THIS MONTH2

From a Guest President

346 Letters to the Editor

4Committee Will Review

Continuing Ed5

Standards Outlook

6Academy Active in

Health Care Reform7

Capitol Views

ENCLOSURESIncluded with this month's

issue of The Actuarial Updateare the following:

In Search Of

ASB Boxscore

ASB Annual Report

CLRS Brochure and Reply Card

Committee ServiceRequest Card

Enrolled Actuaries MeetingCassette Order Form

AMERICANACADEMY OFACTUARIES

VOLUME 22NUMBER 5

MAY 1993

Pension Actuaries Sound RetirementAlarm for Baby Boom RetireesBy Ken Krehbiel

T he United States retirementsystem is at a crossroads, andif public policy makers donot seek solutions now, by2010 we could face a social

problem the magnitude of today'shealth care crisis, Larry Zimple-man told legislators and reportersin Washington on April 21,

Zimpleman, Academy vicepresident and chairman of itsPension Practice Council, wasjoined by Ed Hustead and GreggRichter. They addressed separateparts of the retirement system,first in the U .S . Capitol at a brief-ing for congressional staff, then ata press conference at the NationalPress Club as part of the actuarialprofession's Forecast 2000 pro-gram .

Ed Hustead, member of theAcademy Committee on SocialInsurance, spoke about the futureof the Social Security system, andAcademy Pension Committeemember Gregg Richter addressedthe current state of the PensionBenefit Guaranty Corporation(PBGC) .

Richter presented pros andcons of three possible solutionsto the PBGC's $2.7 billion short-fall, as stated in the PBGC's 1992annual report. Richter recom-mended reducing plan sponsors'

risk rather than cutting partici-pant guarantees or increasingemployer premiums, two otherpossible solutions. He said thatlarge risks and high-profile planfailures damage public confi-dence in the private pension sys-tem and in the PBGC. In orderto address both problems, public

policy and PBGC reform shouldfocus on plan funding and reduc-ing plan sponsors' risk.

According to Richter, reduc-ing participant guarantees wouldreduce the value to workers andundermine the program's initialintent. He also advised againstincreasing premiums thatemployers pay into the system,because most employers canchoose not to sponsor a definedbenefit plan ; the only employerswho have no choice are thosewho have very underfundedplans.

This could present a scenariofor a classic underwriting spiral :raise premiums so that good risks(well-funded plans) leave-the sys-tem; then premiums need to beraised again, which drives outmore good risks; and finally onlythose that cannot leave (preciselythe plans that pose the greatestrisk to the PBGC) remain .

Hustead explained that theSocial Security system was notcreated to be the primary source

Continued on page 8

Forecast 2000, the North Americanactuarial profession's public relationscampaign has won the Silver Anvil awardof the Public Relations Society of America .

The Silver Anvil, the most prestigiousaward in the industry, is awarded annuallyto public relations efforts in fourteen =

categories . Forecast 2000 was selected the best institutional publicrelations program for 1992 . A panel of judges, fifty-five senior publicrelations professionals, awarded this singular honor to Forecast 2000,calling it "a superb, effective program that brings responsiblecommentary on public policy issues to a wide audience . The SilverAnvil ''ill be presented to Academy Director of Public Relations ErichParker at a black -tie ceremony on June 9 in New York City .

Forecast 2000 was begun in 1989, part of the celebration of, theactuarial profession's centenary in North America, and has become thepremier public outreach program for the profession . It is sponsored bythe Academy, the American Society of Pension Actuaries; the Casualty -Actuarial Society, the Canadian - Institute- of Actuaries , the Conference ofConsulting Actuaries, and the Society of Actuaries,'

AMEBiCAitiACADEMY OFACTUARIES

PresidentJohn H . HardingPresident-Elect

David G . Hartman

Vice PresidentsHoward J . BolnickStephen P . LoweWalter N . Miller

Richard H. SnaderLarry D . ZimplemanSecretary-TreasurerJames R . Swenson

Executive VicePresident

James J . Murphy

EXECUTIVE OFFICEThe American Academy

of Actuaries1720 I Street, NW

7th FloorWashington, DC 20006

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

MEMBERSHIPAUNUNISTRATION

Woodfield Corporate Center475 N . Martingale Road

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

THE ACTUARIALUPDATE

Committee on PublicationsChairman

E . Toni MulderEditor

E . Toni MulderExecutive Editor

Erich ParkerAssociate Editors

William CarrollStephen A . Meskin

Charles Barry H, Watson

Managing EditorJeffrey Speicher

Contributing EditorKen Krehbiel

Production ManagerRenee Cox

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

ters to the editor, are made on theresponsibility of the authors alone anddo not necessarily imply or represent

the position of the American Academyof Actuaries , the editors, or the

members of the Academy .

FROM

guest presidentA Vision for OurProfessionBy Waller Rugland

W hen I received the badgeand gavel of the office ofSociety of Actuariespresident, I felt enor-mous pride in being part

of such an honorable andrespected profession .

As actuaries, we hold a publictrust that I predict will continueto be unrivaled among other pro-fessions . Today, users of actuari-al expertise expect work of thehighest caliber and, rightly, holdus accountable for our work .That accountability ispart of what itmeans to be aprofession . For along time actu-aries havestruggled withthis notion ofwhether weare a collec-tion of practi-tioners or a trueprofession .

More and more,the actuarial work forceis taking on every other markof the compleat profession-weapply actuarial research to day-to-day practice, we attest that weare qualified to do the work wedo, we hold ourselves and areheld by others accountable forour work, and we have in placean effective counseling and disci-pline process .

I make this statement with nota little perspective. Twenty yearsago, I joined the AmericanAcademy of Actuaries Board ofDirectors as secretary. I've seenwhere the actuarial professionwas then; I see how far we'vecome. My tremendous pride attaking the helm of the Society ofActuaries is based in part on thesense of this profession havingcome of age .

And it is a gradual process Ihave been fortunate to witnessand perhaps even shape . Let'snote just some of the recentaccomplishments of the actuarialprofession in the United States .U We have achieved legal recog-nition of the integrity of ouremployee benefit plan assump-tions .U The Actuarial Standards Boardhas been established to promul-gate standards of practice .

D The actuarial professiondiscipline processes

have been strength-ened and stream-lined throughthe establish-ment of theActuarialBoard forCounselingand Disci-pline .

U The Academyhas set qualifica-

tion standards.0 We have pressed for

and achieved a meaningful insur-er valuation role, the "appointedactuary," which recognizes theneed for actuarial skill in the anal-ysis of an insurer's investment riskand economic health .0 The Academy publishes anaward-winning magazine, Con-tingencies, that brings the worldof actuarial thought and analysisto public policy makers and busi-ness leaders.1 For 4 years the actuarial pro-

fession has pooled financialresources to fund an issue-orient-ed public affairs campaign calledForecast 2000, which focuses pub-lic attention on actuarial exper-tise as it enlarges and enhancespublic policy debate .

These major developments, allwithin the last half decade, enable

us, with our unique set of skills,to open doors and forcefully say :"Ask us! Ask actuaries to be apart of your problem analysis andsolution."

There's no such job as "a -ary," but being an actuary meansthat we possess a host of uniqueproblem-solving skills and nativeabilities-expertise that we arelearning to apply broadly tosocial and business challenges .

In that regard, I have a visionfor the actuarial profession that Iwant to share . I see the day in the21st century when business andgovernment decision makers"Ask an Actuary" when facedwith a question of future risk andcost assessment . Share that visionwith me; wear an "Ask an Actu-ary" button. They are available inquantity from the Society ofActuaries office . The buttons giveyou an opportunity to say that youare more than a back-room techni-cian restricted to the liability sideof the balance sheet . You are alsoa useful adviser on the asset man-agement side, as advances in actu-arial education and research havepositioned us . Your knowle eand judgment afford yprominent place on the probsolving teams of any number ofbusinesses and industries .

Actuaries are heeding thisvision and realizing that togetherwe can make it happen .

Rugland is president of the Societyof Actuaries.

Put professional pride onyour lapel . Wear the "Askan Actuary" button! Toorder your supply of but-tons, contact Connie Tegel-er, Communications, Soci-ety of kctuartes, 475 N .Martingale Road, Suite800, Schauinburg, IL60173-2226; Telephone :(708) 706-3500 . Fax:17081706 3599 . Pleaspecify quantity

nee'd's

and intended usc .

2 The Actuarial Update ∎ May 1993

leversTO THE EDITOR

Clean Slate at PBGC

A

ctuaries and other pensionprofessionals have reason tohope that the Pension Benefit

Guaranty Corporation (PBGC),under newly appointed executivedirector Martin Slate, willbecome a positive force on behalfof defined benefit plans.

In congressional testimony onApril 20, Slate was thoughtfuland non-alarmist in tone-a wel-

Keeping PracticeNotes Current•onna Claire

Practice Notes were createdprimarily to assist actuariesinvolved in asset adequacy,

but they require the continuingassistance of the profession ifthey're to serve their purpose .Our goal is to update them dur-ing the summer-based on theresponse from practitioners andthe industry, so that the updatedPractice Notes will be available atthe Valuation Actuary Sympo-sium in the fall.

By now, a number of valua-tion actuaries have received the1992 Practice Notes. By keepingthe notes up to date, practitionerscan stay apprised of current prac-tices among other actuaries. Onthe whole, reaction from theapproximately 75 actuaries whohave responded has been posi-tive. The two most frequent spe-cific requests have been for revi-sions of existing standards and

notes to address additionalcs .Asset adequacy testing for

health insurance is one topicactuaries would like to seeincluded in new notes. Leonard

come change from the alienatingstyle of his predecessor . Forexample, he acknowledged thatthe PBGC has "enough cash flowand assets to meet its obligationsfor many years," and is not facedwith an imminent S&L-type cri-sis . Thus, there is time to thinkabout ways to protect its solven-cy, as an interagency task force isnow doing .

Slate will serve the public wellby maintaining a constructiveapproach. Plan sponsors needassurances that defined benefitplans can not only work well, butare a highly effective tool for cor-porate retirement planning. Inthat vein, perhaps he will now

Koloms is now coordinating theeffort for Practice Notes onhealth insurance topics. Someactuaries also requested moreinformation on reinsurance andshareholder dividends ; we arelooking for volunteers to writethese Practice Notes.

Other Information

A survey cosponsored by theAcademy and the Society ofActuaries will provide anothersource of information for Prac-tice Notes . The survey is beingsent to all those who are listed aschief actuaries for their company,and it will include questionsabout several different sources ofmaterial available to the appoint-ed actuary, including the PracticeNotes.

i

DILBERT reprinted by permission of UFS, Inc.

halt the PBGC's major effort topublicize the fifty largest unfund-ed plans, a campaign that sug-gests that conditions are muchworse than they really are . Slate's10 years of working in pensions atthe IRS may also enable him tolaunch a joint-agency effort tofocus on the reduction of com-plexity and the easing of contri-bution restrictions.

If plan sponsors come to seeour federal officials truly showingcare and concern, the decimationof the private defined benefit plansystem may yet be halted .

David LangerNew York City

Sessions at the June Post-mortem 1992 Valuation ActuarySeminar, sponsored by theFinancial Reporting Section ofthe Society of Actuaries, will pro-vide a third source of informa-tion. Current plans are to haveseveral seminar sessions on thetopics covered in existing andfuture Practice Notes.

In order for the Practice Notesto fulfill their dual purpose ofreflecting current practices andproviding guidance to those per-forming asset adequacy testing,we need your help. So keep thosecards and letters coming!

If you have suggestions orrecommendations for Practice Notes,please write or call Donna Claire,55 Shoreham Dr. East, Dix Hills,NJ 11746-6581 ; (516) 586-0112.

The Update

welcomesletters from its

readers .

Letters for

publication

should be

submitted' to

"Letters to the

Editor," and

must include

the writer's

name , address,

and telephone

number .

Letters may he

edited for style

and space

requirements,

YOU'RE ACONSULTANT.

s IRONIC .I5N'T IT?

E

Aa-l a

The Actuarial Update - May 1993 3

Committee on QualificationsWill Review Continuing EducationBy John K . Boath

n a letter to the editor in theApril issue of The Update,Ralph Healy lamented that"the Academy Board of Direc-tors establishes qualification

standards and then does little tohelp the practicing actuary fulfillthe continuing educationrequirements ."

Since the Qualification Stan-dards were first adopted in 1991,a great many members of the !,Academy have raised questionsconcerning the requirements forcontinuing education, andinquiries continue to pour in tothe Academy office . It is clearthat the Academy's members rec-ognize and wish to fulfill theircontinuing education responsi-bilities under the QualificationStandards but, sadly, it is evenclearer that many actuaries areunsure of just what those respon-sibilities might be .

At a meeting in January of thisyear, the Committee on Qualifi-cations agreed to undertake aproject that will assist actuaries todetermine whether particularseminars, meetings, and othereducational opportunities consti-tute "organized activities" forpurposes of the QualificationStandards. Actuaries who mustsatisfy the Qualification Stan-

WHERE TO FIND CONTINUINGEDUCATION REQUIREMENTSInquiries regarding continuing education are thquestions most frequently asked of Academy staff,Continuing education requirements appear in the booklettitled, Qualification Standards for Public Statements,adopted by the Academy Board in January 1991 . Thisbooklet should be filed in Section VIII of the ActuarialStandards Handbooks . To obtain a copy of thestandards write : American Academy of Actuaries, 1720 1Street NW, Washington, DC 20006 Attention : Devara'Bodog

dards are currently required toobtain an average of twelve credithours per year of continuingeducation (the average being cal-culated based upon a two-yearperiod), and at least half of theactuary's credits must be derivedfrom "organized activities", e .g .,meetings, seminars, or other pro-grams with actuarial content,including correspondence cours-es for which a grade or certificateof completion is awarded .

Many actuaries who seekguidance on the QualificationStandards want to know whethera specific educational endeavorqualifies as an "organized activi-ty." However, the Academy doesnot currently have any criteria fordetermining whether a particularactivity is "organized," apartfrom the inclusive list of exam-ples appearing at Part III, Para-graph 2(a) of the QualificationStandards, and no more definiteanswers to actuaries' questionscan be provided. Rather, theactuary is left to make a good-faith determination of whether aparticular meeting or seminaramounts to "organized activity ."The Committee on Qualifica-tions plans to develop criteria fordetermining whether a particulareducational opportunity is "orga-nized," to assist actuaries in theirefforts to obtain sufficient creditsfrom "organized activities" tosatisfy the Qualification Stan-dards' continuing educationrequirements .

The development of criteriafor designating educationalactivities as "organized" is amajor task and is likely to takesome time to complete . In theinterim, the Committee onQualifications recognizes thatactuaries will need answers totheir questions not only aboutcontinuing education, but aboutall aspects of the QualificationStandards. Fortunately, manyactuaries have similar questionsand concerns, and these can bereadily responded to by Academystaff. (For example, Mr . Healy'scomment that "it is literally

impossible to maintain the con-tinuing education requirementsfor both the pension and healthqualification standards" suggthat the actuary who wish*satisfy both standards must com-plete an average of 24 hours ofcontinuing education each year .However, some educationalactivities are relevant to the sub-ject areas of both standards, andcredit hours spent on thoseactivities could be creditedtoward satisfaction of the contin-uing education requirements forboth standards .)

For other inquiries, the Com-mittee on Qualifications is avail-able to answer members' ques-tions concerning application ofthe Qualification Standards on anindividual basis. Such inquiriesshould be addressed in writingto :

Committee on QualificationsAmerican Academy of Actuaries

1720 1 Street NW, 7th FloorWashington, DC 20006

The Committee on Qualifica-tions is gratified that actuaries eeager to understand and satheir obligations under the Q -ification Standards, and it iscommitted to improving mem-bers' comprehension of the stan-dards' requirements .

Booth is chairman of the Academy'sQualification Committee .

The Academy's importantwork of promoting publicunderstanding of the actu-arial profession and offeringits expertise to public policymakers depends on theefforts of its volunteers .Please take time to considerhow your talents may bestcontribute to the advance-ment of the profession as youfill out the CommitteeService Request Cardenclosed with this month'snewsletter. New committassignments will be mabefore the Academy AnnualMeeting on October 6 .

4 The Actuarial Update ∎ May 1993

standardsOUTLOOK

ASB Adopts ThreeStandards at April MeetingBy Christine Nickerson

L ife and health insurance statu-tory opinions, the actuary'sresponsibility to the auditor,

measuring pension obligations,and continuing care retirementcommunities were among theitems on the agenda for the Aprilmeeting of the Actuarial Stan-dards Board (ASB). During abusy 2 days, the board reviewedand adopted three final actuarialstandards of practice (ASOPs)and voted to release two pro-posed standards for exposure .

Standards Adopted

The board adopted the followingactuarial standards of practice :

SOP No. 21, The Actuary'sonsibility to the Auditor. This

ndard provides a basic set ofrecommended practices for actu-aries concerning their responsi-bilities to auditors, It applies toany organization's statements orreports that are expected to beaudited or examined by a publicaccounting firm . The standardreplaces Financial Reporting Rec-ommendation 2, Relations withthe Auditor.ASOP No. 22, Statutory State-

ments of Opinion Based on AssetAdequacy Analysis by AppointedActuaries for Life or Health Insur-ers. This standard applies to actu-arial opinions required by theNational Association of InsuranceCommissioners' (NAIC's)amended Standard Valuation Lawand by Section 8 of the modelActuarial Opinion and Memoran-dum Regulation. Section 8requires the actuary to perform ananalysis of the assets that supportthe reserves to mature a compa-

obligations and to opine onadequacy of those assets .ASOP No . 4, Measuring Pen-

sion Obligations . This standard,originally adopted in 1988, hasbeen reformatted in the uniform

format adopted by the ASB. Theonly significant change to thestandard is a new section dealingwith disclosures about the possi-bility of changes in benefit valuesarising from changes in theamount and timing of benefitpayments and changes in actuari-al assumptions because of planterminations or special plantshutdown benefits . Two expo-sure drafts dealing with the shut-down issue were previouslyreleased , and a public hearingwas held on the topic .

Exposure Drafts

The following proposed stan-dards were approved by the ASBfor release as exposure drafts :

Statutory Statements of Opin-ion Not Including an Asset Ade-quacy Analysis by AppointedActuaries for Life or Health Insur-ers . This proposed actuarialcompliance guideline applies tothe actuarial opinion requiredunder Section 7 of the NAIC'smodel Actuarial Opinion andMemorandum Regulation. Theopinion rendered under Section7 does not require an asset ade-quacy analysis, nor does itrequire an opinion as to whetherthe reserves are adequate tomature the insurer's obligations .

ASOP No. 3, Practices Relatingto Continuing Care RetirementCommunities. This standard wasoriginally adopted in 1987. It hasbeen substantially revised by theCommittee on Continuing CareRetirement Communities of theAcademy. One significantchange is that the "componentapproach" is no longer includedas an acceptable actuarial basisfor financial management of aCCRC. The component approachfocused solely on health carecosts, on the presumption thatother costs do not produce sig-nificant gains or losses. This andother changes necessitated expo-sure of the revised standard .

Other Agenda Items

The board reviewed a proposedactuarial glossary developed bythe Editorial Advisory Commit-tee of the ASB. The purpose of

the glossary is to assist actuariesby providing general definitionsof terms used by actuaries intheir work. The board decided todefer action on the glossary untilthe July ASB meeting in order toallow time for further review .

The board also discussed theMarch 4 public hearing on thedetermination and illustration ofnonguaranteed elements and pol-icyholder dividends . This hear-ing was called by the ASS to heartestimony from regulators, actu-aries, and other interested partiesabout what problems exist thatmight be addressed by standardsof practice. Seven witnesses testi-fied at the hearing and thirteenwritten statements were submit-ted. The board reviewed thehearing transcript and discussedwhether these issues might behandled more appropriately aspublic policy questions ratherthan as concerns falling withinthe standards arena. Given thepublic policy nature of the issues,the board agreed to ask the fAcademy to review the transcriptand written statements and coor-dinate action that might includeinvolvement by the ASB and theNAIC .

The next meeting of the ASB willbe July 20-21 in Washington, D.C.

Nickerson is director of theAcademy's standards program.

The 1992 Annual Report ofthe Actuarial StandardBoard is enclosed with thismonth's mailing of TheActuarial Update.

CALENDARActuarial Board forCounseling andDiscipline MeetingJune 3

Canadian Institute ofActuariesAnnual MeetingJune 9-10

Society of ActuariesSpring Meeting-Financial ReportingJune 14-15

Actuarial Sta ndardsBoard MeetingJuly 20-21

National Associationof InsuranceCommissionerfall MeetingSeptember 12-14

Casualty Loss ReserveSeminarSeptember 13--14

Actuarial Board forCounseling andDiscipline Meeting '_September 28

Academy AnnualMeetingOctober 6

Actuarial StandardsBoard MeetingOctober 13-14

Society of ActuariesAnnual MeetingOctober 17-20

American Society ofPension ActuariesAnnual MeetingOctober 17-20

Conference ofConsulting ActuariesAnnual MeetingOctober 25-27

Casualty ActuarialSocietyAnnual MeetingNovember 14-17

The Actuarial Update - May 1993 5

Academy Members and GroupsHelp U.S. Health Care ReformBy Christine Cassidy

he actuarial profession islending its specialized toolsto the construction of areformed U .S . health caresystem. As the Clinton

In an extensivediscussion with

committee chairmanHal Barney, taskforce membersasked whether

CCRCs should bepart of the health

care reform agenda .After consultingBarney, the task

force decided thatCCRCs will not be

part of theadministration'sinitial proposal,

although their rolein the health caresystem should be

consideredat a later date .

administration's deadline for itshealth care reform planapproaches, the Academy con-tinues to provide technical infor-mation and analyses to keymembers of the health care taskforce headed by Hillary RodhamClinton.

An Academy task force oncommunity rating, organizedjointly by the Academy HealthPractice Council and HealthCommittees, has submitted areport to the administration taskforce's Quantitative AnalyticSupport Working Group, at therequest of its chairman KenThorpe. The task force met withThorpe to discuss the paper andthe consequences of communityrating .

pe, the group recently challengedestimates of the cost of includingmental health care in a mandato-ry minimum benefits package .The group urged the task force toconsider closely the problem ofinduced demand for mentalhealth care. Access to insurancecoverage for mental health ser-vices often increases demand, at amuch greater rate than thedemand for other types of healthcare. Task force members asked

Standard BenefitsIn addition, Academy workinggroups have prepared whitepapers for the administration,which will be distributed to theappropriate congressional com-mittees when the debate movesto Capitol Hill.

The working group on mini-mum benefits, headed by JuliaPhilips, is focusing on the cost ofminimum and standard benefitpackages and the role of thosepackages in a reformed healthcare system. In a letter to Thor-

the Academy for further expertopinion on costing mental healthservices.

Risk Adjusters

The working group on healthrisk adjusters has completed apaper on health risk assessment,health risk adjustment, and theroles they play in health carereform. Alice Rosenblatt, headof the working group, has metwith Gary Claxton, chairman ofthe administration's InsuranceReform Working Group . Rosen-blatt and members of her grouphave participated in severalmeetings with the administra-tion's task force on the issue ofinsurance reform and the use ofrisk adjustment .

CCRCs

The administration's task forcerequested general informationfrom the Academy CommitteeContinuing Care RetiremoCommunities (CCRCs) . In anextensive discussion with com-mittee chairman Hal Barney, taskforce members asked whetherCCRCs should be part of thehealth care reform agenda. Afterconsulting Barney, the task forcedecided that CCRCs will not bepart of the administration's initialproposal, although their role inthe health care system should beconsidered at a later date .

The Health Practice Counciland Health Committees also arelooking at the issue of administra-tive costs, focusing on the impactof Health Plan Purchasing Coop-eratives, the regional entitiesexpected be central features in theadministration's reform proposal .

Cassidy isAcademy GovernmentAffairs Liaison .

Academy Executive Vice President Jim Murphy (center) and ActuarialBoard of Counseling and Discipline (ABCD) members Daphne Bartlettand Curtis Hamilton attended the quarterly meeting of the ABCD inWashington, D.C. At the meeting, board members discussed the rapidpace of case resolutions; of the fifty-six cases the ABCD received in 1992,twenty-six have been resolved.

CASUALTY LOSS RESERVE SEMINARThe 1993 Casualty Loss Reserve Seminar will be held September 13-1at the Hilton at Walt Disney World Village, Lake Buena Vista, Florid>Among the topics covered by new sessions at this year's seminar aresolvency regulation, graphical methods' for loss reserving loss reservingwith limited data, and catastrophe reinsurance reserving :

6 The Actuarial Update ∎ May 1993

"lRie Medicare hospital trustfund, which pays benefits to 35million elderly and disabledpatients, will run out of moneyin 1999, according to thetrustees' annual report . Lastyear, the trustees projected thatthe Medicare hospital trust fundwould be insolvent by 2002 . Thereport also said that the com-bined Social Security retirementand disability funds are expectedto remain solvent until 2036, butthat the disability fund alone willrun out of money within the next4 years. To remedy the problem,the trustees recommend shiftingfunds from the healthier old-agefund to the disability fund .According to the trustees, a .75%increase in payroll tax rateswould preserve the combinedfunds until 2067 . The SocialSecurity Administration esti-mates that during the next 75years, the costs of hospital bene-fits will be almost three times the

d0nue received by the hospital

at current tax rates. SocialSecurity old-age and disabilityprograms paid about $290 billionin benefits in 1992 .

Pension simplification legisla-tion was introduced by Sen .David Pryor (D-Ark.). The bill,S. 762, is intended to simplify thedefinition of a highly compensat-ed employee and provide safeharbors from nondiscriminationrules for lump sum or deferredplans. The proposed "PensionSimplification Act" includes sub-stantially the same provisionsthat were in House Ways andMeans Committee ChairmanDan Rostenkowski's tax simplifi-cation bill (H .R. 13) passed byCongress and vetoed by Presi-dent Bush in 1992 . The billwould create two alternativedesign-based safe harbors underSection 401(k) to allow sponsorsto avoid onerous testing require-

ts. The definition of a highlyspensated employee would bechanged to include any employeewho owns 5% or more of thebusiness or who has receivedcompensation exceeding $50,000

during the current or previoustax year . S. 762 would repeal the5-year income averaging rules forlump sum distributions frompension plans and would insti-tute a simplified method for tax-ing annuity distributions undercertain employer plans. ANational Commission on PrivatePension Plans would be createdto examine the private pensionsystem and report its findings to

ferred provider organizations .The plan is based on the stateemployees insurance plan, whoseparticipants saw an increase incosts of only 2% over last year .The plan would be paid for bypooling public and privatemonies to provide enough statemoney to obtain $2 .26 billion infederal matching funds . The statewill request a waiver from thefederal Health Care FinancingAdministration if the GeneralAssembly adopts the proposal .New York Gov. Mario Cuomoproposed a health care reformpackage in a series of bills beforethe New York state legislature .The plan would create regionalhealth systems managementagencies responsible for planningand global budgeting . Providers

Congress.

Florida adopted a comprehen-sive health plan designed to usemanaged competition and thepurchasing power of elevenregional community-based poolsto help small employers, govern-ment, and individuals buy healthcare coverage at affordable rates .The legislation, which takes effectin 1995, establishes a number ofpractice parameters for physi-cians and requires insurers issu-ing policies to employers with upto fifty employees to do so on aguaranteed basis without regardto health status, preexisting con-ditions, or claims history . Thebill requires community rating ofsmall business products withadjustments for age, sex, familycomposition, tobacco use, andgeographic location .

MEWA legislation introduced byRep . Thomas Petri (R-Wis .)would establish new funding andreserve requirements underERISA for multiple employerwelfare arrangements (MEWAs)that provide health care benefits.H .R. 1272 is similar to a billsponsored by Petri in the 102dCongress.

Tennessee's Medicaid programwould be abolished under a pro-posal introduced by Gov . NedMcWherter . The proposalexpands an existing state pro-gram that covers people who aredenied health insurance for med-ical reasons to include Medicaidrecipients and the uninsured .The reform package would bring900,000 Medicaid recipients and500,000 uninsured Tennesseeanstogether in a single health carenetwork of managed care plans .Universal coverage would be pro-vided by a system of health main-tenance organizations and pre-

and hospitals would be encour-aged to form comprehensive ser-vice organizations called preferredhealth networks, with primarycare given an elevated role . Pri-mary care would be expandedthrough Medicaid fee increases,and the state's all-payer systemfor hospitals would be extendedto ambulatory care as a way ofcontrolling costs and improvingaccess. Other provisions includean extension of the state's hospi-tal rate-setting law, technologyassessments, and medical equip-ment limits .

The Arizona Senate approved asmall-group health coverage billthat provides for actuarial certifi-cation, health insurance availabil-ity for small employers, estab-lishment of classes of business,renewability of coverage, healthbenefit plan provisions, and pre-existing condition limitations .The bill would require insurers tofile an annual actuarial certifica-tion report with the state insur-ance department, stating that theinsurer's premium rates for con-version policies are actuariallysound and not excessive, inade-quate, or unfairly discriminatory .

Georgia health care reform isdead for the 1993 legislative ses-sion. A health reform packageaimed at limiting insurance ratesand broadening access for theuninsured did not pass the Gen-eral Assembly. The plan has been

Continued on page 8

In a recentinterview on thesubject of healthcare policy,Hillary RodhamClinton said,"I'm not anactuary andI'm not aneconomist ."The good news isthat she and thetask force sheleads know whatactuaries do andwhere to findtheir expertise .(See page 6.)

The Actuarial Update ∎ May 1993 7

PENSIONS, continued from page 1

Ed Hustead, senior vice presi-dent, HaylHuggins, Wash-ington, D.C.

GreggRichter, consultingactuary for Noble Lowndes,Chicago.

Larry Zimpleman, secondvice president, PrincipalMutual Life Insurance Co.,Des Moines .

of income for a comfortableretirement but rather only as abasic floor for retirement income .He also stated that baby boomerswho say Social Security wouldn'tbe there when they retired weremistaken. However, while theOld-Age and Survivors Insuranceportion of the Social Security sys-tem is financially sound over thenext 75 years, the DisabilityInsurance and Medicare portionsof the program are in trouble,with funds expected to beexhausted in 1995 and 1998,respectively .

Although the system will bethere, Hustead said that futureretirees can expect to receive asubstantially lower percentage oftheir preretirement income fromSocial Security than today'sretirees .

"Declining Social Securityreplacement ratios, caused byincreases in the normal retirementages for full benefits and aggravat-ed by the Clinton administration'sproposed greater taxation of bene-fits, will make meeting anywherenear the two-thirds to three-quar-ters of preretirement wages thatretirees need to maintain theirstandard of living impossible,"according to Hustead. "And pro-posed changes to redistribute ben-efits more generously to spousesmay further reduce direct benefitsto workers ."

The unforeseeability of futureevents over such a long term isanother factor to consider. Forexample, if actuaries 75 years agohad attempted to establish thefinancing required for such a sys-tem today, Hustead pointed outthat they would have been hard-pressed to predict or allow for theeffects of events such as WorldWar II and the Depression .

Sixteen reporters from generaland trade press attended the after-noon press conference at theNational Press Club . Zimplemanoffered a brief overview of theentire retirement system, and

Hustead spoke about Social Secu-rity. Richter was asked severalquestions about the PBGC,specifically which of three possi-ble solutions he thought best. Herecommended measures focusedon funding and reducing plansponsors' risk, which effectivelywould increase public confidence .

Academy Executive Vice Pres-ident Jim Murphy and Directorof Government Information GaryHendricks joined Hustead,Richter, and Zimpleman in themorning. Murphy introducedthe speakers at both sessions, andat the congressional briefingHendricks summarized results ofthe Academy's survey of definedbenefit plan terminations .

The Hill briefing, in the HughScott Room of the U .S. Capitol,was presented to give congres-sional staff a better understand-ing of the whole retirement sys-tem, its individual parts, and theneed for reforms . Zimplemanexpressed support of H.R. 199,introduced this year by Rep .William Hughes (D-N .J.), whichincludes a provision for a com-mission to study the U .S . retire-ment system.

CAPITOL VIEWS,continued from page 7

placed in a study committee bythe House Insurance Committee .The package was developed aftertwenty public meetings aroundthe state and had passed the Sen-ate by a wide margin .

On April 13, Maryland Gov .William Donald Schaefer signedhealth care reform legislation thatwould limit insurance companyprofits. HB 1359 requires insur-ers to offer a standard benefitpackage to employers of fewerthan fifty workers and to grantcoverage regardless of preexistingconditions . The legislation alsoestablishes commissions to moni-

Zimpleman is second vicepresident for Principal MutualLife Insurance Company in DesMoines, Hustead is senior vicepresident for Hay/HugginsWashington, and Richter is csuiting actuary for Noble Lowndesin Chicago .

The congressional breakfastand press conference at theNational Press Club were jointefforts of the Academy' s publicrelations and government infor-mation departments for Forecast2000, the public affairs and infor-mation program of the actuarialprofession in North America .Forecast 2000 is cosponsored bythe six organizations in NorthAmerica representing actuaries :the American Academy of Actu-aries, American Society of Pen-sion Actuaries, Canadian Insti-tute of Actuaries, Casualty Actu-arial Society, Conference of Con-sulting Actuaries , and the Societyof Actuaries .

Krehbiel is assistant director ofpublic relations for the Academy.

is

for health care providers' feesand procedures, and to set clini-cal guidelines for physicians .Doctors and insurance compa-nies will have to follow regula-tions similar to those the statehas used for the last 20 years tocontrol hospital costs and com-petition . Also, informationabout medical prices and prac-tices to help consumers selectcost-effective care will berequired to be published .

For more information on theselegislative proposals or regulations,contact Christine Cassidy in theAcademy's governmentinformation department.

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8 The Actuarial Update ∎ May 1993