THEACTUARIAL

THIS MONTH2

From the President3

Letters to the Editor

3Notes & Comment

4Regulatory Actuaries

on the Forefront

BAcademy Committee

Meets with AICPA

BASB Compliance Guideline

7Capitol Views

7Proposition 103

Put on Hold?

Meet General CounselLauren Bloom

ENCLOSURESIncluded with this month's

issue of The Actuarial Updateare the following:

In Search Of

ASB Boxscore

t Academy Statements

AMERICANACADEMY OFACTUARIESVOLUME 21NUMBER 3MARCH 1992

Task Force on Insurer SolvencyCalls Actuarial Analysis "A Must"

he Academy announced, ina news release on January24, the establishment of theTask Force on Insurer Sol-vency. The blue-ribbon

task force is examining ways tominimize the risk of insolven-cy-both in terms of the numberof insolvencies and their effect onthe financial well-being ofclaimants, beneficiaries, and poli-cyholders.

The task force, whose effortsare augmenting other work bythe actuarial profession on this

crucial topic, will issue a reportlater this year . That report willencompass both the life/healthand property/casualty insuranceindustries. Among the many sol-vency safeguards being studiedby this group of the nation'sleading actuaries is an approachthat would be patterned on theappointed actuary system that isin place in the United Kingdomand Canada .

The Board of Governors ofthe Society of Actuaries hasissued, through the task force, a

Actuary Dozier Appointedto ERISA Advisory CommitteeP ension actuary R . Williamr Dozier, Jr. of Oklahoma City

accepted a three-year appoint-ment to the ERISA AdvisoryCommittee in November

1991. The advisory committee hashad a statutory role since 1974,when Congress passed the Employ-ee Retirement Income Security Act(ERISA). As Dozier notes, "weadvise and counsel the U.S. Secre-tary of Labor through our deliber-ations on health, welfare, and pen-sion plans."

The ERISA Advisory Commit-tee is composed of fifteen mem-

hers. Other committee membersinclude representatives fromaccounting, insurance, invest-ment counseling, investmentmanagement, corporate trust,employees, employers, and thegeneral public .

Dozier, who had his own pen-sion consulting firm for manyyears, is now chairman of theboard emeritus of Fringe BenefitsDesign, Inc . "I've always wantedto serve government in somecapacity," Dozier comments. Lastyear he became aware of theopening and contacted the

public statement on life insurancesolvency. Their statement reads :

"In recognition of the signifi-cant changes in the operatingenvironment for the life insur-ance business in the UnitedStates, the Board of Governors ofthe Society of Actuaries pointsout to observers and analysts ofthe U .S. life insurance businessthat the statutory Annual State-ment of a life insurer presents itscurrent financial conditionaccording to legal standards. Byitself, the Statement is not suffi-cient to assess future solvency andfinancial strength. Evaluation ofa life insurer's future viability andfinancial strength over the longterm must include, at a mini-mum, actuarial analysis of risk,considering current and possiblefuture conditions."

The Academy's Task Force onInsurer Solvency plans to meetwith members of Congress, theBush administration, and theNational Association of InsuranceCommissioners following therelease of its report.

"Restoring public confidenceis critical to the continued healthof the insurance industry," saidJim Murphy, executive vice presi-

Continued on page 8

R. William Dozier, Jr .

Department of Labor. "I've beenreally active in pension worksince 1962 . I told them what I'dbeen doing and would do in thefuture. They asked me to repre-

Continued on page 5

AMERICANACADEMY OFACTUARIES

PresidentHarry D . GarberPresident-ElectJohn H . Harding

Vice PresidentsRobert H . Dobson

R . Stephen RadcliffeRichard H . SnaderMichael A. WaltersLarry D . ZimplemanSecretary-Treasurer

Thomas D. LevyExecutive Vice

PresidentJames J . Murphy

EXECUTIVE OFFICE1720 I Street, NW

7th FloorWashington, DC 20006

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

MEMBERSHIPADMINISTRATION

Woodfield Corporate Center475 N . Martingale Road

Schaumburg, 1 60173-2226(708) 706-3513

THE ACTUARIALUPDATE

Committee on PublicationsChairperson

Roland E . KingEditor

E . Ton! Mulder

Executive EditorErich Parker

Associate EditorsGary D . Lake

Stephen A . MeskinCharles Barry H. Watson

Managing EditorJeanne Casey

Contributing EditorKen Krehbiel

Production ManagerRenee Cox

The American Academy atActuaries

1720 I Street, NW7th Floor

Washington, DC 20006

Fax: (202 ) 872-1948 cover all of the major elements

presidentClosingProfessional Gapsby Harry D . Garber

W hen I started my actuarialcareer, actuaries toiled inobscurity and were littleknown outside of theinsurance industry. After

all, most benefits, including pen-sions and employer-sponsoredhealth benefits, were financed onan insured basis, and there wasno question that insurance com-panies, life and casualty, wouldmeet the obligations under theircontracts.

How different our world istoday! The security of employeebenefits has been an importantpolitical issue for the past twodecades. The savings and loandebacle, the weakness amongcommercial banks, and the recentfailures of large and prominentinsurance companies-all exacer-bated by press attention and con-cern-have directed considerablelegislative and regulatory atten-tion to the issue of insurancecompany solvency . And, in thisprocess, the critical role of theactuary has been identified andmagnified . Actuarial opinionshave replaced or supplementedspecific legislative and regulatoryrequirements .

This increased reliance on ourprofession is likely to continue .For example, current insurancecompany solvency tests measuresolvency only at one point . If sol-vency measurement is to assume,as it must, a dynamic posture,

(202) 223-8196- --ac4uarial opinions will need to

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

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

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

for an insurance company's oper-ations, and the work of the actu-ary will be greatly expanded.

The spotlight on our profes-sion is not limited to legislativeand regulatory matters. Account-ing requirements for insurancecompanies, pension plans, andpostretirement benefits undergenerally accepted accounting

principles (GAAP) have high-lighted the key role of actuariesand of actuarial services.

With increasing reliance onactuaries to ensure the safety andsecurity of employee benefits andthe solvency of insurance compa-nies, the public expects that theactuarial profession will ensurethat actuaries meet the require-ments of the roles assigned . Theleaders of the profession have rec-ognized this . Within the lastdecade, the necessary infrastruc-ture for a public profession hasbeen established .

The essential elements of thisinfrastructure are a code of con-duct; an organization to establishand to maintain standards ofpractice, the Actuarial StandardsBoard; an organization to counseland to discipline members, theActuarial Board for Counselingand Discipline ; and a process toevaluate and to establish qualifi-cation standards . Although theexistence of this infrastructure isa necessary condition for meetingthe obligations of the profession,it is not a sufficient condition .The principles and practices ofthat infrastructure must also bereflected in the recommendationsand actions of practicing actuar-ies.

If actuaries frequently violatethe code of conduct, ignore thestandards of practice or takeassignments for which they arenot qualified, the carefully con-structed infrastructure will be dis-counted by our publics and bythe regulators. The professionmay have a problem in this areabecause there appears to be a gapbetween the needs recognizedand addressed by the leadershipand the understanding andactions of the members .Although some of the evidencesupporting the existence of such a

gap is anecdotal, the indicatorsare: (1) the response rate to ASBrequests for comments on ex o-sure drafts typically is lowstatutory opinions filed by aaries are sometimes incomplete,and (3) many company actuariesincorrectly believe that standardsof practice apply only to consul-tants or chief actuaries . It is clearthat we must close this gap .

The Academy's Committee onProfessional Responsibility isstudying the issue and has devel-oped several recommendationsfor consideration . While theseactions are a good start, theobjective will be reached onlywhen each of us understands thatprofessional work requires a life-long commitment to self-improvement through continu-ing education, experience, andpeer review, and we each make acommitment to follow the stan-dards of the profession and, tothe extent feasible, to participatein their formulation .

There is a gap of a somewhatdifferent nature in the public pol-icy arena. A quarter century a oour predecessors recognizeda public profession needetake part in the development oflegislation and regulation . TheAcademy, which was establishedfor this purpose, has achievedconsiderable standing with theNational Association of Insur-ance Commissioners and onCapitol Hill, despite the handi-caps of the small size of the pro-fession in the United States, theexistence of multiple organiza-tions representing actuaries, andthe lack of formal public recogni-tion.

The Academy is often asked tomake statements on public issues ;it also makes statements in theinterest of the profession and thepublic it serves. Many actuariesbelieve that the profession shouldnot make any public statements .Others believe that such state-ments should reflect onlyresearch of the profession or theactuary's professional interest inthe issue. I believe that limit'the profession so narrowly mieither exclude it from seminalpublic debates or limit its role inthese debates . However, I alsobelieve that we should not take

I Continued on page 8

2 The Actuarial Updates March 1992

leverst TO THE EDITOR

erience Required?

I n the March 1991 Update, H.J .Brownlee questioned theimportance of the experience

requirements for membership inthe Academy . Before readingthat article, I tended to think weshould increase the experiencerequirement . Brownlee made arather convincing argument fordropping it altogether . While Iwill reserve my judgment on theexperience matter for a latertime, I would like to explain theshortfall I see in our currentmembership requirements, whichwould worsen if the experiencerequirement were dropped .

As a member of the Society ofActuaries (SOA), I can only speakfrom that side of our profession .

Consider: (1) Many new asso-ciates have had no experience withprofessional standards. We do notcome into this profession with a

41 y developed sense of profes-nalism. The SOA associateship

exams do not introduce us to pro-fessional standards. (2) Most newassociates have their minds focusedon the next big hurdle-fellowshipexams. They have neither the timenor the interest to study the stan-dards of the Academy. (3) Unlikethose of us who have been Acad-emy members for several years,these new associates have not hadcontinual exposure to talk aboutthe professional standards. Associ-ates may not be aware of howimportant these standards are. (4)Some new associates are in ratherisolated positions, without a senioractuary to guide them into theirprofession. Their main contact iswith the managements of theircompanies. These managers wantactuarial opinions. They may notunderstand, be aware of, or evencare about the Academy's stan-dards. I don't know how commonthis situation is, but it does exist.

e Given the first three observa-ns, and sometimes the fourth,

'-would it be surprising if a newmember of the Academy gave anactuarial opinion that did notcomply with our standards? Or ifan opinion were given in some

area by an actuary who did notsatisfy our qualification standardsin that area? Such opinionscould be given in complete igno-rance of our standards, by peopleof otherwise high integrity .

It seems to me that we needsome way to emphasize theimportance of standards to newmembers, before they're calledupon to express actuarial opin-ions . Perhaps the Academy coulddevelop something similar to theSociety of Actuaries' Fellowship

notes& COMMENT

Enough Already!By Richard S . Foster

R eaders of The ActuarialUpdate have no doubtnoticed the prolonged dis-cussion of whether SocialSecurity's actuarial balance

should be calculated by the "pres-ent value method" or by the"modified average cost method ."This debate has gone on for overfour years, with neither sideshowing any sign of yielding .

I would like to say "enoughalready!" We are wasting whatlittle actuarial influence we haveby continuing to argue the respec-tive positions so rigidly . The factis, under normal circumstancesboth methods produce fairly sim-ilar results . For example, consid-er the long-range actuarial bal-ances for the Old Age, Survivorsand Disability Insurance (OASDI)and the Hospital Insurance (HI)programs :

While the differences betweenthe two methods are not trivial,the same overall financial pictureemerges with either one . Thus, ifone of these methods is valid, theother can hardly be inappropriate .

I would much rather see usdevote our expertise to moreimportant Social Security con-cerns.

-Although OASDI appears tobe accumulating a large reserve tohelp meet the impending finan-cial burden of the baby boom's

Admission Course, which includesa section on professional ethics,

Granting membership to inex-perienced actuaries without suffi-cient education in standardsinvites violation of our standardsby people of high integrity whosimply don't know any better .This is a disservice to them andan insult to the profession. It canhappen now, even with our cur-rent experience requirements .

Steve MalerichCedar Rapids, Iowa

retirement, in many experts'opinion the reserve will not easethe burden whatsoever .

-The OASDI taxes scheduledin present law are projected to besufficient to meet only aboutthree-fourths of the cost of theprogram in 2040 and later .

-Correcting the long-termfinancial shortfall projected forthe HI program would requiretaxes to be immediately doubledor benefits to be cut in half .

-The combined cost ofOASDI and HI is projected toreach 25% of taxable payroll whenthe baby boom is fully retired,compared to 14% today. Manyanalysts believe that society wouldbe unable to support such costs .

None of these issues is beingseriously addressed by the nation'spolicy makers at this time .Wouldn't the actuarial professionbetter serve the public by directingmore attention to such problemsand their solutions, rather thancontinuing to argue about rela-tively minor differences inmethodology?

Foster is deputy chief actuary forthe Social Security Administration .

Long-range ActuarialBalances

Program Assumptivns Modifiedaverage

cost method

Presentvaluemethod

OAS[I rapt Ill Htic 1:22% 1 .34%IntPrmediat 1 .59 -1x38PessirnStc -5'8 -4 .12

H' Oo} rniSti: -3,97 -3 .81In terlrnedia'e -3 .79 -3 .35Nr, ;;simisllc -9 .21 -8 .03

The Actuarial Update ∎ March 1992 3

Regulatory Actuaries on the Forefront :John Montgomery and Ted BeckerA s chairperson and vice chairperson of the NAIC Life and Health

Actuarial Task Force, Chief Actuary and Deputy Insurance Com-missioner John Montgomery (Calif.) and Chief Life Actuary TedBecker (Tex.), along with the regulatory actuaries on their taskforce, do much of the behind-the-scenes (technical) work on life and

health insurance regulation .Update Managing Editor Jeanne Casey met with them during the

December NAIC meeting in Houston .

The company'sbottom line shouldnot only be profitsfor the company's

managementbut also a high

degree of fiduciaryresponsibility.

People so often losesight of that fact .

THE UPDATE: When was theLife and Health Actuarial TaskForce organized?

MONTGOMERY: We had ourfirst meeting back in 1973, at thewinter NAIC meeting in LasVegas. I had just come into theCalifornia Department of Insur-ance. I realized, along with otherregulatory actuaries, that a basicaspect of any solvency review wasthe actuarial end of things. Weneeded an actuarial task forcewithin the NAIC to look intoreserve adequacy.

As it happened, the EquityFunding investigation was beingconducted by the U.S. Attorneythat year, a case that I document-ed to computer fraud. A deputyfrom Scotland Yard interviewedme regarding the documentationof the fraud . Frankly, after all thepublicity, I had little trouble get-ting the actuarial task force start-

I ed later that December .

THE UPDATE: Could youbriefly describe the Life andHealth Actuarial Task Force'srole?

MONTGOMERY: The task forcereviews all actuarial aspects of lifeand health insurance regulationfor the NAIC. We work with var-ious groups within the NAIC todraft model laws, regulations,and guidelines that have actuarialaspects, such as the standard val-uation laws and the standardnonforfeiture laws. We also draftthe actuarial guidelines found inthe NAIC Financial ExaminersHandbook .

Other NAIC task forces andcommittees often seek our adviceon the actuarial aspects of regula-tion or legislation that they are

drafting . On occasion , we havedetected problems and suggestedthat some changes be made .

THE UPDATE: What regulatoryissues are on the horizon for yourtask force?

MONTGOMERY: Solvencysurveillance is certainly a keyissue. An insurer's primaryresponsibility is to maintain astrong financial position so thatall benefits it guarantees can bepaid to the policy- or contractholder. The company's bottomline should not only be profits forthe company's management butalso a high degree of fiduciaryresponsibility. People so oftenlose sight of that fact.

In addition, the task force willbe looking at the assumptionsunderlying cash-flow projectionsrequired under the new valuationactuary regulation and will beworking to strengthen further therole of the valuation actuary .

We'll also be watching therisk-based capital project. There'sno telling how the risk-basedcapital formula is going to workuntil it has been around for awhile. Of course, it will changeover time to accommodatechanges in the industry, as doother regulatory measures .

Consumer protection is anoth-er concern: We'll examine mis-leading advertising and sales illus-trations, and inequitable nonfor-feiture values . We want to detectinsurance products that are of lit-tle value to the consumer .

THE UPDATE : There may besome concern that the SecondStandard Nonforfeiture Law thatwas released for exposure is goingto limit methodologies and

assumptions that the actuary canapply,

MONTGOMERY: Yes, it wiwe don't set some limits ilaw, we're going to get too manyfantasies.

BECKER: Some people thinkthat if you just disclose everythingabout an insurance policy, that'senough. I think that some thingsare just not appropriate in a poli-cy, whether they are disclosed tothe consumer or not .

THE UPDATE: Do you thinkthat the new appointed actuaryregulation may actually help toprevent insurer insolvencies?

BECKER, Yes, I believe it willhelp prevent insolvencies . Forexample, there are some caseswhere life insurance companieshave a substantial volume ofproducts that have disintermedia-tion risk and yet have not beendoing cash-flow testing . Underthe new regulation, such compa-nies would have to begin makingcash-flow tests. Moreover, a com-pany must inform the regulaif it dismisses its appointed acary. The regulators can thencheck into why the action wastaken . One possibility is that theformer actuary would not agreeto sign an unqualified actuarialopinion because of the company'sfinancial condition.

Of course, the appointedactuary concept is relatively new .It should not be expected toprevent all insolvencies, but it is amove in the right direction .

MONTGOMERY: We have comea long way with the 1991 appoint-ed actuary regulation. Now insur-ance departments will have the bigjob of evaluating the actuarialopinions and supporting memo-randa. The cash-flow assump-tions are very important, and fromwhat I've seen already, we're goingto have a lot of difficulty acceptingsome of the assumptions actuariesare using. I think that we will haveto request second opinions Msome instances. The validitythe assumptions is extremely vital-'because just a slight change tothem could obscure the fact that amarginal company is having prob-lems. Actuaries will have to be

4 The Actuarial Update ∎ March 1992

educated as to what are appropri-ate assumptions for these projec-tions .

tit UPDATE: Do you thinkthe appointed actuary regu-

lation may expand in the futureto include an actuarial opinionon surplus adequacy?

MONTGOMERY: Yes, but onlywhen actuaries and regulatorshave sufficient experience review-ing the valuation opinions on theadequacy of assets supportingreserves and the cash-flow projec-tions . The expansion of the tech-nology related to the valuationactuary process will eventuallyinvolve the testing of surplus ade-quacy. I don't think there's anyquestion about that. Such testingwill be needed to augment themore empirical risk-based-capitalapproach to solvency surveillance .

We really have a number ofsolvency surveillance measures,and they all fit together. Therisk-based capital approach is butone empirical approach, anotheris the present financial ratio sys-

4 t m, which may ultimately berporated into the risk-based

pital formula . Then there isalso the multivariant analysisproject being conducted by theNAIC Life and Health FinancialRatios Group (an even moresophisticated approach) .

The risk-based capital formulais really a super-duper financialratio in itself. To get to the finalrisk-based capital ratio, the for-mula has to look at all the variousassets, lines of business, etc .,which all have factors attached tothem. It's really like a recipe foran Irish stew . And to extend themetaphor, I think it's also goingto have to cook for a while beforewe know how it tastes .

THE UPDATE : The NAIC isincreasingly referencing stan-dards of practice issued by theActuarial Standards Board (ASS)in model regulation. Is there anyway that the standards programcould more effectively serve the

Aeblic and regulators as well as,WrEuaries?

BECKER: Perhaps these stan-dards of practice could be givenmore publicity. This mightinclude a series of articles in suc-

cessive issues of The ActuarialUpdate emphasizing parts of thestandards program, with the ideathat the series as a whole wouldcover at least the current set ofstandards rather comprehensive-ly. After each article, there couldthen be an invitation for actuar-ies to submit written questionsfor the ASB to answer. The ques-tions and answers could then beprinted in a subsequent issue.

The ASB could also prepareand mail out a "quiz" on actuari-al standards to all Academymembers. There might be threeor four different versions of thequiz available, one for each prac-tice area. Those members whowished could take the quiz. TheASB would then send out theanswers several months later.

Of course, the whole purposeis to allow individual actuaries toevaluate their own knowledge ofthe standards and help them todetermine what they still need towork on. New standards of prac-tice could be added to the quiz asthey are promulgated by the ASB .

THE UPDATE: There's one finalquestion that I would like to askboth of you . Do you have suffi-cient actuarial support withinyour department? If not, what ifany remedies are being proposed?

BECKER: The Texas Departmentof Insurance could make gooduse of additional qualified actu-aries . A bill that passed in 1991indicated that the insurancedepartment probably still neededadditional actuaries and examin-ers to monitor the solvency ofinsurance companies effectively .An appropriations act for thedepartment that mentions actu-

, from page I

sent the actuarial consultingfield ."

Dozier has had previous expe-rience advising the government ona more informal basis. In 1988,the Internal Revenue Service'sDallas field office set up a relation-ship with area practitioners toadvise its Exempt Plans/ExemptOrganizations Division. Accord-ing to Dozier, the relationshipworked very well. He just recently

aries as possi-ble "exempt"employees-and thereforenot subject tolimitationsunder the state'snormal payscales-is stillbeing reviewed .In addition, wehave availablesome separatefunds for actu-arial trainees .(Those fundsarose out of aspecial settle-ment made bycertain insur-ance compa-nies with the Texas AttorneyGeneral's Office .) We had twowith us last summer and havetwo again this fall .

One real advantage to workingfor a state insurance departmentis the opportunity you have tomeet and talk with top actuariesfrom many different companies .

MONTGOMERY: I agree .Nowhere but in a state insurancedepartment do you get to workon such a broad range of issuesrelated to insurance .

The California InsuranceDepartment has had its ownactuarial training program for anumber of years . I like the waythis internal training program isworking, and I think that it mightgo a long way toward easing ourstaffing problem.

We currently have five casual-ty actuaries and one life actuaryin training . One life actuary actu-ally became a fellow of the Soci-

Continued on page 6

went off that committee .What's on the ERISA Adviso-

ry Committee's agenda this year?Four projects are planned : (I) apaper discussing extending theDepartment of Labor's authorityto help participants who aredenied their pension benefits, (2)a paper on pension fund invest-ments, (3) a study on health care,and (4) a paper on pension plancoverage and adequacy of bene-fits, with particular focus onsmall business. ∎

Becker andMontgomery(foreground) tackleregulatory issues head-on .

The Actuarial Update - March 1992 5

CALENDAR

Sac'~ety of Acluaries Spring Meeting(Health Pensions .Reinsurance, andManagement)April 6-8

Actuarial Stan-dards'Bdard

;,April 8-9

Actuarial Board' forCounseling andDiscipi'neApril 8-9

Casualty ActuarialSociety SpringmeetingMay 10-13

Council ofPresidentsMay 13

Health PracticeCouncil MeetingMay 13

Acaderny Board ofDirectors MeetingMay 14

Society of Actuarins Spring Meeting(Pensions . Invest-ments . Nontradi-tional Marketing ,and Manage WentMay 21-22

InternatioonatAssociation ofConsulting`ActuariesMay 24-29

International Actuaria[ Association'May 31-June 5

Canadian Instituteof Actuaries'Annual MeetingJune 8-9

Society of Actuar!as ;Spring Meeting;(Product D evelop-'ment and Financial'Reporting)June 11-12

Academy AnnualMeetingSeptember >30

Academy Committee Meetswith AICPA on Proposed SOPby Stephen Meskin

0

n February 6, the Academy'sCommittee on Health andWelfare Plans met with atask force of the AmericanInstitute of Certified Public

Accountants (AICPA), at theirinvitation , to discuss the AICPA'sproposed statement of position(SOP), Accounting and Reporting

I by Health and Welfare BenefitPlans .

Under the proposed SOP, aplan's financial statements mustinclude, if applicable, an accruedpostretirement benefit obligation(APBO), calculated using themethodology for Statement ofFinancial Accounting Standards(SFAS) No. 106 . The financialstatements must also include an

obligation for accumulated eligi-bility credits for active planmembers. Additionally, thesetwo obligations would be pre-sented-along with liabilities forpremiums due, claims due, andclaims incurred but not paid-off the balance sheet, either in afootnote or separate statement.

The AICPA task force hadthree questions for the Academycommittee: Is it possible to com-pute the APBO for multiemploy-er plans? Are there significantdata problems involved? What isthe cost of computing the APBOfor multiemployer plans? Thecommittee answered "no," "yes,"and "high," respectively .

The committee members said"no," in practice it was not possi-ble to compute the APBO,

ASB Compliance Guidelineon SFAS 106by John Bertko development of plan provisions

n December, the ActuarialStandards Board (ASB) releasedI an ambitious exposure draft ofa compliance guideline forStatement of Financial Account-

ing Standards (SFAS) No. 106,Employers', Accounting forPosteretirement Benefits OtherThan Pensions. The exposuredraft was developed by the ASBRetiree Health Care Committeein response to actuaries' needsfor interpretation and assistanceas they worked with the new setof accounting rules .

This compliance guidelinerepresents a new tool for actuar-ies and is a welcome addition tothe actuarial literature for retireehealth benefit valuation. Thistool will be especially useful forthose actuaries who are justbeginning to perform SFAS 106valuations or for actuaries whoperform a limited number ofthese calculations each year. Thediscussion of factors affecting

and per capita claims costs shouldbe particularly helpful .

Readers should be aware thatnot all important questions areanswered in the complianceguideline. Further guidance isneeded on critical issues such asthe substantive plan . Of course,not all issues could be covered ina single document . For example,there is the practical question ofwhere an actuary can obtain reli-able per capita costs for a compa-ny with few retirees .

This compliance guideline isone new means of assisting actu-aries who are entering a develop-ing field, retiree health benefits .Everyone is encouraged to readthe compliance guideline andsubmit comments to the ASB .

Bertko is chairperson of theAcademy's Committee on Healthand Welfare Plans . Thiscommittee has commented andtestified frequently on SFAS 106.

because of the SFAS 106 defaultattribution methodology. SFAS106 requires that the APBO for anactive plan participant be talced as a fraction of the participtotal expected postretirement ben-efit obligation . The fraction isequal to the ratio of the number ofyears-of-service from date of hireto the number of years from thedate of hire to the date of full eligi-bility. The committee pointed outthat "date of hire" and "years ofservice" are not meaningfulnotions for most multiemployerplans; thus, SFAS 106 could not beapplied . After heated discussion,the task force seemed to under-stand the committee's position.

The committee raised otherissues, such as whether the threecurrent liabilities should beremoved from the balance sheet,but the ideas were generally dis-missed by the task force .

The committee recommendedthat the AICPA statement of posi-tion allow actuaries flexibility inapplying the SFAS 106 methodol-ogy to multiemployer plans . Thecommittee also suggested thatAccounting and ReportinHealth and Welfare Benefit Pbe re-exposed and its effective datebe delayed. Whether the task forcewill take up these suggestionsremains to be seen .

John Bertko, Stephen Meskin,and Neela Ranade were thecommittee's representatives atthis meeting.

( Y & BEW from page 5

ety of Actuaries, having complet-ed the entire series of examina-tions while employed by thedepartment. Even if the actuarialstudents don't stay with us, theirexperience within the depart-ment will make them more valu-able to the industry, and that's apositive incentive for them tostart out with us . Also, it can'thurt the department to have afew of its former trainees outthe industry

. ot

THE UPDATE: Thank you bothfor your candid comments on thechallenges you face as regulatoryactuaries. ∎

6 The Actuarial Update ∎ March 1992

0

CapitolLong-term Care Insurance

On January 21, Senator EdwardKennedy (D-MA) introduced theLong-term Care InsuranceImprovement and AccountabilityAct. This bill would create aLong-term Care Insurance Stan-dards Commission composed ofactuaries and members of theinsurance profession . The legis-lation would also establish federalstandards for long-term careinsurance, such as guaranteedrenewability.

PBGC Legislation Introduced

H.R. 4114, legislation introducedJanuary 24, would amend Chap-ter I I of the bankruptcy code toallow the Pension Benefit Guar-anty Corporation to be appoint-ed to creditors' and equity securi-ty holders' committees . Repre-sentative Schumer (D-NY) intro-ed the bill .

Health Care Coverage

Legislation to amend the TaxReform Act of 1986 was intro-duced by Congressman Glickman(D-KS) on January 24 . This bill,H.R. 4109, would extend theperiod of employer-providedhealth care coverage to six years .The Consolidated Omnibus Bud-get Reconciliation Act of 1985(COBRA) currently requiresemployers to offer health carecontinuation coverage to employ-ees for eighteen months after ter-mination of employment ortwenty-nine months for individ-uals with Social Security defineddisabilities. H.R. 4109 does notaddress the provision in COBRAthat allows employers to charge100% of the premium plus anadditional 2% for administration .

Health Care Reform Legislation

0 January 22, the Senate Laborand Human Resources Commit-tee approved the Democratichealth care legislation, "HealthAmerica," by a party-line vote of10-7. The bill would require all

employers either to providehealth benefits to their workersor pay a tax to finance a newpublic program, "AmeriCare ."AmeriCare would also replace theMedicaid program by providingbenefits to anyone not covered .through an employer . The meas-ure allows states to opt out of thesystem and set up Canadian-styleprograms or other systems pro-viding universal coverage .

This bill is a watered-downversion of S.1227, sponsored bySenator Mitchell (D-ME) . Thefinancing provisions wereremoved from the legislation inorder to bypass the SenateFinance Committee . SenatorBentsen (D-TX), chairman of theSenate Finance Committee, hasbeen reluctant to take up this billand has been pushing a moremoderate one. Bentsen nowcomes under pressure from thedemocratic leadership to take upthe financing mechanisms ofS.1227. The proposed legislationis expected to come to the Senatefloor for a vote this year .

Insurance Consumer Fraud

The conference report on H .R .3371, the Violent Crime Controland Law Enforcement Act of1991, was approved by the Houseon November 26, 1991. The bill

remains on the Senate calendarafter a cloture motion failed toforce a vote on the conferencereport on November 27 . H.R .3371 contains an insurance con-sumer protection section that, forthe first time, would establishfederal criminal penalties forinsurance fraud .

Regulatory Actions to Note

The Internal Revenue Service(IRS) revised its lists of requiredmodifications (LRMs) fordefined-contribution master andprototype plans and regionalprototype plans on December 31,1991 . On January 1, the IRSannounced 1992 limits for quali-fied pension plans.

The following week, the IRSissued revised procedures for issu-ing determination letters for qual-ified plans and revised proceduresfor issuing technical advice forqualified pension plans .

In addition, the IRS issuedfinal salvage and reinsurance reg-ulations for property/casualtyinsurers on January 27.

If you would like more informationon the above regulations, pleasecall Government InformationSpecialist Christine Sand at theAcademy's Washington office.

PROPO$fflON 103 PUT ON HOLD?On January 10, the California Office of Administrative Law (GALL) disapproved Proposition 103 regula-tions submitted by the Califorma Department of Insurance . At the same time, the DAL disapproved theextension of the current' emergency regulations that had been in effect since August 31 , 1991 In addi-tion January 23, the DAL disapproved new emergency regulations, which virtually mirror the originaltegu :a' one . Proposition 103 is the initiative , approved by California voters in 1988 , that establishes asystem of prior-approval rating ' for property/casualty Insurers in California and mandates a one-time roll-back in certain insurance rates .

The California OAL screens ali new state regulations to make sure they are clear , necessary andauthorized by law . According to Mart Garcia, director of the DAL, the regulations tailed to satisfy 'thenecessity, authority, clarity , consistency, and reference standards" of the law . This is seen as a major set-back 'for Insurance Commissioner John Garanlendi . These ''regulations are needed for Garamendi to orderS2.5 b'llion in auto insurance rebates . Without these regulations, . Garamendi lacks the legal authority toconduct the hearings that would set the amount the insurance companies owe their policyholders .

Th s DAL action has reopened the debate an the validity of Proposition 103, Many insurance compa-nies uppose the regulations because they fail to recognize the "flexibility needed in a competitive market

"plai;e The DAL decision supports the opinion that the proposed regulations go beyond the commission-ser's authority.On January 30, the department appealed toe OAL decision to the governor ' s office . Governor Wilson,

who appointed Garcia and has authority - o overrule his appointee ' s decision, can approve the regulations .Proposition 103 will not 'be in effect until Ine DAL or the goveincr ' s office approves permanent or emer-gency regulations .

The Actuarial Update • March 1992 7

0I S.B. 240ACTUARIAL

PEER REVIEWIn December,

eight actuaries 'met in Columbus .

Ohio to partici-pate in a first-of-its-kind actuarial `

peer review .The meeting wasconvened at therequest of Ohio

legislators, Sena-tor Robed Ney

and Representa-tive Wayne Jones, , ;

supporters ofSenate Bill 240,Ohio's proposed

small-grouphealth insurance

reform legislation .

Tim Harrington ofthe Academy

Health Commit-tee served as

facilitator . Themeeting was

intended to bringtogether the actu-aries who made

different costestimates of

Ohio's proposedsmall-group

health insurancereform, legislation

to determinewhether a more

focused estimatewere possible .

None` of theparticipants

expected an easysolution . Har-rington stated'

afterwards ."I believe that w edid what we. set

out to do ."

Look for a reportin a future'

Uplalte .

Meet General Counsel Lauren Bloomauren Bloom joined theAcademy staff as generalcounsel this January. She isstaff liaison to the newlyestablished Actuarial Board

for Counseling and Discipline(ABCD) . She expects to takemembers' calls about Academybusiness and qualification stan-dards as well.

"My effectiveness as generalcounsel will be directly propor-tional to the degree that themembers feel comfortable callingme with questions about theAcademy and the ABCD," saysBloom .

Bloom believes that her pro-fessional background willenhance her work with theABCD. Upon graduation fromlaw school, she joined the jus-tice Department's Civil Divisionas a trial attorney, under theAttorney General's honors pro-gram. "That was a fun job . Iwas trying cases while my class-mates in law firms were slavingin the library." She then becamea litigator with a private firm forfour years, before coming to the

FROM THE PROMM from page 2

public policy positions untilthere has been full discussionand debate within the professionand the positions taken repre-sent a broad consensus of theviews of the profession . Thereare several current issues thatmerit this level of attention bythe profession, including lifecompany solvency, health care,and national pension policy . Itis my hope to begin the processof closing this gap by developingat least one of these issues forconsideration and debate by ourprofession before the end of theyear .

There are fewer and fewerplaces where the work of theactuary is insulated from publicinterest, concern, and attention .Like it or not, matters that mostactuaries work on (pensionplans, health plans, insurance

Lauren Bloom, the Academy's newgeneral counsel

Academy. Her clients includedprofessional and trade associa-tions . She assisted a trade-school accrediting body todevelop and apply its accredit-ing standards . "The best way toreach reasonable decisions is toestablish fair procedures andthen make sure they're fol-lowed," she noted . "I'm pleasedto say that I never lost a case Iargued for the accrediting com-

contracts) are the subject ofintense public and regulatoryinterest and attention. The lead-ership of the profession hasresponded to these events expedi-tiously and effectively, but, in sodoing, has created a gap between

I"JSUHER SOWBVCY, from page 1

dent of the Academy . "The regu-latory oversight of the industry isbeing scrutinized by state andfederal legislators-especially inthe wake of the savings and loandebacle . The time is right for theactuarial profession to take aclear stand on this issue and,through the profession's uniquequalifications, to assist in mak-ing the regulatory system workbetter ."

"Helping to prevent insurancecompany insolvencies is a toppriority of the actuarial profes-sion," said John H. Harding, task

mission, in large part becausewe were careful to follow therules."

Bloom graduated from Yal1979 with a bachelor' s degrrEnglish . She then worked for theNew York State legislature beforegoing to law school. In 1985, shegraduated first in her class fromCatholic University Law School.In 1991, she completed a master'sdegree in labor law at George-town Law School, again withhonors .

What's on her docket at theAcademy? First and foremost,she wants to help get the ABCDup and running. There are somepending cases that were trans-ferred to the ABCD from theAcademy's Discipline Commit-tee. "We need to become opera-tional quickly so that those peo-ple get a fair hearing," she says,adding, "Justice delayed can bejustice denied ."

The ABCD will meet onFebruary 28 to consider draftprocedural guidelines . "Theseare very reasonable people," saysBloom, having met the newboard's members. "They wa qftbe fair, they want to be carWorking with them will be apleasure." ∎

the leadership and the vast bodyof members. If the profession isto take full advantage of theopportunities available, we mustclose this gap. That is a majorchallenge to all of us in the nextfew years. ∎

force chairperson and president-elect of the Academy . "Our goalis to author an aggressive planfor minimizing and managinginsolvency risk. The professionis really pulling together onthis ."

To support the work of thetask force, the Conference ofConsulting Actuaries has com-missioned background studieson such topics as past insolvties, the historical role ofactuary in financial reportinthe history of financial reinsur-ance and fronting, and actuarialfinancial reporting systems inother countries. ∎

8 The Actuarial Update ∎ March 1992