the future of the brazilian health market · financial groups are making strategic investments in...

The Future of the Brazilian HealthMarket

In This Issuepage

Asia Committee Begins to Roarby Chelle Brody . . . . . . . . . . . . . . 9

Call for Papers . . . . . . . . . . . . . . . . . . . 6

Chairperson’s Cornerby Michelle Chong Tai-Bell . . . . . 1

Editor’s Notesby Kevin M. Law . . . . . . . . . . . . . 3

The Equation for Success—Professionalism and Profitability:Part II: Focus on Asian Marketby Thomas H. Kelly . . . . . . . . . . 12

Filipino Actuaries Attend Management Seminarby Angelica Michail . . . . . . . . . . . 7

Foreign Insurance Investorsin Latin America: Can TheyAll Survive and Prosper?By Camilo J. Salazar . . . . . . . . . . 3

page

The Future of the BrazilianHealth Marketby Ronald L. Poon-Affat . . . . . . . . 1

Insurance Regulation in Spain—Changes and Challengesby Daniel A. DeKeizer . . . . . . . . 23

International Actuarial WorkshopHeld in China . . . . . . . . . . . . . . 13

International Sessions at the . . . . . . . .Annual Meetingby Michael Gabon . . . . . . . . . . . 31

The Italian Life Insurance Marketby Alessandro Corsi . . . . . . . . . . 21

Life Assurance in Dublin’s IFSCby Colm Fagan . . . . . . . . . . . . . 25

page

Minutes of the International Section Conference Call,Monday, July 20, 1998 . . . . . . . 27

Reforming Taiwan’s NHIwith Managed Competitionby Chiu-Cheng Chang . . . . . . . . 16

Seminars in Asia Mark a Firstby Shirley Shao . . . . . . . . . . . . . 14

SOA Ambassador List . . . . . . . . . . . . 29

SOA Ambassador Program Evolves . . . 2

Use of Embedded Values(Shareholder Value) by U.S. andEuropean Insurance Companiesby Allan D. Affleck and Steven I. Schreiber . . . . . . . . . . . 19

NUMBER 17 SEPTEMBER 1998

Chairperson’s Cornerby Michelle Chong Tai-Bell

he results are in … Michael Ga-Tbon, Ronald Poon-Affat, andJames Toole have been elected toour Council. As you can see

from the following bios, the new mem-bers of our Council have been quite activeas members of the SOA and of the Inter-national Section.C Mike Gabon. Mike is a manager

with KPMG Peat Marwick in NewYork. His major field ofprofessional activity is in providingfinancial risk and reinsurancesolutions for domestic andinternational life client companies. He has participated in numerousSOA activities having been aFinancial Reporting Section panelistin 1996, a moderator/panelist for the1997 Annual Meeting, andInternational Section ProgramCommittee representative

continued on page 8, column 1

by Ronald L. Poon-Affat

n the first week of June 1998, the C To standardize the “product” that theIBrazilian Senate passed the long- health industry sellsawaited Act that radically revises theregulation of the private health

insurance industry. The importance ofthis passage should not beunderestimated; the revisions will have animpact on a $17 billion (U.S) industryencompassing 1,400 registered healthcarriers, 233,000 physicians, and 41million private health clients.

This is understandably a verycomplex piece of legislation, which is stillbeing hotly debated (even as this goes topress). The intention of this brief articleis to give a general overview of thereforms and to highlight some of the mainchallenges, that now face the healthindustry.

The intention of the legislation is toeffect the following revisions:

C To level the “reporting requirement”playing field of the various players

C To place the industry on a strongerfinancial footing

C To allow health carriers to gain directaccess to the capital of foreignpartners

C To put into place a facility that willallow the government to receivefinancial compensation in the eventthat a person with a private plan usesthe government’s services.The following develops each of these

points in more detail.


INTERNATIONAL SECTION NEWS SEPTEMBER 1998

INTERNATIONAL SECTION NEWSIssue Number 17, September 1998

International Section of the Society of Actuaries475 N. Martingale Road., Suite 800

Schaumburg, IL 60173Phone: (847) 706–3500 Fax: (847) 706–3599

Web Site: www.soa.org

This newsletter is free to Section members. A subscription is $10.00 fornonmembers. Current-year issues are available from theCommunications Department. Back issues of Section newsletters havebeen placed in the Society library. Photocopies of back issues may berequested for a nominal fee.

Expressions of opinion stated herein are, unless expressly stated to thecontrary, not the opinion or position of the Society of Actuaries, itsSections, its Committees, or the employers of the authors.

The Society assumes no responsibility for statements made or opinionsexpressed in the articles, criticisms, and discussions contained in thispublication.

Kevin M. Law, Newsletter EditorPan-American Life Insurance Co.601 Poydras StreetNew Orleans, LA 70130Phone: (504) 566–3302Fax: (504) 566–3914

Bill Bluhm, Board of Governors AdvocateChiu-Cheng Chang, Assistant EditorRandy Makin, Assistant EditorMichelle Chong Tai-Bell, ChairpersonBruce D. Moore, Vice-ChairpersonAngelica Michail, Secretary/TreasurerJoshua David Bank, Council MemberRichard J. Geisler, Council MemberJeong S. Han, Council MemberKevin M. Law, Council MemberPeter K.Y. Luk, Council MemberJohn O. Nigh, Council Member

Copyright 1998 Society of Actuaries. All rights reserved. Printed in the United States of America.

SOA Ambassador ProgramEvolves

he SOA began the Ambassador the program’s objectives. TheTProgram to help achieve its global staff member will:strategy of advancing the actuarialprofession, better serving its

members outside the United States andCanada, maintaining contacts with country summaries to improve theactuarial organizations around the world, breadth of their distributionand, in some cases, helping theseactuarial organizations grow.

The program has been in place forfour years and is managed by theInternational Section Council. Within thelast year, an SOA staff position wasdeveloped to support SOA internationaloutreach programs, including theAmbassador Program.

Recently, the International SectionCouncil approved a plan to improve theeffectiveness of the AmbassadorProgram. The plan uses staff resourcesto keep ambassadors informed of activitythroughout the world and to facilitatecommunication with interested SOAmembers.

Use of staff resources will leveragetime for member volunteers to focus on

C Notify ambassadors as to thenew resources available tothem and remind them of therequired activities

C Ask potential ambassadors to reporton the working relationship betweenthemselves and the local actuarialorganization to determine the scopeof actuarial development in thatcountry

C Develop a list server (single e-mailaddress for a group) for ambassadorsto communicate directly with eachother and with interested SOAmembers

C Develop an electronic bulletin boardon the SOA web site for ambassadorsand others to exchange information

C Create a database of research efforts,continuing education opportunities,regulatory environment, and

C Perform routine functions, such as aregular reporting process amongambassadors, the Section Council,and the International IssuesCommittee.The International Section will be

evaluating the results of the expandedcommunication plan for the AmbassadorProgram as outlined above. There areadditional areas for future expansion,including customized initiatives to reflectcultural and economic differences amongthe countries.

For information on the AmbassadorProgram, contact Jeanette Selin,International Outreach Coordinator, at847–706–3533 or at [email protected].

For a current listing of SOAambassadors, see page 29.

SEPTEMBER 1998 INTERNATIONAL SECTION NEWS PAGE 3

Foreign Insurance Investors inLatin America: Can They AllSurvive and Prosper?

Editor’s Notesby Kevin M. Law

e are fortunate once again toWpresent in this issue ofInternational Section News anoutstanding selection of

articles of interest to actuaries involvedwith international business includingmaterial on a number of differentcountries and/or regions—Asia, Italy,Taiwan, Ireland, Brazil, Philippines,Spain, and Latin America.

Given the quantity of material in thisedition, I will be deliberately brief in thiscolumn. I would like to express myappreciation to all of the authors for theircontributions, and in particular to RonaldPoon-Affat for his timely lead article onthe recent health insurance legislation inBrazil. This is Ronald’s second article onBrazilian private health insurance and welook forward to receiving additionalmaterial from him for future newslettersthat covers various aspects of theinsurance industry in Brazil.

As my term is now expiring on theSection Council, I would like to take thisopportunity to thank my fellow Councilmembers for their contributions to theSection and for their support in my rolesas newsletter editor and as theChairperson for 1995–1996. Specialthanks and appreciation are also due tothe excellent, hard-working SOA staffthat make possible our activities,functions, and publications. In particular,I would like to personally thank BarbaraSimmons, Susan Martz, and LoisChinnock, with whom I have workedclosely over the last several years.

Kevin M. Law, FSA, is Vice President,Group Actuary at Pan-American LifeInsurance Company in New Orleans,Louisiana, a member and formerchairperson of the International SectionCouncil, and editor of InternationalSection News.

by Camilo J. Salazar

atin America has become anLintegral part of the globalizationprocess. Multinational insurancecompanies and international

financial groups are making strategicinvestments in the region equal in size toother investments in North American,Europe, or the Far East.

As regional economies have opened,the transfer of ownership in the financialservices industry from local hands toforeign hands has been fast and decisive. In the last few years, the growth in thesupply of insurance products and carriershas been impressive. This articleexplores some issues related to the growthin supply capacity, the relatively slowerpace of growth in consumer demand forthese products, and the factors thatcompanies can identify in forming theirstrategies to achieve their objectives.

When a multinational insurancecompany evaluates an expansion strategyin Latin America, or any other region, ittypically relies on data such as:C Political stabilityC Key economic data (economic policy,

GDP, trade balance, income percapita)

C Size of the market, labor forceC Demographic profile of the countryC Macroeconomic indicators (inflation,

currency, interest rates)C Insurance penetration and premium

density as a percentage of GDPC Insurance industry regulation.

For many countries in the region,these macro indicators point to a newfrontier of future potential and growth. Premium penetration and premiumdensity numbers in these countries makeit clear that there is quite a gap to fill.

Understanding the local marketcontext in which these indicators arepresent today is critical to understandinghow quickly these markets will be able tofulfill their future potential tomorrow.

BackgroundUntil the late 1980s, the economicdevelopment strategy applied by almostevery country in the region wascharacterized by a high level ofprotectionism and import-substitution. The state exercised generalized controlover all economic activity.

Two main events can perhaps becredited with forcing a dramatic change ineconomic policy in the region: (1) thedebt crisis of the 1980s which exposed thefailure of the economic models and (2)the fall of the “iron curtain” anddisintegration of the Soviet bloc.

Latin America was a strategicallyimportant battleground for the cold war,both on an economic as well as politicalbasis. Under the label of “nonalignedcountries,” many countries in the regionplayed the United States against the Sovietbloc as a source of foreign credits andeconomic aid, which helped mask thefailure of their own economic policies. With the collapse of the Soviet bloc, theonly alternative was to attract foreigncapital through open economicdevelopment.

The economic transformation of theregion has been brought about by aradical change in economic policies inmost Latin American countries, with aclear focus toward open and market-oriented economies in which the stateplays a very different role than before.

Supply and DemandThe rapid influx of foreign capital andpresence has not been matched by anequally fast growth in demand forinsurance products. This is not to saythat insurance activity is not growing. Both life and property and casualtypremiums are growing at rates higherthan GDP growth, but there is a mismatchof supply and demand at this point.

On one hand, the supply of foreigncarriers and new companies has occurredvery quickly. Aided by regulatorychanges and the lifting of foreign


“One of the most critical issues that foreigncompanies face ... is the adaptation of theircorporate domestic culture to the realities of thenew market environment in which they will nowoperate.”

Latin Americacontinued from page 3

investment restrictions, several foreign CULTURAL PERCEPTION OF INSURANCE and less on short-term, more speculativegroups have established local subsidiary instruments.companies or have formed joint-venture Assume the company decides to enterrelationships with local companies. New a new market where inflation haslicenses have been granted or old inactive historically been higher and thecompanies have been bought and investment market has been more volatilerecapitalized. than in the United States. Political and

On the other hand, consumer demand economic stability is improving, butis growing at a more incremental pace. historically has had volatile periods. TheConsumer attitudes change more slowly, company then applies the sameand income levels rise incrementally. In investment policy that it has developed insome countries, income per capita is still the United States, relative to the U.S.too low and unemployment too high to market, without adapting it relative to thecreate a significant demand for insurance new environment.products. The lack of additional The company could be putting itsconsumer demand in these markets can capital investment in a very speculativealso be influenced by the following position against its corporate values byfactors: trying to invest long-term in a short-term

environment. Being conservative in thisC Inflationary legacyas lack of innovation and adequateC Cultural perception of insurance

C Regulatory sponsorship of insuranceactivities

C Logistical factors.

INFLATIONARY LEGACY

During the 1990s the region has, for themost part, come out from under manyyears of inflationary environments, insome cases severe, as in Argentina andBrazil. The impact that prolonged andsevere periods of inflation has on societyas a whole, as well as on individuals, isdifficult to imagine for those who havenot experienced it.

It is probably fair to say that timehorizons in these countries are generallyperceived as shorter relative to countriesthat have not been exposed to prolongedperiods of inflation. From planningsocial policy to planning personal savingsand retirements needs, these processestend to be influenced by a shorter-termmentality. Adjusting to a noninflationaryenvironment takes time.

The current generation of politicaland business leaders in most countries inLatin America has grown up in aninflationary environment and has just inthe last few years begun to experienceeconomic stability. In Argentina andBrazil, the transition from hyper-inflation to basically zero inflation hasoccurred in a very compressed period oftime.

Insurance has had a difficult past in theregion. Property and casualty businesssurvived, even under the most severeinflationary pressures, but underwritingand pricing these products for profitabilitybecame secondary to investment gains oncash flows. Brokerage companiessometimes took advantage ofhyperinflation periods by withholdingpremium and claims payments to investthem short-term for their own financialgain. In the eyes of the consumer, thisnegative perception tends to spill over tothe entire industry.

Traditional life insurance is notregarded as an effective tool in protectingone’s assets from inflationary erosion. Unprofessional market practices, as well

insurance regulation, helped create anegative image. Many countries hadhighly inefficient stateinsurance monopoliesand productdifferentiation andcompetition wasrestricted.

One of the mostcritical issues thatforeign companiesface when establishinga presence in a newmarket is the adaptation of their corporatedomestic culture to the realities of thenew market environment in which theywill now operate.

Corporate values represent thephilosophical foundation of anorganization and define how it conductsits business and relates to its clients. Such values are absolute and should notchange in reference to the market inwhich the company operates. Theapplication of those values, however, isrelative to the market and the culturalcontext in which the company operates,whether domestic or nondomestic.

Assume that a well-establisheddomestic U.S. company has as one of itscore values, financial prudence. As aresult, its financial and investmentstrategies have evolved over the yearsrelative to the U.S. market in which it hasoperated since its inception. Thepolitical, economic, and regulatoryframework present in the United Stateshas, over the years, allowed thedevelopment of investment policies thatrely on more stable long-term instruments

new environment means being short-termfocused in order to hedge and preservethe purchasing power of the currency.

The relative application of its corporatevalues would be misguided, although itsphilosophical value has not changed.

In addition to trying to adapt theircorporate domestic culture to the localmarket, foreign companies also face thechallenge of building name recognitionand brand presence in a new market inwhich their domestic prominence at homemeans little, or nothing, locally.

They find themselves in these newmarkets increasingly crowded with manyof the same domestic competitors theythought they left back home, plus a fewother multinational competitors. To thetypical local consumer, however, all theseforeign players look very similar. Theytend to be recognized by their common-denominator attributes, which can besummarized as large in size, financiallystrong, and foreign.

These three attributes areinterrelated. Relative to the markets andeconomies in the region, the foreign



TABLE 1

CountryInsurance Premium

per Capita

Insurance Premiumas a Percentage

of GDP

United StatesJapanU.K.FranceMexicoArgentinaChileColombiaBrazil

$2,3725,0881,6942,268

39142147

5290

8.6012.7810.33

8.551.481.723.062.292.04

TABLE 2Insurance Premium as a Percentage of GDP

Year U.S. Japan U.K. France

19791985198919931996

7.257.528.788.908.60

4.896.949.71

12.6412.78

5.837.119.38

11.7310.33

3.624.505.997.588.55


parents of some of these companies lookuncommonly big by local standards. Their size intuitively projects financialstrength and this, in turn, is associatedwith foreign ownership.

Beyond these attributes, there isn’tmuch differentiation in the eyes of theconsumer. Foreign companies, however,struggle to differentiate themselves fromone another in pretty much the same waythey attempt to do so in their domesticmarkets.

The consumers they are trying toreach differ from the U.S consumer forwhom they have developed their messageover the years. The consumer in thesecountries is at a very different level ofsophistication.

Under economic conditions in thepast, market competition, in general, wasnot intense in these markets andparticularly weak in the insuranceindustry, given regulatory restraints andstate insurance monopolies. Lack ofcompetition meant lack of choice. Choices in insurance offerings haveincreased exponentially, but the consumeris still adapting to this change.

To illustrate this point, let’sremember how the Japanese developed afoothold in the auto industry in the UnitedStates in the 1960s and 1970s. Thetypical U.S consumer at the time wanteda Japanese car, not necessarily a Toyotaor a Honda. The consumer wanted aJapanese car for its attributes of reliabilityand economy of operation. Years later, asconsumers became more sophisticatedand mature, they began to differentiateamong brands.

REGULATORY SPONSORSHIP

When doing insurance research on theregion, one of the most noticeable macrofigures is the relatively low insurancedensity and premium penetration as apercentage of GDP as compared todeveloped markets. Table 1, based on1996 available figures, illustrates thispoint.The relatively higher figures fordeveloped countries such as the U.S. orJapan, have evolved over several years(see Table 2). It is, therefore, optimisticto expect to reach the same levels ofdensity and penetration in the region in afew short years.

Consistent government sponsorshipof insurance over the years, whetherdirect or indirect, has played a critical

role in developed countries in facilitating 36 million; and Mexico, 95 million; for athe creation of an insurance culture. total of 345 million.

This sponsorship and support needs By any measure, these numbers areto occur in the context of economic and impressive, as they represent a group ofpolitical stability. Such sponsorship, consumers larger than the U.S.from favorable treatment of insurance population or the European community. premiums and cash values from a tax The ability to reach such a number ofperspective, to the creating of compulsory consumers needs to be put in perspective,insurance programs for employers and however, with factors such asemployees has been historically present in infrastructure limitations in transportationdeveloped countries. Historically in Latin and telecommunications, cost of basicAmerica, regulatory authority was services and income levels, historicalexercised to the detriment of promoting patterns, and rural versus urbanthe growth of the industry. State population distribution.insurance monopolies and tariff controlsmade it difficult, if not impossible, forthe industry to develop.

With the economic restructuring inthe region, this is changing. With theprivatization of the various state pensionsystems, consumers in these countries arelearning, for the first time, about theirretirement needs and the level of basiceducation about retirement savings and itslong-term benefit is beginning to rise.

LOGISTICAL FACTORS

Latin America encompasses a populationof more than 450 million people. In thecountries in which most insurance activityand foreign investment is currentlyfocused, the population is distributed asfollows: Argentina, 35 million; Brazil,165 million; Chile, 14 million; Colombia,

ConclusionsLatin America has acquired aneconomically strategic importance in theprocess of globalization that it did nothave a decade ago. The region hasattracted significant attention andinvestment in the internationalcommunity, and the internationalinsurance industry is an integral part ofthis effort.

The determination of the necessaryand achievable critical mass has been, insome cases, carried out without



Call for Papers“Fair Value of Insurance Business”

he Society of Actuaries and New York University join forces again. ATconference on “Fair Value of Insurance Business” will be held on March 18and 19, 1999, in New York City. The goal is to extend and update the bodyof knowledge from the 1995, “Fair Value of Insurance Liabilities”

Conference; to highlight similarities in various theoretical developments; and worktowards resolution of differences and implementation issues. The scope of theconference has been broadened to encourage fair valuation efforts which considerinsurance business as an integrated whole.

The conference will: C Provide an overview and comparison of various theoretical developmentsC Provide an update on various efforts in accounting and management reportingC Suggest how the various theories may be applied to financial and management

reporting in practice, and discuss implementation issues and potential solutions.A call for papers is being held in conjunction with the conference. The goal of

this call for papers is to promote fresh perspectives on this challenging topic; toprovide a solid foundation for the conference; and to move forward the state of the arton insurance valuation. Papers should bring fair value accounting for insuranceforward with respect to recent developments in accounting initiatives as well asmanagement practices. Papers submitted in response to this call may cover topicsrelated to fair value of assets, liabilities or insurance enterprise value.

The Society of Actuaries anticipates publishing acceptable papers in a book. Papers from the 1995 conference have been published in the book “The Fair Value ofInsurance Liabilities,” Kluwer, 1998. Expenses incurred by authors who presentaccepted papers at the conference will be paid by the Society of Actuaries.

The target date for receipt of papers is October 30, 1998. The detailed call forpapers can be accessed via the Research Section of the Society of Actuaries web site(http://www.soa.org/research/cfp2.html). Or contact Joanne Temperly (Phone:847–706–3519, Fax: 847–706–3599, E-mail: [email protected]) to receive a copyvia fax, mail, or e-mail.


proper analysis and identification of somecritical factors such as deeperunderstanding of market expectations anddistribution practices, consumers’historical perception of insurance, andlack of insurance culture. Thedevelopment of an insurance culturesimilar to that present in developedcountries will take longer than issometimes estimated.

For some foreign companies thathave established a presence in LatinAmerica, their investment and long-termpresence is threatened by the difficulty inreaching anticipated levels of criticalmass. Many companies will be forced toeither invest more capital, consolidatetheir presence through acquisitions, orexit the market.

Foreign investors face two criticalstrategic options when entering theregion—to pursue a strategy of reachingcritical mass in a short period of timethrough acquisitions or joint ventures, orto reach critical mass in a longer periodof time through internal growth. Eitherstrategic option needs to incorporate in itsanalysis a much deeper understanding ofthe market and cultural differences andlocal consumer perspectives andexpectations.

This will allow investors to designstrategies that will take into account alonger-term perspective for marketevolution and achievement of criticalmass, which in turn will provide morerealistic expectations for capital needs andreturn on investment.

The industry will continue toconsolidate. Foreign ownership willcontinue to dominate these markets. Those companies able to establish a solidand long-term presence in Latin Americawill be successful at applying theircorporate culture in the context ofunderstanding the realities of thosemarkets in the region in which they arepresent.

Camilo J. Salazar, ASA, is SeniorConsultant, Latin America, with Milliman& Robertson in Denver, Colorado and aformer Chairperson of the InternationalSection Council.


Filipino actuaries get acquainted at the meeting of the Actuarial Society of thePhilippines held last March.

Filipino Actuaries Attend Management Seminar by Angelica Michail

nce every three years, I visit theOPhilippines—my native country. Most of the time I visit friends,family, and new tourist spots.

This year, I had a big bonus. On March4, 1998, a large group of Filipinoactuaries attended a management seminarat which I was a presenter. The eventwas facilitated by Mabini Juan, our SOAAmbassador to the Philippines.

At last year’s SOA meeting, I toldMabini I was planning a trip home in1998 and asked if he would arrange ameeting with Filipino actuaries during myvisit. He agreed and gave me his e-mailaddress.

My plans turned to reality and I sentMabini an e-mail message with myvacation dates. I also informed him thatwhile on vacation, I planned to give somemanagement seminars. After “merienda,” a sumptuous afternoon snack well attended. The participants foundcorresponding with Mabini and Edna of Filipino delicacies. The seminar your topics interesting, gauging from theLedesma, a former classmate and also an covered a variety of topics— public participation that occurred. After youractuary, we decided that I would give a speaking, stress management, and time session, we have had some requests tothree-hour seminar under the sponsorship management. give more expanded seminars on someof the Actuarial Society of the Philippines The ASP regularly sponsors topics which you covered.”(ASP). I was delighted—this was a great professional development seminars, most The ASP is an active actuarialopportunity to see Mabini and Edna again of which are insurance-related. This is organization and I am thankful that ourand meet Filipino actuaries in the the first time it sponsored a management Philippine ambassador, Mabini Juan,Philippines. seminar. I was born and raised in the made it possible for me to have a

On March 4, I was pleased to face an Philippines but almost all my work memorable and productive visit with ASPaudience of 59 insurance experience is in the United States, so I do members. I encourage Internationalprofessionals—42 ASP members and 17 not claim to be familiar with their day-to- Section members to get in touch with ourguests. In the audience was Professor day struggles. I have found out, Ambassadors when they plan a trip toInez Belleza, the University of the however, that Filipino actuaries deal with countries that may have actuarialPhilippines math professor who the same issues of lack of time, too much organizations. With e-mail technologyintroduced many of the Filipino actuaries stress, and fear of public speaking. and better telephone and fax capabilities,to the profession and encouraged their As to the reaction of the audience to making arrangements with foreign-basedefforts to study actuarial science. the seminar, I prefer to quote from a actuaries can be easy, simple, and fast.

For me, the seminar was a wonderful letter sent to me by Mona Lisa de laexperience. I achieved two Cruz, the current president of the ASP. Angelica B. Michail, FSA, is a consultantobjectives—meeting Filipino actuaries at “The seminar has certainly opened our at National Actuarial Network in Rowlandhome and talking to actuaries about the eyes to the nonactuarial issues that affect Heights, California andimportance of developing nontechnical us in our day-to-day work. It is Secretary/Treasurer of the Internationalskills to enhance professional skills. It interesting to note that despite the two- Section Council.was a wonderful gathering, with the usual week notice given for the seminar, it was


Chairperson’s Cornercontinued from page 1

for the 1997 Annual and 1998 and C Ronald L. Poon-Affat (2001) Fellows a communication link between1999 Spring meetings. C James F. Toole (2001). the Section and the appropriate practice

area and to the Board of Governors. InC Ronald Poon-Affat. Ronald isDirector and Vice President of newsletter editor; John Nigh; and myself.General and Cologne Re Brazil Ltda. The term of the new Council membersHe is responsible for the begins at the Society’s October Annualmanagement of the Life and Health Meeting.Unit of the Brazilian operation. He The internationalization of thehas lived and worked in England, profession is indeed accelerating. InPuerto Rico, Trinidad, Tobago, and 1998, in Birmingham, U.K., the Generalnow Brazil. Ronald is a past Council Assembly of the International Actuarialmember of the Caribbean Actuarial Association (IAA) voted to restructure theAssociation and currently SOA IAA into an association of associations. Ambassador to Brazil. This umbrella association will provide the

impetus to the creation of a truly globalC Jim Toole. Jim has more than tenyears of actuarial experience in theproduct development, bancassurance,and merger and acquisition areas,most recently spending two yearsworking in South America andAustralia from the Mexico Cityoffice of Tillinghast. He is a formerSOA Ambassador to Mexico. HisSociety activities also include beinginstrumental in establishing a SOAexam center in Puebla, Mexico, afounding member of the ComputerScience Section, Council member forfour years, past editor of CompAct,the newsletter of the ComputerScience Section, as well as a frequentSOA meeting session moderator.As a result of this election, the newly

elected International Section Council is asfollows (terms expire): C Joshua Bank (2000)C Michael E. Gabon (2001)C Richard J. Geisler (1999)C Jeong S. Han (2000)C Peter K.Y. Luk (1999)C Angelica B. Michail (2000)C Bruce D. Moore (1999)

Outgoing members are Kevin Law,

profession with common codes ofconduct, minimum educational standards,and the like. What’s more, the IAA willbecome the platform for our profession’svoice on the world stage, forging relationswith such bodies as the InternationalAccounting Standards Committee, theInternational Social Security Association,the World Bank, and the InternationalMonetary Fund.

The International Section, led byyour new Council, has exciting timesahead. The mission of the Section—toencourage and facilitate the professionaldevelopment of its members in the areasof international insurance, pensions, orsocial security programs, as well asinternational areas of practice—isbecoming even more important in thelives of a growing proportion of Societymembers. In recognition of this, theSociety has provided additional staffsupport to the Section. The Societyrecently reorganized with a view offacilitating coordination between theSections and the practice areas. MostSections have been assigned a staffFellow or a managing director, providing

the case of the International Section, ourstaff liaison is Chelle Brody who hasrejoined the Society as Manager ofInternational Affairs. Chelle will providea necessary point of contact between theInternational Section, the InternationalIssues Committee, the Asia Committee,and the Board of Governors. It has beena pleasure working with Chelle, and Iurge the new Council to make use of hersupport and advice.

Since this may be my last“Chairperson’s Corner” as I welcomeMike, Ronald, and Jim to the Council, Iwish to take the opportunity to thankKevin and John for their yeoman’sservice over the years. Kevin is thelongest standing and most experiencedmember of the Section, having been amember of the Council since 1993. Hewas Vice-Chair in 1995, Chairman in1996, editor of six issues of ournewsletter from December 1993 toAugust 1995, and resumed the position ofeditor with our last issue in June 1998. John, who joined the Council in 1995, hasalso had an illustrious career as editor ofthe Section newsletter, having been editorof six issues from December 1995through to February 1998. I would alsolike to thank everyone on the Council andthe membership for their support. It hasbeen an enjoyable year chairing yourCouncil.

Michelle Chong Tai-Bell, FSA, isExecutive Director, Individual Insurance,Maritime Life (Caribbean) Ltd., inTrinidad and Chairperson of theInternational Section Council.


Asia Committee Begins to Roar by Chelle Brody

he Board of Governors approved outlined below. of Asian Services (Patrick Cichy)Tthe formation of the Asia continues to coordinate efforts with theCommittee in January 1997, in Nankai University actuarial program topart to maximize opportunities help find instructors and to provide study

suggested by the election of a Vice materials. Clement Cheung is thePresident whose office was located in member coordinator appointed by theHong Kong, which is a Special SOA President to manage the program.Administrative Region of China. ByNovember 1997, the SOA hadtemporarily relocated one of itsadministrative staff, Patrick Cichy, to arepresentative office in Hong Kong. Arepresentative office gives the SOA thelegal right to promote the SOA, providinga liaison role between the headquartersoffice in Schaumburg, Illinois, and itsmembers and students in Asia. Theoffice is physically located in spaceoccupied by Metropolitan Life InsuranceCompany on an arrangement thatreimburses Metropolitan for expensesattributed to its operation.

The approximately 600 members ofthe Asia Committee have beenrepresented by a Core Committee ofabout 15 actuaries resident in Hong Kong,which has met monthly since November1997. The Core Committee is dividedinto subcommittees in the areas ofEducation, Finance, Membership,Priority and Planning, ProfessionalConduct, Project and Public Relations.

The mandates of the AsiaCommittee, as approved by the SOABoard, are: C To represent the SOA in promoting

actuarial educationC To provide services to members in

the development of educational subsequent reports to SOA officers andprograms, research and other the Board. professional support

For more information on the AsiaC To build the image and awareness ofthe profession in Asia.The Asia Committee has a new

Chairperson. Kin Chung Chan is theVice President of Marketing at Top GloryInsurance Company in Hong Kong. Heis working with SOA Vice President BillBluhm on restructuring the AsiaCommittee to focus its efforts.

Projects the committee has beenworking on during the last year are

Primary ProjectsVirtual Tutorial Center. The VirtualTutorial Center is designed to giveactuaries practicing in Asia a place toquestion “experts” regarding work-relatedactuarial issues. These experts will belisted on the SOA web site along withtheir practice areas for individuals tocontact privately with their questions. Itis hoped that continuing educationnewsletter articles will be developed fromthe experts on frequently asked questions.Reference Centers. The creation ofreference centers is designed to supplyuniversities with SOA study, research,and reference materials. The universitiesidentified so far are: Fudan University,Shanghai; Keji University, Heifei; EastChina Normal University, Shanghai;Hunan College of Finance & Economics,Hunan; Shanghai University of Finance &Economics, Shanghai; Renmin Universityof China, Haidan; Nankai University,Tianjin; and Zhongshan University,Guangzhou. The materials to be suppliedby the SOA are: ASA study notes, TheActuary, The Future Actuary, Society ofActuaries Yearbook, The North AmericanActuarial Journal, (NAAJ), Sectionnewsletters, and books published by theSOA. The selection criteria for theseuniversities could be applied touniversities in other countries.Asia Committee Newsletter. The AsiaCommittee Newsletter is a projectdesigned to publicize the committee’sefforts and share work-relatedinformation. The newsletter is to bepublished electronically only via theCommittee’s page on the SOA web site. It will include relevant past articles fromInternational Section News and TheActuary.Joint Seminar. A joint seminar betweenthe International Actuarial Association,the SOA Asia Committee, and theChinese Insurance Institute for March1999 in Beijing is under discussion. Nankai University. The Coordinator

Seminar. The Asia Committee and therepresentative office helped coordinatePresident-Elect Howard Bolnick’sSeptember visit to Asia. In China, theSOA delegation donated books to thePreparatory Committee of the ChineseActuarial Association and visited Renminand Nankai Universities. While in HongKong, President-Elect Bolnick gave aluncheon presentation to the ActuarialSociety of Hong Kong. The AsiaCommittee hosted a seminar onSeptember 26 on “The Impact of theAsian Financial Crisis on the InsuranceIndustry.” Speakers from several Asiancountries presented how the crisis hasaffected their countries and their solutionsto dealing with the crisis. The tripconcluded with a visit to Kuala Lumpurand a meeting with the Actuarial Societyof Malaysia on September 28.Communication. The Asia Committee istrying to formalize links between the SOABoard, the Committee on InternationalIssues (CII), and the InternationalSection. Current examples in this attemptat links include broader and more timelydistribution of Asia Core Committeeminutes and regular reporting between therepresentative office and the SOAManager of International Affairs, with

Committee and its projects, contactPatrick Cichy by e-mail [email protected], bytelephone at (852) 2973–4032, or by faxat (852) 2826–9189. The RepresentativeOffice’s mailing address is G.P.O. Box192, Hong Kong.

Chelle Brody is Manager of InternationalAffairs for the Society of Actuaries.


Brazilcontinued from page 1

Standardized ProductIn the past there was a wide range ofplans, with premiums ranging from R$20to R$800 per month. Plans at the lowerend offered inexpensive but veryrestricted medical attendance. Commondeficiencies for the bottom-basementprices included limited length of stays for“in-patient” treatment (includingtreatment within intensive care units), theomission of treatment for all major organtransplants, lengthy initial waitingperiods, and no protection in terms ofholding technical reserves.

The politicians gained kudos for theelimination of the time restrictions, whichwere often applied to in-patient treatment,that is, many low budget plans limited thenumber of days that could be spent in aprivate hospital. The Minister of Healthwas reported to have said that sellinghealth insurance with such in-patientlimitations was akin to selling propertyinsurance that protected your home foronly the first hour of a fire.

The new law introduces five types ofstandardized plans, which all healthcarriers can offer. These plans havedefined benefits and limited exclusions. They are (1) a wide ranging, all-encompassing comprehensive plan (planoreferencial) and four distinct plans thatprovide treatment only in respect to (2)out-patient (ambulatorial), (3) in-patient(hospitalar), (4) maternity (obstétrico),and (5) dental (odontológico) benefits.

The law sets out the minimumbenefits that must be offered under eachplan. Companies may, of course, chooseto improve their product and include awider range of benefits.

Level Playing Field My previous article (“Brazilian HealthIndustry,” International Section News,June 1998) described the differencesbetween insurance companies’ plans(seguros saúde), the HMO-type plans(Medicina de Grupo), the co-operativeassociation-type plan (Unimed) and theself-insured sector (Autogestão). In thepast only the insurance companies hadsupervisory control under the Ministry ofFinance. The new law puts all healthcarriers under the watchful eye of foursupervisory authorities.

First, two bodies under the Ministry and Prudential, to name a few. Howeverof Finance existed in the past: the passage of this law will now make

direct investment easier and allow up toC The Conselho Nacional de SegurosPrivado (CNSP) or the NationalCouncil for Private Insurance

C The Superintendência de SegurosPrivados (SUSEP) or Superintendentof Private Insurance.Two newly created bodies now exist

under the Ministry of Health:C Conselho Nacional Saúde (CNS) or

the National Health CouncilC Conselho Nacional de Saúde

Suplementar (CONSU) or theNational Council for SupplementaryHealth.So from the statutory point of view,

not only has the field been leveled, it hasalso become much more complicated. The Ministry of Finance will deal withtechnical issues and the Ministry ofHealth will look after the on- goingquality of service. As yet, the roles ofeach of these bodies have not been strictlydefined.

Stronger Financial FootingIn the past, only insurance companies thatsold health business (21% of themarket—Seguros Saúde) were obliged toset up reserves, but only for unearnedpremiums and reported but unsettledclaims; very few companies establishedIBNRs. The rest of the health industrywas not required to establish suchreserves; and the vast majority did not. The new legislation now necessitates thatall health plans establish some reserves. This will include, at the very least,unearned premiums and reported-but-unsettled claims. SUSEP, the legislativebody responsible for defining reserverequirements, is presently formulating itspolicy on IBNRs.

Access to Foreign CapitalAllowing health carriers to gain directaccess to the capital of foreign partnersfits in with President Fernando HenriqueCardoso’s ongoing drive to “open up theeconomy to foreign investors.” In thepast, it was difficult, but certainly notimpossible, to secure a financial interestand many international companies arealready well established in the local healthmarket—Aetna, AGF, AIG, Cigna,Allianz, Generali, HSBC, ITT-Hartford,

100% foreign investment.

Compensation for the Government Health Plan(Sistema Unico de Saúde (SUS)or Single Health System)Under the new law, if a person with aprivate health plan receives treatmentfrom a government facility, thegovernment can seek financialreimbursement from the person’s privatehealth carrier. A database will beestablished that will compare the namesof all Brazilians who have a private healthplan with the names of those who arereceiving treatment from a public facility. This is a bit of double taxing, because alltax-payers contribute to SUS. There aremany cynics who say that this is theraison d'être for the change of legislation.

Some of the More Interesting ClausesC Premiums cannot be “actuarially”

increased for persons over 60 whohave been in a scheme for at least 10years. In respect to individual plans,this would seem to imply that onewould then have to pre-fund the costof actuarial increases by establishingmathematical reserves that could thenlead to surrender values. Building uplong-term actuarial reserves willcertainly be a challenge, given theinavailability of long-term assets.

C As to pre-existing conditions, ahealth carrier has up to two years toascertain whether a new client had apre-existing condition that he knewabout upon entering the plan, todecline coverage for such an illness. After two years has passed, the clientis eligible for treatment even if he orshe knowingly sought to deceive andstated that he or she did not having apre-existing condition at thecontract’s inception.

C Waiting periods have been slashed. At one time, carriers offered planswith a wide range of initial waitingperiods. Terms of up to 18 monthswere not uncommon for the less



TABLE 1

Number

Premiums$U.S.

(Billions)

Self-Insure Groups (Autogestão)HMO-Type Plans (Medicina de Grupo)Cooperatives (Unimed)

300730320

5.14.63.7

Total 1,350 13.4

Brazilcontinued from page 10

expensive plans. The maximumwaiting period is now 24 hours foremergency treatment, 300 days forpregnancy, and 180 days for all othertreatment.

C Inclusion of treatment for AIDS,major organ transplants and mentalhealth illnesses. These werecommonly excluded in the past. Thenew benefits are limited to thetreatment of “full blown” AIDS (this does not include treatment ofpre-AIDS antiretroviral medication)and transplants of kidneys andcorneas. There is presently fiercelobbying taking place in an attempt todefer the introduction of these newbenefits.These points must be implemented

quickly! The initial September 1998 dateset out in the legislation has recently beenpushed back to November 1998. Thisdeadline mandates that all health carriersmust submit actuarial technical notes forthe five new “standardized” plans by thatdate, and they cannot sell “old” plans tonew clients after November 1998.

Other ImplicationsIncreases in PremiumsIncreases in premiums is inevitable. Theindustry is saying that, on average,premium increases will be between 10%and 20%, but this is still a poker gameand no one is as yet willing to show theirhand. While one of the noble intentionswas to give the Brazilian public a betterhealth plan, the reality of the situation isthat many will not be able to afford a newhealth plan.

Brazil has a population of 156million, however only 41 millionpresently have access to a private healthplan. This is due in large part to thepoverty level, which is still quite high.Statistics

showed that in 1995, only 10% ofBrazilians earned more than $350 (U.S.)per month (three times the minimumsalary). It is inevitable that these priceincreases will push access to privatehealth plans out of the reach of many,which will then undoubtedly increase thedemand for the government’s alreadyover-stretched health services.

The prices of the insurancecompanies’ (Seguros Saúde) plans willprobably not increase very much becausethese plans were already quitecomprehensive and the pricing includedthe capital cost of establishing somereserves. The really hefty price increasesare expected to be experienced by theclients of other health carriers, that is theHMOs (Medicina de Grupo), Unimedassociations (Cooperativas), and the self-administered plans (Autogestão).

Less Players The reserving requirement will require alarge number of health carriers toestablish reserves for the very first timewithin a five-year time period. Thosehealth carriers (79% of the health market)that previously did not have to establishreserves are shown in Table 1. Therewill be many who will not have access tothe required capital and it is predicted thatthere will be many mergers andacquisitions accompanied by the entry ofnew foreign capital.

Concluding CommentsA common misinterpretation in the localpress is that the law changes the structureof health carriers. This is not technicallycorrect. The new law only changes the“product.” Clearly, some of the changesintroduced point to making certainchanges to the corporate structure, butsuch changes have not been mandated bythe law.

The general mood is positive with theindustry largely admitting that there aremany positive aspects of the new law thatwill benefit both the consumer and theindustry as a whole. Nevertheless, muchdoubt exists as to the exact interpretationof many aspects of the new law and afeeling that the time-frame for theimplementation of the new plans is tooshort to achieve a seamless transition.

If you would like to receive acomplete copy of the legislation translatedinto English, please feel free to contactme at [email protected].

Ronald L. Poon-Affat, ASA, is Directorand Vice President—Life and Health atGeneral & Cologne Re Brazil Ltda. inSão Paulo, Brazil, SOA Ambassador toBrazil, and a newly elected member of theInternational Section Council.


TABLE 1Worldwide Population Trends

1995 2020Percentage

Increase

WorldU.S.ChinaIndiaBrazilIndonesia

5.7 billion265 million

1.2 billion890 million165 million190 million

7.7 billion315 million

1.4 billion1.3 billion

215 million255 million

35%1917463034

TABLE 2Economic Growth

GDP Growth(Percentage)

Per CapitaGDP

Inflation(Percentage)

Savings(Percentage

of GDP)

ChinaHong KongIndiaIndonesiaMalaysiaPhilippinesSingaporeSouth KoreaTaiwanThailand

9.95.17.07.88.15.95.87.26.68.5

$ 54023,200

335940

3,9301,130

26,40010,07612,265

2,680

5.66.68.54.73.14.41.94.92.04.3

42352336371552372634

U.S. 3.9 26,620 3.0 15

TABLE 3Growth Opportunities

Premiumsper Capita

Percentageof GDP

JapanSouth KoreaSingaporeHong KongTaiwanMalaysiaThailandPhilippinesIndonesiaIndiaChina

$3,817782569409412

7227

6442

10.19.12.71.93.62.31.40.60.41.30.3

U.S. 965 3.6

The Equation for Success—Professionalism and Profitability: Part IIFocus on Asian Market by Thomas H. Kelly

Editor’s Note: This article containsmaterial excerpted from a speech given onJune 17, 1997 by Tom Kelly, Senior VicePresident and Managing Director ofLIMRA International, at a LOMA/LIMRA Strategic Issues Conference inSingapore. Credit is also due to RandyMakin, who converted the outlines andslides from Mr. Kelly’s speech into anarticle format for the newsletter. This isthe second installment of three articlesderived from the speech. The first articleappeared in the June 1998 issue ofInternational Section News.

he following percentagesTdocument that the global marketshare of life premium haschanged dramatically.

1950 1994

North America 75% 24%Rest of World 25% 76%

Looking at this on a regional basis,we can see the life premium market shareby each region where 85% of the Asiashare represents Japan.

1994

Asia 47.9%Europe 25.2North America 23.9Africa 1.2Oceania 1.1Latin America 0.7Total 100.0

Another major force at work is theworldwide population trend. Every year,88 million people are added to the worldpopulation. Table 1 reflects where thisgrowth is taking place and Table 2 looksmore closely at Asia, specifically, itseconomic growth.

As to premiums per capita forselected countries and as a percentage of



FIGURE 1Southeast Asia Industry Life Cycle

The Equation for Successcontinued from page 12

the GDP, Table 3 presents a greatopportunity for today and the future.

As shown in Figure 1, if we placethe countries on the industry life cycle,there are many years of future growth forSoutheast Asian countries.

Many companies are already takingadvantage of these opportunities, as therehave been a number of new entrants intothe Asian markets in recent years.

The career-agent system is thesystem of choice for distribution. InAsia, 50% of agents are part-time and atleast 50% are women. There has beenlimited penetration with other channels,such as brokerage, bancassurance, worksite, and direct response.

Traditional products, such as wholelife, endowments, and term products aredominant in the region, with somesprinkling of variable life and universallife. Other products include specialtypackage savings products (marriage,children) and personal accident/ indemnity. There is limited groupcoverage. Core products also come withsuch riders as par riders on nonparproducts, critical illness riders, andhospital indemnity. Some wrinkles totraditional products include “anticipatedendowments” contracts, with 5–10% of

the face returned every three years and a I truly believe there is an opportunitytotal return in 20 to 25 years. We have for creative and value-added productalso seen a rise in equity- or unit-linked development and, in doing so, changingproducts, based on the maturity of stock the value-added proposition withmarkets—Singapore, Malaysia, Hong customers in each country with the qualityKong. Side funds are stock-indexed of product offerings, services, andregional. distribution.

International Actuarial Workshop Held in China by John Zhang

n international actuarial actuarial firms in China and their possible care system, and the growth inAworkshop was held in structures. competition for qualified personnel thatGuangzhou, China on June 3–5, The meeting promoted would be generated by business1998. Actuaries and participants communications between academia and development.

from more than ten insurance companies industry in actuarial science and provided The meeting was organized by Dr.and scholars from Beijing University, our Chinese colleagues up-to-date John Zhang, an assistant professor ofZhongshan University, Jinan University, information about actuarial science. As a mathematics at IUP, with the support of aBoston University, Indiana University of result of the meeting, participants have a China Bridge International (CBI)Pennsylvania (IUP), and the SOA better understanding of how to use fellowship and SOA Asia subcommittee.attended the meeting. At the meeting, actuarial science in Chinese insurance The People’s Insurance (Life) Companyparticipants examined the current business companies and a better understanding of of China, Ltd. (PICC) Guangdongenvironment in China and studied the the future of actuaries in China—which Branch and the mathematics departmentrole, functions, and future directions of is, perhaps, the biggest future commercial of Zhongshan University co-hosted theactuaries and actuarial science in China. market in the world. After a lengthy meeting. John Eng, a Fellow of the SOA,Issues examined included: how to educate discussion, participants estimated that it attended and gave a short course at theactuaries for the needs of future Chinese would take from three to five years for meeting. The organizer wants to thankbusiness development; the functions and China to have demand sufficient to James W. Grosheider of Towers Perrin,structures of an actuarial academic support actuarial firms. The key criteria Rachel L. Gilmore of Buck Consultants,program; the conditions necessary for the considered include the enactment of laws and Tom Fagan of Blue Cross and Blueexistence of favorable to the development of actuarial Shield of West Pennsylvania for their

business, the privatization of the health information and help.


The Banner in Jakarta. Can you read the topic and time of the seminar?

Panelists in Tokyo (the first seminar). From left to right, Junzo Tanaka, SteveConwill, Mo Chambers, Shirley Shao, Bruce Moore, and Bill Bugg.

Seminars in Asia Mark a First by Shirley Hwei-Chung Shao

t all started during lunch in a sunnyIrestaurant at the SOA AnnualMeeting in Orlando in October 1996when Bill Carroll came up with the

idea of presenting seminars in Asia.That very afternoon, I went to my

first Financial Reporting Section Councilmeeting where the members discussedplans for 1997. “Great opportunity,” Ithought to myself as I mimicked Bill’sidea. After some wisecracks, I wasasked to develop a proposal outlining thepurposes, topics, cities, speakers, and, ofcourse, budgets. The proposal had tojustify running seminars 10,000 milesaway. related to the International Section: Bill itself needing to respond to the crisis as

Searching for the top 10 reasons why Bugg, who was the Chairperson, and well as reevaluating businesswe should sponsor seminars overseas, I Bruce Moore, the current Vice fundamentals. More focus is beingwas surprised to discover that neither the Chairperson. After many months of placed on the need for a closer review ofInternational Section nor the SOA had a planning and a binder full of faxed assets and liabilities together and theone- or more-than-one day seminar correspondence, the seminars took place resulting surplus.anywhere outside the United States. It in November 1997. The seminars were developed to helpseemed that we were missing a The topic of the seminar was asset actuaries and other financial professionalstremendous opportunity to exchange adequacy/capital adequacy analysis. understand the current regulatoryknowledge and serve our members. When we selected this topic at the environment in Canada and the United

In the spring of 1997, the Financial beginning of 1997, we could not have States, including reserve adequacy andReporting Section Council approved imagined the challenging times that were related solvency issues, how the currentsponsoring full-day seminars in Tokyo, ahead in Asia later in the year. In some environment evolved, and what has beenTaipei, Hong Kong, and Jakarta. It was sense, the interest in our seminars was experienced. At a higher level, thesealso decided to seek partnership with the heightened because of this turmoil. The seminars were intended to illustrate howInternational Section and International overwhelming feedback we received actuaries have responded to the changingPractice Area. These partners turned out proved the timeliness of these seminars. environment in North America and haveto be a great resource in planning, In each city, about 75 to 95 actuaries and become the leading profession in thecoordinating, recruiting, and so on, other financial professionals attended the broader area of the assessment andbecause they already have the inroads to seminar. management of financial risks.those markets. In fact, two of the The actuarial profession in Asia, both Bill Bugg (AFLAC), Mo Chambersplanners and panelists are very much in regulatory and industry fields, found (London Life), Yves Guerard and Bruce

Moore (Ernst & Young), and I(Prudential), two from Canada and threefrom the United States, traveled to thesecities to be the panelists. We were joinedby local speakers: Junzo Tanaka andSteve Conwill in Tokyo, Won-How Lo inTaipei, Paul Heady in Hong Kong, andKasir Iskandar in Jakarta. The seminarswere very informative, both for attendeesand speakers, because of the wealth ofknowledge from this diverse group ofpanelists.

The seminars first gave theperspective of what happened in thefinancial and insurance markets in the1970s and 1980s versus the previous erain



Temple in Hong Kong. From left to right: Bill Bugg,Shirley Shao, Mo Chambers and two local actuaries.

Welcome sign in Taipei. From left to right: Bill Bugg,Yves Guerard, Mo Chambers, and Shirley Shao.

Seminars in Asiacontinued from page 14

Canada and United States. There was a much attention orgreat deal of interest in this historical interest in the regionperspective because Asian markets are on risks that arisefacing some very similar issues today: from asseteconomic instability, financial weakening concentration, assetof the industry, heightened competition, defaults, or assetchanging needs of customers, and so on. liability mismatching. We then discussed the various responses Now, I find myselfto these issues, including asset adequacy trying to answerand capital adequacy analysis. questions relating to

The Asian markets are dominated by two-factor interestrelatively traditional products, with a rate models.small amount of variable products in a We talked aboutcouple of cities we visited. The audience modeling details suchwas interested in seeing the statistics and as the interest ratedescriptions of how and why the markets, models and theproducts, and distribution methods in various data,North America have changed over the last assumptions, andtwo decades. methods. We also

The underlying risk drivers for assets gave some examplesand liabilities were reviewed in detail to to show how changesfacilitate the presentations on the actuarial in risk profiles maytools and techniques for combating them. affect a companyThis was an eye-opening experience for financially and howme to see just how much interest there is that can be captured by using actuarial also reviewed how these roles havein getting a better handle on the risks. As tools. In particular, we demonstrated the evolved over the years. To tie into thea consultant 10 years ago, I could not get cash-flow-testing model and the dynamic topic of our seminars, we then focused on

financial analysis model. the role of the appointed actuary inAnticipating that this level Canada, compared with that in the Unitedof technical detail may put States. I thought this would have been amost actuaries to sleep fairly boring subject, but we receivedduring the long day of a many questions on how actuaries strike aseminar, I was pleasantly balance between working for the industrysurprised at the responses and fulfilling their professionaland related questions. obligations, especially if the two are in

The local actuarial conflict. The attendees were also veryspeaker shared what types interested in understanding whatof risks pertain to their motivates actuaries in North America toenvironment and how volunteer for activities benefiting thesome of them are profession and the public. In particular,addressed. It was a many were curious about why speakersterrific way for me, and I from North America were willing toam sure for the other devote our time and financial resources toNorth American speakers conducting these seminars and why theas well, to learn the unique SOA and employers are supportive of thissituation and risks to type of activity. which the actuarial At the end of each seminar, weprofession in each city will opened the floor for questions,need to respond. comments, and discussion for about one

I was somewhat hour. Frankly, this segment worried meamazed by the level of the most—I was afraid that we would notinterest in how the public get any questions. As it turned out, weis served by actuaries in were bombarded with North America. At theseminar, we discussed the continued on page 16, column 1various roles served by theactuarial profession thatarise from regulatoryrequirements and fromprofessional bodies. We


Seminars in Asiacontinued from page 15

questions. The speakers had to continue The actuarial institutes in each city I am very proud to have been a partanswering questions during the reception actively worked with the SOA on the of this first series of SOA seminarsafter the seminars. The questions and logistics of these seminars, which was no abroad. I would like to take thiscomments really reflected the fact that small task. We had strong support from opportunity to express my deepactuaries in each city are wrestling with the leadership of each institute and a appreciation to the many people involvedsomewhat different issues. group of excellent coordinators: Hikaru (it took me several months to finishThis is natural considering that market Sugawara in Tokyo; Jung-Hui Huang in writing thank-you letters). It was theirconditions are unique in each country and Taipei; Michael Ross in Hong Kong; and belief in this cause that made thesethat each country has suffered from the Kasir Iskandar in Jakarta. The local seminars a success. The model developedAsian financial crisis in varying degrees. actuarial institutes committed substantial for this series of seminars will beIn Tokyo, our presentation was taped so financial resources essential to making expanded to elsewhere in the world: Junethat it could be transcribed and distributed these seminars possible. Funding was 1998 in Buenos Aires; possibly Decemberto the attendees as well as to those who also provided by a joint effort within the 1998 in the Carribbean; and spring 1999did not attend. In Jakarta, we were asked SOA (International Section, Financial in Eastern Europe.to go back for a sequel on financial Reporting Section, and International Overall, it was a very successfulmodeling. Practice Area). journey, especially considering I only lost

Yes, we also followed the good old The speakers witnessed the SOA (and found) my luggage twice in all theU.S. tradition of hosting a reception after Ambassadors program under the stops I made.the seminar. The receptions were an International Section at work and were theexcellent opportunity for discussing ideas, direct beneficiaries of this program. For Shirley Hwei-Chung Shao, FSA, is Vicefor meeting people, for sampling local example, Dominic Lee (the Ambassador President and Assistant Actuary at thefood and drink, and for exchanging in Hong Kong) and his better half went Prudential Insurance Company inbusiness cards. I ran out of my 50 or so above and beyond in showing speakers a Newark, New Jersey, Vice-Chairperson ofbusiness cards part way through the visit great time in Hong Kong over the the Financial Reporting Section Council,to the third city. weekend. and organizer of the Asian Seminars.

Reforming Taiwan’s NHI with Managed Competition by Chiu-Cheng Chang

ABSTRACT aiwan’s National Health Insurance(NHI) program was implementedNOTE: This article evaluates the

performance of Taiwan’s NHI program employees, employers, and theagainst its objectives and offers a government. The contribution rates varymanaged competition model to reform the among six categories of employment,program. The model is expected to with the insureds contributing the most inimprove efficiency, quality, and total, followed by the government andinnovation in health care within the then closely by the employers. Inconstraint of equitable access but may not addition, the insureds are required to co-contain costs. In such a case, I argue for pay for health care services provided. letting the market determine the optimal For ambulatory and inpatient care, userlevel and allocation of health care fees are also charged to the patients. spending. If government intervenes the Under NHI, the payment system ismarket by putting an upper limit on health mainly on the fee-for-service basis,care expenditures, I argue for the supplemented by case payment, paymentexclusion of cost-ineffective care from the for disposable medical devices andcompulsory health insurance system. This care for all Taiwanese citizens materials, and a long list of prescriptioncreates a new concept of equity and a drugs.two-tier health care system. After more than two years’

Tin March 1995. It is acompulsory, single-payer health

insurance scheme incorporating 13 pre-existing public health insurance plans inTaiwan. It covers more than 96% of thepopulation and provides comprehensivehealth care services to its insureds. Theseinclude hospital and surgical inpatientcare, outpatient care, dental care,preventive care, pharmaceuticals,traditional Chinese medicine, and so on.

The objectives of the NHI programwere as follows:C To provide equal access to health

C To ensure both quality and efficiencyin delivering health care services

C To control health care cost so that thetotal expenditures fall within anacceptable range.

The source of NHI’s revenue ispayroll-related premiums contributed by

operation, Taiwan’s NHI experience hasgradually emerged. There are manydiscussions and debates over whether theNHI program is succeeding in achievingits goals and whether there should be


some reforms to restructure the program. The purpose of this



“The managed competition model as proposedhere is to solve the problems described ... butwithin the constraints of equitable access andcontrol of total health care expenditures.”

Reforming Taiwan’s NHIcontinued from page 16

article is to evaluate the NHI program and aim at improving the efficiency and to the Bureau of National Healthoffer a managed competition model to quality with which health services are Insurance (BNHI) via the tax-collectingreform it so as to achieve its objectives. produced and used. The managed authority. The insureds will receive their

Evaluation of Taiwan’s NHI ProgramAs of the end of May 1997, Taiwan’sNHI has collected nearly $18 billion(U.S.) of premiums and paid close to$16.5 billion (U.S.) of health careexpenditures. Thus, it appears self-sufficient on the cash basis. However,the program does show a few worrisomesigns.

Although the health care expenditureis only 5.26% of GDP for 1995–1996, itsgrowth rate accelerates at more than 13%while the growth rate for GDP is at 8%. Also, the annual growth rate of the totalhealth care expenditure is at 11.2%, ofwhich outpatient care expenditure growsat nearly 15%. Examining theexpenditure components further, onefinds that the outpatient care exceeds 54%of total NHI medical claims and the drugexpenses surpass 25% of total medicalexpenditure. Moreover, both the healthcare utilization rate and health care costper capita increase rapidly.

Perhaps far more important than theabove statistics are the following:C NHI’s inability to deliver health care

services efficiently due mainly to itsresource allocation and fee-for-service payment system

C NHI’s inability to assure quality ofcare in delivering health services

C NHI’s failure in providing both theinsureds and providers the freedomof choice of insurers

C Difficulty in accessing health servicesbecause of uneven distribution ofproviders

C Public dissatisfaction rates rangefrom 25% to 60%, averaging around40%.The idea underlying the managed

competition model to reform Taiwan’sNHI program comes not only directlyfrom the desire to solve the aboveproblems but also from reform experienceof many countries. Most of thesecountries’ reforms started out with theremoval of barriers to access to healthservices. They were then followed by thecontrol of the subsequent rise in healthcare expenditures. Finally, these reforms

competition model as proposed here is to subsidies to help them buy theirsolve the problems described and listed compulsory health insurance. Theabove but within the constraints of subsidies will be paid directly by BNHI toequitable access and control of total health the qualified insurers/health plans chosencare expenditures. by the insureds.

A Managed Competition ModelThe managed competition model asproposed here envisions a competitivemarket in which the allocation and pricesetting are determined by the market withthe government instituting a set of rulesso as to achieve the nations’s goal withrespect to equity and an efficientfunctioning of the market. As mentionedabove, Taiwan’s NHI is a single-payer,compulsory health insurance schemeunder which both the insureds andproviders do not have the freedom ofchoice as to the insurer. The proposedsystem intends tointroduce managedcompetition amonginsurers and/or healthinsurance plans aswell as among healthcare providers.

Many peopleconfuse the term“managed care,”which refers to the procurement of healthcare services by health plans and/orinsurers, with “managed competition,”which refers to the procurement of healthinsurance policies from competinginsurers and/or health insurance plans. The central idea of managed competitionis to force rival insurers/health plans tocompete honestly and fairly for enrolleesin the health insurance market. Fundamental to this process is accurateinformation that a health care consumerought to have on each competing plan. These information requirements are bothvast and vitally important.

We can thus characterize theproposed system as a compulsory healthinsurance for the whole population andmanaged competition amonginsurers/health plans as well as amonghealth care providers. Just as in theexisting NHI program, under theproposed managed-competition schemethe mandatory income-dependentcontributions will be made by theinsureds, employers, and the government

The subsidy per insured isindependent of the chosen health plan/insurer and is equal to the expected percapita costs within the risk group to whichthe insured belongs, minus a fixedamount which is equal for all insureds. The deficit created by this deductedamount is met by a flat-rate premium tobe paid by the insured directly to thehealth plan/insurer of his or her choice. The difference between the actual costsand the risk-adjusted payment will not bethe same for all health plans/insurers andwill be reflected in the flat-rate premiumthat the competing health plans/insurerswill quote. This creates the incentive for

health plans/ insurers to be efficient.The health plans/insurers will

function as an intermediary between theinsureds and the health-care providers. To a great extent, health plans/insurersand providers will be free to negotiate theterms and conditions of contracts. Because Taiwan’s National HealthInsurance Act does not specify the scopeof benefits in terms of institutions such ashospitals or nursing homes, but rather interms of types of care, any health caresupplier meeting certain quality standardsshould be allowed to provide theseservices. This will greatly increase thepossibilities for substitution of care andthus the competition among providers. Health plans/insurers will be allowed toselectively contract with providers and to



Reforming Taiwan’s NHIcontinued from page 17

offer different insurance options as long olume and capacity in health care, making n example, in Britain, salaried physiciansas the insurance conditions provide the managed competition unworkable. On working in a hospital are allowed to treatinsureds coverage for all types of benefits the other hand, if government is willing to private patients in their private practicespecified in the law. Insureds are free to share the responsibility for cost for a private fee. Under the proposedchoose among different health containment, efficiency and quality of system, many wealthy Taiwanese, whenplans/insurers, selecting the insurance care with all parties concerned (insureds, necessary, are expected to go abroadpolicy they like the most. The premium health plans/insurers, providers), then it searching for the best treatment availablepaid will reflect the efficiency and cost- should let the market determine the in the world.generating behavior of the contracted optimal level and allocation of resourceshealth-care providers. to be spent on health care. What the

Equity, Cost Containment, Efficiency, and QualityUnder the proposed system, competitioncan be expected to improve theefficiency, quality, innovation, andresponsiveness to consumers’ needs andpreferences. However, a questionnaturally arises as to whether managedcompetition can improve all these inhealth care within the constraints ofequitable access and control of total healthcare expenditure. The constraint ofequitable access appears to be achieved ina managed competitive health care systemas proposed here for Taiwan’s NHIprogram. Under the compulsory healthinsurance scheme, each Taiwanese citizenhas access to a comprehensive healthinsurance benefits package within a largepool of well-mixed risks.

On the other hand, managedcompetition may not be able to provideany guarantee for the achievement of costcontainment because health careexpenditures under the model may exceeda certain percentage of GDP. This isespecially likely given that:C Additional health care can contribute

to one’s health.C Most people consider a good health

status to be the most important thingin life.This means that a managed

competitive health care system may yieldhigher total costs. However, we shouldalso point out that a managed competitionsystem could be expected to yield morevalue for money and may also yield moreefficiency.

If managed competition does yieldhigher total costs, the government couldimpose a global budget on total healthcare expenditures by putting an upperlimit on the premium that each insuredpays directly to the health plan/insurer. In this way, the government is interveningwith price controls and controls on

market determines should then beconsidered the choices and preferences ofall health care consumers in the nation.

An argument for government to putan upper limit on some health careexpenditures is government’s objective toprovide access to health care for everycitizen. Access to care for sick and low-income people means cross- subsidiesfrom the healthy and high-income people. Should government put a cap on publichealth care expenditures, an importantquestion arises as to what types of healthcare should be provided by thecompulsory health insurance scheme. Should everybody have guaranteed accessto all care with any possible benefits,regardless of the costs? Clearly nocountry in the world can really afford thiskind of access. In such a situation, webelieve cost- ineffective care (that is carewith very high costs but very lowexpected benefits) should be excludedfrom the compulsory health insurancesystem. Therefore, under the managedcompetition scheme as proposed here,health plans/insurers should be allowed torefuse to reimburse those costs arisingfrom cost-ineffective care. In otherwords, only equal access to cost-effectivecare is guaranteed under the system. Certainly the insureds are free to buy anall-inclusive policy that unconditionallyreimburses all health expenditures. Ifsuch a policy is available on the market,its premium can be expected to be veryhigh.

This brings up another question. Will a two-tiered health care system, inwhich those who can pay will buy all-inclusive policies and those who cannotpay will not receive cost-ineffective care,emerge under the proposed managedcompetition scheme? Given the limitationof resources available for cross-subsidies,it appears that a two-tiered system isinevitable. Those who can pay willalways find their way. As

ConclusionThis article first reviewed Taiwan’s NHIprogram and evaluated its performanceafter two years’ operation against itobjectives. In order to help the NHIprogram achieve its objectives moreassuredly, I offer a managed competitionmodel to reform Taiwan’s NHI program. The model is expected to improveefficiency, quality and innovation inhealth care within the constraint ofequitable access but may not be able toachieve cost containment. In such a caseas managed competition yielding highertotal health care costs, I argue for lettingthe market determine the optimal leveland allocation of health care spending. However, if government’s objective is toprovide access to health care for allcitizens, it will intervene in the market byputting an upper limit on health careexpenditures to achieve the cross-subsidies to the sick and low-incomepeople. In such a situation, I argue forthe exclusion of cost-ineffective care fromthe compulsory health insurance system. This creates the new concept of equity,that is, equal access to cost-effective care,which in turn induces a two-tiered healthcare system, in which those who are ableto pay have access to care excluded fromthe compulsory health care benefitspackage. Given the limitation ofresources available for cross-subsidies tothe sick and low-income people, a two-tiered health care system is inevitableanyway. Finally, the cost-effectivenessof care appears to be the desirablecriterion on which society can decide towhich types of care every citizen shouldhave access.

Chiu-Cheng Chang, FSA, is Professorand Head, Department of BusinessAdministration and Director, MBAProgram at Chang Gung University,Graduate Institute of Management in Tao-Yuan, Taiwan and a former member ofthe International Section Council.


Use of Embedded Values (Shareholder Value) by U.S. and European Insurance Companies by Allan D. Affleck and Steven I. Schreiber

ver the past several years, many year’s operations created new value EUROPEAN STOCK COMPANIESOwell-known corporations, such (destroyed value).as Coca-Cola, AT&T, and To determine the extent to whichQuaker Oats, have begun using major U.S. and European insurers are

the concept of economic value-added using the embedded value concept,(EVA) to measure financial performance consultants from Milliman & Robertsonand to determine incentive compensation and from Bacon & Woodrow surveyedfor management. The primary goal of an senior executives of selected largeEVA system is to increase shareholder companies. For companies currentlyvalue. EVA is basically a company’s net using embedded values to measureoperating profit after taxes and after financial performance, we wanted to learnreflecting the cost of capital. Instead of their views on the advantages andfocusing only on earnings, the EVA limitations of the embedded valuesystem reflects how much capital is concept, and whether these companies areneeded to generate those earnings. If the using embedded values as a basis fordiscounted cash flows from a business incentive compensation for management. exceed the cost of the capital used togenerate those cash flows, then value hasbeen created for the shareholders.

A similar concept has been developedin the life insurance industry. Severalcompanies are now evaluating financialperformance based on the concept ofembedded value. Some companies referto this same concept as shareholder value. The embedded value or shareholder valueof an insurance operation equals;C Adjusted capital and surplus

plusC Discounted value of future profits on

in-force business.Both the adjusted capital and surplus

and the value of future profits reflect thecost of the capital required to support thein-force business, which is not availablefor distribution to shareholders.

Some companies also include a thirdcomponent in their definition ofembedded value to reflect the value offuture business. When the value of futurebusiness is included, this value is oftenreferred to as appraisal value.

Embedded value is expected toincrease from the beginning of the year tothe end of the year by the required returnon adjusted capital and surplus, plus thediscount rate times the discounted valueof future profits at the beginning of theyear. After adjusting for these expectedchanges in embedded value (and anycapital infusion or shareholder dividendspaid), any additional increase (decrease)in embedded value shows that the current

Survey ResultsU.S. STOCK COMPANIES

All but one of the companies surveyeduse the embedded value concept. Although one company has used theconcept for seven years, the others usingembedded values have been doing so fortwo years or less. Some of the newerusers consider the process to be in theimplementation stage and are still tryingto get comfortable with the concepts andhow to interpret the results.

All companies using embeddedvalues today continue to monitor andreport financial results on a generallyaccepted accounting principles (GAAP)basis as well. This is necessary becauseof regulatory requirements and becauseGAAP results continue to be the primarybasis for evaluating companies in thefinancial markets.

U.S. MUTUAL COMPANIES

Although several of the mutual companieshave studied the concept in great detail,none has yet implemented the embeddedvalue concept on a company-wide basis. However, one of the surveyed companieshas been using embedded values forseveral years to evaluate the results of itsinternational operations.

Most companies surveyed are using theembedded-value concept to evaluatefinancial performance, several for sixyears or longer. Two European insurersusing embedded values also use theaccruals method of accounting to evaluatefinancial performance.

COMPANIES SURVEYED

We spoke with senior executives from thefollowing insurance companies: U.S.Stock Companies; U.S. MutualCompanies; European Stock Companies;AEGON; John Hancock; Allstate; Metropolitan Life; Allianz; CIGNA; NewYork Life; AXA; Equitable Life;Northwestern Mutual; CommercialUnion; Lincoln National; Prudential;ING; Prudential Corporation; andTransamerica.

Advantages and Limitations of the Embedded Value ConceptMost companies using the embeddedvalue concept regard it as an effectiveway to evaluate financial performance,although some of the newer users said itwas too early to reach a conclusion.

Survey respondents identified thefollowing advantages of the embeddedvalue concept for measuring financialperformance. The embedded valueconcept:C Enables management to make better

decisions by providing one measurethat encompasses all activities

C Reports the whole effect of a changein management action or a change inexperience assumption in the currenttime period, whereas GAAP andstatutory accounting methodsrecognize either part of or none ofthe effect in the current period

C Focuses on a longer time horizonthan GAAP or statutory accountingmethods

C Allows management to evaluate theimpact of its actions by measuring



Use of Embedded Valuescontinued from page 19

the differences in embedded values C It is difficult to ensure that the risk financial performance, few are using it toresulting from various decisions discount rate appropriately reflects determine incentive compensation for

shifts in the current risk profile over management. One U.S. companyC Is particularly meaningful forevaluating results for life insurance,since the long-term focus ofembedded values matches the natureof the product concept were able to address these

limitations and found embedded values toC Clearly highlights where value isbeing created and where it is beingdestroyed

C Is an effective tool for making capitalallocation decisions, because itreflects the impact of the use ofcapital to generate earnings

C Leads to analysis of actual expenses,new business production, investmentreturns and persistency againstprojected assumptions

C Improves communication amongbusiness units and between the headoffice and foreign operations by acommon language and approach.The companies using embedded

values also identified certain limitations tothe method:C There are no official rules or

interpretations for the method (suchas by FASB or the NAIC), whichresults in different methods amongcompanies and the potential formanipulating results.

C It cannot currently be used as a U.S.company’s primary financialmeasure, because it is not acceptedby capital markets. (However, thecapital markets are beginning torecognize the useful informationprovided by insurance companyembedded values.)

C The calculations are complex andtime-consuming.

C The learning curve is difficult formany managers, requiringconsiderable time for everyone tounderstand and to acclimatize.

C Sensitivity to some assumptions ishigh, so embedded value results maychange significantly from one year tothe next. (This makes analyzingchange in embedded values asimportant as the embedded valueresult itself).

C The measurement of trends overseveral time periods may be distortedby changes in assumptions.

time or the current differences in risk surveyed determines 50% of seniorprofile by line of business. management’s incentive compensation

using embedded values, with the other However, the companies using this

be a useful way to evaluate financialperformance.

If the Embedded Value ConceptWas Considered, Why Was ItRejected?For companies not using the embedded-value concept, the primary measures offinancial performance include statutoryinternal rate of return, modified GAAPand key drivers (such as agent recruiting,agent retention, expense levels, lapserates, and so on).

Several of the companies not usingthe embedded value concept spent asignificant amount of time studying thisapproach, but did not implement it. Some of the reasons given for notimplementing embedded values include:C The process is too difficult to

implement, particularly in largecompanies with many autonomousunits that cannot agree on groundrules.

C Results may be volatile and toosensitive to changes in assumptions.

C Management is uncomfortable withany system not based on GAAPprinciples, which allowsbenchmarking of results againstcompetitors.

C It is difficult to link projecteddividend scales with projectedeconomic assumptions.

C The company is too busyimplementing GAAP for mutuals toconsider other methods.

C The return on investment on newbusiness is less than the company*shurdle rate, so the embedded valueapproach would consistently showvalue being destroyed.

Use of Embedded Values for Management Incentive CompensationWhile many of the companies surveyedare using embedded values to measure

50% based on GAAP return on equity. Another U.S. company is in the processof changing its management incentivecompensation plan to incorporate theembedded value concept. Only oneEuropean company surveyed basesincentive compensation on embeddedvalues. For this company, embeddedvalues is a key component of the incentivecompensation plan. Several otherEuropean companies are now discussingthe possible use of embedded values forincentive compensation.

The most frequent reason companiesgive for not using the embedded-valueconcept in determining incentivecompensation is that the process is toonew and the companies first need toresolve all technical issues associated withimplementation. One company that hasused embedded values for several years toevaluate financial performance said that,because of the highly political nature ofthe incentive compensation formula, itcontinues to use traditional measures. According to companies using embeddedvalues for defining incentivecompensation, two other benefits inaddition to those described above are:C Management reacts more quickly to

pricing and experience problemsC The process has a direct impact on a

company’s decisions to enter orcontinue in a line of business.

Implementation SuggestionsSeveral of the companies surveyedoffered useful suggestions for companiesconsidering implementation of anembedded-value system. Thesesuggestions include:C Do not rush implementation. One

European company, as part of itsimplementation process, allowed fiveyears to resolve technical issuesacross all of its subsidiaries andseven years to fully educate seniormanagement on the meaning of theresults. Several companies



“It has come to my attention thatone of you called the profit motive ‘a

figure of speech’?”

The Italian Life InsuranceMarket

Use of Embedded Valuescontinued from page 20

iterated this same general suggestion.C Do not discontinue the current

approach until all technical issues andeducational aspects are fullyaddressed.

C Do develop a set of guidelines. Toensure uniformity in calculation fromone period to the next and amongbusiness units, as well as to preventmanipulation, each company needs todevelop its own guidelines on howthe embedded value process willwork. These guidelines shouldaddress all issues associated with theembedded value process, includingdefining responsibility for settingassumptions and defining the processfor revising assumptions.

Future of Embedded ValuesWe anticipate increased use of theembedded value approach as morecompanies recognize its benefits formeasuring financial performance. Whileimplementation is not easy, companiesthat have gone through the effort believethe embedded value concept providesbetter information for management andthereby improves the actual decisionsmade by its managers.

Allan D. Affleck, FSA, is a principal andconsulting actuary in the Seattle office ofMilliman & Robertson. He is the founderof Milliman & Robertson Japan. StevenI. Schreiber, FSA, is a consulting actuaryin the Tokyo office of Milliman &Robertson Japan.

by Alessandro Corsi

he Italian life insurance sector has total U.E. life market, 1.4% on GNP),Tbeen influenced by dramatic and behind France with ITL 137,700 billionhistoric changes over the last few (6.0% of GNP), the U.K. with ITLyears. These changes have 118,400 billion (6.2% of GNP), Germany

stemmed from the creation of the with ITL 88,900 billion (2.6% of GNP),insurance common E.U. market, the and The Netherlands with ITL 29,500strengthening of new competitors into the billion.market such as banks and financial As to distribution channels, trendsconsultants, and the recent modifications have been changing dramaticallyin households’ savings profile. Also, in throughout the 1990s. Traditionalthe last few years, the social security channels, which are basically career-tiedpension scheme has been reformed agents and companies’ employed salesthrough a change in the method of forces, continue to be the largest channel. calculating social security pensions and a However, their market share has fallenprogressive increase in the retirement rapidly fromage. The introduction of pension 82% in 1991funds, which to below 60%came into in 1997. Oneffect in the other1997, will hand, banks,have to either throughcompensate a totallyfor future owned life officelower state or through a jointpensions, thus venture with an insurer,creating new opportunities and gained remarkable market shares at thechallenges for life offices, although in the expense of traditional outlets. Their sharecontext of a more aggressive grew from 4% in 1991 to nearly 25% inenvironment. 1997 with more than 50% of new sales.

Total life premium income amounted The third major distribution channelto about 37,100 billion Italian lire in 1997 consists of financial consultants, which[roughly $21 billion (U S.) at the are the captive sales network of mutualDecember 31 exchange rate of $1 (U.S.) fund companies and financialto 1,760 (ITL)], 41.5% over the previous intermediation firms known as theyear’s figure and representing close to Securities Intermediation Company45% of the total insurance sector. The (SMI). They have maintained a more orlife market share was only around 25% in less constant share of approximately 15%1990. As to the different business lines for the last few years, thanks to thiswithin the life market, well over 90% is channel offering global advice on allindividual business, the remainder being financial needs to their clientele. Theygroup business which has been quite have effectively segmented the marketstagnant over the last few years. As to and sell tailor-made products to mediummarket concentration, of 127 companies and high segments. In life business,carrying on life business at the end of brokers play a marginal role, with a1996 (105 pure life, 22 composite marginal market share concentrated inoffices), the top-ten-ranked companies medium- to large-sized group schemes.had a market share of 55%, 72% taking Generally speaking, consistent with ainto account the first 20-ranked. It may trend which can be observed Europe-be of some interest to locate the Italian wide, Italy is experiencing a progressive life market within the European Union: in1996 Italy was only the fifth-ranked continued on page 22, column 1market with premiums of ITL 26,100billion (5.4% of the


“Reforms of both the social security system andsupplementary pensions started in 1993 andreceived a fresh impetus in 1995 ... social securitybenefits will be defined in terms of contributionspaid throughout employees’ working lives, ratherthan based on final earnings.”

The Italian Life Insurance Marketcontinued from page 21

integration between the financial, single currency forced the Italian on the subject. Interested readers canbanking, and life insurance sectors, as government to pursue an economic policy find a more thorough treatment in thewell as a radical change in the households aimed at reducing both inflation and the April and October 1997 issues of Benefitssaving profile, all of these events again public finance deficit, the result of which & Compensation International.driven by macroeconomic factors. was a brutal and rapid decrease of The Italian pensions environment is

Until some years ago, it was typical governmental bond yields (incidentally dominated by a variety of State and otherfor an average Italian household of a backing most of the life liabilities to date) compulsory, collectively bargainedmedium- to high-income band to funnel a on new issues. arrangements, varying by business sectorlarge part of its traditionally high savings The households reaction over the last and category of employee. Theseratio into short-medium term treasury couple of years has been from the one provided benefits that were generousbonds, guaranteeing high real yields side to switch a significant portion of their salary-wise by international standards,within a relatively high inflation scenario. savings from treasury bonds to shares or with the exception of higher-paidThis was much more attractive than the mutual funds, both domestic and foreign, employees. Before 1993 no coordinatedthen-asphyxiated stock market. Life and from the other side to utilize a single legislation governed supplementary insurance could complement the provider for all of its saving and pension schemes. Therefore, employershousehold’s portfolio, typically under the sometimes its protection needs (one-stop who established pension funds, normallyform of a traditional, relatively high- shopping). for highly paid employees only, were ableloaded, fiscally-driven endowment with The life insurance industry’s to set up the benefit structures and theprofit sharing. Pure risk policies were, reactions have been a move to integrate funding means almost as they wished, inand still are, virtually marginal because of with other financial players, including the context of a generous taxa “cultural” lack of awareness of death joint ventures with banks and acquisitions environment.and disability risks within Latin of mutual funds companies, to convert the Reforms of both the social securitycommunities. From the industry’s traditional sales forces into more global system and supplementary pensions

standpoint, main focus points were the with an eye to saving rather than risk pensions, have finally been regulatedlittle or no contact between life companies products. In the early 1990s, the from a statutory and tax standpoint after aand other financial players, the traditional traditional with-profit endowments long bureaucratic process which almostwell-commissioned distribution channel marketed by traditional sales forces ended in 1997. dealing with life and nonlife, the high started to reduce their loadings to face the As to fund legal structures and apartmargins stemming from not too competition of low-load banking products. from the detailed regulations such as theinnovative and inflexible products, and a Over the last one-and-a-half years, all of separation between the Fund and thecertain administrative inefficiency within these product lines have been partially different operational parties involved (thata relatively self- replaced by new investment products is, administration, investment and assetprotected market. meant to link the life industry to the custody, tax treatment, investment

In the early 1990s, banks started to booming stock markets, especially as to restrictions), it is useful to recall thatenter the life market, normally with pure- financial consultants and banks’ networks. pension schemes will have to be defined-saving, low-loaded, fiscally driven These would typically be either single- contribution. Defined-benefitproducts sold on a single-premium basis premium, index-linked, medium-term arrangements are possible—albeitor on a single-premiums program basis. products with a return guarantee wrap, or unlikely—for the self-employed only. Thereafter the European directives single/singles programs unit-linked There would basically be two classes ofregarding Free Movement of Capitals and products, normally without a return new pension funds, “open” and “closed.” of life insurance specifically, all implying guarantee. Closed pension funds could be establisheda higher degree of competition and an The new laws reforming social by an employer or other “affinity group”enhanced consumer’s protection, were security pensions and introducing pension with membership limited to that group.incorporated into all member countries funds have been mentioned at the outset Membership of open regulations, including Italy. of this article. Because of the impact that

Last but not least, the needs of they will have on the financial market, as continued on page 23, column 1complying with the so-called “Maastricht well as on the life industry, it iseconomic parameters” to qualify for the worthwhile to provide a quick overview

financial consultants, started in 1993 and received a freshmore efficiency, and impetus in 1995. In particular, futurethe reduction in social security benefits will be defined inacquisition and terms of contributions paid throughoutmaintenance expenses employees’ working lives, rather thanthrough commissions based on final earnings. Moreover,squeezing and restrictions have been imposed on earlyreengineering retirement. It is widely recognized thatprocesses. further benefit cuts and more restrictions

On the product will be necessary in the future. In turn,side, more innovation private pension funds, meant tohas arisen, although supplement lower social security


The Italian Life Insurance Marketcontinued from page 22

pension funds would initially be restricted different lines. First, there will be a banks, life companies, mutual fundto those who are not covered by a number of national industry schemes, companies, and SMI, apart from offeringcollectively agreed pension fund, but it applying to certain employment sectors investment, administration, custody, andwill be possible for a closed pension fund which will be largely influenced by the consultancy services to the closed-pensionmember to transfer one’s rights to an national trade unions. Second, several funds, will establish their own openopen fund after five years of large employers will establish closed funds.membership. pension funds to cover their employees,

Likely developments of the new contracting out of the relevant industry- Alessandro Corsi is with Assicurazionimarket will be that new pension funds wide arrangement. Third, the main Generali in Trieste, Italy, and a memberwill be established along a number of financial services providers, such as of the Italian Society of Actuaries.

Insurance Regulation in Spain—Changes and Challenges by Daniel A. DeKeizer

he European insurance market has any. This note must be certified by a the reserve interest rate for up to twoTbeen rapidly changing in the last qualified actuary. years before reserve strengthening wasfive years. Adoption and required (Article 71 of the 1985implementation of the life and regulation).

nonlife directives, the converging For policies denominated in non-economies required by the monetary Spanish currencies, a similar formula,union, privatizations, mergers, and applied to the appropriate governments’acquisitions have all helped reshape the bond yields, is required for foreigninsurance landscape. currency contracts.

Spain has not been exempt from Currently, this formula would resultthese changes. In response to the 1995 in a statutory interest rate ofOrdinance on the Supervision of Private approximately 3.4%, which by itself willInsurers, the Direccion General de require substantially higher reserves thanSeguros (DGS) has proposed a sweeping many companies are now holding. new set of regulations. These regulations However, for “unit-linked” contracts, inreplace the 1985 and 1986 regulations and which the insured is bearing the interest-their amendments and are intended to rate risk, the company can simply holdbring Spanish regulation and practice into the market value of the assets. Theseline with the European Community (EC) contracts are reported as part of thedirectives. general account. No separate accounting

This article reviews some key aspects treatment is currently required for suchof the new Spanish regulation and products. discusses possible responses by the This provision should encourageinsurance market. companies to move more aggressively

Technical NoteMuch of Spanish regulation builds on theconcept of the “Technical Note,” whichis a formal statement of the pricing basisfor a given contract form. This concept table, such as the U.S. Commissioner’sis carried forward from the 1985 Standard Ordinary table. Instead, theregulations. The Technical Note must table must satisfy certain criteria:include a guaranteed mortality table andinterest rate, benefit descriptions, thecalculation of the net premium, and theexpense loads used to convert the netpremium to a gross premium. It alsodescribes the basis for participation, if

ReservesArticles 32–38 of the proposed legislationdeal with the calculation method, theinterest rate, mortality tables, andexpenses. Previously, the reserves weredetermined on a valuation premium basis,which provided for maintenance expensesbut not the amortization of acquisitionexpenses. The interest rate and mortalitytable were the same as those used todetermine the premium in the TechnicalNote. Under the new regulations,products of up to one year durationrequire an unearned premium reserve,while longer term products require aseriatim, prospective, gross-premium-type reserve.

InterestThe interest rate can be no more than60% of the weighted average of long term(five or more years) government bondyields during the last quarter of the lastthree years. The weighting is 50% of themost recent year’s rate, 30% of the nextprior year’s rate, and 20% of the yieldfrom three years ago. The governmentwill publish the rate on an annual basis. If the actual investment returns of theinsurer are less than this benchmark rate,then the actual returns are to be used. For certain contracts, the interest rateused in determining the premium—iflower than either of the above rates—isused in reserves as well. Previously,actual returns were allowed to be below

into variable products or products withmarket value adjustments.

MortalityThere is no explicitly specified mortality

C It must be based on national orforeign experience and determinedusing generally accepted actuarialmethods.

C It must be within certain confidenceintervals specified by thegovernment.


Insurance Regulation in Spaincontinued from page 23

C It must be based on observation interest, mortality, and expense the same formula has the effect ofperiods within the last 20 years. components of the reserve separately. strengthening the required capital.

This is a more conservative standard in The simple nature of this formulaC It must include mortalityimprovements if significantsurvivorship benefits are available.In addition, if emerging experience

credibly demonstrates that the originaltable is inadequate, reserves must beincreased to reflect the actual behavior.

ExpensesThe administration and acquisitionexpenses included in the product’sTechnical Note are also reflected in thereserve. Under the previous regulation,expenses were generally charged asincurred, although the amortization ofcertain acquisition costs (in excess offirst-year loads) was allowed.

In contrast to GAAP reserves orDAC in the United States, no lapses orwithdrawals are included in thecalculation. Companies will need to bevery careful that they do not overestimatehow much of the acquisition costs can befront-loaded.

If the company’s actual expensesexceed those assumed in the TechnicalNote for more than two years running,and those expenses cannot be rationallyexplained as being “extraordinary” orone-time expenses, then the actualexpenses must be reflected in the reservecalculation. This loss recognition conceptwill encourage careful monitoring andstrict controls on expenses as compared tothe loads in the Technical Note. It mayalso encourage companies to refile theTechnical Notes on existing products,reallocating expenses, interest gains, andmortality tables even if the price andbenefits to the consumer are unchanged.

Adequacy of ReservesUnlike the United States or Canada,where the actuary opines on the adequacyof the reserves in aggregate, the Spanishregulation requires the actuary to test the

that gains from one component or product means that it may not do a good job ofform will not be allowed to offset losses discriminating between strong and weaklyon another. This may create an capitalized companies. At this time,interesting opportunity for surplus relief regulators do not appear to be seriouslyreinsurance treaties supported by the pursuing a more detailed risk-basedgains of one component of the reserves to capital formula such as the U.S. oroffset the surplus strain created in another Canadian methods.area.

AssetsThe growing cross-border activity of theEC is expected to bring greater liquidityto the asset side of the balance sheet. Increased liquidity and a broader range ofassets should improve insurers’asset/liability matching and the marginsavailable from cash-flow management. These advantages may be offset byadditional competitive pressure ascompanies with superior investmentperformance pass on a portion of thesegains to their customers.

Articles 50–53 control the assetallocation and valuation rules for thoseassets supporting the technical reserves. These clauses contain much more detailthan the corresponding clauses of theprevious regulation. Insurers are allowedgreater access to assets from across theentire EC. New asset types, such asderivatives and futures, are explicitlycovered as admitted assets.

Solvency Marginsthe Euro, Y2K, new competitors, andSolvency margins are discussed in

Articles 61 and 62. For life companies,the standard of 4% of reserves plus 0.3%of the net amount at risk is continuedfrom the previous regulation. “Unit-linked” products have a lowerrequirement of 1% of reserve plus 0.3%of the net amount at risk. This isconsistent with those of a number of theEC nations. However, because of thestronger reserve requirements, keeping

Conclusions and Future PossibilitiesThis regulation takes a big step toward anopen market with the EC, improves thetechnical bases for reserves and assets,and generally strengthens the solvency ofthe Spanish insurance community. Theapplication of the regulation is likely toproduce new products, especially of thevariable or unit-linked type, and somereinsurance opportunities. The expensecomponent of the reserve formula will putpressure on inefficient companies anddistribution methods to reform.

I speculate that future regulation willinclude commission and cost disclosure asis already being practiced in Great Britainand Portugal, and the growing cross-border and direct marketing insurancetransactions will act to further reduceexpense margins.

The Spanish market has become afast-changing, challenging place in whichto do business. Insurance companiesmust respond to the new Spanishregulations and, at the same time, manage

falling interest margins. Recognizing andtaking advantage of the opportunities inthis regulation is one way for superiorcompanies to distinguish themselves inthis market.

Daniel A. DeKeizer, FSA, is a SeniorActuarial Associate at Metropolitan LifeInsurance Company, InternationalOperations, in New York, New York.

1994 1995 1996

$0

$100

$200

$300

$400

$500

$600

PAGE 28 INTERNATIONAL SECTION NEWS SEPTEMBER 1998

FIGURE 1Premium Income ($millions)

Life Assurance in Dublin’s IFSC by Colm Fagan

EDITOR’S NOTE: This article first A major attraction for newer European countries where unit-linkedappeared in the International Money entrants, however, is Ireland’s regulatory policies were only introduced within theMarketing magazine and is reprinted with regime for life assurance and the last five to 10 years.permission. country’s long experience in the design Ireland was ahead of the U.K. in

n Dublin’s fair city, where the“Igirls are so pretty” run theopening lines of the city’santhem, “Molly Malone.” But

is it just the pretty girls that are enticingmajor financial services groups toestablish cross-border life assuranceoperations from Dublin’s InternationalFinancial Services Center (IFSC)?

The latest “Blue Book” fromIreland’s Enterprise Ministry recordsbusiness transacted in 1995. It shows atotal of 12 companies authorized totransact cross-border business fromIreland under the EU’s Third LifeDirective. This Directive—also called theFramework Directive—established theframework for Europe’s single market inlife insurance.

Total premium income in 1995 wasIR^161m ($240m), a 50% increase onthe previous year. Industry estimatesindicate that premium income more thandoubled to IR^343 million in 1996(Figure 1).

While growth rates in the three yearsprior to 1996 have been exceptional,activity during 1997 indicates that lifeassurance in the IFSC is moving to aneven higher plane. Major changes arealso taking place in the nature ofoperations being launched from Dublin.

Most of the companies named in the1995 Blue Book were subsidiaries ofU.K. parents. Their initial raison d’êtrewas to sell policies back into the U.K.

Of course, tax is still an importantattraction for companies thinking ofestablishing in the IFSC. Investmentincome and capital gains onpolicyholders’ funds are completelyexempt from Irish tax. Also,shareholder’s profits are subject to aspecially low tax rate of 10% until theyear 2005. Thereafter, tax onshareholders’ profits increases—but onlyto 12.5%. The Irish Government hasguaranteed the 12.5% rate until at leastthe year 2025.

and delivery of both unit-linked and embracing the unit-linked concept, mainlytraditional policies. because Irish Life, the market leader, was

The Department of Enterprise, an early convert to the unit-linked cause. Trade, and Employment (DETE) is the It introduced its first unit-linked policy inregulator for the insurance industry. 1964 and its “Property Modules” range ofTraditionally, it has adopted a “hands- funds, introduced in 1969, captured theoff” approach to supervision and has imagination of an investing public eagerplaced considerable reliance on the to share in the benefits of a booming realprofessional judgment of the insurer’s estate market.Appointed Actuary. This approach has The Irish insurance industry’s earlycontinued following the implementation of love affair with unit linking contrasts withthe Third Life Directive. Its effect has the U.K. where the market leadersbeen to facilitate product innovation (Prudential, Standard Life, etc.) viewedwithout compromising solvency. In the the concept with suspicion and, as alast 60 years, not a single life insurer consequence, were slower in adding unit-supervised from Ireland has gone into linked products to their portfolios.administration or receivership. This long experience with unit

As long ago as the early 1970s, unit- linking means that there is now in Dublinlinked business already accounted for a strong cadre of professionals with themore than 50% of all new insurance necessary skills in dealing withpolicies sold in Ireland. The flexible sophisticated life insurance products. Thewhole of life product design was market is also responding quickly to thecommonplace by the early 1980s as well growing demand for outsourcedas for Critical Illness Insurance. This professional and administrative services— contrasts with the experience in many actuarial advice, Third Party


Administration, etc.



“The vision of the original promoters of theEuropean single market is at last being realized. It isnow almost as easy for a company based in Dublinto sell business in Lombardy as it is for one based inMilan or Rome.”

Life Assurance in Dublin’s IFSCcontinued from page 25

This combination of a favorable transact cross-border business from an (IDA), whose primary function is toregulatory regime, no tax on Irish head office using either the Freedom promote inward investment into Ireland,policyholders’ funds, low tax on of Establishment or Freedom of Services is charged with recommending to theshareholders’ profits, a strong skills base, provisions of the EU’s Third Life Department of Finance whether theand membership of the EU is attracting Directive are relatively straightforward. undertaking qualifies for the special taxan increasing number of major financial An application to the DETE for exemptions associated with the IFSC. services groups to establish life assurance authorization to establish a head office The IDA’s primary concern is that thecompanies (“head office undertakings” is undertaking in Ireland must be undertaking is not a “brass plate”the official terminology) in Dublin to sell accompanied by a comprehensive operation and that it generateslife assurance and pension products to business plan. The Department has employment in Ireland, either directly orcustomers both within and outside the specified the required content of the plan indirectly through the medium of a ThirdEU. in general terms. In reality, it is looking Party Administrator. The target is that it

The vision of the original promoters for a little more than the type of planning should generate 20 jobs—either direct orof the European single market is at last document which the sponsoring institution outsourced—within three to five years ofbeing realized. It is now almost as easy will want prepared in any event to satisfy commencement of operations.for a company based in Dublin to sell itself of the undertaking’s viability. An application to the DETE forbusiness in Lombardy as it is for one The plan must be accompanied by approval to establish a branch in anotherbased in Milan or Rome. optimistic and pessimistic financial EU member state follows a similar but

This is precisely what is happening in projections based on alternative sales and more streamlined procedure. The normalthe case of the Lombardy-based Gruppo expense assumptions. The capital time limit for branch authorization isArea, a broadly based financial services requirement for the undertaking is derived three months, compared with six monthsgroup whose activities include a bank, from these projections. for a head office undertaking.

Area Banca, established in 1995. years of operations. requirements. General good requirementsSales of life insurance and annuity The capital requirement depends on a include regulations to protect consumers

products are central to the group’s variety of factors including product from unscrupulous sales practices, e.g.,operations. Up to now, the Gruppo Area design, sales volumes, distribution costs, rules on the wording and content of salessales network has distributed the products etc. The minimum solvency margin illustrations.of other Italian life assurance companies. required under EU Regulations is 800,000 The procedures for carrying onThis will change in the future, however. ECUs. This equates to approximately “Freedom of Services” business are much

A wholly-owned subsidiary, Area IR£640,000 at current exchange rates. simpler. The applicant is only required toLife International, has now been The DETE likes the projections to show send a notification to the DETE statingauthorized to transact cross-border free capital exceeding the minimum by a the nature of the commitments that itbusiness from Dublin’s IFSC and, in the comfortable margin throughout the plan proposed to cover. The DETE in turnfuture, the group’s Italian sales network period. Furthermore, even the simplest notifies the supervisory authority of thewill distribute the products of Area Life. business plan will include some start-up other member state. It is worth notingAt a later stage, Area Life International costs that cannot be recovered that no approvals are required, providedplans to sell policies in other EU member immediately from margins in policies that the company satisfies normal Irishstates. sold. solvency margin requirements.

A number of other European and Taking all these factors in account, Naturally, it is also necessary to complyAmerican companies are taking a similar total shareholder funds of at least IR£1M with the general good requirements of theroute. At least two major American ($1.5m) will be required for the simplest host member state.groups have decided to base their planned of business proposals. The capital The most important point to noteEuropean life assurance companies in requirement could be much higher for a about the Irish regulatory process hasDublin, selling into other countries on proposal involving significant capital more to do with style than substance. either a “Freedom of Services” or strains in the early years. Both the DETE and the IDA see their“Freedom of Establishment” basis. While the DETE approves the primary job as helping bona fide

The procedures for obtaining application for authorization to establish a applicants to secure authorization, notauthorization to establish a new life new life assurance company in Ireland, hindering them.assurance company in Ireland or to the Industrial Development Agency

The undertaking’s On approving an application toAppointed Actuary establish a branch in another membermust certify that the state, the Irish supervisory authorityinitial capital base will informs the supervisory authority of thebe sufficient to cover “host” member state and provides it withmathematical reserves information of the proposed constitutionand the required and operation of the branch, as requiredminimum solvency under the Framework Directive. Withinmargin under EU two months of receiving this information,regulations for the the host country supervisor must notifyfirst three to five DETE of its “general good”


Minutes of the InternationalSection Conference Call

Life Assurance in Dublin’s IFSCcontinued from page 26

There is much debate about therelative advantages of “Freedom ofServices” and “Freedom ofEstablishment” under the Third LifeDirective. In practice, the right answerdepends on a variety of factors. Theseinclude:C The scale of the operation in a

particular countryC The distribution channels being usedC The products being soldC The host country’s tax and regulatory

structure.Essentially, the question should be

answered by reference to businessconsiderations. Too often it has beenanswered incorrectly by referring purelyto legal and tax considerations, withoutconsidering wider business issues.

In summary, Dublin’s emergence asa leading location-to-market cross-borderlife assurance in Europe is due to acombination of:C Zero tax on policyholders’ fundsC 10% tax on shareholders’ profits

(increasing to 12.5% for the 20 yearsfrom 2005)

C A regulatory regime that facilitatesproduct innovation

C A sophisticated support structure thatincludes ready availability of peoplewith strong product knowledge andtechnical expertise. With all these advantages, who cares

about the prettiness of the girls inDublin’s fair city?

Colm Fagan, ASA, is Chief Executive atLife Strategies Ltd., in Dublin, Ireland.

Monday, July 20, 1998

Participating: Michelle Chong Tai- Bell(Chairperson), Josh Bank, Mike Gabon,Ric Geisler, Kevin Law, Bruce Moore,Angelica Michail (International SectionCouncil); Bob Collett (Committee onInternational Issues); Chelle Brody, LoisChinnock, and Lela Long (SOA Staff).

Ï Ò

he minutes from the March 3,T1998, conference call wereapproved.

SPRING MEETINGS REVIEW. Mike Gabonreported that he believed that the Mauisessions were successful and wellattended.

Mike Gabon will be the Section’sSpring Meetings representatives for 1999.

ANNUAL MEETING UPDATE. MikeGabon reported that the Annual Meetingsessions are fairly well set, with somerecruiting left to do. The Section willsponsor five sessions (including the fieldtrip to the United Nations and the Sectionbreakfast) and co-sponsor three othersessions. The attending Ambassadorswill be asked to speak briefly at thebreakfast. The Council decided to have ahospitality suite after the field trip onTuesday, October 20. Mike will handlethe arrangements. Lois Chinnockreminded the Council that the deadline forputting speaker names into the finalprogram is August 3.

Bob Lyle will be the Section’s 1999Annual Meeting representatives.

AMBASSADOR PROGRAM. The Council several 50th anniversary activitiesmembers discussed Lela Long’s memo of and commemorative events plannedrecommendations to improve the for 1999 in San Francisco. TheAmbassador Program and agreed to all International Section was asked to berecommendations for better use of involved in the following anniversaryresources. The Council asked for a projects planned:written procedure for the appointment of

Ambassadors. The members saw a needfor more information about the candidatesbefore appointing them. The Council alsoagreed to the recommendations forimproved communications and suggestedthe list of Ambassadors and theiraddresses be placed on the SOA web siteas well as be published in every issue ofthe International Section News. Lela willformat her memo into an article for thenext issue.

Josh and Lela will work on the list ofambassadors to bring it up to date.

REPORT ON THE MEETING OF COUNCILOF SECTION CHAIRPERSONS

C E&E REDESIGN: There is a potentialproblem internationally. Forexample, on the ContinuingEducation segment, how much creditis needed and how do you obtain it ifyou are overseas? Bruce Moore willsubmit a newsletter article by August15, 1998, describing the internationalissues, with a request for feedbackfrom the members. Ambassadorswill also be contacted to see whetherthey can get involved.

C SOA STRUCTURE: Lois Chinnockdescribed the new SOA StaffStructure. Linden Cole is retiringthis year. Chelle Brody is the newManager of International Affairs. Lela and Patrick Cichy will providesupport. The rationale for therestructure is to induce Sections,practice areas, and the Board ofGovernors to work together.

C ANNIVERSARY ACTIVITIES. There are

a. Monograph of classic papers. The International Section was



Minutescontinued from page 27

asked to recommend three C Josh—Puebla meeting Chelle and the Continuing EducationTransactions articles with an Committee are in the process ofinternational flavor. developing guidelines for sponsoring

International seminars.b. Time line in the North AmericaActuarial Journal. TheInternational Section was askedto suggest events and trends thatdefine the 50-year period.

c. Section Monograph. Sectionswere asked to choose andpublish five or six classic articlesfrom previous Sectionnewsletters. It was decided thatinstead of five or six classicarticles, the Section will do aspecial issue of the newsletterinstead. Publishing a separatecommemorative issue would costabout $6 each.

Bruce Moore will take careof items (a) and (b) above andKevin, item (c). Recommendations for items (a)and (b) should be submitted toBradley Smith by August 1,1998.

NEWSLETTER UPDATE. Kevin requestedthat articles be submitted by August 15,1998. The September newsletter isexpected to be mailed by the end ofSeptember 1998.Articles will be submitted by:

C Lela—Ambassador ProgramRecommendations

C Bruce Moore—E&E RedesignC Michelle—Caribbean Actuarial

Association Meeting; “Chairperson’sCorner”

C Angelica—Actuarial Society of thePhilippines seminar

C Mike—International Annual Meetingsessions, including sessions co-sponsored with other Sections.

PRODUCT DEVELOPMENT CD. Josh willbe mailing the CDs to the Ambassadors. Enclosed is a brief description of the CDsalong with a request for feedback fromthe Ambassadors.

WEB SITE. Per Lois, the InternationalSection Council members are alreadylisted in the web site.

RESEARCH PROJECTS. No requests havebeen made.

There is some interest in sponsoring(or jointly sponsoring) seminars using theAsia seminar model set up by ShirleyShao for the Financial Reporting Section. Chelle will write an article for thenewsletter on the seminar. Currently

Rick Bergstrom, M&R, and HankGeorge, Editor-in-Chief of On the Risk,are currently putting together a seminarfor the Philippines or Singapore and theyare looking for potential sponsors. Loismentioned that the Section can reservemoney for future seminars so we canconsider this in next year’s budget. Also,the idea of an IAA- sponsored seminar inAsia was promoted at this year's meetingin Birmingham.

We may also piggyback on seminarsthat already exist and add an internationalflavor. Lois will ask Barbara Choyke forideas and will send an e-mail message toMichelle with a copy to Bob.

NEXT MEETINGS. The next conferencecall will be held on Wednesday,September 16 at 4:00 p.m. EasternStandard Time. A reminder will be sentout Sept. 1, 1998. The Section Councilwill also meet at the Annual Meeting inNew York on Sunday, October 18.

Respectfully Submitted,Angelica Michail, FSASecretary/Treasurer


SOA Ambassador ListAs of September 10, 1998

Shahid Siddiqui,ASA Janet C. Fuller, FSAAmerican Life Ins. Company Llwyn-Onn 4 Heol Ty MawrP.O. Box 5984 Pendoylan CowbridgeSharjah, UNITED ARAB EMIRATES UNITED KINGDOM CF71 7UQ phone: 971-659-7315 Ext: 206 fax: 971-659-8910 Richard J. Geisler, FSAe-mail: [email protected] National Mutual Life

Rodney Mark Benjamin, ASA Wellington NEW ZEALANDBacon & Woodrow phone: 4-474-4731Albert House, S. Esplanade fax: 4-473-7673Guernsey e-mail: [email protected] St. Peter Port CHANNEL ISLESphone: 148–172–8432 Verna P.Griffith, ASAfax: 148–172–4082 Life of Barbados Limitede-mail: [email protected] Life of Barbados Building

Luis G. Caro, ASA BARBADOS West IndiesCarrera 7a #33–42 e-mail: [email protected] Piso 11 phone: 246-426-1060 Santa Fe de Bogota, COLOMBIA fax: 246-436-8835phone: 571–338–1789 fax: 571–287–6820 Jonathan S. Herron, ASAe-mail: [email protected] INT

Stephen H. Conwill, FSA RadishchevskayaMilliman & Robertson Japan Moscow RUSSIA 10900440–9 Oyama-Cho, #102 Mailings:Shibuya-ku 666 Fifth Ave. #572 – Box 612Tokyo Japan 151 New York, NY 10103phone: 35–211–7031 phone: 95–932–3810 fax: 35–211–7033 fax: 95–932–3810 e-mail: 74673,[email protected] e-mail: [email protected]

Robyn Day, FSA Jeffrey P. Newnam, FSABuck Consultants Ltd. PT AJ Principal Egalita IO The Chamber of Commerce Building Jalan Tanah Abang 11– No.15Westmoorings P.O. Box 498 Jakarta INDONESIA 10160Port of Spain TRINIDAD phone: 221–350–6666 phone: 868–637–7084 fax: 221–344–0216 fax: 868–633–7968 e-mail: [email protected] Allan J. Wendt, FSA

Alan Dubin, FSA 505 Bourke St. Box 78BZion Insurance Company Ltd. Melbourne, Vic 3000 AUSTRALIA41–45 Rothschild Boulevard phone: 39–208–7173 Tel-Aviv 65784 ISRAEL fax: 39–208–7708 phone: 03––564–6848 e-mail: [email protected] fax: 03–516–4934 Mabini L. Juan, FSA

Peter Chien H. Foo, FSA 6/F Filipino Merchants Bl LOMMA Consultant 135 Dela Rosa Legaspi Vlg 18 Ewe Boon Road #02-04 Makati City PHILIPPINES Singapore 257326 SINGAPORE phone: 632–894–3827 Telefax: 65–242–3125 fax: 632–812–8512

80 The Terrace – PO Box 1692

Wildey, St. Michael

20 Nizhnyaya

Deloitte Touche Tohmatsu

Actuarial Advisors Inc

continued on page 30, columnn 1


SOA Ambassador Listcontinued from page 29

Hassan B. Kamil, FSA Ronald L. Poon-Affat, ASAAetna Universal Insurance Co. General&Cologne Re Brazil Ltda84 Jalan Raja Chulan das Nacoes Unidas 11.541P.O. Box 10846 14 andar-C 141Kuala Lumpur 50927 MALAYSIA Sao Paulo BRAZIL 04578000phone: 603–261–7255 phone: 115–506–3088 fax: 603–925–8058 fax: 115–506–3630e-mail: [email protected] e-mail: [email protected]

Peter C. Lamprecht, ASA Janet M. Sharp, FSASouthern Africa Actuarial Consultants Island Life Ins. Co. Ltd.Box 836 6 St. Lucia AvenueHoughton, 2041 SOUTH AFRICA Kingston JAMAICA 5phone: 11–480–8666 phone: 809–968–6874 fax: 11–480–8699 fax: 809–926–2679 e-mail: [email protected]

Won How Lo Ping An Insurance Co. of ChinaChina Life Ins Co Ltd. 4/F Ping An Building12F 122 Tung Hwa North Rd. No. 3 Bagua Road Bagua LingTaipei TAIWAN Shenzhen REPUBLIC OF CHINA 518029phone: 2–718–5062 phone: 755–226–2888 fax: 2–718–7449 fax: 755–243–1059

Charles E. Moes, Jr., FSA Ralph VásquezMailing Address: Metropolitan Life Ins. Co.MetLife Paseo Doce Estrellas, 41 Madison Ave., Area 10G Campo de las NacionesNew York, NY 10010–3690 Madrid SPAIN 28042Business Address: phone: 341–721–1127Metropolitan Life Seguros de Vida fax: 341–721–0704Avenida Madero 942 Piso #11Buenos Aires, ARGENTINA 1106 Henryk S. Walerys, ASAphone: 541–318–1828 Alte Leipziger Hestia SAfax: 541–318–1853 AL Niepodleglosci 741Be-mail: [email protected] 81–840 Sopot POLAND

Cyrus Neyssari, ASA e-mail: [email protected] rue Mademoiselle 75015 Paris FRANCE

Arthur (Guang-tong) Ren, ASA

phone: 58–550–7008


International Sessions at the Annual Meeting by Michael Gabon

October 18–21, 1998New York, New York

ollowing is a list of sessions at the SOA Annual Meeting national Ambassadors on local issues, an update on recentFin which the International Section has been involved. We developments of the IFAA, and a report and discussion ofhope that you, as Section members, support these issues facing the International Sectionsessions with your attendance and that you find the

material covered to be valuable.

Monday, October 19

@@ 10:30 A.M.–12:00 NOON

4PD INTERNATIONAL VALUATION SYSTEMSAs the NAIC Life and Health Task Force crafts thevaluation law of the next century, it is considering the resultsof the American Academy of Actuaries’ research ofvaluation systems and the role of the actuary of 14 othercountries covering close to 70% of the world insurancemarket. In this session, find out how you may be affected.

7PD OFFSHORE LIFE INSURANCE MARKETSThis session provides an update on, and comparison of, thejurisdictions currently utilized for offshore insuranceproducts along with the key considerations for successfullyoperating in this market.

@@ 2:00–3:30 P.M.26PD LESSONS FROM ASIA

The financial turmoil continues in Asia and this sessionpresents the impact of the recent volatility on the insurancemarket, the challenges facing Asian insurers, how regulatorsand actuaries are dealing with these challenges, and what theinsurance industry in North America can learn from theAsian marketplace.

32IF INTERNATIONAL ACCOUNTING FOR INSURANCEThis session presents the viewpoints of an international (non-U.S.) company, a consultant with significant U.S. GAAPconversion experience, and developments in internationalaccounting.

Tuesday, October 20

@@ 7:30–10:00 A.M.47SM INTERNATIONAL SECTION HOT

BREAKFASTJoin us for breakfast with aninternational flair including aroundtable discussion of currentinternational issues, briefings from

@ 8:30–10:00 A.M.56PD BANCASSURANCE: A GLOBAL PERSPECTIVE

ON CUSTOMERS, PRODUCTS, AND DISTRIBUTIONMETHODS

This session presents a comprehensive look at bancassurancein the United States, Europe, and Latin America from bothinsurer and banker perspectives and covers target customersegments, products offered, and distribution structures.

@ 2:30–4:00 P.M.90FT STAND UNITED AT

THE UNITED NATIONSJoin us for a tour coveringfour of the most importantareas of the UN: the GeneralAssembly, Security Council,Economic and Social Council,and the Trusteeship Council.

Wednesday, October 21@ 8:00–9:30 A.M.118CS WORLD-CLASS BENCHMARKING AND

THE BALANCED SCORECARDThis session focuses on the Balanced Business Scorecard(BBS) methodology as it may be applied to an insurancecompany. The BBS is a communication tool used byprogressive organizations to help overcome the barriers tostrategic change. In doing so, it takes the vision of the fewand communicates it throughout the entire organization,building consensus and teamwork, aligns actions with thestrategy of the organization, and links strategy to planningand budgeting and compensation, thereby defining anddriving the culture of the organization.

Please join us at the Annual Meeting in New York!

Michael Gabon, FSA, is Manager at KPMG Peat Marwick LLPin New York, New York and International Section SOA AnnualMeeting Representative.

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