, `(veActuafial UpdateVOLUME 15 NUMBER 10

In t

2

his issue

Notes and Comments

2 February EA Meeting

3 Letters to the Editor

3 Annual Meeting Round-Up

4 Milton 18, Destiny 0

4Halley and the Roots ofActuarial Science

5 1987 AERF GrantsCompetition

5 War Stories

6 Non-Routine Board Actions

6 Checklist of AcademyStatements-August 1986

6 NAIC Report

EnclosuresIncluded in this month's issue

of The Update are the following :• Government Relations Watch• In Search Of . . .• Cassette Order Form

AMERICAN ACADEMY OF ACTUARIES ,

Congress Recognizes Academyin Risk Retention Act

"(B) a copy of any revisions tv such planor study, as prodded in paragaph (t )( )(which shall include any change In the des-Ignation of the State in which it Is char-tered); and

"(3) to the insurance -commissioner ofeach State in which It Is doing business, acopy of the group's annual financial state-ment submitted to the State In which thegroup is chartered as an insurance company,which statement shall be certified by an in-dependent public accountant and contain astatement of opinion on loss and loss adjust-ment-expense reserves made by-"(A) a member of the American Academy

of Actuaries, or"(B) a qualified loss reserve specialist .",(e) EXAMINATION OP FINANCIAL CR)cnl

TToN.--erection 3(a)(1XB) (as redesignatedby subsection (b)) Is amended--

(1) by striking clause (1) ;(2) by redesignating clause (ii) as clause

(I); and(3) by-adding at the end the following new

OCTOBER 1986

tie corm is drier . .(yf anany subsequent changesprovided in such notice .

"(e) A purchasing, $Twith and designate the Simissioner of each Statebusiness as its agent soleof receiving service of '1proi ess, except that suetnot apply in the casegroup--"t 1) which---(A) was domiciled be6

and"(B) Is domiciled on an

the enactment of this Adin any State of the Uhitei"(2) which"(A) before the date di

this Act, purchased Insusurance carrier licensed ii

'"(B) since such date --tchases Its Insurance frotsrier licensed In any State .

RISK RETENTION AMENDMENTS OF 1986

by Christine E. Nickerson

Legislation recently approved by Con-gress specifically mentions the Amer-ican Academy of Actuaries in referringto a required statement of opinion onloss and loss adjustment reserves forrisk retention groups. The bill, whichaims to help address the problems ofavailability and affordability of liabil-ity insurance, would expand the Prod-uct Liability Risk Retention Act of 1981and open up the options of risk poolingand group purchase of liability insur-ance to corporations, hospitals, tradeassociations, and municipalities . Itwould allow a risk retention groupchartered or licensed in one state tooperate nationwide, without having tobe licensed in other states. Addition-ally, the legislation would preempt statelaws prohibiting employers from pur-chasing liability insurance on a groupbasis .

Under the proposal, a risk retentiongroup would be required to :• Submit to regulators in every state in

which it operates a copy of the annualfinancial statement that it files in itsdomiciliary state . This statementwould need to be certified by an inde-pendent accountant, with a memberof the Academy or a qualified lossreserve specialist providing an opin-ion on the group's reserves .

• Submit an operating plan to the com-missioner in each state in which itplans to do business .

• Exclude coverage for punitive dam-ages or intentional, fraudulent, orcriminal conduct to the extent suchcoverage is prohibited by state law.

Additionally, federal courts would havethe clear authority to issue an injunc-tion to stop a risk retention group fromoperating in all states if the court findsthat a group is operating in a hazardousfinancial condition .

(continued on page 5)

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PresidentPreston C. BassettPresident-ElectJohn A. FibigerVice PresidentsEdward H . FriendCommittees on Public Issues-EmployeeBenefits and Social Insurance

Burton D. JayCommittees on Accreditation,Qualification and CommunicationW. James MacGinnitieCommittees on Public Issues-InsuranceMavis A. WaltersCommittees on Accounting andFinancial ReportingSecretaryRobert H. DobsonTreasurerDaniel J. McCarthy

Executive DirectorStephen G. KellisonExecutive Office17201 Street, N .W. 7th FloorWashington, D.C. 20006(202) 223-8196Membership Administration500 Park BoulevardItasca, Illinois 60143(312) 773-4204

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

American Academy of Actuaries1720 I Street, N.W. 7th FloorWashington, D.C. 20006Statements of fact and opinion in this publication.including editorials and letters to the editor. are madeon the responsibility of the authors alone and do notnecessarily imply or represent the position of theAmerican Academy of Actuaries. the editors, or themembers of the Academy.

Special Actuarial Opinions

When most actuaries think of actuarialopinions in the insurance context, theyprobably think of the statements ofactuarial opinion on the several NationalAssociation of Insurance Commission-ers' (NAIL) statutory annual statementblanks. These statements of opinion arecontained in the instructions to theblanks and, thus, wording is standard-ized. Moreover, the Academy has pro-mulgated qualification standards andstandards of practice in these areas ; theground rules are well known and applybroadly across the states .

However, there is another set of actu-arial opinions for which the ground rulesare not as clearly defined and for whichgreater diversity exists . This is the worldof so-called "special purpose actuarialopinions."] define such opinions as thosethat are not the result of any NAIC modellaw or regulation . They exist in only one,or a very small number of states . Typi-cally, such opinions are developed in astate to meet a particular need .

Most special purpose actuarial opin-ions arise in the areas of pricing andpolicy design. This probably results fromthe fact that the NAIC has not chosento develop standardized language foropinions in these areas as it has forfinancial reporting . In the absence ofNAIC model language, states that wishto use such actuarial opinions have hadto develop their own language .Special purpose actuarial opinions

seem to be proliferating . In an effort tocall attention to this phenomenon, theAcademy published a special state sup-plement to the July issue of The Actu-arial Update, which listed opinions wehad collected from a variety of sources .Since the publication of this supple-ment, a number of additional items havebeen submitted by members . Many ofthese diverse requirements are of rela-tively recent origin .The reasons why such opinions are

being used more frequently is not hardto understand . Insurance regulation isa much more complex matter than it

The Actuarial Update

used to be. Nevertheless, most stateInsurance departments are woefullyunderfunded. In such an environment,the use of actuarial opinions is seen asa regulatory tool allowing insurancedepartments to stretch their scarceresources further.

There is both good news and bad newsin this for the actuarial profession. Thegood news is that the professional rolesand responsibilities of actuaries arebeing enhanced. The bad news is that,on occasion, we may be asked to signan inappropriate or poorly-designedopinion. In the extreme, signing suchan opinion might even increase the lia-bility exposure for an actuary.The challenge becomes one of work-

ing with regulators to design actuarialopinions so that they give the regulatorswhat they need, while at the same timeembodying appropriate professionallanguage from our standpoint. Althoughthis is not always easy, it generally canbe done . It does require a greater effortthan our profession is making at thepresent time, however.

Also, the actuarial profession shouldconsider trying to standardize more ofthe wording in these opinions either viaprototypes we develop or NAIC models .This need will continue to become moreacute as more of these opinions comeinto existence . In some cases, such asthe Rhode Island annuity regulation inwhich the phrase "sound and safe"appears, new and untested language hasbeen introduced . How such undefinedterms might be interpreted in a courtof law is anybody's guess .Special purpose actuarial opinions

offer an important new tool to insuranceregulators . Our challenge as a profes-sion is to ensure that it is used properlyand effectively. If it is, we have the besttype of win-win situtation. Not only dothe insurance regulators get a betterproduct, but we get increased recogni-tion as a profession, and, most impor-tantly, the public interest is well-served. A

February EA MeetingThe 1987 Enrolled Actuaries Meet-

ing and Exposition, cosponsored bythe American Academy of Actuariesand the Conference of Actuaries inPublic Practice, is scheduled for Feb-ruary 11-13 at the Sheraton Wash-ington Hotel in Washington, DC .

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October 1986

Letters to the Editor

Volunteer ServiceThe Committee Service Request formwas issued in a vacuum. Which com-mittees are suffering from a dearth ofvolunteers? Are there particular skillsthat are being sought? What are keyemerging issues to be addressed bycommittees? Which deserve priority?

The Academy has identified a need formore volunteers, now it's time for anarticle, or articles, in The ActuarialUpdate, describing Academy needs andwhat members should expect if they vol-unteer. I, for one, would be more likelyto volunteer if I knew to what I was beingasked to respond .

Alfred 0. WellerShort Hills, New Jersey

Editor's note : The Academy received104 responses from members eager toserve on any number of committees .That number is, by far, the largestresponse ever received by Academyleadership to a callfor volunteers .Committee guidelines providefor therotation of one-third of a committee'smembership every year. Hence, com-mittees are always in need of newblood. As to emerging issues and prior-ities, The Actuarial Update and the"Government Relations Watch" regu-larly cover committee activities anddeveloping, priority issues .

The Update welcomes letters from read-ers. Letters for publication must includethe writer's name, address, and tele-phone number, and should be clearlymarked as Letters to the Editor submis-sions. Letters may be edited for style andspace requirements .

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President Preston C . Bassett receives the gavel of office from outgoing President BartleyL. Munson at the annual meeting business session .

Annual Meeting Round-UpSome 325 actuaries gathered in SanAntonio, Texas, September 22-24, 1986for the annual meetings of the Academyand the Conference ofActuaries in Pub-lic Practice . The riverwalk may never bethe same again.The two and one-half day meeting

showcased panel sessions coveringsuch topics as FASB-Employers'Accounting for Pensions ; Our AgingWorkforce; Small Finn Management ;The Valuation Actuary-Views of theIndustry and Regulators ; Health CareCommunication Issues; When ShouldCasualty Consulting Actuaries beRetained? ; FASB 87 ; Various View-points on Continuing Care RetirementCommunities ; Asset/Liability Valua-tion Methodology for Life InsuranceCompanies; and Use of Plan Assets inCorporate Acquisitions, Leveraged Buy-

Outs and Take-Overs . Not to mentiona mock trial on actuarial liability andan actuarial seance!!!The Academy's business session fea-

tured a discussion of the past year'saccomplishments and future goals bythe leadership, as well as the traditionalpassing of the gavel to President PrestonC. Bassett by Bartley L . Munson, imme-diate past-president . In keeping withpast practice, a transcript of the busi-ness session will-appear in the 1986Journal, which should be available fordistribution in March 1987 .The business and panel sessions were

tape recorded and are available on cas-settes from the Conference CassetteCompany for $8 .00 per cassette tape,plus $3.00 postage and handling . Werefer you to the order form enclosed withthis issue of The Update. A

CROCK BY RECHIN & WILDER

6

Non-Routine BoardActionsby Robert H. Dobson

NAIC Reportby Gary D. Simms

At its meeting on September 5, 1986 inNashville, Tennessee, the Board ofDirectors took the following non-rou-tine actions .• The individuals named below were

elected to serve as officers during thecoming year: John A . Fibiger, presi-dent-elect : Burton D . Jay and MavisA. Walters, vice presidents; Daniel J .McCarthy, treasurer; Robert H . Dob-son, secretary.

• The board approved the interimActu-arial Standards Board (IASB) Nomi-nating Committee recommendationof Ronald L. Bornhuetter, as chair-person of the IASB, succeeding JohnA. Fibiger.

• The board approved an increase indues to $160 per year, effective Jan-uary 1, 1987. (More on this action willappear in dues notices, which aremailed December 1) .

• The chairperson of the Joint ProgramCommittee for the Enrolled ActuariesMeeting reported to the board on itsactivities .

• The board changed the name of theCommittee on Property and LiabilityInsurance to the Committee on Prop-erty and Liability Issues and approvedcorresponding changes in the com-mittee charge .

• The Health and Welfare Subcommit-tee of the Committee on Health waselevated to full committee status andthe reporting relationship was revisedsuch that the new committee willreport to the same vice president asthe Pension Committee .

• The board discharged the SpecialCommittee on Pension Qualifica-tions, with thanks. o

The Fall Zone Meeting of the NationalAssociation of Insurance Commis-sioners (NAIC) was held September7-10 in Des Moines, Iowa. Welcom-ing representatives of the insuranceindustry, regulators, and others werenewly-appointed Iowa InsuranceCommissioner William D . Hager, for-mer general counsel of the Academy,and NAIC President Josephine M .Driscoll, commissioner of the state ofOregon .As regular readers of The Update

are aware, a key actuarial focus ofNAIC meetings are the deliberationsof the Life and Health and CasualtyActuarial Task Forces . However, thesegroups did not meet in conjunctionwith this meeting. The Life and HealthActuarial Task Force met, instead,October 9-10. The Casualty Actu-arial Task Force is scheduled to meetagain at the Winter National Meetingin Orlando, Florida, December 7-11 .

The issue of liability insurance costand availability was the center of dis-cussion in Des Moines and was high-lighted by the appointment of twonew advisory committees to the LegalLiability Insurance Task Force,chaired by Fletcher Bell, Kansasinsurance commissioner. One newadvisory committee, comprising rep-resentatives of the insurance indus-try, business organizations, majortrade groups, and legal organiza-tions, will be required to undertakea major study of the liability insur-ance issue . A second advisory com-mittee, focusing on the availability ofstatistical information, is due to

Checklist of Academy StatementsAugust 1986Copies are available from the Washing-ton office, American Academy of Actu-aries, 1720 I Street, N .W., 7th Floor,Washington, DC 20006 .

TO : Senate and House conferees on taxbill, August 7, 1986, RE : Pension leg-islation. BACKGROUND: Letter on alter-native minimum tax on differencebetween pension contribution and FAS87 pension expense .

TO: Financial Accounting StandardsBoard, August 25. 1986. RE: Insuranceaccounting. BACKGROUND : Materialsubmitted to FASB at open meeting onaccounting for universal life insurance .

TO: Senate and House conferees on taxbill, August 26, 1986 . RE : Pension leg-islation . BACKGROUND: Letter on pro-posed penalty for "overstated" liabilitieson pension plans. A

The Actuarial Update

report its findings at the Decembermeeting in Orlando. The focus ofefforts by that group involve an anal-ysis of what forms of information arealready available, how that informa-tion can be analyzed effectively andefficiently, and how data can be usedto monitor the impact of tort reform .

In addition, the issue of data avail-ability was raised in a general ses-sion, which featured representativesfrom the Insurance Services Office(ISO) and the Risk and InsuranceManagement Society (RIMS) . CaroleBanfield, representing [SO, detailedthe efforts undertaken by that orga-nization to accumulate and analyzeindustry data, notingwith specificitythose questions being raised in cur-rent debate that are not answerablebased on current data availability. JonHarkavy of RIMS called for an "inde-pendent source" of industry data andsuggested that the NAIC could prop-erly undertake this role .

On another front, the NAIC's Stateand Federal Health Insurance Legis-lative Policy (B) Task Force took a majorstep toward the drafting of model leg-islation covering preferred providerorganizations IPPO) . The model billunder consideration would bedesigned to authorize the establish-ment of PPOs , as well as set stan-dards and guidelines for their oper-ation .Zone meetings will be terminated

by the NAIC at the end of 1987 ; begin-ning in 1988, the NAIC will limitmeetings to June and Decembernational affairs .

The author is the Academy's gen-eral counsel .

Coming Soon .

• An interview with Dennis M . Kass,Assistant Secretary for Pension andWelfare Benefits, Department of Labor ;and

• A special subject supplement, whichwill present in summary fashion theannual reports of the Academy's com-mittees for 1985-1986 .

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October 1986

RISK RETENTION(continuedfrom page 1)

Earlier House and Senate-passed riskretention bills had differed in several ways .Meetings between House and Senate staffto work out differences in the proposalsled to the following compromises :• The risk retention amendments would

not preempt state laws that set finan-cial responsibility requirements foremployers engaging in certain activ-ities. Under this amendment, if a riskretention group had not qualified asa licensed, admitted insurer, a statecould still say that an employer hav-ing obtained coverage through the riskretention group did not satisfy itsfinancial responsibility requirement .The Senate bill had originally lackedsuch a provision .

• The Commerce Department would berequired to submit a'report to theCongress on the effect, if any, that therisk retention amendments have oneasing the liability insurance crisis .The report would also be required toexamine the extent, if any, to whichstates initiated discriminatory actionsagainst risk retention groups .

The bill now awaits President Reagan'ssignature. The Administration has sup-ported the proposal, and presidentialapproval is expected . The effective dateof the legislation would be the date ofthe signing of the bill by the President .Numerous Congressional hearings

have been held during the past year toexamine the liability insurance crisis.The risk retention bill is one of the fewproposals addressing this issue that islikely to be signed into law during the99th Congress. Hearings and investi-gations into the liability insuranceproblem are certain to continue in thenext Congress. Issues likely to be exam-ined include profitability of the propertyand liability industry, data collection,underwriting practices, and theMcCarran-Ferguson Act .

Nickerson is the Academy's publicaffair's specialist.

Share your actuarial war storteswith your colleagues. Your profes-sional-related anecdote should betrue, short andhumorous. Addressyoursubmission toManaging Edi-tor, The Actuarial Update, at theAcademy's Washington address.

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1987 AERF Grants CompetitionOnce again in 1987, the Actuarial Edu-cation and Research Fund (AERF) issponsoring its annual grants competi-tion. One or more grants, ranging from$5 .000 to $10,000, will be available tosupport actuarial education or researchprojects. Funds may be used to com-pensate grant recipients, themselves, orto cover expenses incurred carrying outthe project .AERF and its five sponsoring organi-

zations-the American Academy of Actu-aries, the Canadian Institute of Actuar-ies, the Casualty Actuarial Society, theConference of Actuaries in Public Prac-tice, and the Society of Actuaries-see asthe goal of the competition the encour-agement and publication of research inactuarial science, with particular empha-sis on practical applications . To this end,proposals are invited from members ofthe sponsoring organizations, faculty

members of U.S . or Canadian universi-ties or colleges who have teaching andresearch responsibilities in actuarial orrelated fields, and other individuals whoare qualified by knowledge and experi-ence to advance such research .

Applications outlining the scope of theproposed project should be submitted,in writing or by telephone, to Mark Doh-erty, acting research director of the AERF .Doherty will send the applicant fullinformation on applying for a projectgrant, including a formal applicationform. Doherty's address is % ActuarialEducation and Research Fund, 500 ParkBoulevard, Itasca, IL 60143 . His tele-phone number is (312) 773-3010 .

Completed applications are due Feb-ruary 1, 1987. They will be evaluated byan awards committee drawn from theactuarial profession. Awards will beannounced in April 1987. A

Quote Without Comment"Someday I am going to start a Society for the Preservation of Actuaries . Theyare the most maligned men and women in our business, and possibly in anybusiness I know. They tend to have sneaky senses of humor that creep up onyou when you least expect it, and blow your pomposity apart . They are alsovery brilliant people . I promise never to join the crowd that makes fun ofactuaries-unless, of course, they deserve it ."

-Don Barnes"As I See It : What Does This Person Believe?"National Underwriter, September 6, 1986

War Stories

Actuarial VaccineHere's my actuarial war story-wayback to World War II, when I was serv-ing as a 2nd Lieutenant in the Officeof the Surgeon General, U.S. Army.Singlehanded, I wiped out a plague

epidemic, as shown in an annual report .I merely checked back to the stationhospital report that showed these casesand found that the entire line for con-tinuing cases, new cases, and remain-ing cases of respiratory diseases in oneweekly report had been typed on thepreceding line (plague) . This was dou-bled-checked by examining the imme-diately-preceding and following reportsas to continuing and remaining cases .

Oh, that all serious actuarial prob-lems could be solved so completely!

Robert J. Myers

How's That Again?During vacation time we had to fill inwith a temporary clerk in our AgencyActuarial Department. It just wasn'tworking. During the first morning therehad been several snafus and a generallack of understanding on some simpleprojects. We had tried to overlook thatand decided we could live with it for aweek. However, the final straw camethat afternoon when I phoned thedepartment and realized we were beingidentified as, "Agency Allergy ."

William C. Cutlip

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Milton 18, Destiny 0by Mary-Loa Weisman

The Actuarial Update reprints thisessay with the kind permission ofthe author and The New York Times,in which it originally appeared onJune 18, 1986.

Westport, Connecticut-My UncleMilton has been a new man ever sincethe Internal Revenue Service notifiedhim of the date he is going to die .

Milton turned 70 recently and wastherefore obliged by law to begin towithdraw money from his pensionplan. His accountant advised him notto take all the money out at once butinstead to write to the IRS for a pay-ment schedule. The IRS actuarialtables, his accountant explained,would take account of Milton's age,as well as other personal informa-tion, and suggest a payment sched-ule based on life expectancy .

Uncle Milton did not at first appre-ciate the deeper implications of beingin possession of such information .He just thought it was smart taxplanning-that is, until he openedthe envelope and learned that he had18.58 years to live.The actuarial table from the IRS

indicated that the 18.58 figure rep-resented his life expectancy as a mar-ried man, using the joint and survi-vor annuity approach. Should hesuddenly find himself not married forany reason, his life expectancy wouldplummet instantly, and presumablywithout notification, to 13 .67 years .(My Aunt Lily reports that Milton,always a thoughtful husband, hasrecently been even more solicitousthan usual.)

It was not until he fed the 18 .58figure into his own computer andcame up October 2004 that Miltonrealized he had broken the ultimatetaboo, he now knew the unknowa-ble-his death date .

The instant Milton read the news,he was suffused with a profound senseof relief and well-being . He had notrealized just how much "the bigcountdown" had been preoccupyinghim. The moment he learned his dyingday, the awful burden lifted . Theidentical news, received from somelesser, fly-by-night Federal agency, likethe Environmental Protection Agencyor the Transportation Department,might not have carried the sameauthority. But there it was in writingfrom the IRS .There are people who would just as

soon not know that kind of infor-mation, even if it comes from a reli-able source . This Apple computer bitefrom the tree of knowledge is notwithout historical precedent andmakes some people nervous . Not Mil-ton.

He sees it more as a matter of tim-ing than mortality. He agrees thatpeople of tender years should notknow their dying day. What's thepoint? They all think they're immor-tal anyway. Death, Uncle Milton says,is wasted on the young . But for themature individual, knowing can bea boon .Certainly Milton seems to be

blooming in the very shadow of hisown definite mortality. He hauls outhis fateful day at every opportunity .People mention dates for the nextworld's fair or election or Marvin Hag-ler fight, and there's Milton, joiningin with a chirpy, "I'll still be alive then ."

The Actuarial Update

When the projected date clearly liesbeyond his dying day, such as hisgrandchild's college graduation, Mil-ton interrupts the conversation withequal good cheer to offer his regrets .Owing to what he calls "the priorengagement," he won't be able toattend, he says.Knowing his death day seems to

have given him what life has here-tofore failed to provide-an unshak-able confidence in the future, and areal sense of purpose.Milton has also found that there are

some solid, practical advantages tohaving his exit timed. He has writtenaway for season tickets to the operaand he stopped buying cashmeresweaters in favor of Shetland. At hisdental appointment last week, he optedfor the middle-price bridge work withthe semi-impervious enamel .But the greatest benefits may be

spiritual. Knowing his dying day hasgiven Milton the ultimate peace ofmind. Now, when he wakes up in themorning with a scratchy throat, hedoesn't panic . He knows this isn't the"Big It." It can't be . He's got nearly 18.58years left. Stress and anxiety have vir-tually disappeared from his life. He hasthe blood pressure of a youngster .Occasionally, though, when he's

tinkering with the guest list for thefuneral, or reworking the eulogy, itoccurs to him that he might just makeit past October 2004, that simplyknowing when he's going to die mayhave added years to his life .

Copyright© 1986 by Mary-Lou Wets-man. Reprinted with permission ofthe author.

Halley and the Roots of Actuarial ScienceIn addition to being the first scientistto predict the periodic return of Halley'scomet, Edmond Halley also made an earlyforay into the realm of actuarial science .Although best known for the comet

that bears his name, Halley was a manof wide interests and knowledge . In aletter to 17th century scientist RobertHooke, Halley, in an aside, dabbles in

the science of actuarial statistics . Aftersummarizing the comparative statis-tics for Paris and London of births, mar-riages, deaths and population density-the last facilitated by Halley himself pac-ing off the dimensions of the city ofParison foot-he concludes : " . . . it will fromhence follow, supposing it alwaies thesame, that one half of mankind dies

unmarried, and that it is necessary foreach married Couple to have 4 childrenone with another to keep mankind at astand ."

The quotefrom Halley 's epistle is takenfrom Comet, Carl Sagan and AnnDruyan, New York : Random House,1985 .

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