Study of economíc loss - finance track * assocíated wíth ......R. Stephen Radcliffe. FSA Anthony...

New Fellowshlr> finance track * underway

by joseph Paesani and Bruce Moore

T he Society of Actuaries recently began to develop a finance track for Fellowshin

students. Many of the courses for this track are available now to students. with more being developed.

a At the October 1991 Board of

vernors meeting. the Board approved the Actuary of the Future Task Force’s recommendation that a finance track be created. This recommendation was part of the task force’s plan to develop nontraditional actuarial opportunities by broadening actuaries’ knowledge of finance. investments, and financial management. This recommendation is consistent with, and an expansion of. discussions and actions of the Executive Commit- tee at its March 1991 meeting. Those discussions initially focused on acceler- atig the activity in the investment education area to expand it into a complete track. The Executive Com- mittee believed. however, that a need existed to develop an investment/ financia1 track. It subsequently passed a resolution requesting the Education & Examination Committee to pursue development of such a track.

Finan&, political. and environ- mental changes over the past 10 to 15 years have created new challenges

d opportunities for actuaries. The

9 uary of the future will be a finan-

ial architect and manager of enter- prises built on the applicatíons of financia1 analysis and risk appraisal. The actuary will be called to measure, manage, and communicate the

Con tinued on page 6 column 1

Study of economíc loss - assocíated wíth credít rísk

by Cery J. Barry and Warren R. Luckner

ante (ACLI), has begun an historical study of the economic loss that results from credit risk events associated with private placement bonds and commercial mortgage loans held by life insurance companies. The studp which covers experience of 1986 through 1989. is a joint effort of actuaries and investment profes- sionals and represents the first phase of an ongoing study. Purpose The primary purpose of the ongoing study is to enhance understanding of the nature of credit risk. To do this. it is necessary to: l Establish a definition of “credit

risk event”

0 Establish an actuar-ial methodology for quantifying the economic loss of credit risk events

0 Identify the asset characteristics that influente credit risk

0 Develop a process for gathering and evaluating intercompany credit risk event data according to the proposed definition and economic loss methodology

The 1986-89 study addresses each of these needs. The definition and the loss calculation methodology have been established. Progress has been made toward identifying the relationship between various asset characteristics and credit risk events. as well as in developing the process for gathering and analyzing the data. These will be refined as the study progresses.

Contlnued on page 9 column 1

In this issue: Study of economic loss associated Megatrends author forecasts into with credit risk next decade

Gery J. Barry and Cecilta Green 6 Warren R. Luckner 1

New Fellowship finance track underway Htghlights of SPDA study

Ludan J. Lombardi 7 Joseph Paesant and Bruce Moore 1

Attentlon: Chief actuaries Stephen N. Patzman B

EdItorial - Society research: Dynamlc growth, broader hortzons Experience studies continue tradttion

Anthony T. Spano 2 Jack Luff 8

CCRC popufation and financia1 model Sources of 1958 CSOICET ANB and Robert B. Cumming and ALB tables Wllllam E Bluhm 3 Robert J. Johansen 10

Report of Board of Governors meeting On the lighter stde ll

Davld M. Holiand 5 Letters to editor 13 Actucrossword. Actucrostic - 15,16

See page 13 for notice on long-term ASA right to vote issue.

The Actuary--March 1992 2

T h e N e w s l e t t e r o f t h e Society o f Actuaries

VO~.UME 26. MO. 3 MARCH 1992

Editor responsible for this issue Tony Spano

Editor Linda B. Emory. FSA

Associate Editors Mary Hardiman Adams. ASA Barbara J. Lautzenheiser, FSA

Robin B. Leckie. FSA R. Stephen Radcliffe. FSA

Anthony T. Spano, FSA Competition Editor Jehn W Keller, FSA

Features Editor Deborah Adler Poppel, FSA

Assistant Editors Peter J. Bond),. FSA

Cl~3rles Habeck, FSA Curti,~; E. Huntington, FSA

Er:!c R Lofgren, FSA J. Bruce MacDonald, FSA Society Staff Contacts

708-706-3500 Cecilia Green Staff Editor

Judith Bluder Assistant Staff Editor Linda M. Delgadillo

Directo:r of Communications

Correspondence should be addressed The Actuary

P..D. Box 105006 Atlanta. GA 30348-5006

Copyright© 1992, Society of Actuaries The Actuary is published monthly (except July an,z[ August) by the SOCIETY OF ACTUARIES, 475 North Mar:ingale Road, Suite 800. Schaumburg, II, 60173-2226. Donald R. Sendergeld. President David M. Holland, VP and Secretary James E Reiskytl, VP and Treasurer Kenneth A. McFarquhar, Director of Publications Non-member s~bscriptions: students, $6.00; others, $15.00. Send subscriptions tc: Society of Actuaries. P.O. Box 95668, Chicago. IL 60694.

The Society is not responsible for statements made or opinions expressed herein. All contributions are subject to editing. Submis,,;ions must be signed.

(~) Printed on recycled paper

Editorial

Society research: Dynamic growth, broader horizons

by Anthony T. Spano

any statement of the Society's lission, research is promi- ently mentioned. The Society's

General Objectives adopted by the 1991 Board of Governors as part of the Strategic Plan lists as the second objective: "Facilitate the conduct of theoretical and practical research in actuarial science."

For many years, organized research within the Society consisted primarily of routine analyses of mortality and morbidity experience. When I joined the Society Board in 1984, Society leadership began to perceive a need to widen the scope of our research efforts. They viewed expanding research as a means of providing a valuable service to Society members and, more broadly, of enhancing the visibility and stature of our profession.

Since then, we've seen dramatic changes in our research activities. An organizational structure to identify and oversee projects has been established. Today 15 research projects and 20 experience studies are in progress, and a functional research library is being actively used. Our research budget, $100,000 in FY 1984, now amounts to $1.2 million. We see some of the results of these vastly expanded efforts in this issue of The Actuary. which includes four articles describing current research.

Periodic review is necessary for any major program, especially one that has had explosive growth. Reviews often suggest directional changes and new pathways. The time is right for some reflection and analysis of the Society research program, and I'm pleased Society leadership is thinking along these lines.

High on the agenda for this review should be the focus of our research and how it is financed. There's almost no end to the chal- lenging and worthwhile projects we can explore, but which should have priority? The financing issue is especially important, since our research

activities currently are not self- supporting. The Society recently hired a development officer who is preparing plans for raising outside funds to help finance research efforts.

A question not addressed adequately that needs urgent consid- eration is how best to issue and publicize our research results. Nothing can do more to increase the visibility of the Society and the profession than an effective mechanism to spread the word about what we're discovering in our research.

Another major issue relates to the theme expressed at our last annual meeting - broadening our horizons. Only by expanding the scope of our efforts and reaching beyond our traditional confines can we hope to enhance our stature as a profession. This is true in research, as well as in many other Society activities. While we must be careful not to go beyond our resources or our professional scope or expertise, I firmly beheve our opportunities to push outward the boundaries of our exploration are considerable.

I've mentioned what Society leadership can do to strengthen our research efforts. Of course, we as Society members can do much. We can contribute individually by writing articles and papers on an endless variety of subjects. We can participate organizationally by serving on one of several Society committees and task forces involved with research or by working directly on a research project. In addition, we can offer our ideas and comments, either on specific research proposals or on the Society's overall efforts in this area.

Success in any of our activities depends so much on effective communication and cooperation between Society leadership and membership. I'm confident we'll all lend our support to the research endeavor that is so vital to the Society and the profession.

The Actuary--March 1992

CCRC population and financial model by Roberi B. Cumming and Wil l iam F. Bluhm

C ontinuing Care Retirement Communities (CCRCs) are a combination of senior

housing facility health care provider, and insurance company As a housing facility, they provide elderly indi- viduals a residence, called an "independent living unit," and related services such as meals, housekeeping, and recreation. As a health care provider, CCRCs guarantee access to nursing care, typically at the same location as the housing.

Like an in:;urer, CCRCs pool the risk of nursing care among residents, and they pre-fund the increase in nursing care costs due to aging. (Not all CCRCs pre-fund and pool risks: those that do are called extensive or all-inclusive.) Because of the impor- tance of these insurance-like aspects and the general lack of understanding of CCRCs, the Society of Actuaries

a research project to greater actuarial involve-

ment with CCRCs. Model for CCRCs The SOA research project produced a new population and financial model for CCRCs. The ;nodel separately performs deterministic and stochastic versions of population projections, actuarial valuations (also known as gross premium reserves), and cash flow projections. The deterministic version of the model calculates expected values, using assumptions provided by the user. The stochastic version simulates what would happen to a variable number of identical CCRCs, and thus provides information about statistical variance as well as expected values. Given the small size of a typical CCRC (about 300 residents), statistical fluctuations in the population can be significant.

Populalion projeclion~ Population projections are the back- bone of the modeling process. The time each person spends in the resi-

ial and care facilities has signifi- financial implications to a CCRC.

Once they're performed, population projections can be combined with unit values from the financial model to estimate future expenses and income.

The model projects future popula- tions on both closed group and open

Closed Group Population Projection 100%

9O%

80%

7O%

60%

5O%

40%

3O%

20%

10%

0% bJ . . . . 10

Years from Valuation

-- " ~ % ~ Deaths ~-~hdrawals

Care Facility

Independent Living Units 20 . . . . . . 30 40

Figure I group bases. The dosed group projection models the future status of only the current residents. These projections are used for evaluating the adequacy of fee structures and for estimating reserves.

The open group projection models the status of both current residents and residents who enter the CCRC after the valuation date. New residents enter the CCRC to fill vacan- cies created by death, withdrawal, or the transfer of residents to the care facility. These projections are used for cash flow projections and for facility planning, such as estimating how many nursing care beds will be needed in the future.

The population projections predict the number of residents in independent living units, personal care beds. and nursing care beds over a number of years. Independent living units may be apartments or cottages and are intended for residents who do not need nursing care services. The projections start with a census of the initial population. The starting census information used by the model includes the number of male residents, female residents, and couples, living in each type of unit and bed. at each age.

The initial population, grouped according to age and status, is pro- jected forward annually for a number of years. Figure 1 summarizes the results of a sample closed group population projection, showing how the residents in the initial cohort change their status over time. Note that, as the population ages, a higher propor- tion of the remaining group requires personal or nursing care services and is moved to the care facility.

Figure 2 shows the impact of the number of trials on the results of the stochastic simulation model. Assuming an open group projection (new residents enter the CCRC), these results can be used to estimate the number of nursing care beds that will be needed in the future.

Figure 3 again shows the pro- jected mean values from the 200 trial run, along with the 95% confidence interval (mean _ 2 standard deviations). The results indicate the need for nursing care beds is likely to fluc- tuate significantly. These stochastic results can help CCRC management balance the cost of new nursing care beds against the undesirable result of placing a resident in an external nursing home.

Cont inued on page 4 co lumn 1

4 The Actuary-March 1992

CCRC cont’d Actuarial vahtation Recause of the pre-funding aspects of CCRC fee structures. reserves are held fox the excess of future expenses over future fee income. This Is similar to an insurance company holding a gross premium reserve to cover the excess of future benefit and expense costs over future gross premiums.

A dosed group actuarial vahration is used to estimate the reserve a CCRC should hold on a given valuation date. The reserve is the difference between the present value of future expenses and the present value of future fee income, calculated for current residents. This calculation is performed on an aggregate basis rather than a seriatim one and includes the impact of inflation. planned fee increases. interest, and survivorship.

Table I shows the results of an actuarial valuation, using the stochastic closed group population projection described previously

Table I Actuarial Vahation Results

(000's omttted)

Actuar-ial Present Value of: a. Residential Expenses: $17.345 b. Care Facihty Expenses: $l;iz c. Depreciation Charges: d. Fee Refunds: e. Monthly Fees: 527;3z

Reserve: (a + b + c + d - ej: $12.792 Standard Deviation

of Reserve: $ 963 95% Confidente Intervak

$10,867 - 14.718

The stochastic model provides the mean reserve, as well as an indi- cation of the úkely fluctuation in the reserve. The mean reserve of $12.792,000 represents the average of the results of 200 simulations. Thus. a reserve of this amount would only be adequate roughly 50% of the time. To be 97.5% confident that the reserve would be adequate would require an additional reserve amount of $1.926.000 (two times the standard deviation).

The population and financial model also can be used for sensitivity testing to test the impact of different valuation assumptions on the reserve. It should be noted. however. that sensitivity testing is a funda- mentally different concept than the statistical confidente provided by the stochastic model.

Number of Nursing Home Beds Needed -65. Open Group Projection

60. 55. - Mean (200 trials) 50. Mean (1 trial) :: . .

. . . . : -..’ ‘. 45. 40. 35. : : : : : :

0 5 10 15 20 25 30 35 40 45 50 Years from Valuation

Figure 2

sads Number of Nursing Home Beds Needed 70- 65.

Open Group Projection - Mean

60. . ...< Mean + 2SD *,.........* . ..*... 55. **’ . ..-* *.. . . . . ** Mean 2SD

. . .._...***.... - ..-.- . 50. :

45.

0 10 20 ‘30 40 50

Years from Valuatlon

Figure 3

The reserve estimate is part of the actuarially based balance sheet, along with the assets of the CCRC and short-term liabilities. The balance sheet is used to determine the solvency of the community on an actuarial basis. Open gmttp cash fl~w projedion Most CCRCs are not-for-profit entities and therefore have limited capital. CCRCs typically use the initial

entrance fees to build the facility. so most CCRCs have limited amounts of cash. These factors make cash flow projection very important for main- taining liquidity. Such a cash flow projection is based on an open group population projection and models cash- receipts and expenses over a number of years.

Figure 4 shows the Byear cash flow projection resulting from the 200. trial stochastic model discussed earlier.

The Actuary-March 1992 5

Conclusion The model described in this article is Cash Flow Projection

ailable for research and educational * ctivities from the Society of Actuaries.

The model is PC-based and can be run on an IBM-compatible PC with two megabytes of memory using LOTUS l-2-3 (version 2.2). For more inforrna- tion regarding the model, please contact Judy Yore. Section and research coordinator for the Society of Actuaries, 708-706-3573.

16- Open Group 14.

12. - Cash Balance (CB)

: CB + 2SD ,- . . . . .

b lo- :

>p CB - 2SD : . . . . : B z IU

.We are pleased to have been chosen, along with Stanley A. Robert& to be the researchers for this project. Anyone who would like to discuss the project is welcome to contact us at our Directory addresses. Robert B. Cumming and William F. Bluhm are consulting actuaries with Milliman & Robertson, tnc.

~J,,,,,,,,,,,,,.,,,,,, 1 10 20

igure 4

Report of Board of Governors meeting * r he Society of Actuaries Board of Governors met ín Boca Raton. Florida, on January

10. 1992. As a follow-up to previous Board discussions of issues affecting life insurer confidence, President-Elect Walter Rugland presented a list of actions where actuaries had made a significant contribution to U.S. life insurance valuation and related areas.

The following motion was adopted as an opinion of the Board.

The Board of Governors of the Society of Actuaries, ín recogni- tion of the significant changes ín the operating environment for the life insurance business in the United States: 1. Applauds the role played by

many actuarles who are members of the Society of Actuaries for their major role ín the research on pertinent financial issues emerging from these changes and subsequent imple-

l mentation of research results ín both practice and regulation to the benefit of the public.

2. Points out to observers and analysts of the U.S. life insurance business that the Statutory Annual Statement of a life

insurer presents its current financial condition according to legal standards. By itself, the State- ment ís not sufficient to assess future solvency and financial strength. Evaluation of a life insurer’s iüture viability and financial strength over the long term must include, at a mini- mum, actuarial analysis of risk. considering current and possible future financial conditions. The Board requested that this

be communicated to SOA members. SOA committees, and the Ameritan Academy of Actuaries. It encourages all actuaries to actively particípate ín discussions surrounding financial risk structures.

Amendments to the bylaws incor- porating the Actuarial Board for Coun- seling and Discipline (ABCD) were approved subject to the membership passing a constitutional amendment transferring the rules for discipline from the constitution to the by-laws. The investigation of alleged violations in the United States, irrespective of the actuar@ country of residence, will be handled by the ABCD, and the Canadian Institute of Actuaries will handle such matters ín Canada. Following investigation, the matter would continue to be referred to the

SOA Committee on Comolaints and Discipline. Concern was &pressed that actual implementation of this process could result ín situations requiring technical corrections to the procedures. Accordingly, the Board believed corrections could be accom- modated more readily in the bylaws instead of requiring a constitutional amendment for each change. The constitutional amendment on allowing longer term Associates to vote will be sent out separately following the members’ response to the related article ín the January Actuary

The Board endorsed the concept of greater financia1 discipline on research and experience study projects by establishing liabihties for the initial budget for these projects when they are initiated. Also. the Board decided ít would formally authorize all research and experience study projects that require outside funding.

Education and Examination reports included establishment of a task forte to evaluate the effectiveness of the Fellowship Admissions Course. Another E&E task forte confirmed the desirabihty of a finance track for Fellowship students that covers finance and financial management,

Continued on page 6 column 1

The Actuary--March 1992 b

Board meeting cont'd with a heavy emphasis on investments. As a result of serious cheating instances on recent exams, penalties, including lifetime prohibition from writing SOA exams, were reported.

Other business included reports by President Donald Sondergeld and Executive Director John O'Connor, as well as reports on continuing education and career encouragement, future meeting sites, elections, communications, Sections, and the SOA financial condition. Please contact me if you have questions or would like more information on any items covered at this Board meeting.

David M. Holland Vice-President and Secretary

Finance track' cont'd financial implications of future contingent events.

The finance track will be broader than an "investment track" might be and will appeal to a range of actuaries, including some who are not involved primarily in investment activities. At the same time, it will permit, through appropriate selection of electives, a heavy emphasis on investments. In its coverage of investment topics, the track will emphasize asset/liability management for insurers, pension plans, and other financial institutions.

The Education and Examination Committee has been working to imple- ment this recommendation for more than a year. The development of this track, which will be a combination of current and new courses, has been assigned a high priority for 1992. The syllabus announcement is anticipated later this year. Joseph Paesani, a member of the Actuary of the Future Task Force, is second vice president and associate actuary at Fidelity Mutual Life Insurance Company. Bruce Moore, Chair- person of the Investment/Financial Track Task Force, is senior vice president and chief financial officer at Prudential Insurance Company of America.

Looking forward to annual meeting

Megattends author [orecastsO into next decade

by Cecilia Green

lthough the 1992 annual meeting is still a few months away, we are

excited to announce that our keynote speaker is the social forecaster and best-seUer author, John Naisbitt. The October 25 opening session speaker is well suited for the meeting's theme, "Financial Services in the Twenty-first Century," and for an audience who spend their professional lives analyzing the implications of future events. Actuaries will appreciate Nais- bitt's knack for interpreting current changes to help us better understand what may be future directions.

In 30 years of business, John Naisbitt has been an executive with IBM and Eastman Kodak and an advisor to many of the world's leading corporations. He served as special assistant to HEW during the Kennedy and Johnson administra- tions, and as assistant to the Commis- sioner of Education and the chairman of the Commission of Presidential Scholars before that. He is director of CRS Sirrine, the country's largest architectural and engineering firm, and maintains a demanding global lecture schedule.

Naisbitt spent almost 10 years researching for Megatrends, the 1982 best-seller he wrote in collaboration with Patricia Aburdene. One of publishing's great success stories, this book. which identified the major social and economic trends for the 1980s, was on The New York Times best-seller list for more than two years. A best-seller in 18 countries. Megattends' worldwide sales exceeded eight million. The international best- seller, Re-inventing the Corporation, followed Megattends in 1985.

In Naisbitt and Aburdene's newest collaboration. Megattends 2000, they name 10 new forces they believe will transform our world as we approach the new millennium. This book, released in January 1990, was Publishers Weekly's number three nonfiction best-seller of the year and on its 1990 list for 33 weeks.

]ohn N,~:sb/t r

Now that the 1980s are over, we revisit Megatrends to see if the 10 major patterns of change Naisbitt predicted for that decade occurred. Naisbitt, in an interview published in the Los Angeles Times on Jan. 17, 1990. pointed out, "These shifts are continuing pretty much on schedule." His paraphrased observations in th, Times article offer a perspective eig years after the book was written.

I rend # 1 : We are shifting from an industrial to an information- based society. Blue-color jobs decreased from 19.5% to 15.5% In the 1980s, and more than 90% of new jobs being created m 1990 are in the information sector, I rend # 2 : We are moving from a national to a world economy World trade has been increasing at 10% a year. and the emerging single- market Europe is but a step to a single-world market. I rend # 3 : We are moving in the dual directions of high-tech, high-touch, matching each with a compensatory human response. Despite the explosion in sales of high- tech VCRs, people didn't abandon the high-touch experience of going to movies. The industry peaked with a record-breaking summer of 1989 at the box office. t r end # 4 : We are restructuring from a short-term society to dealing in longer time frames. Job growth in the 1980s has been in sma//entrepreneurial companies with long-range vision versus Fortune 500 companies, who are

Cont inued on page 11 co lumn 2

The Actuary-March 1992

8

ighlíghts of SPDA study by Lucian 1. Lombardi

T he SPDA studp jointly spon- sored by the Me Insurance Marketing and Research Asso-

ciation (LIMRA) and the Society of Actuaries, examined the persistency and interest sensitive cash flow pattems of single premium deferred fixed annuities for the calendar years of 1984- 1989.

The study originated from LIMRA’s interest in the persistency of annuity products and the Society’s interest in the sensitivity of the product’s cash flow to interest rates. Lucian Lombardi. Sam Cox. Paul Laporte. and Steve Linney were the researchers for the study.

The purpose of the study was to assess the likelihood that a single prernium deferred annuity contract will have some or all of its cash value withdrawn and to quantify the relationshio of this withdrawal activity to ielected characteristics of

contract. The studv was based on business

issued by 24 companies during 1978 through 1989. It included more than 350,000 contracts with more than $8.3 billion cash value in forte. Contracts in the study are concentrated in the early policy years, and the great majority stffl had surrender charges in effect. Data for the later contract years are lirnited, making it difficult to measure full and partial withdrawals and annuitizations for those years.

Because of significant interest in this study’s results. an insertin the February Actuay mailing offered tables summarizing some preliminary results upon request. The table in this article is an overall summary.

Some important preliminary results are highlighted below. l One-year interest guarantee

contracts with no surrender charge are four times more likely to make a full withdrawal than contracts with a surrender charge still in place.

l Multi-year interest guarantee

e ontracts with a surrender charge f 4% or more have a full with-

drawal rate of less than 2%. On contracts where the surrender charge has expired. full withdrawal rates are 36%.

l Other factors associated with full withdrawals on one-year interest

guarantee contracts are age of annuitants, size of contract, and distribution channel.

l Expiration of the interest guarantee period is a primary factor associated with full withdrawals for multi-year contracts, particularly when there is no surrender charge in effect. In these cases, withdrawal rates exceeded 50%.

l Factors associated with partial withdrawals for both one-year and

multi-year contracts include age of annuitant, size of contract. and free partial withdrawal provision.

It has been hypothesized that the withdrawal r-ate is a function of the spread between the contracts credited interest rate and an external “market” rate. The period for which the researchers have data is one of generally declining interest rates. Therefore. this spread is not only very small but also,

ConUnued on piige 12 column 3

Summary of Results Interest Guarantee Period 1 Year or Less

Number of Contracts 226,588 Cash Value in Forte $4,926,023,1 OO

Contract Percent Percent wlthdrawal Cash value

of of cash rate* wlthdrawal rate* me of Contract contracts values Ful1 Partía1 Pu11 Partlal lbtal

With a Surrender Charge

Nonqualified 59.2% 61.6% 3.2 4.3 3.2 0.9 4.1 Qyt;.fd 34.8 94.0% 30.5 92.1% 3.2 3.3 ;:9 3.1 3.0 1.0 1.2 4.1 4.2

Without a Surrender Charge

Nonqualified 5.2% 7.0% 12.3 9.2 13.9 2.1 16.0

Q!k$d 0.8 6.0% w 7.9% 18.6 13.3 10.7 9.6 25.1 15.6 2.1 2.0 27.1 17.7

All Contracts 100% 100% 3.7 4.1 3.9 1.1 5.0

Interest Guarantee Period Greater Than 1 Year Number of Contracts 123,716 Cash Value in Forte $3,382,395,400

Contract Percent Percent wlthdrawal Cash value

of of cash rate* wlthdrawal rate* 5pe of Contract contracts values FUll Partlal Pu11 Partlal Tootal

With a Surrender Charge

Nonqualified 77.3% 77.6% 1.9 2.1 2.1 0.6 2.7

Q%iiid 17.9 95.2% 17.0 94.6% 2.8 2.1 2.3 2.1 2.6 2.2 0.5 0.6 3.1 2.8

Without a Surrender Charge

Nonqualified 3.6% 4.3% 34.2 9.5 37.0 3.0 40.1

Qu;&-$d J.J 4.8% 1.1 5.4% 23.9 31.6 7.0 8.9 33.1 36.2 2.3 2.9 35.4 39.1

All Contracts 100% 100% 3.2 2.3 3.6 0.7 4.3

*Wlrhdrawal rate refers ro annualized withdrawal rate

The Actuary-March 1992 8

Attention: Chief actuaries

by Stephen N. Patzman

ach year. the Society of Actuaries conducts a Chief Actuaries Ooen Forum exdu-

sively for chief actuaries in hfe and health insurance and consulting firms. The 1992 Forum is May 4 and 5 in Toronto. The sessions run for one and one-half days. with a reception and optional dinner the evening before the forum begins.

The definition of “chief actuary” includes any actuary who is in charge of actuarial responsibilities within the company, setting policy and goals for its actuaries. This 1s an actuary whose responsibilities go beyond valuation or product pricing into overall management of the company or line of business.

The Chief Actuaries Open Forum is an informal sharing of information through roundtable discussions. small breakout sessions. and networking. Our legal advisors keep us on the straight and narrow by not allowing any discussion that may involve anti- trust matters, but everything else is fair game.

Chief actuaries should have received a brochure by the end of February that included registration information. If you did not receive one and you function as a chief actuary, please call the Society Continuing Education Department. 708-706-3545.

After you register, you wffl receive materials that include a list of possible topics to be discussed. You can rate the topics in your order of preferente. and your vote will determine which are addressed at the forum.

The Chief Actuarles Open Forum is an excellent way to expand your knowledge by an informal and personal exchange with other senior practitioners. This year’s leaders include Mike Rosenfelder, vice president and actuar-y at Confederation Lifc Steve Patzman, vice president and chief actuary, USAA Life: Dick Mucci, senior vice president and chief actuary, Paul Revere Insurance Group; and Greg Strong, vice president. Minnesota Mutual.

Experíence studíes contínue tradition

by jack Luff SOA Experience Studies Actuary

ion has research it has

existed. The Society of Actuaries upholds this tradition with the experience studies in the Reports series and with top-quality papers in the lhnsactions.

In 1988 the Report of the Task Forte to Review and Revitahze Society of Actuaries Research affirmed the Society’s commitment to an active research program. This commitment has developed into two approaches: continuing and expanded experience studies and special research initiatives or projects. Projects can be either one- time efforts or developmental efforts leading to new continuing studies. Experience staadies basis for mhmPUI pPQjections Special projects have received considerable attention in the past year. but some are really new “experience” studies that are a continuation of our actuar-ial tradition.

While experience studies are not necessarily attention-grabbers, they represent “bread and butter” activities of the profession. For example. the continued small improvement in mortahty, as reported in the latest Standard Ordinary Insurance study, continues a long-term trend that is positive for the industry, but does not generate much excitement. It would take a few years of uptums in mortality rates to break the pattem and get the attention of the public.

If actuaries needing an up-to-date mortality assumption did not have the most recent data, however, they would have to assume the continuation of a past trend to perform their calcula- tions. Some discomfort could set in for the pricing actuary needing evidente that the mortality rates are improving to extrapolate the trend, and for the valuation actuary, worrying it had not improved enough. konomic impact on studies Ironically, the experience studies effort now finds itself in a difficult position. In today’s economic climate. with intemal and externa1 forces influencing

profits, companies find it more difficult to contribute data or financial support to experience studies. Companies also appear less willing at times to provide actuaries to serve on the experience study committees that perform and ,manage these studies. which further complicates efforts. Rising costs and longer response time Similar financial pressures exist within the Society’s organization. The cost of compiling the current experience studies has risen significantly. While a private contractor, MIB, Inc., has performed a valuable service for the kciety in compiling experience data, it has been downsizing and has had difficulty gearing up for our new and expanded studies. Society staff supporting experience studies also fa- challenges in responding in a timely manner to members’ needs. The heavy reliance on volunteers in experience studies further tests our system. Slow progress Although research has been given more emphasis in the past four years, experience studies are not yet as timely as we would like them to be. New methods gradually are being applied to existing studies. but our responsiveness to developments in the marketplace is not as fast as we would like.

What does the future hold? Several courses of action could help alleviate the problems and enhance our operations. Regular annual data collection Essential short-term and long-term needs must be identified and steps taken to address these needs. Since few companies have ready access to a significant amount of historical data, current data must be collected to ser-ve future needs. Regular annual activities work best in most operatinm environments. which suggest collecting data annually for short- and long- term needs.

Continuecl on page 12 column 2


Credit risk study cont’d

d ssets studied o keep the scope of this initial study

manageable, it was decidecl to concentrate on private placement bonds and commercial mortgage loans. These assets represent a significant portion of fixed income securittes owned by hfe insurance companies. Despite these large hold- ings. no published direct data appears to exist from which the economic loss of credit risk events for these securities can be assessed.

Although many studies have been performed on the asset default experience of pubhc bonds, they do not provide information directly transferable to the study of private placement bonds and commercial mortgage loans and do not extend to other types of credit risk events. Analysis to date suggests that the incidence and behavior of the credit rtsk for private placement bonds and commercial mortgage loans are different from pubhc bonds. In addition, studies of pubhc bonds usually have not included the total economic loss of default. For example. losses

8 ue to restructuring before default ften are ignored (largely because of

lack of accessible data). and the economic value of the original sched- uled payments relative to market yields available at restructure. sale, or final settlement is not considered. Need for study A disciphned study of insurance company private placement bonds and commerctal mortgage loans is important because the insurance business has changed, both in the products sold and in the way proceeds are invested. For most of the insurance industry’s business, investment risk. especially credit risk, may be the dominant risk.

Also, the economic environment has changed. Hostile takeovers and leveraged buyouts (LBOs) during the 1980s have weakened many corporate balance sheets. Real estate markets in many geographtc areas have been over- built and remain soft, resulting in historically high levels of dehnquen- cies and foreclosures on commercial mortgage loans.

a

Insurance companies and other nancial institutions have been

developing the means to operate in this new environment. The 1980s saw the development of sophisticated interest rate modeling and cash flow

matching techniques. Prudent applica- tion of these techniques, together with well-designed products and investments, can ease the losses due to cash flow deviations resulting from volatile interest rates.

The 1986-89 study is the beginning of development of a comprehen- sive data base intended to show the full extent of the current levels of economic loss associated with credit risk events and the vartabihty in these levels by asset type, credit rating, age of asset, and other characteristics. Until this data base is fully developed on an ongoing basis, it will be difficult to manage this risk most effectively This can lead to difficulties in product pricing, reserving. and setting surplus standards. Expected benefits The benefits of collecting and reporting credit risk event data are far reaching. With these data in hand, the industry at large. regulators,, companies. and consumers, can:

Gain a greater and fuller conceptual understanding of credit rtsk Develop a benchmark of reliable information useful in assessing the relative value of fixed income asset classes and of assets in various credit rating categories. which would be useful in making port- folio management decisions and in establishing credit ratings Obtain a greater understanding of the character of credit rfsk, whtch will lead to better standards. product pricing decisions. and evaluations of surplus adequacy Monitor experience year-by-year to determine d the industry’s economic loss from credit risk events is improving or deteriorating

Coals of 1986-89 study The specific goals of the 1986-89 study were: 1) To assess the readiness of companies to participate in an ongoing intercompany credit risk experience study 2) To gain experience in the design and implementation of an intercompany credit risk study 3) To generate further interest and support for ongoing credit risk studies within the actuarial and investment communities 4) To the extent possible, to provide information about the economic loss of credit risk events that were incurred in 1986 through 1989

To achieve these goals, the following items were developed:

A definition of credit risk events A loss calculation methodology Exposure base data Credit risk event data Process for collecting, compiling, and analyzing the data Output. including analysis of the loss experience by various asset characteristics

The definition of credit risk event and loss calculation methodology may be of particular interest. Definition of credit risk events The occurrence of any of the following was considered a credit risk event:

Failure (other than for known noncredit-related reasons. such as administrative problems) to make payments of interest or principal under the terms of the contract: also. for private placement bonds. Cbapter 7 or Chapter ll bankruptcy of borrower Modification of the principal or interest terms where the lender agrees to new terms to avoid possible future losses from faflure to pay mterest and/or principal under the terms of the contract Sale of the investment before maturity because of concerns about deteriorated credit, if the the sale is to avoid possib e future Ji

tu-pose of

losses from failure to pay interest and/or principal under the terms of the contract

The opportunity cost associated __ ___ with the call of an asset in a low- mterest-rate environment is excluded as a credit risk loss because the call is an exercise of the borrower’s right and therefore is not credit related.

It was determined that companies could not provide for every sale and restructure the required data for an historical studp Therefore. for this 1986-89 study, companies were asked to submit data only for those modifications, sales, and other events that they have determined are credit risk related. Loss calculation methodo9ogy Traditionally, asset default studies have looked at either the incidence of default (number of defaults) or losses of par value. Studies considering only losses of par value do not account approprtately for credit risk losses because they do not account for the investment’s market value at the time

Continued on page 12 column 1


Sources of 1958 CSOKET ANB and ALB tables by Robert j. johansen

recently was asked about sources for the 1958 CSO Tables and. in narticular. the

Age Last Birthday-(ALB) set badr six years. 1 began a search. Considering the ALB tables are somewhat unusual and referentes to them rather obscure. my findings might be usefuI.

The 1958 CSO Table and the 1958 CET Table first appeared in ZYrans- actions of the Socfety of Actuaries (TSA) X. pp. 6% - 706 (as par-t of the discussion report beginning on p. 686). The juvenile modification of the three- year age setback for females appears in TSA XI, pp. 1.060 - 1,069. The ALB tables, on both bases, appear in TSA XII. pp. 607 - 613.

The 1958 CSO ANB and ALB tables (including the three-year setback extended tables) also appear in two Society publications: Monetary ables, 3% and 3.5%. pubhshed in 1961. and Monetay nbles, 4%. published in 1976. These publications show values of 4, l,, and d,, plus commutation functions. The ANB table (not set back) also can be found in National Association of Insurance Commfssioners (NAIC) Proceedings 1959, Val. 1. pp. 187-196.

The ALB table and the ALB table set back three years are unusual in that the rates per 1,000 are shown to four decimals, not two. They were derived by averaging successive values of 1’. but rounding any res& ending in 0.5 to the nearer even digit. Both the ANB and ALB three-year setback extended table values of 1, run tnto those for Iater ages after adjusting for the age setback.

The six-year setback tables proved more elusive. A discussion by John H. Cook in Record of the Socfety of Actuarles, Val. 3. No. 4. pp. 825830, derives six-year setback values of qx for both ANB and ALB, but the ALB values are to two decimals, not four. (See dso NAZC Proceedings 1978, Val. 1, pp. 534-537.)

Since inquiry of likely sources did not produce any hint of the existence of a four-decimal version of the six- year setback extension, 1 devised a program using the special1’ rounding rule that exactly reproduced the I’s and q’s of the ALB table and the three-year setback ALB table from the respective ANB 1, tables. Using this

program. 1 produced a four-decimal version of the 1958 CSO ALB table set

cannot be obtained by applying the CET loading formula to the CSO

back six years. Values of 4 to four decimals, Z, and d, at ages 0 through 20 appear in the accompanying table. The starting value, &, was adjusted so the values of Z, at the extended ages

values. Rather, the introduction to the volumes of Monetaxy Tables cited previously states that the Z, interpolation method was used for both the CSO and CET tables. The CET values

would r-un into those for the Iate; ages. after taking account of the age setback. At ages 18 through 20, the tabular values are exactly equal to those of the ALB table at ages 12, 13, and 14.

The ALB CET tables also are unusual in that the ALB CET table and the ALB CET set back three years

in the accompanying table were computed by the 1, interpolation formula and the value of b was adjusted so the values of lla to 1X would be identical to the ALB CET values (not set back) at ages 12 to 14. Robert J. Johansen is consulting actuary with Life Actuarial Services.

be Age X e I, 4 X e 4 4

Extended Values for the 1958 CSO ALB Table Set Back 6 Years 0 3.9119 10013470 39172 ll 1.0950 9854608 10791 1 1.5101 9974298 15062 12 1.1050 9843817 10877 2 1.3501 9959236 13446 13 1.1150 9832940 10964 3 1.2900 9945790 12830 14 1.1301 9821976 11100 4 1.2349 9932960 12266 15 1.1549 9810876 11331 5 1.1850 9920694 11756 16 1.1900 9799545 11661 6 1.1401 9908938 ll297 17 1.2350 9787884 12088 7 1.1050 9897641 10937 18 1.2900 9775796 12611 8 1.0850 9886704 10727 19 1.3550 9763185 13229 9 1.0800 9875977 10666 20 1.4250 9749956 13894

10 1.0849 9865311 10703 Sum = 28.0720 Sum I,= 207221602 qx

Extended Values for the 1958 CET ALB Table Set Back 6 Years 0 4.6628 10054900 46884 ll 1.8450 9813919 18107 1 2.2602 10008016 22620 12 1.8549 9795812 18170 2 2.1001 9985396 20970 13 1.8651 9777642 18236 3 2.0401 9964426 20328 14 1.8799 9759406 18347 4 1.9851 9944098 19740 15 1.9050 9741059 18557 5 1.9350 9924358 19204 16 1.9399 9722502 18861 6 1.8899 9905154 18720 17 1.9849 9703641 19261 7 1.8551 9886434 18340 18 2.0400 9684380 19756 8 1.8350 9868094 18108 19 2.1050 9664624 20344 9 1.8301 9849986 18026 20 2.1750 9644280 20976

10 1.8349 9831960 18041 Sum q,=43.8230 Sum 1,=206530087

Manll allerfu Sunmmary ob u3wm awd The 1992 Directory of Actuarial Memberships, which contains a

Medic:ara? programs

membership list and business connec- Robert J. Myers. former chief actuary

c tions for aII members of the six organi-

of the Social Security Administration.

zations representing actuaries. and the has completed a revision of his

1992 Society of Actuarfes Yearbook Summary of the OASDZ and Medicare

were mailed to members in early Programs. This 48-page document

February. If you have not yet received describes the program as of January

this maihng. please caII Donna Klehr 1992. Copies may be obtained by

at the Society Office. 708-706-3526. writing to him at 9610 Wire Avenue, Silver Spring. MD 20901, and enclos- ing five 29~ stamps (and. if possible, a seh-addressed mail@ Iabel).

The Actuary-March 1992 ll

Missed our Mark We mistakenly credited Mark Kinzer in the January issue with being one of the youngest successful exam candi- dates. Actually, it was Mark Evans, who passed Part I just before graduating from high school. became an ASA at 21% and got his FSA at 23%. Evans is second vice president and actuary at Capital Holding Corpo- ration in Louisville, Ky He shares this baseball teaser with readers:

Two fictitious teams. the Triplets and the Tomahawks, are playing a series of baseball games, with the first team to win four garnes declared the

victor. Each team has a 50% probability of winning any single game. The first two games are played in the Triplets’ ballpark. Games three through five are played in the Tomahawks’ ballpark, and the final two games are in the Triplets’ ballpark.

Find the following.expected values: (1) Total number of games to be . played in the series (21 The number of games to be played at each team’s ballpark.

A solution is on page 14.

Las Vegas meetíng to be a show-stopper The Society of Actuaries first 1992 spring meeting is sure to be a show- stopper as health. pension. and reinsurance actuaries make personal appearances at the Las Vegas Hilton, April6-8.

db

More than 90 sessions feature tractions such as a debate on who ould pay to care for the uninsured.

communicating to management, and bankruptcy and benefits plans. Health policy issues wffl be in the spotlight as the subject of the keynote speech.

Other sessions feature a review of the “not gone but forgotten” provisions of the Intemal Revenue Code and regu- lations often overlooked by practitioners, long-term care reinsurance, using reinsurance to fund post-retirement health costs. ethics, mergers and acqui- sitions, and the effect of solvency concerns on health insurers.

The meeting location offers participants a chance for after-hours fun and games at world famous casinos with live performances of leading singers and entertainers. They also can choose from side trips to visit the Valley of Pire where wind and rain have shaped sandstone formations. to ski on Mt. Charleston, or to go sight- seeing at the Grand Canyon and Hoover Dam.

Other highlights include Monday vening’s reception for attendees and

* ests with food, music. and the opportunity to network. and ‘Meet the Board” at Tuesday’s breakfast. which provides an informal setting for one- on-one chats with Board members.

Program change The time for one of the workshops at the Las Vegas spring meeting has been changed. The Proposed Stan- dard Workshop ( 13 WS in the preliminary program) was moved from lo:30 a.m. - noon to 4:15 - 5:15 p-m., Monday April6. The Proposed Actuarial Compliance Guideline about Financial Accounting Standards No. 106 will be discussed in this workshop. Joseph P Macaulap a member of the Retiree Heahh Care Committee that developed the draft. will be the workshop chairperson.

The exposure draft of the guideline has a comments deadline of March 15, 1992. as set by the Actuar-ial Standards Board. Although the date of the workshop is after the deadline. comments made at the workshop will be heard before the committee sub- mits the final guideline to the ASB.

Megatrends cont’d short-term driven and whose hbor force has been shrinkfng. Trend #5: We are shifting from centralization to decentralization in politics, business. and culture. Zn offies, we have moved fiom mafn- f;rrf cozyputers to the wfdespread

Trend #6: We are shifting from institutional help to more self-reliance. Se&help gmups contlnue to gruw as men and women call upon their own resources. Trend #7: We are moving from repre- sentative to participatory democracy.

Cftizen-fnsplred ballet fnftfatives and referendums have been a phenome- non of the 1980s with Cahfornfa In the lead. Trend #(S: We are giving up our dependence on hierarchical structures in favor of informal networks. Networking was the buxsword of the 1980s. affixed to formal and informal groups of all kinds. Trend #9: We are moving from the industrial cities of the Northeast to the South and West. Zn a Sun Belt explosion between 1980 and 1988, Florida’s population gained by 26.6%. Texas by 18.4%. and Califómia by 19.6%. Trend #lo: From an either/or society with a lirnited range of personal choices, we are exploding into a multiple-option society Televfsfon viewers could choose fiom three major (and simflar) networks onfy a few years ago. Today cable TV watchers choose fiom up to 80 chan- nels of programmmg,

In a future issue of The Actuary we’ll look at Megatrends 2ooo’s optimistic outlook for the 1990s and Naisbitt’s theme of the triumph of the individual as an agent for change.

Annual meeting topics in this mailing Included in this maihng is an insert that lists topfcs for the annual meeting in Washington, D.C., October 25-28. Please take a minute to scan these session subjects. and if you are interested in speaking in any of these sessions. please contact the person listed.

12

Credit risk study contti of loss. Therefore, in this studp the economic loss associated with credit risk events is determined by com- par& at the time of the credit risk event. the present value of the remaining cash flows of the original investment to the present value of the cash flows of the new investment following restructure or foreclosure.

The development of the interest rates used to determine the present values was a critical component of the project because the ultimate quantifica- tion of the economic loss depends on the interest rates used. RimitaÍhM of sîudy The study’s coordinating committee belteves the study will make a significant contribution to a better understanding of the economic loss of credit risk events. Limitations to the studp however. should be noted to avoid its possible misinterpretation and misuse.

The committee already has noted two limitations: 1) Private placement bonds and commercial mortgage loans often include other investment components. such as equity, that are not included tn the study Thus, the economic loss determined in the study does not reflect the economic gain or loss associated with these other components. 2) The study is not designed to be able to aggregate. across companies or within companies, different issues from a single issuer. Thus. the inci- dente of credit risk events might be somewhat distorted.

Other limitations will likely be identified as the historical study is completed and wffl be noted in the report. status The preliminary results for private placement bonds are being analyzed by the coordinating committee. Preliminary results for commercial mortgage loans are being prepared.

We expect a preliminary report will be available before the end of the second quarter of 1992. Gery 1. Barry, vice president at Aetna Life & Casualty, is Chairperson of the SOA Credit Risk research project. Warren Luckner is research actuary at the Society of Actuaries.


Expezience studies cont’d lLimit@dl annual amtlysis atnd P@poPthg A certain leve1 of annual analysis and reporting would ensure that the data is being collected satisfactorily and would give initial indications of changes in trends. A complete analysis each year usually would not be necessary, Development of appropriate medium-term analysis and reporting strategies are essential to use effec- ttvely the scarce resources available. us@ <Po tn@W DllethQtlls Innovative methods of analysis and reporting must be developed to serve the current needs of the actuarial profession and its publics. Analysis and reporting must be recognized as the natural extension of the data collection process. New developments in actuarial science and other disciplines’ methods must be applied more quickly to exp@ence studies to improve on and expand the information obtained from the data collected. PPeliullinary PoqmPuS A balance must be struck beíween the need to report information quickly and the time constraints on the abihty of companies to provide quality data. Preliminary reports would reflect results developed before all data have been received and fully processed. Timeliness also could be a deciding factor in how individual companies fit into the various reporting structures of the studies. If a company cannot provide data on a timely basis. it would be part of the long-term collection effort, but be excluded from short-term or interim reports.

The actuarial profession has much to be proud of in terms of its long-term reporting on mortality and morbidity. The same techniques developed for experience studies are being used today in massive data collection efforts to study the insur- ante industry’s investments. These ‘tried and true” techniques of collecting and analyzing sizable amounts of data are helping provide a pioneer study in this area.

The continuation of experience studies is assured. How we change, improve. describe, and disseminate these various reports is takmg shape now. The challenge is to use effectively all available resources to ensure that experience studies serve the needs of the Society’s membership. the industries they serve, and society in general.

SPDA con t’d in many cases, negative; i.e., credited q interest rates on new issues are less than those on in-forte business. In analyzing the available data, no significant results in this area have been found. Sam Cox and Steve Linney are preparing a separate report that will be available from Sam Cox.

It is anticipated that an announcement on the availability of the final report will be made in April. Readers are cautioned that results of the study likely can be better inter- preted in the context of the complete report. Readers should understand that the SOA or LIMRA does not recommend that the values in the preliminary results be used for pricing or valuing any specific financia1 security product. Lucian 1. Lombardi is program director at LIMRA and one of the researchers for the SPDA study.

llunueun5ive ueview

!semiPnJlus obbeued

The Temple University Actuarial Insti- tute will offer intensive review semi- - nars in Philadelphia. Pa., for Course 151 on April9. 10; Course 160 on April23, 24: Course 162 on April25; Course 165 on April 11; and Course 200 on March 30-April4.

The Casualty Actuaries of Mid- Atlantic Region KAMAR) will sponsor intensive review seminars in Phila- delphia for Course 100 on April8-11; Course 110 on April 13-16; Course 120 on April22. 23: Course 135 on April21,22; and Credibility Theory & Loss Distributions on March 26-28 and April2-4.

For more information, contact Bonnie Averbach, Program in Actuarial Science, Ritter Annex 475 (004-00). Temple University, Philadelphia, PA 19122,215-787-8153.

.,.. ..,. *

lRu§§eãn fkml §a?a?k§ assisuawc:e Analysis-Finance-Service (AFS) is a private consulting ftrm providing services for transportation companies in the Russian Republic. AFS also has a license to provide insurance and /-7. investment services. AFS would like to establish a relationship with a North Ameritan actuar-ial firm for technical assistance. If interested, contact Alexander L. Lonshteyn, vice president. 20 Alden Road. Marblehead. MA 01945. 617-639-4677.

We need your letters on

)4 SAs’ right to vote

The January Actuary asked you. as members of the Society, to express your opinion on the proposed constitutional amendment to grant ASAS of 10 years or more the right to vote in Society elections. We had hoped to have enough letters to crystallize membershp reaction and report it in this issue.

We received only 10 letters. however. in response to both the October 199:l and January 1992 articles on this subject. With an SOA membership of 13.830. including 2,400 who have been Associ- ates for more than 10 years. the response has been disappointing.

We are asking again for your views on this important issue. Your letter to the editor can be as short as two or three sentences. letting us know whether you are in favor of or against the amendment and why Please get your letter to Editor Linda Emory by March 31 for a summary in the

ay issue of The Actuary

Dear Editor: Faculty president impressed with annual meeting Having been the Faculty of Actuaries/ Scottish correspondent to The Actuaxy for many years, I have achieved success at last - my photograph in The Actuary (1 was pictured in my capacity as president of the Faculty as a special guest at Toronto.)

Although I have had this connec- tion with the Society for many years, the Toronto annual meeting was the first meeting I had attended. I was impressed by the hospitality I received and the leve1 of discusston. Many of the same problems arise for our profession all over the world, and the same solutions are sometimes found (for example. the expanding concept of the appointed actuary).

aI Continuing contact is vital

ong all the actuaries in the world. and particularly among what we might call the English-speaking block who have such a common heritage and background.


Greetings to all those 1 met, and special thanks to Daphne Bartlett and Don Sondergeld.

Alistair Neill

Actuaries should seek individual opportunities It was heartening to read the summary recommendations of The Actuary of the Future Task Forte in the December Actuary

Yet I do not fully agree wtth their thrust. Why should the Societ be expected to bear so much of t B e burden? Surely the best way to convince employers that actuaries can bring value to nontraditional roles is for individual actuaries to play such roles. Surely individual actuaries can learn from the intelligence and training of other disciplines easily found in most insurance organtzattons.

My point is that we, all of us, have opportunities to expand beyond traditional areas of responsibility. If we do not pursue these opportunities, the Society is helpless.

Don Blue

journals highly rated in Netherlands The Association of Cooperating Univer- sities in the Netherlands regularly prepares classifications of scientific joumals. In 1991. it published a report of 1,200 joumals that are related largely to economics. The top-rated actuarial journal was Znsurance: Mathematfcs & Economics (rating: Al, followed by the Transactfons of the Socfety of Actuaries and the Scandina- tian ActuarialJournal (both rated B). Eight actuarial journals received ratings between C and E. The following SOA members are on the editorial board of Insurance: Matherna- tics & Economics - Stuart Rlugman. John Beekman, Harry Panjer. Amold Shapiro, and Elias Shiu.

Hans U. Cerber

Headline misleads reader Considering Daphne Bartlett’s exhorta- tion to move into nontraditional roles and The Actuary’s editorial “On shaping public policp” I looked forward to reading Bruce Schobel’s letter in the November Actuary in which the headline suggested he was “opposed to lowering fertility rate.” On what broad public policy lines was Schobel opposed to the slowtng of the growth in population, and what would he suggest that we, as a Society, do to reverse the trend? Did he plan to take

13

action himself as part of the “think globally, act locally” philosophy?

You can imagine my disappoint- ment when the letter revealed that he was only opposed to the “assumption.” not the ‘lowering fertility rate.”

Edwin C. Hustead

One more proof Several recent letters reminded me of a proof that 2 = 1 that 1 think readers will find of interest because it is short, is not well-known. and does not involve division by zero. n*=n+n+n+...+nbaddends) Taking the derivattve of both sides, we have: Zn=l+l+l+...+l=n 2=1

Edward Scher

Living benefits morally profitable I believe it is time for the actuarial profession to speak out and act on an issue of social concern - living benefits.

New York State recently authorized the writing of such polictes. The front page of the National Under- writer carried a photo of Gov Mario Cuomo signing the bill. flanked by Ron Barbaro. president of The Prudential.

I was in Canada a few years ago when Barbaro, after visiting some AIDS patients and asking them what he could do to help, single-handedly started a program to lend terminally-ill policyholders money that would be repaid from the proceeds of their policy Other Canadian insurers quickly adopted this program.

After resolving the various legal and tax problems in the United States, The Prudential began offering without charge a rider to its existing and new policies granting about 90 to 95% of the death benefit to tnsureds who have stx or less months to live. including those requiring vital organ transplants.

To my knowledge, few U.S. insurers have followed The Prudential route. Some insurers are offering accel- erated death benefits, but for a premium. Isn’t this an area of intense human suffering that could be alleviated somewhat by the actuarial profession calling on all insurers to follow The Prudential’s lead? It is. after all, cost neutral and morally profitable.

Daniel E. Kahan

Continued on page 14 column I

14

Dear Editor con t’d ILeó your consciente 0e your guide Precept 15 of the “Code of Professional Conduct” (in the December 1991 supplement to The Actuazy) obligates every actuary to inform against a fellow actuary whenever the latter violates any precept, except: 0 when the violation is trivial or

merely formal 0 when informing reveals confi-

dential information 0 when informing is illegal and the

actuary fears a defamation suit In the general case in which the

exceptions do not apply, Precept 15 can easily conflict with one’s moral and religious inclinations.

Even from a secular point of view, those who “rat” on their fellows generally are not held in high esteem. They are not regarded as paragons of virtue, even by the authorities to whom they “squeal.”

Why introduce an ethic of denun- ciation into the Society of Actuaries? The Society has survived for years without it.

The biggest shortcoming of Prec t who ‘p

15 is that it leaves an actuary ollows bis or her own con-

science vulnerable to a civil charge of professional misconduct. The most sensible and moral course of actton ts to let an individual determine in bis or her own consciente whether snitching on a fellow actuary in a particular instance is or is not a professional. ethical, and heroic activity.

Thomas M. Zavist

kll@LnOuy psiubll

A tenure track position in actuarial science is open at the University of Manitoba, beginning July 1992 or later. Candidate should have a Ph.D. in actu- aria1 science or closely related area, or FSA (FCIA). or equivalent. In accord- ante with Canadian immigration requirements. priority will be given to qualifted Canadian citizens and perma- nent residents. A curriculum vitae and three referentes should be sent by April 1. 1992, to Professor Eric Seah. Dept. of Actuarial and Management Sciences, University of Manitoba, Winnipeg, MB R3T 2N2, Canada. .,.. . . . . .,,. . ..I.. .._, .._ . . _., .,

llw lflmmmDuiJiuun Ellis W Scott ASA 1967

Ernest Clark Gilí FSA 1926


The January Actuary contained an error in the synopsis of John C. MayMrd’s paper accepted for publica- tion in Volume 43 of the Transactfons. The third paragraph of “Financing Defined-Benefit Pension Plans with Indexed Benefits” should have read:

For the periods selected, the illus- trations do not show surplus growth. which many actual plans without fully indexed benefits have shown in the 1980s.

We apologize for any confusion this may have caused.

L

Re§eau& uuEeu?uiwg The University of Western Ontario’s n Department of Statistical and Actu- arial Sciences will conduct a research meeting on ‘Actuarial Methods with Applications to East European Insur- ante Markets” on Tuesdap May 26.

The meeting will be in Room 240 of the Western Science Centre, Depart- ment of Statistical and Actuarial Sciences. at the University of Westem Ontario, London, Ontario. The registration fee is $50. For more information or a registration form. please call Rrzysztof Stroinski at 519661.3613 or fax him a note at 519-661-3813.

Solution to baseball teaser Let P(x,y) = probability Triplets win x games and Tomahawks win y games Let Q(z) = probabtlity series ends after z games

P(O,4) = ; ( K 1

; 4 = $= P(4.0)

P(1.3) = ; ( )( 1

; 4 = ; = P(3.1)

P(L4) = P(1,3) x 2 = g = P(4,l)

1 1 P(2,3) = P(1.3) x z + P(2,2) x z = x 5 = P(3.2)

P(2,4) = P(2.3) x ; = & = P(4.2)

1 1 5 P(3.3) = P(2.3) x z + P(3,2) x z = i6

P(3.4) = P(3,3) x ; = 5 = P(4*3)

253 now Q(z) = 1 P(4.L4) + P(Z-4,4) 4 5 2 5 7

= 2P(4, 2-4)

Q(4) = i Q(5) = f Q(6) = 5 Q(7) = 5

#l: 2 f, Q(i) = $ = 5; 1=4

#2: Triplets; 2 + 1 X Q(6) + 2 X Q(7) = 2%

Tomahawks; 2 + 1 x Q(5) + 1 x Q(6) + 1 x Q(7) = 2;


15

ll ( ACTUCROSSWORD bv Bob Hohertz

I

Across Down 0 0 u( 0 0 0 0 0 0 0 ll u Il 0 0 0 0 0 0 ll ll1 0 0 0 0 0 Il 0 0 Il 0 u Il 0 0 0 ll 0 0'

1. Grant goes around as Miss Piggy, gets the bird (9) 6. Scurvy? Try peach stew (5) 9. Turf, a shot-all for coke, maybe (4,3)

10. Warn addled Henry V early on to see the monocerous (7) ll. Took exam-that is, wrote six Gnossiennes (5) 12. Composer in line for Don Juan (9) 14. Reckon what he had done already covers it (3) 15. The “Psychics’ Review”? (6,5) 17. Grub: provide food and support (ll) 19. Morris as an example of the first of cat advertising regulars. (3) 20. Simpletons-their day is December 28 (9) 22. George Sand and George Eliot confuse me now (5) 24. Sour maple tree-one found in British Columbia (7) 26. It? It takes a liberal Scot (7) 27. One less than twenty three... (5) 28. . ..ten. if Fred changed (9)

1. Curse holds power: “The horns of the crescent moon!” (5) 2. Set down around the beginning of daylight, put to sleep (7) 3. Work the crowd or bully (9) 4. Shock disrupted a chain of mountains (ll) 5. Long for money (3) 6. Firm note in the railroad removes the center (5) 7. Repeating “1 love Narcissus” in Greek (7) 8. Plastic toys repel (9)

13. Hobo state in ill nature, intoxicated (6,5) 14. Part of the circle, he in the past was Spenser’s enchanter (9) 16. Two fasteners for Lewises’ letters (9) 18. Touching sunburn-man!! (7) 19. Organize imp in old king (7) 21. From elbow to fingertip, bear it (5) 23. Chamber music makes high wire act dangerous? (5) 25. Swine of America, divide and conquer! (3)

27

100% SOLVERS - &ruaw: W Allison, F Clarke, C Galloway, J & A Grantier, C Hachemeister, V Hosler & T Luker, R & J Koch, D Leapman, W Lumsden, M MacKinnon, R Martin, G Sherritt, M Thompson & Cl Elbaum, 8 & J Uzzell, M Vandesteeg & A Whie, D & M Williams, F Zaret

February’s Solution

Send solutions to: Competition Editor, 209 N. Comanche Lane, Waukesha, WI 53186 1

A. Foxgllwe product.

B. Insult; indignily,

C. SmafUy; trimly.

D. Like an encyclopedia.


ACTUCROSTIC by Pt-n H~pokoski

0 , 0

0 1 I 1 I

9 27 30 65 1 I I I I 11 121165131139155

0 ‘0

E. Composer of A Gemnui Requiem.

F. W~kenwrk material.

S. Musical send-off. (2 wds)

Y. Olympic gold medakt. (3 wds)

. lsbesm.

J. Biihops and kings.

(. Li¡.

i. Plane figure.

W. Member of the crw.

u. Bolted soft.

1’ 1 ” ’ “1 1 166 10 63 17 192 42 61 125152

I 1 1 1 1 1 ' I 221 16 36 65 156291236

0. Souvenirs; keepsakes.

I 1 1 1 1 1 ’ I 232 15 75 102 211 55 144

II 11 11 ’ 1’1 122267146 7 2l4n 39 46 53

1 1 ’ I

72 99 246

I 1 1 1 1 1 I 16417677193234134

I 1 1 1 1 1 I 171 142135136145 60

II 11 I""I 6 32 601M126143151166 2

I 1 1 ’ J 167296105 52

Il 11 11 “‘1 119 132 147 12 16 190 47 54 70

II 1 ' I 66 es 196112

l 1 1 1 1 1 ’ 1 I 134922232386268176

II fi 11 “1 1 I

154166166196 35 66 20 36 76

1 ’ ’ ’ 1 126 63 ll 163

I 1 1 1 1 1 1 l 26 62 197 91 113 116 161

I 1 1 ’ 1 ’ ’ 1 163176169167213 46 71

I 1 1 1 t

29227140236

F? Teke possession of; arrest.

Q. lb~Lazeti&WaiteHcytin1~2g, e.g.

R. Note of cunency (slang).

S. Monogamist rule ol thumb. (4 wds)

T. Oiiisions; misunderstandings.

ll. Homo sapiens; compassion.

V. Spiritualiic communkation board.

W. Psychotics.

X. Peticipant in the judicial process.

Y. Whei makes a male. (2 wds)

z. sllllts; flutt6rs.

AA. Happenings.

BB. Sea animals.

I 1 1 ’ ’ 1 ’ ’ I 67 157 37 41 96 IM 200 94

/ 11 1 ’ 11 ’ 1” 9712913921022922843 292 3 14

1 1 1 1 1 1 1 174195225 4 28154

CC. Fungal affliclion of, e.g., Ulmus 11 1 ' 11 "'1

hollandla majar. (3 wds) 199 23 33 45 9013716619176

l 1 1 . 156172179 0

0 U 0 0 0 U 0 0 U 0 0 0 U 0 0 0

'J 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

‘0

11 11 11 1 ” I 44 In160204 73 117194224177

l 1 1 ’ 1 ’ ’ I 57 66 74 215 165 299114

I 1 ’ ’ ’ 1 149 13 175 216 98

1""""' 1 197116160169 25 196212 231 19 56

1 I 1 1 1 , 129 66 216162162

1"""' 1 138 141 205 31 222 237 24 133

Il "'1 219 93 64 115 59

1 I 1 1 1 1 1 ’ I

im23564 79169164 6 67

II 11 11 "'1 66 111 124 153 233 290 5 40 49

II 11 ’ 1 ” ‘1 50 61 110 123 146 173 161 229 22

I 56 194

1 1 I 1 1 1 I 206 217 226 239 51 150

Study of economíc loss - finance track * assocíated wíth ......R. Stephen Radcliffe. FSA Anthony...

Documents

Transcript of Study of economíc loss - finance track * assocíated wíth ......R. Stephen Radcliffe. FSA Anthony...