Letters To The Editor
Letters to Editor
by Thomas P. Tierney and Ed Betz
Phil Bieluch's probing editorial in The Actuary's Dec. 2004 issue asked, "Are we comfortable with the assumptions underlying our calculation of pension liabilities on employer's balance sheets? Even if this isn't our responsibility?"
This query begs the larger question: "Why isn't it our responsibility?" The answer is that it used to be our job to opine on the noted assumptions, but when affected sponsors turned up the heat, the actuaries left the kitchen. The watchers of this wimpy walkout included Warren Buffet who said in Fortune's Dec. 2001 issue, "Heroic assumptions do wonders" for the bottom line. By embracing those expectation rates (in FAS No. 87 computations) "actuaries who have roles in this game know" anyone choosing not to lower assumptions is "misleading investors."
A sketch of how the deal went down is as follows: In the late '80s, a pension actuary's obligation with respect to FAS 87 assumptions was scripted in Precept 8 of the Professional Code of Conduct, which mandated, "An Actuary who performs Actuarial Services shall take reasonable steps to ensure that such services are not used to mislead other parties." And ASOP 2 which mandated, "If calculations conflict significantly with the actuary's understanding of SFAS No. 87, including conflict with respect to the assumptions utilized, that fact should be disclosed." This practice served the public well, but nonetheless, on-actuary pressure moved the Actuarial Standards Board, after a torturous seven-year effort ending in 1996, to promulgate ASOP 27, which eliminated the ASOP 2 disclosure mandate and substituted a much weaker "state the source of any prescribed assumption(s)" requirement.
For more detail, read Frank Todisco's 2003 paper entitled, "A Re-evaluation of ASOP 27, Post-Enron: Is It An Adequate Standard of Professionalism?"
Thomas P. Tierney, FSA
I found your editorial in the current issue of The Actuary to be a timely reminder of the actuary's role in promoting the corporate image of our employers or clients. I enjoyed reading it and believe it offered valuable advice.
I did want to correct a comment that you made about long-term care insurance (LTC) and life insurance. Your precise comment was:
"When we discuss long-term care pricing, do we mention that if everyone who purchases the policy intends on keeping it in force, the rates must increase? The illustration actuary requirements reduced the opportunity for lapse support in life insurance pricing, but there is no similar requirement for long-term care. Do you think the public would be surprised if they understood lapse support?"
Your point, while technically true, may mislead some readers. The life insurance sales illustration regulation does not cover health insurance products, as its name suggests. I am afraid that some readers may be left with the impression that there is no regulatory constraint that applies to the pricing of LTC.
Moreover, the illustration regulation only requires lapse support testing if the life insurance policy has cash values. I strongly suspect many products like 30-year term insurance would fail the lapse support test if it were to be performed. LTC insurance does not have cash values either, so even if the illustration regulation applied to health insurance products, these policy forms would not be subject to lapse support testing.
The LTC rate stabilization regulation requires that an actuarial certification be included in all LTC rate filings; the certification with the initial rate filing must state (among other things) that "the initial premium rate schedule is sufficient to cover anticipated costs under moderately adverse experience." A similar certification is required for rate increases. The LTC rate stabilization regulation, like the life insurance illustration regulation, is an example of learning from our mistakes. The illustration regulation was adopted too late to prevent the class action lawsuits and accompanying media coverage that many insurers faced from unhappy former customers. I am not aware of any class action lawsuits stemming from rate increases on LTC products due to higher than expected persistency; however, as you said in your concluding remarks, "regulatory and judicial forces will be focused on the products we produce for a very long time."
I had a little trouble understanding your intended context for where such disclosure is needed. One hopes that the impact of persistency (and any other assumption that has a major impact on profitability) is clearly stated in conveying pricing or financial performance results to audiences such as company management, financial analysts (and the press) and rating agencies. It is less clear to me to what level public disclosure should be taken. If it is disclosed during the sales process it can be yet one more bit of information that the consumer may or may not absorb, given all the other data that is being supplied. It is more useful for the customer to receive information on the company's history of rate increases. This information is provided for LTC as a requirement of the rate stabilization regulation, but is much harder to get for life insurance.
The lyrics for "Cover of the Rolling Stone" were written by Shel Silverstein, a well known cartoonist for Playboy magazine as well as being the author of several children's books. There is little chance that anything we actuaries write or say in practicing our profession will appear in that journal, even if it is the naked truth.
By the way, these remarks are purely my personal views, and do not reflect the opinion of my employer.
Ed Betz, FSA, MAAA
Samsung Fire & Marine Insurance Company
I just wanted to let you know that I really appreciated the comments in your editorial. I think it is important to encourage actuaries to "do the right thing." Keep up the good work!