retireebenefits. The Retirement Income PolicyAct (RIPA) was one attempt to accom-plish this, but only parts of it were adopt-ed. Do you foresee the development ofsuch a policy?Walker: I don't know that there will everbe a "document" that is passed by theCongress that spells out our national re-tirement income policy. For all practicalpurposes, even if they did this, It wouldhave to be a statement of principles, and itwould have to be somewhat flexible-basedupon the economic and fiscal climate. How-ever, the Administration has taken a num-ber of steps to try to ensure that employeebenefits policy is developed on a balancedbasis, looking at the social, economic, andfiscal policy implications, all of which areimportant. In addition, it is important tolook at both the long-term and the short-term implications of any related policy de-cisions .

The Labor Department has a lead role intrying to make sure that social and eco-nomic policy considerations do not take aback seat to fiscal policy consideration . Inthat regard, I would note the establishmentof the ERISA Coordinating Committee abouta year and a half ago. This is a standingworking group of the Economic Policy Coun-cil, chaired by the Department of Labor. Atpresent, I fill that role on behalf of theSecretary of Labor, and [ am joined by sixother officials from Treasury, Health andHuman Services, Justice, Commerce, theOffice of Management and Budget, and theCouncil of Economic Advisors. The com-mittee exists to deal with important andemerging employee benefits policy issues,and the administration of ERISA on a co-ordinated basis.

Our pension reform proposal was thefirst product of that group, and retirementincome policy was our number-one consid-eration in its development. We didn't evenrun the revenue numbers until we haddetermined what we wanted the retirementpolicy to be . After that, we ran the revenuenumbers because we needed to make surethat it was fiscally responsible. The key isto establish the process. While we shouldnot be unmindful of the fiscal implications,we should not let them be overriding .

At the same time, people must recognizethat while employee benefits are a priority,we also have a need for fiscal austerity.Congress is going to look at an area that

9

represents the single largest tax prefer-ence. The key is that they not look to thisarea first, and that when they do, anychanges be structured so as not to ad-versely affect coverage, benefit design, ben-efit levels, or benefit security. We at theDepartment of Labor, and I in particular,will do everything possible to make surethis doesn't happen . Over the last year anda half much progress has been made inthat regard, and I'm hopeful it will contin-ue .The Update: You have been appointedto your new position during the lastfifteen months of the Reagan Adminis-tration. Is there enough time left to ac-complish your goals?Walker: Yes. I have been at DOL for twoyears and with the Administration four.During that time we have accomplished agreat deal. In addition, we have a numberof initiatives that are underway, many ofwhich are substantially complete . We alsohave a few other initiatives that we plan toundertake and complete during the remain-ing fourteen months. I believe we can ac-complish a great deal in the time thatremains during this Administration .Why? First, because, we have some ex-

tremely capable and dedicated people hereat the department . Second, because wehave a number of legislative, regulatory,and operational challenges that need to beaddressed. And, third, because we're in anarea that deserves, in fact demands, bipar-tisan support, and I think that we can riseabove partisan politics to get things done,even in an election year.The Update: What can the AmericanAcademy of Actuaries do to help you?Walker: By all means, the Academyshould continue its efforts with regard tothe Interim Actuarial Standards Board .And, the Academy should continue toprovide us with assistance on the legis-lative and regulatory initiatives that weare considering, lending its expertise andits perspective as to the likely implica-tions from both a broad policy perspec-tive and for those you serve . I think theAcademy represents an extremely valu-able resourceThe Update: You've been very generouswith your time this morning. Thank you .Walker: Not at all. A pleasure. a

10

CALL FOR PAPERS(continued from page 3)

the discussion . Other specific topics in-clude actuarial problems; accounting con-siderations ; investment aspects ; social in-surance programs and their development,both Social Security and Railroad Retire-ment; government programs, such as CivilService; the place of pensions in flexiblebenefit programs ; and employee compen-sation generally. The role of the individualvs. the role of the employer and govern-ment is also of long-term interest .Healthcare in the 21st Century . Pa-

pers could address one or more of theevents or trends that will have an impacton healthcare in the 21st century . Papersshould include both the problemsbrought on by the events and trendsdiscussed, and realistic solutions . Ex-amples are : (1) the increasing role ofmedicine in the procreation process, frompreventing or abetting conception to med-ical care during pregnancy to the birthingprocess ; (2) the emergence of the "rightto die" issue for the elderly and termi-nally ill; (3) an increasingly older popula-tion; (4) the increasingly higher cost of"heroic" medicine (i .e ., how much is toomuch both in terms of money and emo-tional strain on the family) ; (5) the in-crease in self-care and wellness programs ;(6) the gradual spread of Eastern meth-ods of healing, such as acupuncture ; (7)the increasing cost of medical malprac-tice insurance ; (8) the AIDS virus discov-ery and spread ; (9) the increase inpollution-related diseases, and (10) theincreasing financial requirements ofhealthcare on the business community.

These and other events and trends placea strain on the present healthcare system,which is a combination of governmentaland private medical care and health insur-ance. This strain also has an impact on oursocial and political systems. A

Pictured top right . Michael A . Hatch,Commissioner of Commerce, State ofMinnesota, welcomes attendees, whichinclude loss reserve specialists, riskmanagers, insurance managers, actu-aries, accountants, and others. Bottomright, Iowa Insurance Commissioner Wil-liam D . Hager (former general counselat the Academy) addresses CLRS lun-cheon guests.

The Actuarial Update

1987 Casualty Loss Reserve SeminarAttracts Record Number of Attendees

700-plus individuals attended this year's Casualty Loss Reserve Seminar (CLRS) .which was held in Minneapolis, Minnesota, September 10-11 . The meeting iscosponsored by the American Academy of Actuaries and the Casualty ActuarialSociety. The 1988 CLRS is scheduled to take place September 19-20 in Atlanta,Georgia .

December 1987

Special Subject Supplement to The Actuarial Update

Summary of 1986-87 American Academy of Actuaries Committee Reports

Committee on PlanningThe Committee on Planning, whose roleit is to review Academy objectives anddevelop strategies for achieving its goals,issued two recommendations stemmingfrom its 1987 activities :*Director of Government Relations : AJanuary 25 . 1987 report was submit-ted to the effect that this role shouldbe formalized and made the primaryresponsibility of someone at staff levelin the Academy's office .

• Exclusivity as regards actuarial work :A report on this subject was submittedon September 9, 1987 . Over the years,this subject has been designated byvarious labels. These include formalrecognition, such as accreditation, cer-tification, or licensing. The committeetook into account the experience ofother professions. The committee ad-dressed the issue of whether or notcertain actuarial activities should le-

Saally be practiced only by actuaries,d the response was affirmative. The

committee suggested the general out-line of a method for accomplishingthis objective, including some initialsuggestions for implementation .Additionally, the committee began work

on a long range plan at an October 14,1987 meeting . The minutes of that meet-ing reflect an approach to the planningprocess that the committee believes to beworth pursuing. Some work has beenassigned to Academy staff to help facili-tate the process.

W. H. Odell, chairperson

Admissions CommitteeFor the period through July 1, 1987, 190applications were received, 198 new mem-bers were added, forty-six applications werepending with the committee, and thirty-seven were pending in the Academy's of-fice. There were five reinstatements

Three goals were accomplished in thecommittee's plan for the year :• Continue to operate the Academy's ad-

missions system with an average timeto process applications for member-iips at the low level established in82, while maintaining the present

high quality of professional review ofindividual applications .

• Review the continuing experience withthe new questions on felonies. Thecommittee will work with the Aca-

demy's general counsel to evaluate newguidelines for the use of answers tothis question and its impact on theadmissions decisions and process .

• Recent controversial applications haverevolved around the choice of and an-swers of applicant's references . Thecommittee will review the problemsand determine if published guidelineswould be helpful, and if they would, itwill develop such guidelines for possi-ble inclusion in the yearbook .The first of these three goals is continu-

ing in nature and being met . With respectto the second goal, there were no specificexperiences to test the guidelines . This willcontinue to be monitored in the future .With respect to the third goal, pro-

posed changes the question on the refer-ence form pertaining to professional in-tegrity have been developed to deal withpoor responses to this key question . Inaddition, a recommendation has beenmade to include required references aspart of the reinstatement process . Thepractice of permitting references fromblood or marital relations has beenchanged and will no longer be accept-able. The application instructions will bechanged to make this clear.

Finally, as a result of input from appli-cants and committee members, a recom-mendation was made to change the Acad-emy dues waver guidelines to more closelyparallel those of the Casualty Actuarial So-ciety and the Society of Actuaries . Thismatter was taken to the Budget and Fi-nance Committee, which has recommendedaction to the Academy's board on thee issue .

James J. Murphy, chairperson

Budget and Finance Committee

During 1987, the Budget and FinanceCommittee accomplished the following :• supervised the preparation of periodic

financial reports and projections forthe current year ;

• developed a recommendation for theboard on Academy dues for 1988 ;

• analyzed the financial effect of proposedoperating arrangements for the ASB andworked with the SOC to develop a mutu-ally acceptable arrangement;

• developed financial projections, undervarious assumptions, of operatingcosts for the ASB ;

• directed the investment of the Aca-demy's investment fund ;

11

• reviewed the report of the independentauditor and reported to the board on theresults of the audit (the Audit Subcom-mittee, consisting of those members ofthe Budget and Finance Committee whoare not on the Academy's Executive Com-mittee, met separately with the auditorand reported to the board concerningthe results of the meeting) ;

• reviewed the basis on which the Acad-emy performs services for other actuarialbodies and updated some of the letters ofagreement defining the basis of perfor-mance and payment for such services;

• participated, through its finance com-mittee, in financial planning and over-sight for the forthcoming 1989 Cen-tennial Celebration ; andcarried out other ongoing functions,including the review and recommen-dation to the Board of Directors con-cerning dues waiver actions .

Daniel J. McCarthy, chairperson

Interim Actuarial Standards Board(IASB)

The. IASB met six times during 1987. InJuly, the IASB met jointly with the Stan-dards Organizing Committee (SOC) toreview and discuss a draft of recommen-dations prepared by the SOC for theestablishment of an Actuarial StandardsBoard in 1988 .

Operating Committees Activities : Eachof the five operating committees of theIASB were involved in several active stan-dards projects. The status of these arepublished monthly in the "IASB Box-score" and reported on at each IASBquarterly meeting. A Subcommittee onFormats and a special Task Force onRetiree Life and Health Benefits was ap-pointed by the IASB during 1987 to han-dle some special projects and concernsrelated to the standards setting process .An Editorial Advisory Committee wasalso established to assist and furtherdevelop the process for unifying the for-mat, structure, and content of actuarialstandards .

Standards Activities : There were threestandards of practice issued in 1987 :• Recommendations Concerning Non-Guaranteed Elements (January 1987).

• Actuarial Standards of Practice Relat-ing to CCRCs (July 1987) .

12

• Recommendations for Actuarial Com-munications Related to FAS 87 & 88(July 1987) .The exposure draft on "Incurred Health

Claim Liabilities" published in August 1987had a comment deadline of October 13,1987. "Recommendations for MeasuringPension Obligations" was released in July,with a comment deadline of September 25 .Administrative projects recently com-pleted by the IASB :• An IASB procedures manual .• The hiring of a technical writer to

assist the operating committees in thewriting of standards.

Projects Pending/Other Matters :• The drafting of a structural framework

for standards of actuarial practice .• A primer project on the foundations of

actuarial science .

Ronald L. Bomhuetter, chairperson

Committee on Guides to ProfessionalConduct

The committee, through its chairman, pre-pared an article for The Actuarial Updatesummarizing the view of the committee onthe subject of third party certification abusesby certain enrolled actuaries and the ade-quacy of the current Guides and Opinionsto deal with the problem .

In June, the committee met to reviewthe recent developments in the areas ofconduct, practice, and discipline, and toIdentify problems, tasks, andliaisonworkneeded, as follows :• The committee decided to follow up with

the Joint Board for the Enrollment ofActuaries to determine the status of theadditions to the regulations and revi-sions to Schedule B (Form 5500) and itsinstructions proposed by the professionlast year, and to recommend that theJoint Board take action .

• We agreed to develop a series of articlesfor the Enrolled Actuaries Report deal-ing in more depth with each of thevarious problem areas identified withthird party certifications, as well asdiscussing the specific Guides andOpinions that are applicable .

• In light of recent developments of theIASB and the likelihood of the ASB com-ing into being during 1988, the commit-tee suggested that the section of theyearbook entitled "Procedures for the De-velopment of Standards of ProfessionalConduct and Practice" be rewritten torelate to professional conduct only for1988, and that the recently developedIASB procedures manual be included forstandards of practice .

Special Subject Supplement to The Actuarial Update

• The committee agreed to coordinatewith the development of the "Struc-tural Framework for Standards of Ac-tuarial Practice" for the IASB and thatconsideration be given to the develop-ment of a companion document forstandards of conduct .

• We reviewed a summary of the issuesfacing the Discipline Committee andidentified a number of areas for whichthe Guides and Opinions should bereviewed for adequacy.

Jack M. T rnqutst , chairperson

Committee on Qualifications

During 1987, the committee held severalmeetings, resulting in the developmentof a proposed revised structure for qual-ification standards for consideration bythe Board of Directors and for exposureto Academy membership .

The proposed revised structure focuseson qualification standards for those ac-tuarial functions for which there arepromulgated standards of actuarial prac-tice and which create results for use inthe public domain or for use by personswho have not been a part of the processof selecting the actuary who did the work .A core set of qualification standards issuggested . Specific additional standardswill supplement these as necessary, de-pending on the actuarial functions in-volved. With this structure in place, thecommittee is prepared to address vari-ous issues of qualification that are emerg-ing on both the governmental and stan-dards of practice fronts.

Walter S . Rugland, chairperson

Committee on Liaison with the NAIC

The committee provides ongoing, mostlynon-technical coordination and commu-nication between the Academy ExecutiveCommittee and the National Associationof Insurance Commissioners' (NAIC) Tech-nical Services (EX5) Subcommittee onactuarial issues of significance to insur-ance regulators .A report from the liaison committee to

the (EX5) Subcommittee was delivered atthe June 1987 meeting. The report ad-dressed several Academy communicationsreporting on NAIC activity, various Acad-emy committee projects related to items onthe NAIC's agenda, the development ofstan-dards of practice by the IASB, and variousrelated Academy actions and programs . Asimilar report is expected at the December1987 NAIC meeting .

The eleven members of this committeereviewed drafts of the reports to the (EX5 )

Subcommittee and made important co -tributions to the final reports thatpresented. The committee includes reresentatives of the Academy committeesthat have responsibilities related to stateregulatory activities .

Burton D. Jay, chairperson

Public Relations Committee

The committee's major activities for theyear centered on continuing care retire-ment communities. An interview withAcademy spokesperson Barbara Snyderwas sent over three national radio feeds,and further interviews on television andradio were completed with local stations .Articles on actuarial involvement inCCRCs were distributed to consumermagazines and daily and weekly newspa-pers nationwide .Other topics covered by the various

media included : casualty insurance is-sues (a CBS Nightwatch interview and athree-column newspaper story), an arti-cle on the first actuary, publicity on Con-gressman Florio's speech to the AcademyWashington luncheon attendees, SocialSecurity, PBGC premium rate structu~healthcare, and FAS 87 .

Publicity was also provided for the En-rolled Actuaries Meeting, the Academy'sannual meeting, and the Casualty LossReserve Seminar. A standards public re-lations plan was prepared. PR work forthe Casualty Actuarial Society (CAS) be-gan in a formalized way by Academystaff-work billed to the CAS. There wassubstantial involvement in the planningfor the 1989 Centennial Celebration andwith the Task Force on the ActuarialMagazine. News releases were placed asnew members are admitted to the Acad-emy. Finally, a tabletop exhibit on theAcademy was completed and will be ondisplay at various industry meetings .

Bruce F. Vane, chairperson

Committee on PublicationsThe committee on publications is re-sponsible for all Academy publications .The major publications are The ActuarialUpdate, and the Enrolled Actuaries Re-port. Other publications include : the year-book, journal, Government RelationsWatch, Academy Alerts, IASB Boxscore,Issues Digest, and Fact Book. All editand associate editors of the two major p~lications are members of the committee .

Items of particular note this year in-clude :• TheActuartal Update printed two spe-

cial subject supplements in 1987 .

December 1987

• The Enrolled Actuaries Report Intro-uced an important new feature, "Pen-ion Practitioner," with its September

issue. Also, in response to member sug-gestions, efforts were made to securemore technical articles for the publica-tion.

• The 1987 Yearbookwas mailed to mem-bers on time this year. Work on the 1988Yearbook, with an expanded section onstandards, proceeded on schedule .

• Government Relations Watch pub-lished two special state supplementsduring the year. Academy Alerts, ournew subscription news service, beganpublication during the year .

• The Fact Book was reprinted duringthe year. reflecting the continuing largedemand for this publication.In addition, committee members partic-

ipated in the work of the Joint Task Forceon the Actuarial Magazine, leading to Itsfinal report in June. The committee is nowready to assist the new Academy task forceworking on this important project .

Carl R. Ohman, chairperson

Task Force on Continuing Educationcognition

0tablished in 1986, the task force'scharge is to develop a program of con-tinuing education recognition for theAcademy. With valuable input from theExecutive Committee and the Board ofDirectors, it has prepared a DiscussionDraft Report which is to be distributedto the membership. This includes a ques-tionnaire that will, it is hoped, encour-age members to comment on the issuesinvolved, including some suggestedcomponents of a program . Member-ship feedback will result in the prepa-ration of a final report during 1988 .Members will again have the opportu-nity to comment before any program isadopted.

Daphne D. Bartlett, chairperson

Committee on Life InsuranceFinancial ReportingThe committee experienced an active yearwith all members participating on atleast one of the committee's task forces :(1) Non-Guaranteed Premium, (2) Rec-ommendation 7, and (3) Reinsurance .

During 1987, the Non-Guaranteed Pre-Task Force analyzed the Financial

Womunting Standards Board's (FASB) Ex-

posure Draft, developed an extensive writ-ten response, and appeared before FASBto deliver oral comments. The committeeendorsed the composite method of ac-counting for universal life and opposed

the exposure draft . Although continuedassistance has been extended to FASB, itappears that the committee will not becalled upon to provide further informa-tion prior to adoption of the FASB's finalposition . During the year, an informalmeeting with FASB was arranged; in-sight was gained regarding their opera-tions and how dealings with them couldbe improved. Once FASB adopts a posi-tion, there will be a need to revise and/orreplace existing recommendations re-garding this issue.The Revised Recommendation 7 Task

Force began work on drafting standardsof practice on behalf of the Interim Actu-arial Standards Board (IASB) for actuar-ies completing cash flow studies in theirwork. The project was initiated by the[ASB's desire to promulgate quickly suchstandards . The committee anticipates adraft of these proposed standards to beready for delivery to the IASB sometimeafter the committee's scheduled meetingin December 1987 .The Reinsurance Task Force discussed

several important items, such as the NewYork amendment of Regulation 20, and aresponse to a National Association of Insur-ance Commissioners' request for Academyassistance in dealingwith reinsurance prob-lems. While no formal recommendations orresponses have been prepared to date, thecommittee is continuing to monitor devel-opments in this area.

The committee has reviewed several spe-cial purpose actuarial opinions which weresummarized in a recent Academy newslet-ter supplement. While the committee willcontinue to monitor developments in thisarea, it has determined that the issuanceof standards of practice is not appropriateat this time . Input from the Board of Direc-tors would be appropriate in the eventfuture action is taken.

The committee will continue to moni-tor developments of the NAIC StandardValuation Law Advisory Committee inthe event that, should standards be re-quired, the committee would be ready torespond expeditiously. In light of therecent activity of the IASB, there is aneed to address the composition, size,and activity of the committee . To date,the IASB has requested the committee'sassistance in drafting their standards,which may or may not continue .

Edward S. Silins, chairperson

Committee on Property and LiabilityInsurance Financial Reporting

A major focus of the committee's activitiesfor the year has been loss reserve discount

13

ing in the context of statutory , GAAP, andtax accounting. The committee preparedand delivered testimony before a NationalAssociation of Insurance Commissioners'study group looking into the discountingissue from a statutory perspective . In addi-tion, the committee commented on theFinancial Accounting Standards Board's(FASB ) exposure draft, Accounting for In-come Taxes, focusing specifically on theimpact of the new reserve discounting pro-cedures on tax accruals. Finally, the com-mittee is continuing to study the issue ofdiscounting from a GAAP perspective . Thecommittee has reviewed an American Insti-tute of Certified Public Accountants ' (AICPA)task force draft issues paper on discount=ing. In that context , the principal issueappears to be the appropriateness of theinclusion of margins in the discountedreserves. The committee is continuing todevelop a position paper on the marginsissue .Additionally, the committee has mon-

itored a number of other insurance ac-counting issues , including FASB's pro-posal that realized captial gains andlosses to be included in operating in-come, and the AICPA s analysis of claimsmade accounting .The committee has also been monitoring

developments relating to the valuation ac-tuary concept . This includes the specialcall by the California Insurance Depart-ment analyzing "Quality of Surplus ."

Finally, the committee is expanding itshorizons beyond accounting by insur-ance companies to accounting by self-insurers .

Stephen P. Lowe, chairperson ,

Committee on Pension Accounting

During this year, a special task forcemade up of actuaries and acccountantscompleted work on the standard confir-mation letter. The letter was designed foruse by auditors in requesting pensioninformation from actuaries when audit-ing pension plans. This has particularrelevance for practitioners of both pro-fessions in view of the new accountingstandard, FAS 87 . The letter was pub-lished in the July issue of The ActuarialUpdate. The accounting profession wasalerted to its existence in a fall issue ofthe CPA Letter. The Journal of Accoun-tancy and the 1987 American Institute ofCertified Public Accountants (AICPA) Au-dit and Accounting Manual, (publishedin September) also include the letter .Four members of the committee con-

tinued to serve on the Pension Imple-mentation Group created by the Finan-

14

cial Accounting Standards Board (FASB)to deal with implementation problemsthat arose because of FAS 87 and 88 .This year the group assisted FASB informing Qs and As dealing with FAS 88 .

In July 1987, the committee providedthe Governmental Accounting StandardsBoard (GASB) with the Academy's per-spective on GASB's pension accountingproject. In the same month, the GASBPension Task Force held a meeting todiscuss the Academy's views at whichseveral committee members were present .A subsequent meeting of the committeewas slated for a time after the exposureof the GASB draft .A restructuring of the committee mem-

bership roster begun in 1986 in an effortto limit committee membership of toolong duration and to bring on more mem-bers with governmental plan expertise,was continued in 1987, resulting in threenew members rotating off, one resign-ing, and four new members being added.

Harper L . Garrett, Jr. chairperson

Committee on Relations withAccountants

The committee had three regular meetingsin 1987 with its counterpart at the Ameri-can Institute of Certified Public Accoun-tants (AICPA), the Relations with Actuar-ies Committee . Selected members of thecommittee attended a special meetingbetween the Academy and the FinancialAccounting Standards Board (FASB) inJune to discuss current FASB projectsand exposure drafts. At each meeting ofthe committee, each profession updatedthe other on items of interest such asimplementation of pension accountingprocedures, FASB exposure drafts on uni-versal life and accounting for incometaxes, and AICPA projects on audits ofproperty and liability companies, account-ing for continuing health care, and dis-counting .

The committee has also been stayingabreast of developments of the Govern-mental Accounting Standards Board, in-forming them of the profession's progressin the standards of practice area.Relations with FASB were a continuing

and growing concern. The committee rec-ommended to the Academy Executive Com-mittee that it should instruct the Aca-demy's financial reporting committees toestablish formal liaison with FASB staff .

P. Adger Williams, chairperson

Committee on HealthThe parent committee's principal area ofactivity during the year has been the

Special Subject Supplement to The Actuarial Update

preparation of a series of statements oncurrent health issues and pending fed-eral legislation . Statements have beensubmitted on long-term health care plandesign and financing on pending legisla-tion related to changes in Medicare andproposed catastrophic health insurance .The committee also prepared a state-ment on the potential impact of AIDS onhealth insurer solvency, submitted to theNational Association of Insurance Com-missioners (NAIL) as part of a statementfrom the life committee .At the committee's only meeting of the

year, a number of important issues andpending legislative items were identified .Committee task forces will study theseissues to determine what written state-ments or tentative testimony should beprepared. These include: (1) pending leg-islation proposing expansion of Medi-care to include prescription drug cover-age (an extremely expensive coverage),(2) pending legislation dealing with man-datory employer benefits and risk pools :S. 1265, H.R. 2501, S. 1634, S. 177 anda Stark-Gradison FY 1988 Budget pro-posal amendment for risk pool amend-ments, (3) H .R. 3128, proposing a tax onemployers to fund hospital indigentcare .These studies and potential state-

ments form the basic planning of thecommittee for 1987-1988 .The Subcommittee on Liaison with the

NAIC continued work on the controversialarea of NAIC Minimum Reserve Standardsfor Health Insurance, submitting a reportto the NAIC Life and Health Actuarial TaskForce in March that became a third expo-sure draft on this topic, distributed to theprofession by the Health Section of theSociety of Actuaries . A follow-up report hasnow been submitted to the NAIC task forcerecommending revised standards for NAICadoption .This subcommittee also submitted a

statement to an NAIC "working group"dealingwith proposed standards for Medi-care supplement benefits and loss ratios .E. Paul Barnhart, chairperson

Committee on Life InsuranceThe committee's function is to monitorlegislative and regulatory activity in thelife insurance area and, when appropri-ate, to present the Academy's position onpublic issues. This activity is coordi-nated with other actuarial groups . Itsmonitoring activities includes issues con-sidered by the National Association ofInsurance Commissioners' (NAIC) Lifeand Health Actuarial Task Force, otherlife insurance issues considerd by the

NAIC, possible life insurance tax legisla-tion, matters before the Federal TrCommission and other federal retory agencies, as well as development ofinterest to life insurance actuaries

In response to a request from the NAICLife and Health Actuarial Task Force, thecommittee appointed a task force to de-velop amendments to the valuation andnonforfeiture provisions of the UniversalLife Model Regulation. This task forcehas submitted two reports to the NAIC,and its work is continuing.

The committee also submitted a back-ground paper to the NAIC Life and HealthActuarial Task Force dealing with theimpact of AIDS on life insurance solven-cy. The Academy committees on risk clas-sification and health also contributed tothe development of this paper.

In addition, the committee actively fol-lowed a number of ongoing issues : (1)proposed NAIC actuarial guidelines . (2)the valuation actuary concept, (3) pro-posed revisions to the standard valua-tion and nonforfeiture laws, (4) miscella-neous actuarial opinion requirements,(5) the development of a yield index forinterest-sensitive products, and (6) vous proposals for policies with nongranteed elements .

Gary E. Dahlman, chairperson

Committee on Property and LiabilityIssues

The committee continued to promoteopen dialogue between the actuarial pro-fession and the public. During the pastyear, the committee issued two state-ments: the first was titled "Estimatingthe Impact of Civil Justice Reform on theCost of Liability Insurance," and ad-dressed the issues of quantifying theeffect of proposed tort reform through-out the country.In addition, the committee recently

released a paper describing the histori-cal cyclical behavior of the property/lia-bility insurance industry. Included withinthis paper is a discussion of the internaland external cause of these cycles and ananalysis of the techniques used to mea-sure profitability and performance dur-ing these cycles .In order to facilitate open communica-

tion on key issues, the committee hosa symposium in Washington, D.C.congressional staff. The interchange oIdeas was dynamic and all participantsfelt it was a valuable vehicle to access therespective audiences. The success of thisinitial symposium has encouraged the

December 1987

committee to plan to continue this prac-Wn a federal and, possibly, state level .

e committee also participated onthe statistical advisory committee to theNational Association of Insurance Com-missioners' Legal Liability Insurance (D)Task Force and expects to continue itsinvolvement throughout the comingyear.

Albert J. Beer, chairperson

Committee on Risk Classification

A major activity of the committee during1986-1987 was the revisions of the riskclassification and AIDS paper issued bythe committee last year. The revisionsconsisted mainly of the inclusion of up-dated AIDS statistics published by theCenters for Disease Control and infor-mation included in the Surgeon Gener-al's Report on AIDS . The target audienceof this paper is state legislators and stateinsurance commissioners who may beconsidering legislation or regulationsdealing with an insurer's ability to un-derwrite for AIDS.In addition, Overview-Mandated Sex

Neutral Rating was issued this year. It ishort discussion of the probable finan-effect of prohibiting sex-distinct rat-

a In addition, it discusses other pos-sible effects, such as market dislocationand increases in the general cost of in-surance. The intended audience, like theAIDS paper, is state legislators and stateinsurance commissioners who may beconsidering legislation or regulationsdealing with an insurer's ability to usesex-distinct rating .The committee is working with the

Interim Actuarial Standards Board toconsider the advisability of having anactuarial standard on risk classification .This project is in the early stages ; if astandard is needed, the effort will con-tinue into 1988.

The committee intends to revise the pa-per on federally mandated sex-neutral in-surance, presented in 1983 . The purpose ofthe revision is to update the statistics onthe expected financial impact of requiringsex-neutral rating In Insurance .

Patricia L. Scahill, chairperson

Commmittce on Continuing CareRetirement Communities

primary activity of the committee forW year was the development of thestatement of actuarial standards of prac-tice for actuarial work with continuingcare retirement communities (CCRCs) .This document was widely distributed tointerested parties . In October 1987, the

Academy sent several hundred copies tothe annual meeting of the American As-sociation of Homes for the Aging, whosemembership includes approximately 80 %of existing CCRCs .

Several members provided assistanceto state legislators who were draftingCCRC legislation. Texas has passed CCRClegislation, and three states, Massachus-setts, Washington, and New York, arestill considering such legislation . Also, apresentation on CCRCs and the newstandards was made to the Health CareFinancing Administration Task Force onLong-Term Health Care Policies .The committee met the objectives of

the plan prepared at the beginning of theyear through issuance of the standardsof practice document .Currently, the committee is working on

two projects: (l) the development of a "whitepaper" with the Conference of Actuaries inPublic Practice on the role and rationale forguidelines for the incorporation of appro-priate actuarial principles In the regulatoryprocess; and (2) the development of legisla-tive guidelines for the incorporation of ap-propriate actuarial principles in the regu-latory process. Additionally, members ofthe committee have been assigned individ-ual states where they are to contact theinsurance department and trade associa-tions to express the Academy's interest inCCRCs and to offer assistance and guid-ance in financial issues regarding CCRCs .

Alwyn V. Powell, chairperson

Pension Committee

Committee activity is concentrated intwo general areas : liaison with other pen-sion committees in the actuarial profes-sion, as well as interfacing with variousfederal government officials . There is alsothe preparation of formal responses onposition papers on different matters af-fecting Academy members working inthe pension area.

With respect to liaison activities, thecommittee met once during the year, atthe 1987 Enrolled Actuaries Meeting . Atthis time, a very broad range of issues(from standards matters to issues involv-ing the Governmental Accounting Stan-dards Board to Pension Benefit Guar-anty Corporation (PBGC) variable ratepremium, etc.) were discussed .

The committee's workload for the yearcentered on dealing with proposals forlegislative change, as well as proposedregulations. The committee commentedin several minor regulatory areas . Themajor legislative area requiring the com-mittee's attention dealt with the Admin-

15

istration 's proposals for changing thecurrent rules on Sec . 412 minimum fund-ing rules and variable rate PBGC premi-ums. The committee testified on theserelated issues before the House Over-sight Committee on April 9 , 1987. Sincethat time, a committee task force hasdone additional work in this area andrecently produced a "position paper" con-taining committee suggestions . Initialindications are for a favorable reaction .As part of our overall responsibility,

the committee continues to establish on-going relationships with key congres-sional and regulatory staff people .

Larry D. Zimpleman , chairperson

Committee on Health and WelfarePlansIn fulfilling its charge to address actuarialissues affecting health and welfare plansand to research the actuarial aspects ofthese issues, and to prepare statements ofposition on pending and potential legisla-tion, regulation and policy, the committeeaccomplished the following during the year :(1) organized as a committee (formerly theSub-Committee of the Committee onHealth), (2) developed committee charge,(3) developed liaison with the Interim Actu-arial Standards Board, especially regardingnon-pension retiree benefits, (4) developedliaison with Conference of Actuaries in Pub-lic Practice, (5) continued liaison with Com-mittee on Health . (6) made presentationsto the Financial Accounting StandardsBoard regarding accounting for non-pension retiree benefits, (7) developedcloser contact with the Department ofTreasury through the Task Force on Non-Discrimination Regulations, (8) devel-oped initial draft on "Qualified Actuary,"for discussion and advancement, and (9)submitted a statement on actuarial as-pects of COBRA provisions to the De-partment of Labor and the Departmentof the Treasury.

Thomas G. Nelson, chairperson

Committee on Services to EnrolledActuariesTo carry out its prescribed function ofassisting the Academy Board of Direc-tors in formulating and implementing ameaningful program of services for en-rolled actuaries, the committee accom-plished the following: (1 I compiled resultsof the 1986 EA Survey ; (2) submitted up-dated comments regarding Treasury Cir-cular 2300 to the Academy office ; (3) ana-lyzed 1986 EA Survey results, sentapplicable results to EA Program Com-mittee, and set plans for 1987-1988 ; (4)

16

briefed Les Shapiro, the Academy, andthe committee on recent continuing ed-ucation developments, offering assis-tance and providing applicable portionsof 1986 EA Survey; (5) produced an arti-cle for the Enrolled Actuaries Report(EAR) summarizing survey results andre-publicizing lists of assumption sur-veys available at Academy office .

Additionally, the committee has a num-ber of plans pending or underway, in-cluding the development of an initialform for an annual survey of assump-tions, methods and practices, to be dis-tributed with EAR.Paul L. Engstrom, chairperson

Committee on Social InsuranceIn January the committee sent a reportentitled "Measurement of the ActuarialStatus of the Social Security System" toselected members of Congress and toother interested individuals. The Febru-ary Issue of The Update contained anarticle entitled, "Change Recommenda-tion of Social SecurityActuarial Balance,"which presented the principal findingsof the committee's January report . .The May issue of The Update con-

tained a letter from the committee in

Special Subject Supplement to The Actuarial Update

criticism of our January report by thedeputy chief actuary, Social Security Ad-ministration. As a result of this letter,the committee met in July with actuar-ies from the Social Security Administra-tion to discuss the current approachused to measure the long-range actuar-ial status of QASDI and HI .

As a priority, the committee intends tomake certain that the long-range actuar-ial balance for Social Security is consis-tent with congressional intent for fi-nancing the program .Kenneth A. Steiner, chairperson

Joint Committee on the ValuationActuaryA status report outlining all activity bythe committee relating to the valuationactuary movement was published andwidely distributed in November 1986 andApril 1987. The next status report wasplanned for October 1987 .

In addition to the status report, thecommittee spent much of theyeardraft-ing a reflection paper outlining thechanges in joint committee thinkingsince the committee's February 1985report and a strategic direction state-ment, mapping future activity needed

to implement the valuation actuaryconcept. At the direction of the Booof Directors of the Society of Actu(SON and the Academy, these two doc-uments have been combined into the1987 Report of the Joint Committeeon the Role of the Valuation Actuary.This report, which has been submit-ted to the Executive Committees of theSQA and the Academy for recommen-dation to their respective boards, isdesigned to: (1) place the valuationactuary concept within a h istorical per-spective, (2) report to our sponsoringorganizations, (3) seek an endorsementfrom our sponsors of our modified rec-ommendations, and (4) encourage sup-port for our recommended strategicdirections .

It is expected that this report will begiven wide distribution when approved bythe boards .

In addition to this activity, the chair-man of the joint committee participatedin a panel discussion relating to thestatus and progress of the valuation ac-tuary movement at the SOA Spring Meet-ing in October 1987,

Burton D. Jay, chairperson 0