Growth of the Public Responsibility of Actuaries in Life Insurance

Abstract

The public responsibility of life insurance actuaries has changed from supervisory compliance with detailed state laws to certifying adherence to more general regulatory objectives complemented by actuarial standards of practice.     

Life Expectancy in the Future

Abstract

The public responsibility of life insurance actuaries has changed from supervisory compliance with detailed state laws to certifying adherence to more general regulatory objectives complemented by actuarial standards of practice.     

The Evolving Role of the Actuary in Financial Reporting of Insurance

Abstract

The demands that financial reporting of insurance companies present to actuaries are great and growing. With the prospects of change in the rules for financial reporting becoming more likely and insurance products becoming more complex, it is desirable to examine the evolving roles of the actuary and the actuarial profession. This paper describes these changes and the value that actuaries bring to financial reporting. The challenges presented are significant. As the methods of assessing and managing risk change are becoming more complex, the best efforts of the profession and individual actuaries will be needed to ensure that the actuary’s role is enhanced and expanded. Not only will the techniques used evolve, but the audiences served by the actuary will become even more demanding. The actuarial profession is better situated than other professions to meet these demands.     

The Actuary’s Role in Managed Care

Abstract

Financial risk is moving to center stage in the $1-trillion U.S. health-care market. The growth of managed care has created new forms of risk and has shifted this risk from insurance companies, which have long dealt with it successfully, to health-care providers and other organizations that have not traditionally accepted the same type and amount of risk. Health-care actuaries have the expertise to help these institutions, and the nation, protect their financial well-being.

Actuaries specialize in the evaluation, quantification, and management of risk. Actuarial models of health-care costs, which help evaluate risk, offer management a window to the managed care world. With these models and other tools, health-care actuaries help organizations succeed in today’s health-care environment by showing how the financial and functional elements of an organization relate to risk.

This report discusses the evolution of the health-care industry and the role that the healthcare actuary has played in that evolution. Eight case studies outline actuarial approaches to assessing risk in the era of managed care by discussing situations affecting five groups: providers, employers, regulators, public policy organizations, and HMOs. Built on experience gained in hundreds of cases, these studies show the range of tasks encountered by managed care actuaries and outline approaches that can help balance risks in today’s health-care system.     

Contingent means in multi-life models

Multi-life models are useful in actuarial science for studying life contingency. Contingent probabilities are well-understood by most actuaries and are discussed extensively in the existing actuarial literature. However, the mean of a life in a multi-life model involving order of deaths is often found to be rather challenging to interpret by most actuaries who do not understand measure-theoretic probability. Standard textbooks on actuarial science or statistics do not elaborate on the correct interpretation of contingent means, leaving the actuaries at risk of making a blunder. This paper presents the correct interpretation both heuristically and rigorously using a non-measure-theoretic language, so that actuaries will be aware of some common misconceptions and avoid pitfalls in their work. The primary audience of this paper is practicing actuaries, actuarial students and actuarial educators. So we have given several actuarial applications. We hope that applied statisticians also will find this paper useful.     

Research Into the Aging Process: A Survey

Abstract

We are in the midst of a revolution in biological knowledge. Although research into the aging process was begun long before the Human Genome Project, it has benefited greatly from the powerful tools and techniques spun off from that endeavor. Current research is providing knowledge about life processes that may offer the prospect of slowing the aging process. Dr. Francis Collins, Director of the National Human Genome Research Institute, has predicted that “By 2030, major genes responsible for the aging process in humans will likely have been identified, and clinical trials with drugs to retard the process may well be getting underway” (Collins 2000). A growing number of scientists recognize extension of the maximum life span as a possibility.

The actuarial profession cannot lay claim to expertise in the area of mortality while ignoring scientific research into the causes of aging. This paper provides a brief overview of the subject and a bibliography for those interested in pursuing the matter further. It offers a brief historical perspective, a survey of current research, and a glimpse of future possibilities.?     

Measuring Terminable Postretirement Obligations

Abstract

New approaches are needed to value benefit plans subject to unilateral changes or termination. The paper focuses on postretirement health benefits, but the thesis may be relevant to any flow not guaranteed by law or accumulating funds.

Retiree health benefits have usually been extended to participating active employees only in concert with a reserved right by the plan sponsor to control the design and, by implication, the cash flow. Over the course of the last fifteen years, this reserved extension of benefits has almost invariably led to reductions in benefits, when compared to the plan of benefits at an earlier period. In most cases, such reductions were anticipated under the circumstances that came to prevail (high health care cost increases), but were not taken into account by most of the projection and discounting methods of the time.

Current actuarial and accounting methods generate present values for terminable retiree health plans that have little credibility as measures of the beneficiary’s asset or the sponsor’s liability. Improvements are needed that will expand the actuarial toolbox and provide solutions to economic and accounting problems.

This paper provides a basis for discussion of assumptions that are appropriate when the plan sponsor can unilaterally and dramatically change future cash flows. The paper discusses how actuaries might best approach measurement situations where further plan reductions, or outright terminations, are to be anticipated. It introduces refinements and briefly discusses how each would fit with the usual actuarial model and how differences might affect behavior. These ideas are related to financial economics and the Bader-Gold paper “Reinventing Pension Actuarial Science.” Before concluding, the wider topic of discount rate selection is briefly addressed.     

“Economic Capital Allocation Derived from Risk Measures”, Eddy Van den Borre,January 2003

Abstract

The sustained reduction in mortality rates and its systematic underestimation has been attracting the significant interest of researchers in recent times because of its potential impact on population size and structure, social security systems, and (from an actuarial perspective) the life insurance and pensions industry worldwide. Despite the number of papers published in recent years, a comprehensive review has not yet been developed.

This paper attempts to be the starting point for that review, highlighting the importance of recently published research—most of the references cited span the last 10 years—and covering the main methodologies that have been applied to the projection of mortality rates in the United Kingdom and the United States. A comparative review of techniques used in official population projections, actuarial applications, and the most influential scientific approaches is provided. In the course of the review an attempt is made to identify common themes and similarities in methods and results.

In both official projections and actuarial applications there is some evidence of systematic overestimation of mortality rates. Models developed by academic researchers seem to reveal a trade-off between the plausibility of the projected age pattern and the ease of measuring the uncertainty involved. The Lee-Carter model is one approach that appears to solve this apparent dilemma.

There is a broad consensus across the resulting projections: (1) an approximately log-linear relationship between mortality rates and time, (2) decreasing improvements according to age, and (3) an increasing trend in the relative rate of mortality change over age. In addition, evidence suggests that excessive reliance on expert opinion—present to some extent in all methods—has led to systematic underestimation of mortality improvements.     

Loss Reserves and the Employment Status of the Appointed Actuary

Abstract

Property/casualty (P/C) insurers are required to establish loss reserves for unpaid losses at the time that the loss has occurred or is reasonably expected to have occurred. We examine factors that may impact the accurate setting of loss reserves. These include the level of rate regulation faced by the insurer and the incentives to underestimate or overestimate reserves to improve financial ratios or improve solvency scores, to reduce earnings, to defer taxes, or to smooth earnings volatility in order to meet shareholder expectations. The employment status of the Appointed Actuary, that is, whether the Appointed Actuary is an employee of the firm or a consultant, may also impact reserve accuracy. Using a variety of regression models with data from 1995 to 2010, we examine the impact of these factors on the accuracy of reserves posted by Canadian P/C insurers. Our results provide no evidence of systematic differences in the magnitude or direction of loss reserve errors between insurers that use company actuaries versus those that use consultant actuaries. However, we find that for both consultant and company actuaries positive reserve errors are associated with increases in global stock market returns and decreases in unanticipated inflation. The insurance market cycle impacts reserve errors for company actuaries and not consultant actuaries. As well, our results indicate that as the proportion of short-tailed business increases in a company, consultant actuaries are more likely to over-reserve. Similar to many previous studies using U.S. data, we do not find strong evidence regarding insurers’ incentives to deliberately overstate or understate reserves: Loss reserves are relatively unbiased estimates of the true losses paid. Thus these findings should be welcome news to the actuarial profession in Canada and to the prudential regulator: The Appointed Actuary, regardless of employment status, provides objective and unbiased estimates of insurers’ largest liability.     

Developing Mortality Improvement Formulas

Abstract

Longevity improvements have contributed to widespread underfunding of pension plans and losses in insured annuity portfolios. Insurers might reasonably expect some upside from the effect of lower mortality on their life business. Although mortality improvement scales, such as the Society of Actuaries Scale AA, are widely employed in pension and annuity valuation, the derivation of these scales appears heuristic, leading to problems in deriving meaningful measures of uncertainty. We explore the evidence on mortality trends for the Canadian life insurance companies, data, using stochastic models. We use the more credible population data to benchmark the insured lives data. Finally, we derive a practical, model-based formula for actuaries to incorporate mortality improvement and the associated uncertainty into their calculations.     

Generalized Frasier Claim Rates Under Survivorship Life Insurance Policies

Abstract

This paper proposes two modifications to the well-known Frasier formula, often used in the pricing, design, and valuation of survivorship life insurance policies: (1) allowing lapse rates to change after the first death and (2) reflecting simultaneous exposure to the same hazards, such as infectious diseases and common accidents, and possibly higher mortality among survivors. The purpose is to improve the pricing and valuation of survivorship life insurance. The paper will be of interest to actuaries doing pricing, GAAP valuation, self-support certifications, and to illustration actuaries. The results are important to reinsurers and direct writers. The paper includes numerical examples and compares the claim rates with and without the suggested modifications. The modified survivorship claim rates are considerably higher than those developed using pure Frasier, emphasizing the importance of learning to use these or similar methods.     

Strategies for Dividend Distribution: A Review

Abstract

In today’s world of financial uncertainty, one major public concern is to assess (and possibly improve) the stability of companies that take on risks. Actuaries have been aware of that issue for a very long time and have a great experience in modeling the activity of a risk business. During the first part of the twentieth century, they focused on the probability of ruin to assess the stability of their company. In his seminal paper of 1957 Bruno de Finetti criticized this approach and laid the foundations of what would become an increasingly popular topic: the study of dividend strategies. The contributions made by actuaries in that field constitute a substantial body of knowledge, whose interest is relevant not only to insurance but also to a much broader range of areas of practice. In this paper we aim at a taxonomical synthesis of the 50 years of actuarial research that followed de Finetti’s original paper.     

Some Nonlinear Threshold Autoregressive Time Series Models for Actuarial Use

Abstract

This paper introduces nonlinear threshold time series modeling techniques that actuaries can use in pricing insurance products, analyzing the results of experience studies, and forecasting actuarial assumptions. Basic “self-exciting” threshold autoregressive (SETAR) models, as well as heteroscedastic and multivariate SETAR processes, are discussed. Modeling techniques for each class of models are illustrated through actuarial examples. The methods that are described in this paper have the advantage of being direct and transparent. The sequential and iterative steps of tentative specification, estimation, and diagnostic checking parallel those of the orthodox Box-Jenkins approach for univariate time series analysis.     

The Public Role of Actuaries in Private Pensions in Canada

Abstract

Actuaries have played prominent public roles in the development of occupational pension plans and social security arrangements in Canada. These roles include advising governments and government-appointed committees about regulatory structures, establishing funding standards, actively participating in regulatory functions, and pioneering valuation work for pension plans covering public sector employees. The formation in 1965 of the Canadian Institute of Actuaries led to the accreditation of actuaries in pension and tax legislation and to the development of actuarial standards of practice for pension work.     

New danish bases of calculation in life and pension insurance

Abstract

A committee consisting of actuaries representing private life offices, private pension offices, and Statsanstalten for Livsforsikring (The State Life Insurance Institution) transacting both life and pension business, have compiled a complete set of calculation bases, which have been adopted by all Danish life and pension offices with effect as from January 1, 1966.     

A Note on the Myers and Read Capital Allocation Formula

Abstract

The Myers and Read capital allocation formula is an important new actuarial result. This paper gives an overview of the Myers and Read result, explains its significance to actuaries, and provides a simple proof. Then it explains the assumption that the allocation formula makes on the underlying families of loss distributions as expected losses by line vary. It shows that this assumption does not hold when insurers grow by writing more risks from a discrete group of insureds—as is typically the case. Finally, it shows that this failure has a material impact on the predicted results in a realistically sized portfolio of property casualty risks which will severely limit the practical application of the Myers and Read allocation formula.     

Issues for Implementing Phased Retirement in Defined Benefit Plans

Abstract

U.S. society is aging. The nature of work has changed from work that requires physical strength to work based on knowledge. As a result, workers are beginning to phase into retirement rather than going directly from full-time work to full retirement. From a retirement income perspective, many final-average-pay defined benefit plans have features that make phased retirement difficult at best and detrimental at worst. U.S. pension law and regulations present barriers to phased retirement if the phased retiree wants to receive a portion of available pension benefits during phased retirement.

This paper examines private sector options to encourage phased retirement and to eliminate the disincentives that currently affect defined benefit plans. It offers alternative calculations of final average pay that do not penalize the part-time worker. It also demonstrates that the plan’s early retirement reduction and late retirement increase can be set to maintain actuarial equity throughout phased retirement. The paper presents benefit calculations with equal actuarial values for various payout patterns.

The paper discusses the coordination between phased retirement and subsidized early retirement. Finally, the paper notes some of the changes in ERISA that will be needed to facilitate phased retirement in defined benefit plans, especially for participants who want to receive pension distributions while working part time.     

Pricing Term Insurance in the Presence of a Family History of Breast or Ovarian Cancer

Abstract

We estimate the increased mortality and term life insurance costs for women who have a family history of breast or ovarian cancer. Using data from the medical literature on age-specific and family history-specific incidence rates, we develop double-decrement models to evaluate the actuarial impact of breast cancer and ovarian cancer in the family. We also calculate the increased mortality and term insurance costs for women who test positive for the BRCA1 or BRCA2 gene mutation. We find that the type of affected relative and her age at onset of the disease are key underwriting factors. We find substantial mortality increases (up to 100%) for women with two relatives with cancer and women with a first-degree relative who developed cancer at an early age. Mortality increases for women with the BRCA gene mutation reach 150%. While some females with a family history of cancer can be accepted at standard rates, others may need to be quoted substandard rates, depending on the underwriting policy of the company. Females with the gene mutation can possibly be accepted at a rate that incorporates a severe mortality surcharge.     

Forecasting mortality

Abstract

The work of actuaries is concerned with estimating the future on the basis of past experience. The calculation of a premium to be charged for a given risk implies a forecast of the future but so far as mortality is concerned we have generally been content to examine past experience and assume that the results will be repeated. Judged as forecasts our estimates have sometimes been wide of the mark and owing to an almost continuous improvement in mortality actuaries have been assuming heavier rates of mortality than have been experienced. We may defend the use of past experience by saying that it is on the safe side when we are calculating premiums and we may argue that it is the best practical method; but an alternative is to make a more accurate forecast and then allow in our calculations a margin for chance deviations, emergencies, etc. Moreover the assumption that the past will be repeated has not been uniformly safe; it has led to bad results in annuity business and may prove unfortunate in social insurance, pension funds, and even sickness insurance. For some of these purposes we should either work on an estimate of future rates of mortality or, which comes to much the same thing, take a sufficient margin to cover the error involved in our assumptions.     

The Public Responsibility of Actuaries in American Pensions

Abstract

This article traces the history of the public responsibility of actuaries concerning American pension plans. It includes both defined-benefit and defined-contribution plans for employees of both private and public employers. It does not include Social Security. Actuaries have provided innovative approaches to plan design, funding, funding instruments, accounting, and legal and regulatory requirements. Actuaries have made substantial contributions that have enabled pension plans, together with Social Security, to provide economic security for millions of workers and their dependents when employment ends. However, many Americans still lack assurance of a retirement income that is initially adequate, continues for life, and keeps pace with inflation. Thus, challenges will continue to face pension actuaries in the years ahead.