A m e r i c A n A c A d e m y o f A c t u A r i e s m A r | A P r 2 012

Solvency II: An Update for U.S. Practitioners

WELCOME
to the 2012 issues of Contingencies, the magazine of the American Academy of Actuaries.
Since 1989, Contingencies has been an important resource for actuaries and other professionals interested in financial and social concerns and in the Academys public policy and professionalism work.
READING CONTINGENCIES ONLINE IS EASY. If you have a question, need

navigation tips, or require assistance in customizing the digital edition, simply click the red HELP tab. Other Academy media make it easy for you to follow the actuarial profession and the public interest work of the Academy:
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The Academys website, www.actuary.org; Actuarial Update, an online monthly newsletter for Academy members; Enrolled Actuaries Report, a quarterly online newsletter focusing on the concerns of pension actuaries; 2011 Record, the Academys annual report.

You also can follow the Academy on Twitter @Actuary_Dot_Org and watch Academy videos on its YouTube channel ActuaryDotOrg. Contingencies is always evolving to meet the needs and expectations of its readers. If you have any comments or suggestions, Id love to hear from you. Email me at Mallon@actuary.org.

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RETAINED: Direct Entry Partner/Managing Director: Leading global consultancy seeks a direct entry Partner and Managing Director to build out a Predictive Modeling - Analytics Practice for its Property & Casualty Advisory Services. Candidates will be seasoned consultants and/or industry-focused experts in predictive modeling. Location flexible: New York, Chicago, Atlanta, Dallas, Philadelphia and San Francisco. (#34557) RETAINED: Director, Midwest, USA: P&C insurer seeks ACAS/FCAS with 5-10 years of experience including Pricing, Product Development, Reserving and Forecasting. CPCU designation is desired. Exemplary communication and interpersonal skills are essential. Proficiency in MS Office is required. (#34841) RETAINED: Life Actuary, West, USA: Life insurance company seeks FSA with 10+ years of product pricing experience for Life and Health lines of business. Strong background in Valuation and Reserving is needed. Exceptional oral/written communication skills and strong interpersonal skills are necessary. (#34207)

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Contents
18
Solvency II: An Update for U.S. Practitioners
Its coming to the European Community in 2014. Are you ready?
tony dardis

mAr | APr 2012

Features

While the position of corporate chief risk officer is relatively new, the attributes that could contribute to successful leadership in that role are timeless.
tim cardinal and Jin Li

26

Follow the Leader

36

Come Together
Holding longevity risk continues to be a major challenge for pension funds, insurers, and governments. By combining resources, can we do better?
daniel ryan

Building a Better mortality model

42
2
continGencies MAR | APR.12

Health Care Reform: Learning From Others

A Global Perspective on financing Long-term care

yair Babad, Alex Leung, Al schmitz, and Jennifer Vandeleest

Be sure to Visit our diGitAL edition At www.continGencies.orG

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VoL 24 | no 2

Departments
INSIDE TRACK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . History Lesson
Linda mallon

6 8

Published by

PRESIDENTS mESSAgE . . . . . . . . . . . . . . . . . . . . . . Past as Prologue

dave sandberg

President

dave sandberg
executiVe director

LETTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsuring Catastrophic Health Care

Ho bso n d . c a r r o ll

10 COmmENTARy . . . . . . . . . . . . . . . . . . . . . . 12
UP TO CODE . . . . . . . . . . . . . . . . . . . . . . . Am I Qualified?
robert J. rietz

mary downs
communicAtions director

mark cohen

16 50

editor And AssistAnt director for PuBLicAtions

Linda mallon
PuBLicAtions & mArketinG Production mAnAGer

cindy Johns
AdVertisinG

WORKSHOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Family Connection in Exceptional Longevity

Val rie Jarry , A la in G a gn o n , and r o bert B o u r be a u

mohanna sales representatives (972) 596-8777

dePArtment editors

TRADECRAFT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Improving Claims Handling With Predictive Analytics

r o bert J. wal lin g iii

54 58 60 62 65 66 68

thomas L. Bakos sam Gutterman robert J. rietz mark danburg-wyld

PuBLicAtion desiGn & Production

BOOKLINKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ed King
r ev iew by dan skw i r e

Bonotom studio inc. www.bonotom.com

editoriAL AdVisory BoArd

STATISTICAL mISCELLANy . . . . . . . . . . . . . . . . . . . Face-to-Face Versus Virtual Meetings

ed ward scher

CRyPTIC PUzzLE . . . . . . . . . . . . . . . . . . . . . . . . . . Pyramid Scheme

tom toce

Julia t. Philips, chair dwight k. Bartlett iii robert L. Brown frederick w. kilbourne Barbara J. Lautzenheiser Bruce d. schobel susan e. witcraft
internet Address

PALINDROmIC PUzzLE . . . . . . . . . . . . . . . . . . . . . Fishing Expedition

Jerry Levy

www.contingencies.org
Contingencies (issn 1048-9851) is published bimonthly by the American Academy of Actuaries, 1850 m street, nw, suite 300, washington, dc 20036-5805. for subscription information and customer service, contact the Contingencies subscription department at the address above or (202) 223-8196. Advertising offices: mohanna sales representatives, (972) 5968777, info@mohanna.com. Periodicals postage paid at washington, dc, and at additional mailing offices. BPA circulation audited. (Basic annual subscription rate is included in dues. nonmember rate is $24.) copyright 2012. All rights reserved. this magazine may not be reproduced in whole or in part without written permission of the publisher. opinions expressed in signed articles are those of the authors and do not necessarily reflect official policy of the American Academy of Actuaries. Postmaster: Please send change-of-address notices for Contingencies to Contingencies, Po Box 16976, north Hollywood, cA 91615-6976. ride along enclosed.

PUzzLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . National Mathematics Year

m ark danbu rg-wy ld

END PAPER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . On Regulation

sam Gu tterman

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Inside Track

LINdA MALLON

History Lesson
ITS OFTEN HARd TO IMAgINE PEOPLE WHO LIVEd IN THE PAST as being like usreasonably smart
folks who just put on their pants (or togas, or saber-toothed tiger skins) one limb at a time. On an intellectual level, we know this is ridiculous. But changes in fashion, combined with the widespread fantasy that the world before color photography was monochromatic, conspire to perpetuate this gulf.
This is one of the reasons that I love literature. By reading the classics (and lots of other stuff that hasnt yet made the cut) its possible to imagine what it was like to walk under the stars when the stars were a lot younger. Theres also some consolation in discovering that the ancient Hebrew writers of the book of Ecclesiastes pretty much had it right: Theres nothing new under the sun. On Page 58, Dan Skwire, who has made a lively avocation of looking at how the actuarial and insurance fields are portrayed in literature, reviews a modern retelling of the myth of Oedipus Rex in which the main character (Ed Kingget it?) is an actuary. Skwire has a lot of fun pointing out the places where the author gets it right about both the technical and quotidian details of life as an actuary (and while Guterson occasionally gets it wrong in Ed King, Skwire notes approvingly that there are surprisingly few howlers). Rather than treating the career as an archetype of grayflannel-suited boredom (a favorite approach of other authors), Skwire writes, Guterson uses it as a deliberate device to illustrate a major theme of the Oedipus storythe blindness of humans with respect to their fates. In their article on Page 26, Tim Cardinal and Jin Li put a different spin on the same game by picking out attributes in historical leaders that would make them good chief risk officers (CROs)a relatively modern job title that would have been wildly exotic, if not incomprehensible, to most of the examples Cardinal and Li cite. Many of these attributes are familiar across the ages and common to good leaders and managers in all fields of endeavor. They include initiative, adaptability, vision, energy, self-confidence, and persuasiveness. There are other traits, however, that seem particularly suited to managers of enterprise risk. These include integrity, intelligence, insight, judgment, tact, and communication skills. CROs, despite the importance of the work they do, often fly under the radar in terms of corporate acknowledgment and common acclaim. This is because if they are doing their jobs right, nothing happens. As Cardinal and Li point out, Although we want a CRO to guide us through financial crisis, a great CRO excels at the art of prevention. After all, what looks better on a rsum: Guided my company through a storm or Made decisions that kept the waters calm? Ive just finished reading Walter Isaacsons compelling new biography of Steve Jobs. Isaacson, who also has written bestselling biographies of Benjamin Franklin and Albert Einstein, paints a nuanced portrait of a complex man. While Jobs was a brilliant visionary, a dynamic businessman, and an influential leader in the technology sector, his management style often left co-workers furious and demoralized. Jobs achieved amazing things but in the process created wasteful and unnecessary storms for the companies he ran. The personal costto his colleagues and co-workers but also, ultimately, to himselfwas extraordinarily high. If case studies of Jobs leadership make it into business school textbooks of the future, they should be read as both a template for success and a cautionary tale. Sure, theres nothing new under the sun. And sometimes we learn as much from other peoples mistakes as we learn from their achievements.

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Presidents Message
Past as Prologue

dAVE SANdBERg

AS I WRITE THIS, President Obama is about to give his State of the Union speech, three-fourths of the way
through his first term in office. I realize with a small start that I am already one-fourth through my own term in office and that the past three months are my prologue for the rest of the year.
In my first column (From Black Box to Glass House, November/December Contingencies), I stated that to successfully serve the profession and the public we need to focus on three questions: What is the appropriate governance structure for the Academy (and the U.S. actuarial profession)? What value does the Academy provide to its members? Is the U.S. profession prepared to address future political discussions about private- and public-pooled risk systems? My core policy bet (or initiative that Im championing) was that an enterprise risk management (ERM) methodology would be the most valuable way to address and respond to these questions. So how are we doing? facilitate clearer communication of that with leadership and members. One of our communication challenges is that the Academy is functionally a flat organization. Our public policy work is spread through five practice councils and nearly 150 committees and task forces. These are the groups that speak to regulators through a disciplined and collaborative process, involving both staff and volunteers, to ensure communications are objective and professional. The Council on Professionalism acts as a liaison, coordinating priorities and work products with representatives from the four other U.S. actuarial organizations, the Actuarial Standards Board, and the Actuarial Board for Counseling and Discipline. To address this diversity and better coordinate strategic planning, we have reconstituted our Communications Review Committee with representatives from each of these groups.

governance and Value

The bet aspect is the challenge of creating risk metrics and objective measures of performance for a volunteer organization that doesnt have traditional, objective, bottom-line, corporate measures. To address this, I attended the year-end annual planning meetings of five of the six councils and participated in their discussions of how to measure their effectiveness in 2012. Council members recognized that a healthy professional organization creates and welcomes transparency for what it is accountable to deliver. Planning discussions for 2013 will then evaluate the effectiveness of these prototyped measures. Measures of effectiveness at the council and committee level need to be easily aggregated into a risk dashboard that will allow us to evaluate and manage future performance. At its January meeting, the board of directors approved the formation of a presidential risk committee, to be led by Steve Preston, a former chief risk officer for ING. One of the committees major tasks for 2012 is to create a standardized, highlevel performance reporting process for 2012 Academy priorities. Another objective is to initiate a communication process to clarify the Academys ERM practices and

Visible Public Engagement

The Academy filed an amicus curiae brief in January with the U.S. Supreme Court on whether to overturn a lower court ruling that the individual health insurance mandate included in the Affordable Care Act can be severed from the guaranteed issue and modified community rating provisions. The Academys brief provides actuarial input to the court on the consequences of severing the mandateshould it be invalidated by the courtand allowing the market reforms to remain in effect. The Academy isnt taking a position on the law itself, on the constitutionality of the mandate, or on whether the mandate is severable from any provisions in the law other than those related to guaranteed issue and community rating. I was pleased to see the Health Practice Council contribute sound actuarial input on what is a very divisive legal and political issue. There is more to do in all of these areas. But we have taken solid steps forward. On behalf of the Academy, I would like to thank all who have helped advance this work in these past three months and will continue to do so.

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Letters
Elementary Errors
he author of the puzzle Elementary Economics in the January/February 2012 issue tells the story of Wolfgang, his daughter Angelika, and Wolfgangs desire that his daughter learn the virtue of thrift. Mark Danburg-Wyld writes, This was long ago, of course, when interest rates did not produce negative real returns. (If Angelika were born now, hed want her to learn the virtue of spending it while youve got it.) I am not much of a puzzle solver, but I am as good as the next person in spotting elementary economic errors when I see themand the above statement contains two elementary errors: This was long ago, of course, when interest rates did not produce negative real returns. At least since World War II, we can find numerous examples of timesin the United States and other countries when the nominal interest rate paid to savers has been below inflation rate, resulting in negative real interest rates. If Angelika were born now, hed want her to learn the virtue of spending it while youve got it. In other words, you should contemplate saving a portion of your income only when the anticipated real interest rate is positive. To see the error of this thinking, consider the following example: In August, a farmer harvests enough wheat to feed his family for the rest of the year. But the farmer does not have a proper storage facility, and the wheat will rot. There is a proper storage facility nearby, but the storage company charges a fee that is equal to 10 percent of the total wheat that it stores. The farmer has a choice: either save the harvested wheat and earn a negative 10 percent interest rate or let the harvested wheat rot and risk his seeing his family starve in the winter months. What would you advise the farmer to do?
Ali zaker-Shahrak Los Angeles

Angelika collected all her five euro rewards before the end of 1923. It should be noted that there were no euros in circulation in Bavaria in 1922that was another attempt at humor. All farmers who read Contingencies should follow Ali Shahraks advice on savings. All others can make up their own minds. Personally, I trust him over me in this matter.

Of the People
n his letter to the editor in the January/ February Contingencies responding to Heather Jerbis article on the need for end-of-life counseling (A Good Death, November/December Contingencies), Fritz Busch expresses concern about governmental overreach. As Abraham Lincoln urged in 1863, we should be devoted to the cause that government of the people, by the people, for the people, shall not perish from the earth. Continuing to view government as something separate gets you nowhere.
Steven Rubenstein Antioch, Tenn.

mark Danburg-Wyld responds: Almost everything in the puzzle column, aside from the puzzle itself, is written with tongue in cheek and is meant to be amusing. Based on objective studies conducted over many years by my youngest daughter, things that I say in an attempt to be amusing are only about 2 percent likely actually to be amusing. But I consistently amuse myselfand thats something. The actual time and place of the conversation reported in the puzzle was Bavaria, 1922.

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Commentary

BY HOBSON d. CARROLL

reinsuring catastrophic Health care

MARgARET PARTICIPATES IN HER EMPLOYERS MEdICAL BENEFIT PLAN. Two months prior to the renewal of that program,
Margarets covered dependent son is diagnosed with acute lymphocytic leukemia with complications that will require transplant procedures in the coming 18 months.
The emotional shock to Margarets family is only one of the changes that expand like ripples from this unhappy event. One of those ripples triggers a chain of events related to Margarets health insurance coverage and her employers financing of that coverage. Her employer is faced with a cliff-edge dilemma, caught between a punishing renewal offer and the choice to continue coverage at all. The traditional approach to medical insurance and reinsurance renewals is problematic. I believe theres an alternative that better aligns the needs of society, patients, providers, and the system necessary for financing appropriate care. benefit period starts. The potential liability for health insurance claims is triggered when medical expenses are incurred, filtered through contract limitations of what is eligible, allowable, and payable coverage. Its a continuous process with each daily claim standing on its own. Group LTD and workers comp obligations are based on the continuation of a health statusthere dont have to be new events to trigger benefits. The benefit period begins immediately in the case of workers comp, while group LTD requires an elimination period that must be satisfied to reach benefit status. The critical feature of these two coverage types, however, is that the insurers obligation ends only when the benefit status of the individual claim endsnot when the policy ends. Contrast this with what happens in health insurance, whether fully insured, self-funded stop-loss, or reinsurance. The benefit period for an underlying originating claimant (in Margarets case, the beneficiary in an employersponsored plan) may start during the insurance policy year but ends when that policy year ends, not when the beneficiary has stopped being in benefit status. In this context, benefit status means the individual has a diagnosis that generates a predictable course of treatment extending for some time into the future. It also may be used to describe someone who already has accrued significant expenses and is expected to generate substantial further expenses in the coming policy year. Because the presence of potential ongoing large claim payouts on existing claimants can be factored into the renewal action of the current or any competing carriers, a plan sponsor is faced with a Hobsons choice when the time comes for policy renewal. With workers comp and group LTD, claims that are already in process belong to the prior periods

Hobsons Choice
Consider the basic difference between how group long-term disability (LTD) and workers compensation and health insurance and associated reinsurance programs operate. Group LTD and workers comp function on a claim-occurred, or event-style, basis in which theres an identifiable point when the potential

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Commentary co nt inue d

accountability. If the carrier attempts to recover such expected losses through renewal rate action, the employer is able to move the coverage to a competitor that starts with a clean slate. The current carrier is compelled to offer a renewal on a similar unknown contingency basis to maintain the account. With medical insurance, stop-loss insurance, and reinsurance renewals, the existing carrier has the ability to rewrite the expected losses into its renewal action, even though underlying health plan beneficiaries are in the middle of treatment plans and regimens for existing conditions. This renewal cliff-edge dilemma is most problematic in stop-loss coverage for self-funded employers. The cost that specific stop-loss coverage represents stands out dramatically for the selffunded employer. Anything the stop-loss carrier does is magnified in relation to large claim expectations. The impact of bundling surcharges for ongoing large claimants inside the total premium is far less obvious in fully insured proposals. Specific stop-loss insurance is pure unknown contingency coverage and generally is presented on a one-year term basis. How does this allow for handling Margarets situation, in which predictable ongoing treatment not only will breach the specific deductible but also can be expected to accrue catastrophic levels of expense within the coming policy year? Current industry solutions include pooled coverage, guaranteed rate renewal options, lasering individual claimants (the practice of excluding or modifying the stop-loss coverage of particular individuals, such as Margarets son), or using aggregating deductibles. None of these approaches, however, properly deals with the cliff-edge renewal problem. None of them addresses the need for a product that provides protection for the underlying durational risk of appropriate anticipated medical treatment.

How long should the employer/carrier/ reinsurer that initially shoulders the cost of a random catastrophic event hold the financial burden before it becomes societys responsibility?

Sharing the Burden

Underwriting and renewal rating restrictions in the Affordable Care Act passed

by Congress in 2010 may mitigate some of the anxiety that exists in the current small group marketplaceat least for the employer. But this ambiguous attribution of responsibility certainly prompts a series of fundamental questions. Who within our society should be financially responsible for episodes incurring catastrophic medical expense (such as a serious burn, trauma, or transplant) or catastrophic chronic medical situations (such as hemophilia)? How long should the employer/carrier/reinsurer that initially shoulders the cost of a random catastrophic event hold the financial burden before it becomes societys responsibility? How best should we structure a financial tool for dealing with the cost of a medical expense once it exists? In my home state of Texas, theres been progress in the past two legislative sessions toward passage of a mandatory reinsurance program, known as TexMedRe. While politics and more pressing economic issues have delayed full consideration, the proposals concept of using underlying reinsurance has generated substantial interest. The program would provide not only excess reinsurance coverage to health plan carriers but also an extension of coverage for up to two additional policy years depending on a continuation of the original claimants benefit status. As long as the employer provides continuous eligibility for the claimant in a qualified underlying plan, the reinsurance

(including the extension feature) would transfer to any new carrier assuming coverage. Reinsurance such as this would serve to mitigate substantially the renewal cliff-edge dilemma for covered employer plans. Is a state-mandated reinsurance program the only way to go? I think not. Through the creation of products that supply more longitudinal event-related coverage, the private reinsurance industry can provide a welcome alternative for commercial employer-based medical insurancefully insured as well as self-funded. The distortion in selection between underwriting in the insured arena and what stop-loss carriers are allowed to do in the self-funded industry creates the need for a product that eliminates arbitrary renewal dates at the same time that it mitigates the risk of requiring unlimited lifetime protection. Such a product could revitalize the marketplace, creating a fair and competitive environment that encourages innovation in policy design and provider compensation. Fulfilling this need with private variations of the TexMedRe concept also will encourage new entrants to the carrier marketplace, allowing them to be competitive in evaluating initial risk by protecting them against ongoing claimants covered by extended reinsurance. The private reinsurance industry must develop products that mirror TexMedRes design for handling the risk profile of catastrophic medical expense costs. These could incorporate elements of three-year-accumulation, five-yearbenefit-period, per-cause-style policies of the past. In the absence of any new products, the distress experienced by Margarets employer and others in similar situations is likely to force all of us toward a single-payer model.
H o B s o n d. c Ar r o L L , a fellow of the Society of Actuaries and a member of the Academy, is president of Entrust Risk Management Services Inc. Resource
Legislative Reference Library of Texas, H.B. 1578 http://tinyurl.com/6o5g7tl.

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Up to Code

BY ROBERT J. RIETz

Am i Qualified?
IF THE HEAdLINE PIQUEd YOUR INTEREST, you probably already
know that Precept 2 of the Code of Professional Conduct governs an actuarys qualification to provide actuarial services and that Precept 2 requires continuing education (CE): An Actuary shall perform Actuarial Services only when the Actuary is qualified to do so on the basis of basic and continuing education and experience, and only when the Actuary satisfies applicable qualification standards.
Annotations 2-1 and 2-2 of the Code of Professional Conduct elaborate further on qualification requirements. Precept 2 contains two requirements, and actuaries need to comply with both of them before they can perform actuarial services. I wont address the second clause of Precept 2 ( and only when the Actuary satisfies applicable qualification standards) in detail. That topic was covered expertly by Sheila Kalkunte in her article that ran in the January/February issue of Contingencies, Which CE Requirement Applies to Me? Rather, I will highlight some aspects of CE requirements, including those of the U.S. Qualification Standards promulgated by the Academy. This is because actuaries appearing at a hearing of the Actuarial Board for Counseling and Discipline (ABCD) many times are somewhat fuzzy as to how they satisfied their CE requirements. ABCD members also have responded to requests for guidance from actuaries who are unsure if they are qualified to perform specific actuarial services. The first requirement of Precept 2 commonly is referred to as the look in the mirror test. An actuary must be qualified by basic education (exams or equivalent), CE (more on that in a bit), and experience. Precept 2 doesnt define experience, but the current U.S. Qualification Standards describe experience as three years of responsible actuarial each year (check), and have more than 30 years of responsible actuarial experience (check). Can I perform actuarial services involving life insurance nonforfeiture values? The answer is a resounding no! One look in the mirror and I know that Im not qualified to provide that actuarial service. I would have the same response on a multiemployer pension plan assignment. Although Im a pension actuary, I dont practice in the multiemployer arena. Im not familiar with that areas unique methods and assumptions, nor am I familiar with the section of the Employee Retirement Income Security Act that contains special funding requirements for multiemployer pension plans. Some pension actuaries are qualified to practice in both the private-employer and the multiemployer disciplines, but I look in the mirror and decide Im not qualified. CE is a major factor in my decisions. I primarily attend private and public pension plan CE sessions each year. I dont attend CE sessions related to life insurance or multiemployer plans. As a result, I cant satisfy the CE portion of the first requirement in Precept 2. Even if I attended these types of sessions, I might not satisfy the first requirement of Precept 2. Does my experience include responsible actuarial life insurance or multiemployer pension plan experience? The answer is no, and thats another reason that I fail the look-in-the-mirror test of Precept 2 for these two areas. An actuary also must satisfy the second requirement of Precept 2, involving applicable qualification standards. This phrase refers to the revised U.S. Qualification Standards, approved by the Academys board of directors and

experience, which is defined as work that requires knowledge and skill in solving actuarial problems. Actuaries who provide actuarial services in more than one area of practice should apply the look-in-the-mirror test to each area in which they practice. They also should read Section 2.3 of the U.S. Qualification Standards very carefully.

Case in Point
Im a pension actuary. Lets look at how I might try to satisfy these requirements for determining life insurance nonforfeiture values. I passed the Society of Actuaries (SOA) fellowship exams (check), engage in continuing education

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CE ScorecardThe Conference of Consulting Actuaries adopted a CE requirement for its members effective Jan.1, 2004. The Society of Actuaries (SOA) has required CE compliance and acknowledgment for its members since Jan.1, 2009. The Casualty Actuarial Society (CAS) also adopted similar CE compliance and acknowledgment for its members beginning in 2011. The latter two organizations maintain separate and different CE requirements to cover their respective members who render actuarial services outside the United States or dont issue statements of actuarial opinion in the United States. Both the SOA and the CAS CE requirements provide that members who satisfy the U.S. Qualification Standards CE requirements will have satisfied those organizations CE requirements and must attest to the same annually. Its important to note, however, that the converse isnt true. If you are required to meet the U.S. Qualification Standards because you issue statements of actuarial opinion in the United States, you must meet the U.S. Qualification Standards CE requirements. The Joint Board for the Enrollment of Actuaries also maintains separate CE requirements.
effective Jan. 1, 2008. All five U.S.-based actuarial organizations adopted the same Code of Professional Conduct, which became effective Jan. 1, 2001. Even if you arent a member of the Academy, if youre a member of any of the other four U.S.-based actuarial organizations, Precept 2 of the Code of Professional Conduct requires you to satisfy the U.S. Qualification Standards before you perform actuarial services. (For information on the history of the U.S. Qualification Standards and their CE requirements, I refer you to Sheila Kalkuntes article in the January/ February issue of the magazine.) Section 2.2.2 of the U.S. Qualification Standards reads, in part, To satisfy the General Qualification Standard, actuaries are required to complete and document at least thirty (30) hours each calendar year of relevant continuing education In other words, not only must you complete a sufficient amount of CE each year; you also must document it. The U.S. actuarial organizations all help actuaries document CE: Academyoffers TRACE, an online tracking tool at www. actuary.org/trace.asp that is available to members and nonmembers; American Society of Pension Professionals and Actuaries (ASPPA)offers CE reporting forms at www.asppa.org; Casualty Actuarial Society (CAS)recommends members use TRACE; Conference of Consulting Actuaries (CCA)offers a CE tracking tool that is available to its members at www. actuarialcpd.org; SOAoffers online forms at www.soa.org/professionaldevelopment/cpd-requirement/default.aspx. Actuaries may maintain CE records personally, such as on a spreadsheet with corresponding attendance certificates, if applicable, attached. But its critical to remember that documenting CE is as much a requirement of the U.S. Qualification Standards as the CE itself. The ABCD has conducted more than one hearing in which the actuary claimed to have satisfied CE requirements but was unable to document it satisfactorily. I used the word relevant earlier. Its defined in Section 2.2.7. Relevance is the reason that Im not qualified to perform actuarial services involving life insurance nonforfeiture values or multiemployer pension plans. The CE sessions I attend dont cover these areas and arent relevant to life insurance nonforfeiture values or multiemployer plans. Determining whether you are qualified clearly isnt as simple a process as it might appear at first glance. Your answer will depend on a combination of subjective and objective determinations. And it will reflect careful record keeping. Remember that just because youre an actuary doesnt mean youre qualified to perform all actuarial services.
roBert J. rietZ, who is retired from deloitte Consulting LLP is , vice chairperson of the Actuarial Board for Counseling and discipline. Resources
Kalkunte, Sheila, Which CE Requirement Applies to Me? Contingencies, January/February 2012. http://www.contingenciesonline.com/contingenciesonline/20120102#pg27

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Solvency II
By t o n y dard is

An Update

Solvency II, which updates regulatory requirements for insurance firms operating
in the European Union, is attracting a lot of attention in the United States. The current expectation is that Solvency II reporting for insurers will start on Jan.1, 2014. Many insurersnot just those that are subsidiaries of European parentshave questions about how it will affect them. Although there are many complex and unresolved side issues related to the implementation of Solvency II, in this article Ill limit my discussion to some of the main elements of the new regulatory framework, looking at compliance with statutory solvency requirements but also at the wider implications of Solvency II for how insurers manage their business.

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THINKSTOCK / BONOTOM.ST UdIO

for U.S. Practitioners

Its coming to the European community in 2014.

ARe you ReAdy?

Calculations and methodologies
The implementation of Solvency II is being overseen by an umbrella group of regulators, collectively known as the European Insurance and Occupational Pensions Authority (EIOPA). This includes bodies such as the U.K.s Financial Service Authority and BaFin, Germanys financial regulatory agency. Solvency II calculations will have two key parts: Technical provisionsa market-consistent liability valuation; Solvency capital requirement (SCR)a one-year forwardlooking 99.5th value at risk (VaR) for the market value balance sheet (see Figure 1); the SCR will be assessed using standard formulas or internal models. A number of methodology issues have yet to be resolved for both the technical provisions and the SCR. As noted above, the technical provisions require market-consistent liability valuation. Although theres often a perception that market-consistent valuation doesnt involve any judgment (because what youre doing is just calibrating to what the market says), this is actually far from the case. Many subjective decisions must be made. How, for instance, do you handle ultra-long durations? And what, if anything, should be done to account for the fact that insurance liabilities generally arent liquid? Insurance liabilities often have durations that exceed the maturities of observable market prices. This in turn raises difficulties for calculating the market-consistent value of ultra-long liabilities. How long, for instance, is the longest maturity market instrument, and what can be done when its necessary to have market prices beyond that maturity? Some practitioners, for example, have assumed that forward rates are constant beyond the longest observable maturity. But as can be seen in Figure 2, this occasionally can give extended curves that look quite reasonable but that, at other times, really dont fit well with the data. To address these issues, three factors must be considered: What is the longest forward interest rate? Determining this isnt merely a matter of taking what we observe in the market to be the longest point and making that the starting point for extrapolation. The general market consensus is that ultra-long swap rates may be quoted but theres little or no liquidity available at these very long ends of the market. While theres definitely a case to be made for pruning back the data, there are some significant judgment calls in deciding how far to go. Liquidity, for example, often is defined as the ability to execute a large transaction. But is it the ability to transact a deal of normal market size without moving the price, or is it the ability of the entire insurance industry to undertake large-scale hedging without moving the price? This is an area that needs closer examination. The latest proposal from EIOPA is to use a forward cut-off point of 30 years for British pounds and U.S. dollars and 15 or 20 years for the euro. What should be assumed for the very long term unconditional forward rate? This is another fascinating area around which there is still no agreement. EIOPA currently is looking at a target unconditional
FIgURE 1

Solvency II SCR Looks at VaR for the market Value Balance Sheet

Probability Distribution Forecast

99.5%

SCR Capital

0 PV of Assets minus Liabilities @ one-year Horizon

Source: Author

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Solvency II c ont inue d

FIgURE 2

government Interest Rates in U.S. Dollars Assuming a Constant Rate Beyond the Longest (30-year) maturity End, December 1985December 2007
12% 11% 10% forward interest rate 9% 8% 7% 6% 5% 4% 3% 2% 0 10 20 30 40 50 60 maturity (years) 70 80 90 100

Source: Hibbert, John, Market-Consistent Valuation of Ultra Long-Term Cash Flows

FIgURE 3

government Forward Interest Rates in U.S. Dollars Extrapolated from year 15 to Adjust Toward a Fixed Long-term Level
11% 10% 9% forward interest rate 8% 7% 6% 5% 4% 3% 2% 1% 0 10 20 30 40 50 60 maturity (years) 70 80 90 100

Source: Hibbert, John, Market-Consistent Valuation of Ultra Long-Term Cash Flows

forward rate (UFR) of 4.2 percent, which seems reasonable in the current environment. But while we now are living in times of extremely low interest rates, as recently as the early 1990s dollar swap rates were 10 percent to 15 percent. In setting its target, EIOPA basically has used central banks targets. A more robust approach would take other considerations into accountincluding historyand would recognize the fact that central banks in the long term may revise or abandon their targets altogether. EIOPAs target also could have a bias on the low side because it doesnt

incorporate anything that allows for a term premium effect at extremely long ends of the market. Theres intuitive logic behind the existence of term premium in ultra long-term bonds. Economic theory tells us that investors demand a premium for locking into an extremely long-term investment. While investors may accept a lower (or even negative) term premium on long bonds because they offer a closer match to liabilities, this only holds up to a certain horizon. At ultra-long horizons there are no liabilities that need hedging, and so we return to a situation in which investors demand additional return.

the longest market rate and the unconditional forward rate? This gets into yield-curve extrapolation methodologies, and theres no universal agreement as to which approach is best. The CRO Forum, which comprises chief risk officer representation for the largest European insurers and focuses on developing and promoting industry best practices in risk management, has adopted a Nelson-Siegel extrapolation methodology. Regulators, on the other hand, have chosen a somewhat simpler methodology known as the Smith-Wilson approach. While less complicated, the Smith-Wilson approach has limitations that can mean compromising between a good fit with the available data and the flexibility, speed, and smoothness in moving from the observed market path to the extrapolated value. The extrapolation approach gets to a UFR quickly, but the transition isnt smooth. One solution is to set the speed of reversion so that the targets are matched for the volatility of forward rates. Put another way, given the volatility of observable forward rates, you can derive estimates of volatility for unobservable rates. Figure 3 repeats the extrapolation of Figure 2 but in which we allow the 15-year forward rate to adjust toward a fixed long-term level along a path designed to produce a reasonable level of forward rate volatility. As a final point, what Ive described isnt limited to yield curve extrapolation. It also applies to option implied volatility extrapolation. And in many markets, there is a lack of relevant prices not only in ultra long-term durations but also at any other duration (for example, volatility in real estate).

What path should be set between

Liquidity Premium
Investors will pay a premium price for something that is liquid. Instruments that offer identical cash flows, for example, sell at different prices as a result of their trading liquidity. And hard-to-trade instruments sell at a discounted price.

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Liquidity premium isnt a myth. Theres a large body of theoretical and empirical evidence supporting the view that liquidity premium is real and measurable, that it can be substantial, and that it can vary significantly over time.
The concept typically is considered in the context of corporate bonds, in which spread can be deconstructed as: The expected default loss on bonds; A credit risk premium component that can be split between risk premium for unexpected default and a liquidity premium (see Figure 4). Insurance liabilities typically are much less liquid than assets that have similar cash-flow characteristics with observable market prices. So what market value discount is associated with illiquidity? Because theres no consensus yet on how liquidity premium should best be treated, this continues to be one of the gray areas of Solvency II implementation. Many experts, in fact, question whether it exists at all. Liquidity premium isnt a myth. Theres a large body of theoretical and empirical evidence supporting the view that liquidity premium is real and measurable, that it can be substantial, and that it can vary significantly over time. An array of measurement techniques have been used by different practitioners. For assessing liquidity premium in corporate bonds, four approaches stand out: Microstructure approachesthese dont lend themselves well to empirical estimation, but they provide valuable insights into which fundamental factors should be linked to liquidity premium; Direct approachesthese involve choosing a pair of assets or portfolios that are equivalent in all ways except for liquidity and comparing prices, expected returns, or yields; Structural model approachesthese are similar to the direct approach and use the Merton model but compare a corporate bond with the cost of manufacturing an approximately equivalent synthetic position from a risk-free liquid bond and
FIgURE 4

an option on the issuing firms total assets; Regression-based approachesthese involve regressing one or more measures of asset liquidity and trading costs against observed asset prices or yields. Until now theres been a tendency among European regulators to take a conservative position on liquidity premiumbecause its difficult to estimate, it should be excluded from the valuation of liabilities. Estimation challenges do exist, but thats no reason to ignore liquidity premium, particularly when there are excellent techniques (such as those listed above) for assessing them. The latest proposal from EIOPA restricts the use of a countercyclical premium (essentially a liquidity premium adjustment to the Solvency II discount rate) to times of stressed markets (as declared by EIOPA). EIOPA also is suggesting a matching premium that will apply only to a highly restricted range of liabilities that are exposed to a limited range of uncertainties (typically, longevity will be the major risk) and in which the backing assets are closely matched to the liabilities and are ring fenced from the insurers other assets. The matching premium structure has many characteristics of a held to maturity approach. In determining the discount rate for the matching premium structure, the insurer must consider the cost of turnover (from downgrades and defaults) in the asset portfolio. The countercyclical premium and the matching premium suggest that while the existence of a liquidity premium in asset values has general acceptance, theres still work to be done on its recognition in a liability valuation.

Solvency Capital Requirement

There are specific and significant methodology issues with the
FIgURE 5

Deconstruction of Corporate Bond Spreads

30 20 one-year xs return (%) 10 0 10 20 30

Analysis of One-year Excess Returns

95th percentile mean

Liquidity Premium

market Spreads

Credit Risk Premium

Expected Losses
Source: Barrie & Hibbert

40

All years

following worst 100

following worst 50

following worst 25
Source: Barrie & Hibbert

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Solvency II c ont inue d

FIgURE 6

Comparison of Academy Calibration Criteria vs. 20th-Century One-year Equity Returns

100% 90% u.s. equity total return (cumulative Probability) 80% 70% 60% 50% 40% 30% 20% 10% 0% 0.4 0.6 0.8 1.0 1.2 wealth factor 1-year u.s. equity returns (20th century) AAA percentiles 1.4 1.6 20th-century 2.5th percentile 1-year return of 28%; calibration criteria is 22%

Source: Barrie & Hibbert

SCR that apply both to the standard formula and to an internal model. The standard formula specifies a series of stresses and a correlation matrix to aggregate the risks but without any implied volatility stresses (this makes it inappropriate for the modeling of variable annuities, which EIOPA has acknowledged). It also specifies the use of dampeners. The equity dampener is of particular interest. Its purpose is to identify when markets are less risky following a market fall. But while empirical evidence suggests that higher mean returns are observed following a crash, its also evident that the tails are more severe. Figure 5 is based on historical analysis across 16 markets and more than a hundred years of data. What it shows are the worst annual excess returns (excess over cash) delivered by the equity markets and what happened in the year following the bad year. For the worst 100 returns, the mean excess return is -31 percent. This is somewhat less severe than the equity downturn of 2008 but comparable. The mean return in the year following for the worst 100 was 9 percenta nice recovery. Its confirmed when you look at the worst 50 and the worst 25. Those had year-following excess returns of 15 percent and 19 percent respectively. The arithmetic mean for excess returns over all countries and all years is 6 percent. Given that mean year-following returns look higher than the long-term average, the data might suggest that theres scope for reducing the stress after a market downturn. But lets remember were talking about a capital requirement, so its not the mean thats important but the tail. If we extend our analysis to look at the extreme percentiles of the returns in the year after a bad year, we see some interesting results. Looking at the worst 100 years, for example, the 95th percentile value of the distribution of the year-after returns is -31 percent (its interesting that this is the same value as the average of the 100 worst). A similar pattern is seen across the

worst 50 and worst 25 years, with 95th percentile levels of -37 percent and -33 percent respectively. This is much worse than the 95th percentile for all years, which is -25 percent. On this basis, it could be argued that an equity dampener is hard to justify for a risk-based capital calculation. If anything, the empirical evidence suggests that a more severe stress test is the better way to go. There are issues with internal models as well. In essence, an internal model is anything that isnt the standard formula, so it could encompass a series of stress tests similar to the standard formula. In practice, however, valuing complex path-dependent liabilities will imply a set of real-world stochastic simulations for the year ahead coupled with a set of market-consistent inner scenarios to value the balance sheet. As noted earlier, EIOPA already has recognized that the standard formula wont work for complex variable annuity structures. As a result, a type of complex nested calculation is necessary for such products. Companies are faced with some extremely difficult modeling choices, including how to make calculations manageable. This then leads into areas such as liability proxy modeling (including curve fitting), least squares Monte Carlo, replicating portfolios, and risk factor calibration (which raises questions around calibration targets). There are also questions of governance and of communications to board and senior management. Regulatory review is another issue. What will the regulators be looking for, and what can companies do to prepare? Its interesting that the U.K. Financial Services Authority has received 77 internal model applications and says it plans to review 10 to 20 of them before Solvency II goes live.

Solvency II and U.S. Regulation

While the National Association of Insurance Commissioners (NAIC) move to a principle-based approach (PBA) certainly has helped bring U.S. and European regulators into closer alignment, there are a number of key features that make PBA considerably different from what we are seeing in Europe. Solvency II and U.S. regulators seem to be asking two very different questions of insurers. The European view is to look at reserves and capital on a market-consistent basis, while U.S. regulators are taking a real-world runoff perspective. Both approaches have their pros and cons, but they elicit vastly different answers. In a market-consistent approach, capital is whatever is needed to fund the short-term transfer of liabilities and their risk to a willing third party, at a specified level of confidence. In a real-world runoff approach, capital is whatever is needed to fund all future liability cash flows from existing business as they fall due, again at a specified level of confidence. Some question whether the U.S. approach is truly principle based or rather something in between. For the NAICs VM-20,

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23166 Valani U.S. ad_March

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which defines the ways in which reserves are calculated for life products, it now looks as though there will be a prescribed scenario generator. Even under the NAICs AG 43/C3 Phase II, which defines variable annuity reserves and capital respectively, the so-called standard scenario, which acts as a floor on the PBA amount and is based on stresses defined by the regulator, typically has dominated in practice. There are also limitations on what internal models can do under AG43/C3 Phase II, specifically that projected equity returns are subjected to meeting certain calibration criteria. This may be an issue for a number of reasons, but two to note in particular: The equity risk modeling that forms the basis of the calibration criteria arguably understates historical U.S. equity volatility (see Figure 6); The modeling assumes that historical average total returns are expected in the future (despite todays low interest rate and inflation environment). The NAICs Solvency Modernization Initiative does offer hope. Set up to review international regulatory developments and better align the United States with the rest of the world, the work of the initiative now dominates NAIC meetings. As a result, C3 Phase III, which covers capital for life products, is on the back burner and timing for its implementation is uncertain. The Solvency Modernization Initiative eventually may lead to changes in the U.S. statutory approach that could culminate in equivalency with Europe. In the meantime, however, the granting of equivalency to U.S.-based insurers may come down to a political decision.
to ny dA r dis, a fellow of the Society of Actuaries, member of the Academy, certified financial analyst, and chartered enterprise risk analyst, is head of insurance, North America, for Barrie & Hibbert, a firm specializing in the modeling of financial market risks and economic scenario generation.

Acknowledgments
Many thanks to Craig Turnbull and Sandy Sharp for assistance in the preparation of this article.
References
Carlin, Stephen, Thoughts on QIS5 Yield Curves, Barrie & Hibbert Insights, July 2010. Hibbert, John, Market-Consistent Valuation of Ultra Long-Term Cash Flows, Barrie & Hibbert Insights, October 2008. Hibbert, John, Is There a Case for a Less Severe Equity Stress Test Following 2008 Returns? Barrie & Hibbert Insights, May 2009. Hibbert, John, Liquidity Premium: Myth or Reality, Barrie & Hibbert Insights, September 2009.
This article is solely the opinion of its author. It does not express the official policy of the American Academy of Actuaries; nor does it necessarily reflect the opinions of the Academys individual officers, members, or staff.

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You see the world as either assets or liabilities. Which one is your software?

Twenty years ago, we embraced the ALM model. And weve never looked back. One question drives the Milliman team: what do our clients need? The result is dozens of enhancements, including nested stochastic modeling, grid computing, and our new user interface. No wonder so many companies rely on MG-ALFA. This is a solution you can count on. These days, thats no small feat. Milliman.com/mgalfa.

MG-ALFA

If you type In leadershIp books on Amazon, youll get

more than 60,000 hitsan indication that theres a large market out there of potential leaders looking for easily absorbed principles to guide their paths to fame, success, and financial reward.
But the qualities that make a good leader can be fuzzy and elusive. Gen. George Patton memorably said, Leadership is the thing that wins battles. I have it, but Ill be damned if I can define it. Hes not alone. And the problem is magnified when attempting to define leadership traits in a relatively new field such as enterprise risk management (ERM). What are the attributes of an ideal chief risk officer (CRO)? Its an important question that many entities still are struggling to answer. A 2008 PricewaterhouseCoopers survey found that despite strong commitments to ERM, most companies were struggling to move beyond initial design and planning stages. Structure, process, and reorganization dont suffice to solve a business problem when leadership, firmness, confidence, and direction are wanting. Since the position of CRO is a recent creation, we thought it would be interesting to search history for military, political, and business leaders who practiced administrative techniques that are highly applicable to modern business risk management. While leaders at different levels have differing limitations, our exploration uncovered some common traits and leadership styles that a CRO would do well to emulate. The leaders we looked at demonstrated these traits and styles on each rung of the career ladder as they ascended to the top.

Keeping the Waters Calm

ERM is a complex people-centric process. It involves transparency and communication and is more effective in decentralized networks in which management is highly involved. Done right, ERMs soft sideprocess and peopleis valuable, rare, and hard to replicate. As a result, it often leads to a strong competitive advantage. The corporate leader most responsible for making ERM work is the entitys CRO. CROs must provide transformational leadership through extraordinary efforts or innovation, often in situations demanding performance beyond expectations. Transformational leaders communicate their vision through personal action and emotional appeals, delegate significant responsibility and authority, eliminate bureaucracy, provide developmental experiences, and encourage the open sharing of ideas and concerns and collaborative decision making.

OPENINg IMAgE: SHUTTERSTOCK; LEAdERSHIP PORTRAITS: WIKIMEdIA C OMMONS

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Follow the Leader

By tim cardinal and Jin Li

While the position of corporate chief risk officer is relatively new, the attributes that could contribute to successful leadership in that role are timeless.

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Follow the Leader c ont in ue d

A want ad for a CRO might describe a bevy of desired attributes, skills, knowledge, and experience. While companies dont need superheroes as their CROs, corporate scandals have illustrated time and again the importance of senior leadership that displays integrity, humility, responsibility, and a moral compass. In his last written speech, Franklin Delano Roosevelt paraphrased a verse from the Bible: From everyone who has been given much, much will be required; and to whom they entrusted much, of him they will ask all the more. A CRO certainly is entrusted with much. In a presentation at the 2011 ERM Symposium in Chicago, we conducted an exercise in which we asked attendees to pick five desired leadership traits in a CRO and then choose three military, three political, and three business leaders to hire as a CRO (see Page 29). As attendees moved through the exercise, we asked them to weigh a number of considerations: Do some traits screen out candidates while others select them? Is above average competence a screening criteria but brilliant competence a selection criteria? What if a leader is strong in some traits but weak or lacking in other traits (for example, lacking in tact)? Does the leader exhibit certain traits occasionally, frequently, consistently, and/or judiciously applied according to situation? Are quality and spanvertically and horizontally throughout the hierarchymanifested in behaviors and actions? Which traits are corollaries or precursors of other traits? (Our list didnt include character, for instance, because that encompasses many other traits); Do leaders need all, most, many, or some of these traits, and in extreme measures or not? The lists of leaders that we provided reflect the fact that in most popular leadership surveys, military rankings are dominated by conquerors, politics by charismatic leaders, and business by entrepreneurs and risk-takers. It is paradoxical that leaders who live during severe crises get the most press and thus the highest rankings from both historians and the public. Consider: George Washington during the formation of the United States, Abraham Lincoln during the Civil War, and Roosevelt during the Great Depression and World War II. Few are drawn to leaders who kept crisis at bay. In the Art Of War, Sun Tzu wrote, People see performance in crisis management, not the art of prevention. Although we want a CRO to guide us through financial crisis, a great CRO excels at the art of prevention. After all, what looks better on a rsum: Guided my company through a storm or Made decisions that kept the waters calm? Benjamin Franklins achievements are well-known. He was a scientist (the Franklin stove), a businessman and entrepreneur (the Pennsylvania Gazette), statesman, diplomat, and civic revolutionary who founded and supported libraries and city infrastructure. He was energetic, charismatic, curious, and persuasive. He was also a scholar, a servant leader, and a negotiator. Although blessed with many talents, Franklin identified traits (including resolution, order, industry, moderation, frugality, sincerity, justice, and humility) that he deemed vital to his success and then made a concerted effort to cultivate them. He worked diligently on one trait until he mastered it (more than one at a time was too difficult), and it took many years for him to complete the process (contrast that with todays promised 24-hour transformations). His advice on how to avoid arguments and persuade others was based on what he had learned: I made it a rule to forbear all direct contradictions to the sentiments of others, and all positive assertions of my own. The modest way in which I proposed my opinions procured them a readier reception and less contradiction. George Washingtons best trait, according to historian Paul Johnson, was his ability to face reality and see things as they were, not as he wished them to be. Washington displayed fortitude and was the bedrock of army morale, personally rallying his men in battle and planned withdrawals (its a trait he shares with other great generals, including Julius Caesar, Alexander the Great, Hannibal, and the Byzantine Flavius Belisarius). Washington communicated frequently with Congress, his staff, and his men. He kept the Continental Congress focused and productive. He had drive and ambition (an early life goal was to become a British aristocrat). He also made a list of traits he considered necessary to attaining his goals and worked diligently to acquire them. He learned from his experience and mistakes as a surveyor, in the army, and in politics. Contrast this with Civil War Gen. George McClellan, who saw risk everywhere and was paralyzed as a result, or Ulysses S. Grant, who was effective as a general but completely ineffective as president because of his poor personnel choices and his inability to build an effective team. Franklin D. Roosevelt ranks as one of the top three U.S. presidents in more than a dozen surveys. Insatiable curiosity and a boundless appetite for knowledge complemented a strong character that was tested when he contracted polio. Having conquered personal adversity with courage, tenacity, and hopefulness, he was well-equipped to tackle national adversity. This

Profiles in Leadership
One way to pick the CRO of the future is to look at past leaders through an ERM lens. All of our historical candidates model some of the traits necessary for transformational leadership. Would they have made good CROs?

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You Be the Judge

Heres a simple exercise to get you thinking about personality traits and their function in successful leadership. First, choose from the following list five attributes that you would look for in an ideal chief risk officer.
PERSONAL TRAITS Achievement drive Adaptability Aggressiveness Appearance Charisma Communication skills Compassion Competence Consistency decisiveness determination diplomatic skills Energy Enthusiasm Extroversion Fortitude Humility Idealism Initiative Insight Integrity Intelligence Interpersonal skills Inclusion of subordinates Judgment Leadership motivation Moral purpose Optimism Passion Persistence Persuasiveness Power Prestige Realism Responsibility Self-confidence Sense of humor Tact Tolerance for stress Verbal fluency Vision Other___________

Next, choose three military, three political, and three business leaders whose personal qualities you believe would make them effective chief risk officers. gREAT mILITARy LEADERS King david Alexander the great Hannibal Julius Caesar Constantine King Arthur Belisarius Emperor Taizong Charlemagne Richard the Lionhearted Saladin genghis Khan Toyotomi Hideyoshi Napoleon Bonaparte Horatio Nelson george McClellan Robert E. Lee Ulysses S. grant Bernard Montgomery george Marshall Chester Nimitz douglas MacArthur dwight Eisenhower george Patton george zhukov Norman Schwarzkopf donald Rumsfeld

gREAT POLITICAL FIgURES King Solomon Elizabeth I Catherine the great Frederick the great William Pitt the Younger george Washington Thomas Jefferson Alexander Hamilton Benjamin Franklin John Macdonald Henry Clay Abraham Lincoln Otto von Bismarck William gladstone david Lloyd george Herbert Asquith Franklin d. Roosevelt Winston Churchill Joseph Stalin William Mackenzie King Charles de gaulle Harry Truman John F Kennedy . Lyndon Johnson Pierre Trudeau Ronald Reagan Margaret Thatcher

gREAT BUSINESS LEADERS Sam Walton Walt disney Bill gates Henry Ford J.P Morgan . Alfred Sloan Jack Welch Ray Kroc William Hewlett david Packard Andrew grove Milton Hershey John d. Rockefeller Thomas Watson Jr. Henry Luce Will Kellogg Warren Buffett Col. Harland Sanders William Procter Thomas Watson Sr. Asa Candler Estee Lauder Henry Heinz daniel gerber Jr. James Kraft Steve Jobs Michael dell

Take a moment to think about your choices. Why did you select some leaders and not others? Did you consider their attributes or their accomplishments and the impact these had on industry or society? Did you take into account the means they took to achieve their goals? Did they build for the future, or was their legacy dismantled once they departed the scene? What criteria did you use in making your choice? Did you choose leaders who exhibited the five character traits that youd selected first? We performed this exercise in a presentation at the 2011 ERM Symposium in Chicago. Of the 45 personal character traits we listed, 42 received at least one vote. The choices for specific traits broke down as follows: integrity48 percent; intelligence43 percent; Judgment, competence, communication skills36 percent to 38 percent; responsibility, insight, realism, vision, tolerance for stress 20 percent to 23 percent; Persuasiveness, decisiveness, diplomatic skills, interpersonal skills, adaptability, fortitude, leadership motivation, and other10 percent to 15 percent. Among the military leaders, 26 of 27 received votes. The largest vote-getters were: eisenhower47 percent; Patton23 percent; marshall21 percent; Lee, Grant, Alexander the Great, charlemagne, king Arthur, and king david13 percent to 16 percent. Among the political leaders, 20 of the 27 we listed received one or more votes. those receiving the most votes were: Lincoln52 percent; churchill42 percent; franklin, washington, king solomon, reagan21 percent to 29 percent; roosevelt, Jefferson, kennedy, and truman10 percent to 18 percent. for business leaders, 20 of the 27 listed received votes. specifically: Buffett64 percent; welch, walton, Jobs, Gates 24 percent to 29 percent; sloan, rockefeller, ford, disney, morgan, kroc11 percent to 19 percent.

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Leadership is the thing that wins battles. I have it,

was displayed in his first 100 days in the Oval Officenot only in dealing with the bank crisis but also in formulating the New Deal to advance economic recovery and social welfare. Roosevelt delivered his first fireside chat on March 12, 1933 (having been in office one week), to announce that the nations banks would reopen. Roosevelts performance, in which he didnt scold or name-call but instead appealed to his fellow Americans to seek greatness, had a direct impact on the nations confidence. George Marshall chose the right people in building his team. As chief of staff during World War II, Marshall selected the people who played significant roles in leading the Allies to victory. Most were unproven and without direct experience for the tasks and responsibilities at hand. Five days after Pearl Harbor, Marshall called in Dwight Eisenhower and asked him to recommend a strategy for the Pacific. Eisenhower returned a few hours later and presented a strategic concept with which Marshall agreed. Marshall ended the interview on an approving note, telling Eisenhower, The department is filled with able men who analyze their problems well but feel compelled always to bring them to me for final solution. I must have assistants who will solve their own problems and tell me later what they have done. George Patton also transformed the culture of those under his command, involving and encouraging subordinates. Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity, Patton said. He also wrote, There is a great deal of talk about loyalty from the bottom to the top. Loyalty from the top down is even more necessary and much less prevalent. A driven man, Patton was decisive and bold as he prepared goals, details, and plans. He wrote, One does not plan and then try to make circumstances fit those plans. One tries to make plans fit the circumstances. Patton studied everythingpast military leaders and battles, current resources and situations, contingencies, and, especially, the enemy. Studying past masters is a common characteristic of good leadership. Patton utilized his knowledge of the roads that William the Conqueror used in his operations in Normandy and Brittany to map his own maneuvers, writing, The roads used in those days had to be on ground which was always practicable. Therefore, using these roads, even in modern times, permits easy by-passing when the enemy resorts to demolition. Patton similarly wrote that it was quite natural that my speeches should sound like Napoleons because as you know I have studied him all my life. Patton is legendary for his leadership in the Battle of the Bulge. When Eisenhower asked how long it would take Patton to wheel his Third Army 90 degrees and attack the Germans, Patton shocked everyone by taking just six days to reach Bastogne and attack. This achievement was only possible because of Pattons earlier preparationstraining, planning for contingencies, and creating a culture that involved and utilized subordinates. Dwight Eisenhower exemplified honesty, self-reliance, determination, and hard work. Under Patton, he studied tactics intensively. Under Brig. Gen. Fox Conner, he studied Clausewitzs On War and Plato and discussed defects of the WWI allied command structure and the likelihood that the Versailles Treaty made another war inevitable. Under Marshall he outlined a basic approach that through its logical presentation refocused Allied efforts on a winning strategy. Achieving a consensus was more important to Eisenhower than winning an argument because success depended so heavily upon enthusiastic execution of the plan. He involved others and consistently won over those with different ideas by assuring them that their points of view had a full airing and fair consideration. He was rarely abrupt, never arbitrary, and applied the particular genius of his own personality to persuade other men to accept a common strategy. Which traits from our list would he have chosen? Eisenhower is on record saying that the supreme quality for leadership is unquestionably integrity, and that humility must always be the portion of any man who receives acclaim earned in the blood of his followers and the sacrifices of his friends. John F. Kennedys actions during the Cuban Missile Crisis highlight the perils of reactive versus preventive management. According to historian Paul Johnson, Kennedys biggest test, his biggest apparent triumph, and his biggest mistake, was his handling of Cuba. He was in a position to demand restoration of the status quo ante or even punishment without any concessions or pledges. Instead, Kennedy not only gave way over the Jupiters [missiles] in Turkey but acquiesced in the continuance of the communist regime in Cuba in open military alliance with Russia. It was a defeat. Donald Rumsfeld makes the Risk Management Hall of Fame for his statements, There are also unknown unknowns . . . things we do not know we dont know, and If you are not criticized, you may not be doing much. Rumsfeld earns failing

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but Ill be damned if I can define it.

marks, however, for confusing an open-door policy with being accessible and approachable. He became isolated and took a flawed course of action. In a similar manner, Robert E. Lees earlier success and resulting confidence allowed him to ward off advice from his commanders, who became afraid to voice their opinions. At Gettysburg, Lee ignored subordinates views about his planned charge. When Lee began his military career, muskets had a range measured in the tens of yards with poor accuracy. With fair accuracy and a 1,000-yard range, the effect of modern guns at Gettysburg was devastating to Confederate troops. Because of Warren Buffetts investment genius and results, its easy to overlook his management of nearly 100 chief executive officers (CEO) and more than 200,000 employees. Buffett leads with integrity, transparency, and consistency and demands them of others. Buffett doesnt give direct orders but asks tons of questions, having learned that great managers give orders indirectly by making suggestions. He delegates not just a task but the entire job, admitting that we delegate almost

Gen. George Patton

to the point of abdication. The secret to Buffetts success lies in his insistence on acquiring good people and managing them well. Buffett believes managers benefit from candor, explaining, If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisers will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked. He also said, Hire an adviser and his job likely becomes to advise you to do what you wanted to do in the first place. Advisers who voice dissent too often are soon out of a job. Most people dont keep no men around. Buffett says he evaluates closely his missed opportunities, noting, Since mistakes of omission dont appear in financial statements, most people dont pay attention to them. We rub our noses in mistakes of omission.

The Weight of History

Our review of great leaders illustrates the importance of studying a field of endeavor and working hard to acquire traits that will facilitate success. Many of our leaders were criticized frequently and severely. They confronted failure yet had confidence in their ability to prevail. They learned from their mistakes. They had

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rence of Confe s arie Con Actu sulting

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Follow the Leader c ont in ue d

integrity and strove to do the right thing. They valued their subordinates, remained at the scene, led by example, and listened to alternative points of view yet firmly exercised unity of command. They allowedrather than forcedpeople to follow their lead. But transformational leadership isnt delineated simply by a laundry list of traits. Pick a particular traitcompetence, vision, decisiveness, or fortitude, for instanceand you can find negative examples. Stalin was competent, decisive, and had fortitude and a strong vision, as much as or even more so than Lincoln, Churchill, Franklin, or Reagan. Like Roosevelt, Hitler used charisma and the radio to great effect. But its unlikely you would pick either Stalin or Hitler as a role model to follow. In our exercise at the ERM symposium, integrity topped the list of desired traits in a CRO, coming in at 48 percent. And while moral purpose, humility, and compassion received only between 3 percent and 5 percent of attendees votes, moral purpose coupled with drive and ambition is perhaps the differentiating characteristic for both Lincoln and Churchill. We also need to consider whether great leaders of one era (and in one area) would necessarily be great leaders in another era or in a different area of endeavor. Was their success just luck, a case of being in the right place at the right time? We believe the leaders we have discussed would be just as successful today. We suspect that their drive and sense of purpose would compel them to attempt and achieve great accomplishments regardless of the field. Precept 1 of the Code of Professional Conduct requires an actuary to act honestly, with integrity and competence, and in a manner that fulfills the professions responsibility to the public. The purpose of the actuarial standards of practice (ASOPs) is not to be narrowly prescriptive. Instead, ASOPs lay out principles of ethical and professional conduct. In the same way, ERM isnt prescriptive but requires judgment and leadership. In many recent corporate and government failures, elected officials, board members, and senior management have claimed they werent truly informed of the risks or didnt understand them, all with the intent of shifting the blame elsewhere. Assigning responsibilities, sadly, doesnt necessarily make individuals responsible. Operating as CROs, Lincoln, Churchill, Eisenhower, Patton, or Buffett would have immersed themselves in the details, seen the big picture, and been relentless in asking penetrating questions of everyoneparticularly those closest to the action. ERM entails two Rsrisk and reward. Entrusted with much, our historical CROs would inject a third R and be responsible and good stewards of that trust.
ti m c A r dinA L is a member of the Academy, a fellow of the Society of Actuaries, and a chartered enterprise risk analyst. He is vice president at PolySystems Inc. and can be reached at tcardinal@polysystems.com. Jin L i is a member of the Academy, a fellow of the Society of Actuaries, a chartered enterprise risk analyst, and a chartered financial analyst. Resources and Suggested Readings
Ambrose, Stephen, Eisenhower: Soldier and President (The Renowned One-Volume Life), New York: Simon & Schuster, 1991. Brownworth, Lars, Lost to the West: The Forgotten Byzantine Empire That Rescued Western Civilization, New York: Crown, 2009. Buffett, Mary and Clark, David, Warren Buffetts Management Secrets: Proven Tools for Personal and Business Success, New York: Scribner, 2009. Cannon, Lou, President Reagan: The Role of a Lifetime, New York: Simon & Schuster, 1991. Cardinal, Tim and Li, Jin, ERM and Business IntelligenceLessons From World War II Codebreakers, Contingencies, March/April 2011. Cardinal, Tim and Li, Jin, Strategic Organizational Behavior: Finding the Right ERM Fit, The Actuary, February/March 2011. Churchill, Winston, Memoirs of the Second World War, Boston: Houghton Mifflin, 1990. Collins, Jim, Good to Great: Why Some Companies Make the Leap and Others Dont, New York: HarperBusiness, 2001. Donald, David H., Lincoln, New York: Simon & Schuster, 1995. Franklin, Benjamin, Autobiography of Benjamin Franklin, New York: Collier, 1970. Gilbert, Martin, Churchill: A Life, New York: Henry Holt & Co., 1991. Hayward, Steven F., Churchill On Leadership: Executive Success in the Face of Adversity, New York: Gramercy Books, 2004. Hitt, Michael, Miller, C. Chet, and Colella, Adrienne, Organizational Behavior: A Strategic Approach, Hoboken: John Wiley & Sons, 2006. Johnson, Paul, Churchill, New York: Viking, 2009. Johnson, Paul, Heroes: From Alexander the Great and Julius Caesar to Churchill and de Gaulle, New York: Harper Perennial, 2008. Johnson, Paul, Napoleon: A Life, New York: Viking, 2002. Johnson, Paul, George Washington: The Founding Father, New York: Harper Collins, 2005. Keegan, John, Winston Churchill: A Life, New York: Viking, 2002. Mayo, Anthony and Nohria, Nitin, In Their Time: The Greatest Business Leaders of the Twentieth Century, Boston: Harvard Business Review Press, 2005. McCullough, David, Truman, New York: Simon & Schuster, 1992. McCullough, David, 1776, New York: Simon & Schuster, 2005. McDonald, Forrest, Alexander Hamilton: A Biography, New York: W.W. Norton & Co., 1982. McDonald, Forrest, The Presidency of Thomas Jefferson, Lawrence: University Press of Kansas, 1976. McJimsey, George, The Presidency of Franklin Delano Roosevelt, Lawrence: University Press of Kansas, 2000. Pach, Chester J. Jr., and Richardson, Elmo, Presidency of Dwight D. Eisenhower, Lawrence: University Press of Kansas, 1991. Paludan, Phillip S., The Presidency of Lincoln, Lawrence: University Press of Kansas, 1994. Patton, George, War as I Knew It, Boston: Houghton Mifflin Co., 1947. U.S. Army Center of Military History, Dwight David Eisenhower, Washington: U.S. Army Center of Military History, 1990. Walton, Sam, Sam Walton: Made in America, New York: Doubleday, 1992. Welch, Jack, and Byrne, John, Jack: Straight From the Gut, New York: Warner Business Books, 2001.
This article is solely the opinion of its authors. It does not express the official policy of the American Academy of Actuaries; nor does it necessarily reflect the opinions of the Academys individual officers, members, or staff.

For further leadership profiles, go to www.contingencies.org.

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2012 Conning & Company. All Rights Reserved. GEMS is a registered trademark of Conning Services (Ireland) Limited.

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To evaluate Economic Capital, Reserve and Underwriting Risk Charges, Risk Diversification Credit, Optimal Retention and meet the capital requirements of Solvency II for the aggregate of multiple LOBs including Market Value (Risk) Margins and Technical Provisions (Fair Value) for one-year and ultimate-year risk horizons you need tools that allow you to model the probability distributions and inter-relations (correlation matrices) inherent in your long tail liabilities. For models to be useful they must be identified from, and validated by, the data. They must also give a succinct description of the volatility in each line of business and their correlations. The modelling frameworks for Solvency Risk should be systematic, consistent and transparent. SCR, Risk Margins and Technical Provisions for one-year and ultimate-year risk horizons ICRFS-PLUS is a long tail liability Enterprise Risk Management system that is the key to an innovative way to manage and measure long tail liability risks. A single composite model for multiple LOBs produces forecast probability distributions of loss reserves (and their correlations) by accident year, calendar year and total, for each LOB and the aggregate of all LOBs. Best Estimates of Liabilities, V@Rs and T-V@Rs by calendar year and sums of calendar years are derived under transparent user-defined scenarios that can be related to past volatility. These results enable rapid calculations of Reserve and Underwriting Risk Charges, Risk Diversification Credit, Expected Shortfall and other mandated risk measures including Solvency II Risk Capital and Risk Margins for one-year and ultimate-year risk horizons. Effectiveness of diversification strategies can be gauged instantly from Risk Capital Allocation tables by LOB and calendar year. The results are concise and intelligible from a purely business perspective. One Composite Model for all Long Tail Liability Lines of Business Model identification methodologies take into account inherent process variability, parameter uncertainty and correlations; all driven by the data. The composite model reveals graphically revelas the volatility structure of each long tail LOB in your company and their inter-relationships (correlation structures). All the critical financial information is efficiently computed. A company-wide report can be created effortlessly with a single report template. Integrated System for Risk Information Management With ICRFS-PLUS data input, updating, reporting, monitoring and testing the adequacy of claims provisions are all done within one integrated system. Interaction with other software (or databases) can be automated using COM scripts. Each actuary has access to the same information within an ICRFS-PLUS database. Database access can be restricted, by users, to read-only access. Survey of Industry Data and Risk Characteristics Made Easy Importing scripts and macros are supplied to automatically create ICRFS-PLUS databases from commercially available industry databases, A.M. Best and NAIC (USA) and S&P Syn Thesys (UK). This is a key to unlocking a wealth of unparalleled information that no risk manager should be without.

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[COmE
InCREaSInG LIFE ExPECtanCy IS onE oF thE SUCCESS StoRIES of the 20th and 21st centuries. A Swiss male born in 1900 lived to an average age of approximately 51. Current estimates suggest that a Swiss male born a century later could expect to live more than 35 years longer. Such improvements have been driven by dramatic advances in the treatment of infectious disease and cardiovascular disease, and greater awareness of modifiable risk factors, such as smoking. In the future, we expect to see further improvements in life expectancy driven by advances in the treatment of cancer and neurological diseases, such as Alzheimers. There are considerable differences in opinion over the likely range of future life expectancy, however, and historical projections in recent decades have tended to underestimate how long people will live.
trends and variability. These computer-based models then are used to generate future forecasts without needing to provide an underlying explanation. The purpose of analyzing past experience should be to identify instances in which there is continuing scope for historical drivers of life expectancy to have influence over future life expectancy. For example, the identification of the link between smoking and lung cancer by British researchers Richard Peto and Richard Doll led to dramatic reductions in smoking prevalence in many developed countries over the past four decades. Changes of this scale cannot reoccur, although public Figure 1: Improving Longevity With Later years of Birth, Swiss males health initiatives like smoking bans in public places and improvements in nicotine replacement therapy should see further reductions in 70% the numbers of smokers. 60% The complexity of the human body and its increasing susceptibility to disease as we 50% Age 70 age mean that its only through considering 40% Age 80 multiple diseases that we can ever produce rea30% sonable estimates of future trends. A life-course approachgathering data on the development 20% of harmful risk factors, along with the diagnosis 10% and treatment of new diseases from individual patient recordsis a more complete solution 0% 1880 1890 1900 1910 1920 1930 for assessing human longevity. year of birth A life-course approach would consider more than historical influences. It would anSOURCE: HUMAN MORTALITY dATABASE, 2008 FIgURES alyze relevant events that can occur over the

Predicting Future Trends

There are two traditional approaches for forecasting life expectancy. The most widely used is a blending approach, combining current rates of mortality improvement with a long-term future assumption. This assumption could be based on historical trends or a judgment of the potential for further improvements in life expectancy. The other approach relies on stochastic models. This involves the development of actuarial modelsbased on historical mortality experiencethat capture underlying

survival to future age

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S HUTTERSTOCK

toGetHer]
By dAnieL r y An

Building a Better mortality model

Holding longevity risk continues to be a major challenge for pension funds, insurers, and governments. By combining resources, can we do better?

Building a Better Mortality Model c ont in ue d

course of a persons life and assess how future developments could affect lives, encompassing changes in society, medical practice, or technological advances. New treatments need to satisfy a series of clinical trials that test their safety and assess their effectiveness. Many are unsuccessful, but even successful clinical trials can take a decade or more to complete, and obstacles such as cost and current medical practices can delay widespread adoption further. Lovastatin, the first statin treatment for lowering cholesterol, was isolated in 1978, for example, but it took an additional 16 years before its benefits were widely recognized. Combination therapy in which already approved treatments are used in combination is well-established with, for example, doctors using different combinations of ACE inhibitors, calcium channel blockers, diuretics, and beta-blockers to achieve better control of hypertension. Many clinical trials are now testing further combinations of existing treatments or synergies with new treatments. New treatments need to be licensed and then either recommended or approved for use. But acceptance by the medical profession is not the end of the story. The reaction to a now discredited report stating that a combined childhood vaccine against measles, mumps, and rubella could cause autism meant that many children went unvaccinated against these diseases. This demonstrates how public distrust can hamper future potential improvements.

A Forward-Looking model
Most deaths follow the development of multiple co-morbidities. This means that models based on studying diseases in isolation can be misleading. Mortality models that allow for co-morbidity need large patient databases that provide detailed information on the pattern of disease development, and need to draw on the talents of a range of different disciplines in their construction: Actuaries provide expertise and models for assessing the financial impact of uncertain future events; Medical experts offer insights into future developments in the diagnosis of disease and treatment guidelines; Epidemiologists analyze harmful risk factors that lead to disease and how they might progress; Pharmacologists provide expertise on the development of new drugs and opinions on their potential impact; Demographers help estimate future population sizes, broken down by age; Gerontologists supply in-depth understanding of the physical, mental, and social effects of aging.

Figure 2: Building a Forward-Looking Disease-Centered model

Individual risk factors Healthcare funding
Economic strength of

Patient-doctor interaction
Health awareness Trust and confidence in

Research & development

Public vs. commercial

general drivers to diagnosis and survival

Age, gender, diet, smoking smoking considerations: Taxes and restrictions Current treatments (buproprion) Future treatments (vaccines)

system Public vs. private funding disease-based patient advocacy groups influence Allocation of resources toward cure vs. prevention

sponsors

advice given More types of treatment options to evaluate More emphasis on shared decision making Use of clinical guidelines to improve quality care

Regulators attitude to

developments

Pharmaceutical vs.

biotechnological industries vs. global impact of aging

disease-focused approach

Circulatory

Stroke, angina, heart attack

Respiratory

Chronic obstructive pulmonary disease

multiple diseases

Disease types and disease progression

Healthy
Cancer Neurological
dementia, Alzheimers, Parkinsons Lung, colorectal, prostate, breast

Death

Risk factors
Family history

Current approaches
Targeting dCIS

Factors involved in assessing specific disease

(genes BRCA 1 & 2) Obesity Having children later in life Not breast-feeding

Breast Cancer

Surgery with node follow-up Adjuvant radiotherapy Herceptin Tamoxifen

Early detection
digital mammography MRI for high-risk patients gail algorithm (own risk factors) Klaus algorithm (family history)

medical innovations
growth factor inhibition PARP inhibitors (subject to

Clinical trials pipeline

Phase II (230 trials*) Phase III (56) e.g., pertuzumab (limits cancer

*As of June 2011

SOURCE: AUTHOR

regulatory evaluation) Future of personalized medicine (e.g., tumor profiling)

growth by inhibiting linked receptors)

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Figure 3: Female Breast Cancer Incidence and mortality Rates in great Britain, 1975-2008 Most developed nations have a long incidence rates mortality rates history of collating data from death 140 certificates, although the amount of information captured from the certificate 120 varies. The United States and the Nether100 lands, for example, record all diagnosed diseases on the death certificate in their 80 national databases. Other countries, how60 ever, just record a single cause of death. 40 Any analysis based on cause-of-death information might be unreliable for a 20 number of reasons: 0 Determining the final cause of death can be difficult. This is particularly relevant for elderly people, who are year of diagnosis/death more likely to have multiple diseases. SOURCE: CANCER RESEARCH U.K. Estimating future life expectancy by trends in cause of death can untreatment. It may be that genetic, economic, or cultural factors derestimate prospective improvements in longevity. Trends would prevent full convergence between countries. in less common causes of death may be hidden or distorted A more detailed approach would be to analyze the accesby more common causes that are expected to be less imporsibility and adoption of individual treatments or changes in tant in the future. individual risk factors over a defined period. This could be an There are now, however, more extensive sources that prointensive process, albeit one producing highly valuable insights. vide data on patients throughout their lives. These are available A middle course is suggested by current interest in the use of to academic and commercial researchers for use in their analcombination therapies to achieve particular targets, such as in the yses. One example is the General Practice Research Database treatment of hypertension. Risk algorithms such as QRISK devel(GPRD), a live database of more than 5 million patients in the oped by the University of Nottingham in the U.K. could quantify United Kingdom. the change in the risks posed and yet allow for debate as to the GPRD can provide high-quality information on the tracked period of time over which such population changes may be likely. experience of those with and without a prior history of disease. The database can be analyzed in detail by clinical diagnosis, treatment, laboratory test, family history, and lifestyle informaFuture Life Expectancy With Breast Cancer tion. This information enables us to create a disease mosaic, Any life-course model will need to develop different scenarios which identifies patterns of individual disease and co-morbidfor future diagnosis and survival rates. I have chosen breast canity within the population by age and gender. The real value of cer to illustrate how such scenarios could be developed. Figure this mosaic is that it provides a framework for considering the 2 provides an overview of just some of the many considerations impact of different forward-looking scenarios. for building a forward-looking disease-centered model. It illusA scenario could be a timeline of developments with a common trates the complexity and sheer volume of information required theme, such as introducing professional guidelines into clinical for such an approach and demonstrates how general drivers inmedical practice. Or it might summarize the variety of treatments fluence individualand multiplediseases. and risk-factor behavior in society at a future date. However the Just in our lifetime, we have seen significant increases in scenario is defined, we must be realistic about how far in the future breast cancer diagnosis in many developed countries. This partwe can make informed predictions for individual diseases. ly reflects an increase in the incidence of the disease. Women The process of carrying a new treatment from initial clinical are having fewer children, are having them later in life, are trials through to authorization and widespread use in clinical having their first period earlier, and are widely exposed to the practice might take 15 years or more. This means that horizons contraceptive pill and hormone replacement therapy. All of beyond 15 years could be influenced by treatments that are prothese nongenetic factors increase the risk of breast cancer. foundly dissimilar from those that we are investigating today. Well-developed screening programs in many countries are Different countries are at various stages of development in commonplace. The U.S. National Cancer Institute recommends the treatment of particular diseases. We might want to assume that women 40 and older have screening mammograms every that laggard countries will catch up with leaders in the diagone to two years, which will increase the likelihood of detecting nosis or treatment of a disease. Such a scenario would need to breast cancers at an early stage. explain why these differences between countries existed, perLooking forward, the age-specific chance of women dehaps in terms of diagnosis or the extent of clinical follow-up in veloping breast cancer is likely to remain stable, but overall

rate per 100,000 population

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Building a Better Mortality Model c ont in ue d

diagnosis rates may increase by extending screening programs to women of younger ages. Investigations of younger women are likely to be focused on those who might have a particularly high risk of breast cancer, as identified by risk algorithms developed by researchers Mitchell Gail and Elizabeth Claus. A number of studies have investigated how screening approaches might affect the detection of lesions in young adults, with MRI being suggested as an alternative to two-view digital mammography. More effective screening will help increase the detection of breast cancer in these age groups, and this, in turn, could help reduce mortality rates. Attribution analysis can determine the relative importance and value of any changessimilar to quantifying the importance of smoking to lung cancer, among other diseases. Such analysis has confirmed that the major contributor to improved survival rates for breast cancer was the drug tamoxifen, with only a relatively minor contribution from screening programs. The expectation for the future is that further survival improvements will be driven by a combination of screening and intervention in a systematic manner. There have been encouraging developments in new treatments, either for the direct treatment of cancer or in conjunction with surgery. The most widely known treatment is Herceptin, a monoclonal antibody used for the treatment of HER2+ breast cancers. Herceptin, which blocks cancer cells and prevents them growing, has been approved widely, but significant differences separate countries in the recommendations for using other monoclonal antibodies. Monoclonal antibodies, along with treatments such as tyrosine kinase inhibitors, hold out the prospect of individualized medicine that is tailored to a persons DNA. Highly advanced biological technology, including DNA microarray analysis, can help decide the most appropriate treatment in terms of effectiveness and avoidance of adverse side effects. The development of a disease-centered mortality model involves committing resources to scenario creation according to the importance of that disease to the overall model. For example, the use of Herceptin might improve life expectancy by a number of months for those with advanced breast cancer. These valuable improvements for those affected, however, would translate into only a relatively small increase in the life expectancy of the entire population. It may be more effective to concentrate on early intervention for breast cancer, for which there is more potential for significant improvements in longevity. Its obviously necessary to develop and quantify suitable scenarios for future diagnosis rates and survival rates after diagnosis for use in a life-course model. This is relevant for each disease or combination of diseasesthats tracked in the model. What is perhaps less obvious is that a single scenario will not be sufficient. Considering a number of alternative scenarios for each diseaseand how these interact with different scenarios for other diseaseswill help achieve an understanding of potential uncertainty in future experience.

managing Future Uncertainty

The future is highly uncertain, but a key benefit of predictive approaches is that they can increase confidence in the pricing and funding of future retirement income solutions. Holding longevity risk, however, continues to be a major challenge for pension funds, insurers, and governments, and better methods need to be developed to share the risk appropriately. Models are limited by the quality or quantity of data that are available on a particular subject. Public databases have become more widely accessible to commercial organizations in recent years. With such valuable resources at their disposal, organizations that carry longevity risk should take advantage of the opportunity to improve their understanding of these data. Its clear that scenario development will need to be a continuous and long-term project. The size of such a project may mean that it would be advantageous for the various interested parties to act collaboratively to form a body of resources and to educate journalists, the capital markets, and others in the public arena as to the benefits of shared research. The Life and Longevity Market Association (LLMA), a nonprofit organization that brings together those with an interest in longevity risk, is one such entity. One of LLMAs objectives is the creation of a liquid market, but this requires improved investor education, accounting standards, and access to more consistent and granular disease models. Insurers can work together through their industry bodies and in partnership with their reinsurers to manage longevity risk effectively. As regulatory regimes, such as Europes Solvency II, recognize reinsurance as appropriate mitigation against longevity risk, this will help insurers support capacity for annuities and other innovative products to fund peoples retirements. A predictive, forward-looking mortality model will not solve the potential financial problems caused by dramatic increases in life expectancy throughout the world. Instead, its one of many essential components in creating an overall solution, one that would involve the contribution of both the public and private sectors. Governments, employers, and insurers should work together to achieve a long-term, sustainable infrastructure, including the sharing of longevity risk, so as to better provide for people in retirement. An improved understanding of what will influence future mortality will help manage the pension crisis and assist societies in making suitable provision for populations that are living longer.
dAn i eL r y An is the head of life and health research and development at Swiss Re.
This article is solely the opinion of its author. It does not express the official policy of the American Academy of Actuaries; nor does it necessarily reflect the opinions of the Academys individual officers, members, or staff.

Resources
Guidance on the Use of Trastuzumab for the Treatment of Advanced Breast Cancer, National Institute for Clinical Excellence, March 2002. http://www.nice.org.uk/nicemedia/live/11445/32313/32313.pdf

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Pauline ReimeR
A.S.A., M.A.A.A.

Actuarial, Insurance and Benefits Recruitment

National and International Placement since 1969

It Takes One To Know One ... An Actuary Placing Actuaries

147 W. Old Country Road Hicksville, NY 11801 www.ppryor.com

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HeALtH cAre reform: LeArninG from otHers

A Global Perspective on
By yair Babad, Alex Leung, Al schmitz, and Jennifer Vandeleest

FINANCING LONGBECAUSE OF INCREASING LONGEVITY

and advances in medical technologies and treatment, worldwide demand for long-term care (LTC) is expected to grow by as much as 400 percent in coming decades. While LTC isnt limited to supporting the frail elderly, the increase in older populations is the primary driver for expanding demand. Different countries vary in the current size and projected future growth of their elderly populationsbut all need to design programs that will ensure relative comfort, financial security, and independence for their oldest citizens.
FIgURE 1

Shares Population Age 65 and Older and Age 80 and Older Shares ofof Population Age 65 and Older and Age 80 and Older
Japan Germany
Source: U.S. Census Bureau, International data Base

Austria netherlands united states % 65+ 2010 % 65+ 2030 korea israel 60% 50% 40% 30% 20% 10% 0% 0% 5% 10% 15% 20% % 80+ 2010 % 80+ 2030

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defInIng LongTeRM CARe

Long-term care (Ltc) is health and personal care that is provided for people with chronic illnesses or disabilities. Ltc includes support services and assistance for activities of daily living (AdLs) such as eating, bathing, and dressing. Ltc can be delivered in the home, in a community, in assisted living facilities, or in nursing homes.

-TERM CARE
Germany and Japan currently have the highest proportions of octogenarians and of populations older than age 65, both of which are increasing rapidly (see Figure 1). While the projected speed of aging in the Japanese and Korean populations is faster than that of other developed countries (a problem that is exacerbated by large declines in both fertility and mortality), most of the world is moving in the same direction. These trends will lead to mounting national LTC financial burdens. As populations age, LTC expenditures necessarily will grow as a percentage of gross domestic product (see Figure 2). Finding solutions to the looming LTC funding crisis is emerging as a critical issue across the world. All existing national LTC systems are organized around varying levels of public and private cooperation. But public financing of LTC is complicated by the fact that declining fertility and an aging workforce are reducing tax revenues at the same time that the financial burden of covering LTC, pensions, and other geriatric needs is increasing. Austria, Germany, Israel, Japan, Korea, the Netherlands, and the United States all face similar crises regarding financing the care of their elderly citizens. But while some of these nations have enacted LTC reforms over the past couple of decades, their approaches have differed significantly.

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A Global Perspective on Financing Long-Term Care c o n t i n u ed

FIgURE 2

LTC Expenditure as Share of 2008 gDP

% of GdP 4.0 3.5 3.0 2.5 2.0 1.6 1.5 1.0 0.5 0
Source: OECd Health data, 2010

3.5 Public Ltc expenditure Private Ltc expenditure

1.3 1.0

1.3

0.3

korea

united states

Austria

Germany

Japan

netherlands

Note: data for Austria and the United States refer only to health-related LTC expenditure. In other cases, expenditure relates to both health-related (nursing) and social LTC expenditure. data for Austria and the United States refer only to nursing LTC in institutions. data for the United States underestimate expenditure on fully private LTC arrangements. data for the Netherlands dont reflect user copayments, estimated at 8 percent of total LTC expenditure in 2007. Because of the structure of the Israeli LTC market, comparable LTC expenditure figures arent available. In this market, about 7 percent of the population is covered by the Israeli National Insurance Institute, and its LTC benefit payments were about 0.5 percent of gdP in 2008. About 52 percent are covered by semi-public arrangements through collective LTC policies held by the four Israeli sick funds and insured by private insurers. About 6 percent are insured by individual LTC policies issued by insurance companies. data concerning the LTC outlays by the insurance companies arent available.

PROgRAm FRAmEWORK

United States
LTC in the United States is financed by a combination of private and government programs. Without proper planning, however, many people find themselves facing imperfect options. Government programs provide limited care, and many beneficiaries must turn to family and friends or rely on community support. Medicare and Medicaid, the two government programs that pay for LTC services, have different origins and benefit designs. Medicare operates at the federal level only, while Medicaid has both federal and state components. Medicare is designed to cover acute care services and pays only for medically necessary skilled nursing home and home health servicesgenerally for a limited time. Medicare doesnt pay for custodial LTC. The primary payer of LTC in the United States is Medicaid, a means-tested welfare-based system that is funded by a combination of federal and state moneys and managed by the states. The disparity between states budgets and coverage decisions is reflected in different LTC services and spending across states. Private LTC insurance covers a relatively small proportion of the U.S. population. Approximately one in six people age 65 and older with annual incomes greater than $20,000 held such coverage in 2004. Some policymakers argue that the existence of the government programs crowds out the market for private LTC insurance. Others believe that a large share

of the population would never receive LTC assistance without the support of government programs. In part because of the recent economic downturn, private LTC insurance market penetration, which was never robust, may continue to drop in the United States. While Medicaid offers relatively comprehensive LTC coverage for low-income individuals and wealthy persons have reasonable access to private LTC insurance, LTC remains problematic for the middle class. As a result, a large portion of LTC in the United States currently is provided through informal resources, often in the form of care by family and friends. Its estimated that 10 million to 11 million Americans living at home received care from family and friends in 2007.

Austria
A universal LTC system that replaced Austrias unique regional programs was implemented in 1993. While the federal government is responsible for managing and providing LTC benefits, regional governments are involved in establishing benefit levels. Because Austria allows beneficiaries to choose between different care settings, 24 percent of its population older than 65 received LTC at home in 2008. Austrias LTC system is a mixture of social insurance, social protection, and social assistance. The element of social protection (available only for those who qualify) provides a combination of cash benefit and in-kind services. But all users of LTC services, regardless of age, are eligible for a cash benefit

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that can be drawn on to purchase formal care services or to reimburse informal caregiving. If a beneficiarys cash benefit, personal income, and assets arent sufficient to cover the cost of care, social assistance picks up the difference.

Israel
All Israeli residents since 1995 have been enrolled in a national health program that offers cradle-to-grave coverage (including acute care and hospitalization), is financed by a salary-based tax, and is managed by the four Israeli sick funds. Approximately 65 percent of the Israeli population has some additional LTC coverage. Among those, 52 percent are covered by collective three-year renewable LTC policies that are held and managed by the sick funds. These policies, paid for by age cross-subsidized premiums so as to keep them affordable for older people, provide three to five years (and in some cases more) of LTC payments. Transfer of membership between sick funds is allowed, and since insurance companies sell the LTC policies to the sick funds, individuals who cancel their sick fund coverage can retain their private LTC policies without underwriting. Approximately 7 percent of Israelis are covered by the Israeli National Insurance Institute (INII) and its means-based program. The balance of Israelis with LTC coverage hold private insurance policies. These usually require underwriting, with various durations and provisions, and are far more costly than those offered through the sick funds. In certain segments of the population, including among Arabs, certain religious groups, and kibbutzim (residents of commune-style villages), LTC is more likely to be provided by families and the community. The Israeli commissioner of insurance is pushing for major changes in the LTC market that would affect those not insured by the INII. His proposal favors private and collective policies that would accumulate reserves so as to provide some LTC coverage even when premiums are stopped. It would require fixed premiums that dont increase at older ages (to prevent overload on retirees), and coverage and benefit payments for life (rather than for three to five years). At the same time, the Ministry of Health is lobbying to add LTC to the national health act, financing the program through a salary-based tax of 0.5 percent.

germany
Germanys public LTC system used to be similar to the U.S. system, but growing financial pressure on states and municipalities and continuing disparity between the financing of acute care and LTC prompted reforms in 1994. Before reform, Germanys acute care was covered by universal health insurance and LTC coverage was available only through a means-tested program. Critics decried the lack of social equity and parallel coverage. Germany replaced its means-tested program with a universal, comprehensive social insurance LTC program, and while its still evolving, the program already has achieved many of its stated goals of: Shifting the financial burden of LTC off states and municipalities; Expanding home- and community-based services; Lessening dependence on means-tested welfare; Increasing support for informal caregivers. Both acute care and LTC are administered by sickness fundsquasi-public, quasi-private insurers that are heavily regulated by the governmentbut acute care and LTC are fiscally separate. The sickness funds are responsible for collecting premiums, determining eligibility, negotiating fee schedules and reimbursing providers, and enforcing quality of care. While its possible to purchase expanded LTC coverage through private insurers, less than 10 percent of the German population has private LTC insurance.

Netherlands
The Dutch were the first to establish a universal social LTC insurance program. Implemented in 1968 with the enactment of the Exceptional Medical Expenses Act (AWBZ), the Dutch program is administered not by the government but by private insurance companies. While services and benefits have evolved over time, the founding framework largely remains unchanged. Available to all Dutch citizens, the program is widely popular for elder care and other LTC needs. Because its coordinated with the national health insurance system, it covers catastrophic medical costs as well as LTC expenses, including both home health and institutional care. Given the programs popularity, theres significantly less informal care in the Netherlands than in other countrieswhich increases the programs financial burden. While private insurance companies manage the program, they dont bear financial risks. The Dutch government is struggling with significant cost increases, driven primarily by beneficiaries who have opted for cash benefits.

Japan
Providing care and public assistance to frail elderly is taken as a national responsibility in Japan. All citizens who attain retirement age are required to join the Citizens Health Insurance plan, a nationally administered program that supplies home health and institutional care to the frail elderly. Beginning in 1973, ill elderly became entitled to free hospitalization without restrictions. Widely utilized, the program ended up filling almost half of all hospital beds with elderly patients and driving up health care costs. Over time, the national government increased the number of nursing home beds, adult daycare centers, and home health providers to address this costly phenomenon of social hospitalization. Japan has had a universal LTC program based on mandatory social insurance since 2000. While the price and benefit

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A Global Perspective on Financing Long-Term Care c o n t i n u ed

parameters are determined by the national government, eligibility and benefits determinations are made at the local government level. The market penetration of private LTC insurance in Japan is minimal. Most, if not all, private LTC insurance policies sold in Japan are supplemental coverage.

Korea
Korea is the first example of a nation outside the conventionally defined group of wealthy countries to implement a social LTC insurance program. First enacted in 2008, the program in most respects is a mixture of the German and Japanese approaches. One notable exception is that the Korean program has uniform contributions and benefits that are rooted in its centralized, single-payer health insurance system. The insuring agency, National Health Insurance Corp. (NHIC), administers LTC insurance alongside health insurance. As is the case in Japan, private LTC insurance hasnt been a popular option for the Koreans.
BENEFIT STRUCTURE

assistance needed. There are currently seven levels determined by need. Age, income, assets, or the reason for care have no effect on the benefit amount, which is considered a legal entitlement and not taxable. The recipient decides how to spend the benefit. In 2009, approximately 60 percent of the population age 80 and older and 10 percent of those between age 60 and age 80 received cash benefits. Monthly benefits in 2011 ranged from 154.20 euros to 1,655.80 euros.

germany
Rooted in an ideal of social solidarity, the German LTC insurance program is available to disabled people of all ages. The program covers both home health and institutional care. The eligibility criteria are established nationally and depend solely on functional status (i.e., ADLs and mental conditions). Assessments are performed by doctors and nurses employed by the sickness funds. There are three levels of functional limitations, which vary by degree of disability. Each level defines the benefits and maximum expenditure per person for LTC. The eligibility criteria for each level are the same for home health and institutional care and apply to those insured through the sickness funds or through private insurance. The German LTC insurance program recognizes and encourages informal care. Beneficiaries who are receiving care outside of an institution or are living at home may choose to receive a cash benefit instead of services paid for by the sickness funds. Although the cash benefit is less than half of the value of the service benefits, the fact that its use is unrestricted makes it a popular option for beneficiaries who live at home.

United States
Benefits for LTC in the United States vary by program. Medicare primarily covers short stays in nursing homes and some home health care. To be Medicare eligible, individuals generally must have worked 10 years and be 65 or older. Medicare-covered services are designed to provide care for those recovering from an acute illness rather than for treating only long-term conditions. Institution-based LTC is covered through 100 days only (with a significant copayment for days 21 through 100), and home health services are provided on a limited basis only if skilled care also is required. In addition to post-acute care, Medicare covers endof-life care through a hospice benefit. Medicaid has a bias toward institutional care but covers both home health and nursing homes. Eligibility generally is automatic for those receiving Supplemental Security Income, but the degree of coverage and type of care offered vary from state to state. Most private LTC insurance policies cover both institutional and non-institutional care for policyholders who meet an activities of daily living (ADL) or cognitive impairment requirement.

Netherlands
All Dutch citizens are eligible for the AWBZ with no underwriting. Every request for care, however, is assessed by an independent organization, the Center for Needs Assessment (CIZ), which determines whether an individual is eligible for one or more services covered by the program. These include athome assistance, personal care, nursing, institutional treatment and stay, and extended stay for psychiatric reasons. Benefits are delivered either through in-kind payments made directly to care providers or a cash benefit. The cash benefit is about 25 percent less than the average provider fee for the care required. Beneficiaries who opt for the cash benefit are free to shop for care but must track their use of the money in case of an audit.

Austria
Austrias LTC benefit is a combination of a cash benefit (that can be used for home, institutional, hospice, or respite care) and in-kind services. Eligibility for the cash benefit is determined through an assessment by physicians and other experts. For those who qualify, the need for LTC must be at least 60 hours a month for a period exceeding six months. Theres no age requirement. The benefit amount is based on the level of service and

Israel
Eligibility for LTC support is based on the inability to perform a certain number of ADLs. Those with deficiencies in four ADLs are eligible for full support, and those with deficiencies in three (and in certain cases two) ADLs qualify for partial support. Selected physicians and nurses make the determination and follow up annually or semiannually. Benefits are paid from

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FIgURE 3

2008 Sources of Payment for LTC by Payer Total payments: $264 billion the collective sick fund policies and private policies for a limited period of benefits (usually three or five years, which in some cases can be doubled). Benefits cover the cost of a nursing facility or a full-time caretaker. They also can be used to help family members who provide care. The hospitalization and medical needs of LTC patients are covered under the national health program. As noted above, expansion of LTC coverage, structure, and benefits, especially for the elderly, is under consideration by several Israeli government agencies.

medicaid 39%

Japan
The Japanese LTC insurance program covers both home health and institutional care. But unlike the German and Dutch programs, theres no cash benefit. All citizens age 65 and older and those age 40 to 64 with disabilities are eligible to apply for the program. Eligibility is determined by a comprehensive assessment of medical and physical status and is re-evaluated every six months. The assessments, which vary by region, are conducted by experts who are appointed by local governments. If approved, an applicant is allocated benefits based on the level of services required. The Japanese LTC program pays for 90 percent of the cost of care, regardless of the type of service, but doesnt cover medical care.

other 5% Private insurance 7% medicare 20%

out of pocket 29%

Note: Numbers do not add up to 100 percent due to rounding. Private insurance payments include Medigap insurance as well as LTC insurance. Other sources include the Veterans Administration, individual state programs, and private philanthropy.

Korea
Korea provides LTC benefits to all citizens age 65 and older, as well as those with geriatric diseases regardless of age. Korean LTC insurance covers age-related long-term care (home health and institutional) but doesnt give coverage for disability-related long-term care. The insurance primarily provides service benefits, with cash benefits allowed only in exceptional cases such as when no providers are available in a region. LTC eligibility and level of need are determined through statistical analysis of a questionnaire based on ADLs, and assessments are reviewed by a locally appointed committee. Similar to Germany, there are currently three degrees of functional limitations, each with a different level of benefits.
PROgRAm FINANCINg

Living Assistance Services and Supports (CLASS) Act, which was passed as part of 2010 health reform, would have created a voluntary government LTC insurance benefits program. Enrollment would have been automatic starting at age 18, but with the ability to opt out. In October 2011, the U.S. secretary of health and human services declared the program to be actuarially unworkable, and work on the programs implementation ceased.

Austria
Austrians finance their LTC needs using the government cash benefit, personal income, and assets. A wide variation of private copayments exists for home care and residential care. More than 75 percent of total LTC expenditures in Austria are funded with tax revenues, with the rest funded through private means. Because Austria doesnt have a separate tax to pay for LTC benefits, the funds draw on federal and municipal government general revenue. Tax-financed expenses include cash benefits and in-kind services. Almost two-thirds of tax funding is used for cash benefits, with the remainder spent on in-kind services provided through social assistance.

United States
Figure 3 shows the sources of public and private financing of LTC in the United States. The proportion of informal care, while significant, isnt included in the chart. Medicare is a federal program funded through a payroll tax. Medicaid is a joint federal and state program funded through general tax revenue. Private LTC insurance is paid for by individual policyholders. Beneficiaries out-of-pocket costs vary by program. The financing of LTC in the United States is a major challenge, particularly given the aging population and the retirement of the baby boom generation. One attempt at a solution, the Community

germany
Germanys LTC insurance program is a pay-as-you-go system funded by mandatory contributions and retiree premiums. The contributions are income dependent and shared equally between employees and their employers. Since July 2008, the standard contribution for workers with children is 1.95 percent of the first 44,550 euros of income and 2.20 percent for workers with no children. The German government pays the entire contribution for those who arent working through the unemployment insurance

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Source: The SCAN Foundation, 2011

A Global Perspective on Financing Long-Term Care c o n t i n u ed

FIgURE 4

LTC Expenditures by Source of Funding, 2007

Percent 100 90 80 70 60 50 40 30 20 10 0
Source: OECd Health System Accounts, 2010

Germany

korea government revenue social security

Austria private insurance

Japan out of pocket other

netherlands

Note: Information on Israel isnt available. data on out-of-pocket spending for some of the countries are underestimated. For example, cost sharing on long-term care services is estimated to account for 8 percent of the total LTC expenditure.

fund. Retirees typically contribute half the cost of their premiums, with their pension funds picking up the remainder.

Netherlands
The AWBZ is a pay-as-you-go system that is funded through social security premiums, taxes, and copayments. The social security premium is collected from all Dutch citizens with a taxable income who are age 15 and older. In 2010, the annual premium was 12.15 percent of income up to 32,000 euros. In addition to the premiums, AWBZ beneficiaries are responsible for copayments that are adjusted for income, care setting, and family status. Individuals pay approximately 75 percent of the programs annual cost while general fund revenues cover the remainder.

scale depending on income, and is paid up to age 70. The level of payments to the INII for LTC is between 0.14 percent of salary and 0.23 percent, of which about half is paid by the employer. Individual insurance policies are risk adjusted, with premiums based on age, gender, and health risk, and usually require underwriting. Collective LTC policies occasionally are offered to certain groups.

Japan
Japans pay-as-you-go system is funded through mandatory social insurance, taxes, and copayments. Mandatory contributions levied on all citizens 40 years and older cover about half the costs, while the other half is paid from national and local government tax revenues. Mandatory contributions vary geographically and are means tested. LTC insurance beneficiaries also bear out-ofpocket costs through a 10 percent coinsurance on all services, subject to out-of-pocket maximums that can vary with income level.

Israel
LTC coverage in Israel is financed differently depending on the source. The sick funds policies are limited-term (usually three years) renewable policies, managed by the sick funds but written by insurance companies. Each term is intended to be self-supporting. As a result, premiums increase with every policy renewal. Members of each sick fund are encouraged to join the funds LTC policy, either as an individual or as a family (including all children younger than 18). The governments LTC program is an element of the social security system that covers all Israeli residents and that also includes pension, unemployment, army annual service period, and other benefits. The program is salary based, with a sliding

Korea
Koreas LTC program is funded through a combination of contributions from the insured, limited government subsidies, and copayments by the beneficiaries. The financing model is built on an existing vehicle established for funding other Korean welfare programs (including health insurance, pensions, unemployment insurance, and workplace injuries). Using the same financing model allows the Korean government to leverage

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its existing system and provides operational efficiencies. The LTC contribution is paid by the working-age population and is based on a fixed percentage of its contribution for health insurance. The 2011 health insurance contribution is set at 5.33 percent of wages, 6.56 percent of which goes toward LTC. The two contributions are collected together. Overall financing of the program consists of a government subsidy of 20 percent, copayments of 15 percent (for home health) or 20 percent (for institutional care), and personal contributions that range from 60 percent to 65 percent.
COmPREHENSIVE STRATEgIES ARE NECESSARy

Kaye, H. Stephen, Harrington, Charlene and LaPlante, Mitchell P., Long-term Care in the United States: Who Gets It, Who Provides It, Who Pays, and How Much Does It Cost? Health Affairs, January 2010. http:// tinyurl.com/6ogn3gc Kwon, Soonman, Kim, Soo-Jung and Jung, Youn, Introduction of Longterm Care Insurance in South Korea, School of Public Health, Seoul National University, 2009. Mitchell, Olivia S., Piggott, John and Shimizutani, Satoshi, Aged-Care Support in Japan: Perspectives and Challenges, Benefits Quarterly, 2006. Mitchell, Olivia S., Piggott, John and Shimizutani, Satoshi, An Empirical Analysis of Patterns in the Japanese Long-Term Care Insurance System, Geneva Papers on Risk and Insurance, 2008. Mot, Esther, The Dutch System of Long-Term Care, CPB Netherlands Bureau for Economic Policy Analysis, 2010. National Association of Health Underwriters, LTC Financing Strategy Group, 2004. http://tinyurl.com/7lhvzu8 OECD, AustriaLong-Term Care, 2011. http://tinyurl.com/842xckm Social Security Administration, Social Security Programs Throughout the World: Asia and the Pacific, 2010. http://tinyurl.com/83pgnm3 Stoil, Michael J., Are Other Countries Showing the Way? Oct. 1, 2005, Nursing Homes. http://tinyurl.com/7yycqd8 World Health Organization, Ethical Issues in Long-Term Care, 2003. http://tinyurl.com/7qd5kvu

Aging populations with growing incidences of disabilities, looser family ties, and more two-worker households are all factors driving the increased demand for LTC. Countries around the world must develop more comprehensive strategies to address this multidimensional problem. It will require reframing existing challenges in a manner that facilitates progressive change to the roles of public and private resources and fosters more innovative approaches. Countries with LTC programs that are funded primarily with public money might consider increasing public and private partnerships (through the use of private insurance or other risk-sharing arrangements). At the same time, all countries should continue to offer incentives and improve support to LTC providers and informal caregivers to ensure quality and access in the face of growing demand.
y Air B AB A d, a professor emeritus of the University of Illinois Chicago, is a fellow of the Israeli Actuarial Association. A Lex t. LeunG, a fellow of the Society of Actuaries and a member of the Academy, is a manager at deloitte Consulting LLP in San Francisco. A L scHmi tZ, a fellow of the Society of Actuaries and a member of the Academy, is a consulting actuary with Milliman in Brookfield, Wis. Jenni fer VAnde Le e s t is a fellow of the Society of Actuaries and a member of the Academy. References
Campbell, John Creighton, Ikegami, Naoki and Kwon, Soonman, Policy Learning and Cross-National Diffusion in Social Long-Term Care Insurance: Germany, Japan, and the Republic of Korea, International Social Security Review, October/December 2009. http://tinyurl. com/6u4wj72 Campbell, John Creighton, Ikegami, Naoki and Gibson, Mary Jo, Lessons From Public Long-Term Care Insurance in Germany and Japan, Health Affairs, January 2010. http://tinyurl.com/837q7wh Cuellar, Alison Evans and Wiener, Joshua M., Can Social Insurance for Long-Term Care Work? The Experience of Germany, Health Affairs, May/June 2000. http://tinyurl.com/7nkvckj German Parliament, 13th Voting Period, First Report on Developments in the Long-Term Care Insurance Program, 1997. Gleckman, Howard, Long-Term Care Financing Reform: Lessons From the U.S. and Abroad, The Commonwealth Fund, February 2010. http:// tinyurl.com/4faom36

To read other Contingencies articles in the series, Health Care Reform: Learning From Others, go to www.contingencies.org

Campaign 2 012 ToolkiTS

Delivering Objective Information on Public Policy Issues
Resources for raising awareness of critical actuarial issues among the voting public to ensure more informed policy discussions and debates leading up to the 2012 elections and beyond.
http://actuary.org/events/2011/ electionToolkitpage_2011.html

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Workshop

BY VALRIE JARRY, ALAIN gAgNON, ANd ROBERT BOURBEAU

the family connection in exceptional Longevity

THE dRAMATIC INCREASE IN LIFE ExPECTANCY during the past
century is unprecedented in human history. But despite these spectacular advances, we still have limited knowledge of what factors lead to survival in old age.
Anyone seeking to understand the determinants of longevity should look first at family history. Family studies that go back a century or more provide clear evidence that longevity does run in families (see Box). These findings closely agree with a number of studies that have analyzed further the familial component of longevity through the pedigree of centenarians. In a study published in Lancet in 1998, Thomas Perls, director of the New England Centenarian Study, and other researchers compared siblings of 102 centenarians with the general population and found that the relative risk of survival for siblings of centenarians increases with ageto such an extent that they were approximately four times as likely to live to 91 as the siblings of people who died at age 73. In a second study, published in 2002, Perls and his colleagues compared the survival of siblings of 444 centenarians from the New England Centenarian Study with their cohort of U.S. residents born in 1900. This study revealed that, starting from age 20, brothers of centenarians were 17 times more likely to live to age 100 compared with their birth cohort, while sisters were 8 times more likely. In addition, the death rates of siblings of centenarians were about half those of the general population. Bradley Willcox and colleagues at the Pacific Health Research Institute added to this body of research in a 2006 article published in the Journal of Gerontology that compared the survival of siblings of 348 centenarians with that of the 1890 Okinawan general population cohort. A survival advantage for siblings of centenarians, for both men and women, was again reported with approximately half the mortality of their birth cohortmatched counterparts. death among siblings could be attributed in part to their genetic heritage. It also could be the result of a common environment during childhood or, perhaps to a lesser extent, in adulthood. But what about shared environment in adult life with other family members? If a person lives to age 100, can his or her spouse expect to live long as well? While many demographers, gerontologists, and others have studied the longevity correlation between parents and children and between siblings, there has been much less attention to the equally compelling question of similarities between spouses. Including the age at death of spouses allows researchers to control for a shared environment in adulthood. Spouses, who have shared many aspects of their daily life for years, are likely to benefit from the longevity of one another, according to a variety of studies. But while a few studies have stressed the importance of spouse survival on longevity, we have little information on the effect of this component at very old ages, let alone in families of centenarians. Building on the insight that longevity clusters in families, we first compared the survival experience of siblings of centenarians to that of their respective birth cohort. To evaluate the familial component of longevity further, we then extended prior work by conducting analysis on spouses of centenarians. In particular, we examined whether spouses of centenarians had a survival advantage compared to the general population. In this way we were able to focus on adult life rather than on early life and genetics. We suspected that since spouses have lived a great part of their lives together, they would have similarities in their age-at-death distribution.

Family matters
Why are siblings so alike? Is the resemblance between siblings longevity driven by genetics or by the environment? Researchers Kaare Christensen, Thomas Johnson, and James Vaupel (in a study published in 2006) and A.M. Herskind and colleagues (in a study published a decade earlier) found through classic twin studies that genetic factors account for about a quarter of the variation in adult human survival while 75 percent could be the result of environmental factors. Because they share 50 percent of their genes, the correlation in ages at

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The French-Canadian Centenarian Sample

The database used for our study is part of a larger research project aimed at assessing how early life conditions can influence survival to a very old age. The data collection was done in two parts. In the first part, we gathered the cases of 806 centenarians for whom information was obtained from a list of registered deaths provided by the Institut de la Statistique du Qubec, which contains records on centenarians who died between 1985 and 2005 in the province. Only French Canadian Catholics who were born and who died in Quebec were retained for the study. We validated the ages of the centenarians by linking the baptism certificatefound in parish registersto the burial certificate. Families then were reconstituted by linking these centenarians to their family members through the 1901 and 1911 Canadian censuses. Once the database was completed, we searched for the date of death of each of these individuals through the Quebec Consolidated Deaths Index from the Socit de Gnalogie du Qubec. Our master sample includes 2,954 siblings of centenarians, as well as 390 spouses, who survived to age 40. In the second part of the data collection, we used a control sample extracted from the Canadian Families Projects 5 percent sample of the 1901 Canadian Census. From this sample, French Canadian Catholic households with at least one child born between 1885 and 1901 were selected. Of this control sample, 3,784 individuals were matched to their death records. The first observation of our study was that siblings of centenarians, compared to their respective birth cohort, had higher ages at death conditional on survival to age 40 (see Table 1). For men, the mean age at death was 75.4

Pick your Family

Studies have long shown that longevity runs in families. Using genealogies drawn from the Utah Population Database, Richard Kerber and other University of Utah researchers found in a 2000 study that the siblings of study subjects in the 97th percentile of excess longevity had a life expectancy 14.8 years longer than 5,000 randomly selected individuals within the same population. A 2001 study conducted by researchers at the University of Maryland School of Medicine on a sample of 1,655 Pennsylvania Amish born prior to 1890 also showed that parental and sibling ages at death were significantly correlated. Parents and siblings of long-lived individuals had a higher probability of surviving to very old age than the relatives of those with average life spans.

years whereas it was 79.3 years for their female counterparts. As for the control group, the mean ages at death were 71.8 and 75.4 years respectively for men and women. This resulted in a survival advantage of approximately four years for siblings of centenarians relative to their sex. Since the environment appears to play a significant role in longevity, it became important to take into account the age at death of spouses of centenarians. In our analysis, we kept only first marriages, excluding those of short duration. This restriction was introduced to take into account the influence of shared environment that could be observed only in long-term marriages. As expected, a survival advantage also was observed for the spouses of centenarians. Conditional on survival to age 40, the mean ages

at death of wives and husbands were respectively 75.7 and 77.9 years. Husbands of centenarians lived four years longer than their contemporaries while the corresponding figure was about two and a half years for women. Unlike men, women benefited more from having a centenarian among their siblings than from being married to one. In Figure 1, survival curves from age 40 for siblings of centenarians are compared with their respective birth cohort. The survival probabilities demonstrate that siblings of centenarians experienced a longer life than the general population and kept this advantage through very old ages. For sisters of centenarians, the median life expectancy was about four years higher (82 years) when compared with women from their birth cohort (78 years). As for brothers

TABLE 1. Mean

Age at death From Age 40 of Siblings of Centenarians, Compared With a Control Population mean Age at Death Conditional on Survival to Age 40 Controls of Respective Birth Cohort 75.4 (74.876.1) 71.8 (71.272.3) 75.4 (74.876.1) 71.8 (71.272.3)

Excess years 3.9 3.6 2.5 3.9

Female Siblings of Centenarians Male Siblings of Centenarians Female Spouses of Centenarians Male Spouses of Centenarians
Source: Authors

79.3 (78.580.0) 75.4 (74.776.0) 77.9 (74.881.1) 75.7 (74.977.9)

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FIgURE 1. Survival

From Age 40 of Siblings of Centenarians Compared With the Control Population

P(x) 1.0

0.8

0.6

yield reliable results). For husbands of centenarians, survival curves show a significant survival advantage compared with the control population. We also observed that before the age of 75, these husbands experienced a better survival than brothers of centenarians. There is, however, a crossover in the survival functions. After age 75, brothers of centenarians had a lower mortality than husbands did. This suggests that early life conditions had a much longer reach in influencing late-life mortality, overstepping adult life influences.

0.4
sisters of centenarians women of the control Group Brothers of centenarians men of the control gGroup

genetics and Environment

Our study leads to several important findings and brings us a step closer to understanding the mechanisms modulating the human life span. Its clear that how long a person lives isnt independent from how long his or her siblings lived. And having a centenarian sibling is a powerful predictor of survival after age 40 for both men and women. Longevity inequalities are the result of a wide variety of factors that usually are classified in two categories: exogenous factors on which individuals have little or no control and endogenous factors through which individuals can control their health and the length of their life by changes in behavior. Distinguishing real genetic effects on exceptional longevity is complex because siblings not only have a similar genetic heritage but also share environmental factors that may have strong effects throughout life. Although our study doesnt delineate the specific contribution of genes and environmental factors in achieving old age, it vividly indicates a strong familial component to longevity. The environment in adulthood plays a major role in survival,

0.2

0.0 40
Source: Authors

50

60

70 Age

80

90

100

110

of centenarians, the survival advantage was also considerable their median age at death was 77 years compared with 73 years for men in the general population. Figure 2 displays survival curves for spouses of centenarians (conditional on age 40) compared both with their respective birth cohorts and with siblings of centenarians. Wives of centenarians experienced a survival advantage throughout life compared with their birth cohort. But sisters of centenarians appear to have the greatest survival advantage among all three groups (the number of male centenarians was too small to
FIgURE 2. Survival

From Age 40 of Spouses and Siblings of Centenarians Compared With the Control Population Women men P(x) 1.0

P(x) 1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

sisters of centenarians wives of centenarians women of the control Group

0.2

Brothers of centenarians Husbands of centenarians men of the control Group

0.0

40

50

60

70 Age

80

90

100

110

0.0 40

50

60

70 Age

80

90

100

110

Source: Authors

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and the inclusion of spouses in our analysis provides a means of accounting for the impact of shared environment in adulthood. But while the environmental component shared by spouses seems primarily responsible for a survival advantage up to the mean age at death, it doesnt seem to play much of a role in achieving the oldest ages. In other words, what appears to allow men to survive until the average age is predominantly the result of a shared environment in adulthood while shared living conditions in childhood and genetics could explain the advantage of brothers of centenarians achieving very old ages. These results support the hypothesis that genes may exert a substantial influence on the ability to achieve exceptional survival. The capacity to survive to very old ages, paradoxically, seems to depend more strongly on genetics or earlier influences that largely lie outside individual volition or control. At the same time, familial influences on longevity, whether originating from genes, early life circumstances, or adult life environment, help to explain persistent disparities in health and mortality despite drastic reductions in poverty among the elderly. From a public policy standpoint, programs that target familial well-being also carry health policy implications because of their far-reaching effects into old age.
VALri e JA r r y is a doctoral candidate in the department of demography, Universit de Montral. A LA in GA Gno n is an associate professor in the department of demography, Universit de Montral. r oB ert B o ur B e A u is a professor in the department of demography, Universit de Montral. Resources
Christensen, K., Johnson, T.E., and J.W. Vaupel, The Quest for Genetic Determinants of Human Longevity: Challenges and Insights, Nature, 2006.

Drefhal, S., How Does the Age Gap Between Partners Affect their Survival? Demography, 2010. Gudmundsson, H., Gudbjartsson D., Frigge M., Gulcher J., and K. Stefansson, Inheritance of Human Longevity in Iceland, European Journal of Human Genetics, 2000. Herskind, A.M., McGue M., Holm H., Srensen T., Harvald B., and J.W. Vaupel, The Heritability of Human Longevity: A Population-based Study of 2,872 Danish Twin Pairs Born 18701900, Human Genetics, 1996. Kerber, R.A., OBrien E., Smith K.R., and R.M. Cawthon, Familial Excess Longevity in Utah Genealogies,Journal of Gerontology, 2001. Mazan, R., and A. Gagnon, Familial and Environmental Influences on Longevity in a Preindustrial Population, Population, 2007. Mitchell, B.D, Hsueh W., King, T.M, Pollin, T.I., Sorkin, J., Agarwala, R., Schaffer, A.A., and A.R. Shuldiner, Heritability of Life Span in the Old Order Amish, American Journal of Medical Genetics, 2001. Perls, T., Alpert, L. and C.J. Wager, Siblings of Centenarians Live Longer, Lancet, 1998. Perls, T., Wilmoth, J., Levenson, R., et al., Life-

long Sustained Mortality Advantage of Siblings of Centenarians, Proceedings of the National Academy of Sciences, 2002. Shoenmaker, M, DeCraen, A., DeMeijer, P., Beekman, M., Blauw, G, Slagboom, P., and R. Wetendorp, Evidence of Genetic Enrichment for Exceptional Survival Using a Family Approach: The Leiden Longevity Study, European Journal of Human Genetics, 2006. Westendorp, R.G.J., and T.B.L. Kirkwood, Maternal and Paternal Lines of Familial Longevity, Population, 2001. Willcox, B.J., Willcox, C.D., He, Q., Curb, D.J., and M. Suzuki, Siblings of Okinawan Centenarians Share Lifelong Mortality Advantages,Journal of Gerontology, 2006.
Acknowledgment: This study was funded by the Social Sciences and Humanities Research Council of Canada. The authors gratefully acknowledge the helpful advice provided by Jean-Marc Fix. This article is adapted from a presentation given at the SOA 2011 Living to 100 and Beyond International Symposium, which was held Jan. 5-7, 2011, in Orlando, Fla. (http://livingto100.soa.org).

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9/26/11 10:07 AM

Tradecraft

BY ROBERT J. WALLINg III

improving claims Handling with Predictive Analytics

INSURANCE COMPANIES CONSTANTLY SEEK competitive advantages that result in superior underwriting results. Long accustomed to using predictive analytics in the development of sophisticated pricing tools, insurers are now discovering that applying predictive analytics to workers compensation and medical professional liability insurance claims data also can improve commercial casualty insurance underwriting results.
Predictive analytics is a statistical technique for examining how a group of characteristics (such as rating or demographic factors) estimates a target variable (such as claim frequency or severity). Applying predictive analytics to workers compensation and medical professional liability insurance claims data can yield powerful business intelligence. Some companies are outperforming their peers by using case reserving systems, proactive claims protocols based on scoring claims data, and fraud monitoring tools to reduce claims frequencies and severities, cut claims defense costs, and identify and combat fraud. Target variables related to loss severity are particularly interesting and include useful measures for triaging newly reported claims, such as the likelihood of:
Severity more than twice the average A claim exceeding a self-insured Non-economic damages greater than Defense costs greater than Y percent

for a given injury type; retention;

X percent of total losses;

FIgURE 1

U.S. Industry Results 20042008

50,000 44,122 40,000

of total losses. The utility of predictive analytics depends on the type of coverage. Both health and personal lines insurance have the advantage of large volumes of claims, with low average claim sizes, which tend to settle quickly. By contrast, medical professional liability and workers compensation insurance offer fewer claims, higher average severity, longer settlement lags, higher legal defense costs, and larger numbers of insured individuals (see Figure 1). Models for commercial casualty lines of necessity focus on fewer characteristics. But the payoff in improving claims-handling procedures and identifying problem claims sooner is substantially higher.

Claims Reserving Applications

The largest risks the commercial casualty insurer faces are adverse development of loss reserves and underwriting/pricing decisions based on underestimated reserves. Predictive analytics commonly are used in casualty claims to refine claims-reserving estimates. Many insurers use predictive analytics to quantify claims adjusters qualitative expectations of differences in ultimate claims severities. This approach also provides new insights into the characteristics that influence claims severities. Constructing a severity model with even a few claims characteristics can lead to improvements in estimating ultimate claims values. Figure 2 shows the predicted severity for claims based on factors such as legal jurisdiction, severity of injury, and attorney involvement. The analysis identifies and isolates a

30,000 23,908 20,000

10,000 2,597 0 Personal Auto Liability

9,774 3,507 Homeowners 5,004 5,888 148 Workers Compensation Medical Professional Liability

Average Annual claim counts (000)

Average claim severity

Source: Pinnacle analysis of insurance industry annual statement data from Schedule P via the AM Best Co.

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FIgURE 2

Severity by Injury Type & Attorney Involvement

80,000 70,000

number of useful differences in claims severity. Attorney involvement has a larger percentage impact on claims in the emotional only category than for other injury types, for example. Such a model could be used to improve workers compensation and professional liability reserve estimates by quantifying the expected effect of regional differences in attorney involvement. This type of claims model also has proved effective in measuring geographic differences for the medical component of workers compensation claims, in which differences in medical costs and managed care fee schedules affect severities. Analyzing medical professional liability claims by region also can provide insights into geographic differences in court behaviors. Many claims characteristics, or explanatory variables, are effective in identifying differences in expected medical professional liability claims severity. Figure 3 details broad categories of these variables along with examples. A medical professional liability predictive model that includes even a subset of these characteristics is useful for a multitude of potential underwriting and claims applications.

60,000 50,000 40,000 30,000 20,000 10,000 0

Emotional Only

Temporary Slight

Temporary Minor

Temporary Major

Source: Author

severity without attorney

severity with attorney

FIgURE 3

Medical Professional Liability Claims

Characteristic Category Providers Examples
Prior Incidents Specialty Years of Experience Medical Education Average Prescriptions per Patient Number of Employees Number of Procedures or Patients Treatment Characteristics

Practice

Claims Process Applications

Predictive modeling can offer increased accuracy of claims estimates and reductions in overall claims costs. One critical decision is whether to fight or settle a claim. (In some cases, quick settlements can have lower overall claim costs, including defense costs, than drawn-out and costly defenses.) This may be true even with favorable decisions with little or no loss payments. Predictive models that include factors such as the nature or severity of injury, patient age, and court venue can determine which claims merit defense and which are better to settle. Risk managers responsible for large
Claims

% Medicare % Elective % Informed Consent

Attorney Involvement Reporting Lags Settlement Lag Severity of Injury Stage of Suit at Settlement se of Specific Attorneys and Expert U

Witnesses Patient/Claimant
Age Sex Profession Marital Status Parental Status State County of Injury County of Lawsuit

geographic

Source: Author

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Tradecraft co nt inue d
FIgURE 4

Florida Closed Claim dataMedical Malpractice Severity Relativity

Claim Counts 30,000 25,000 20,000 15,000 10,000 5,000 0 claims severity relativity Severity Relativity 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Hi lls bo ro ug h

Br ow ar d

da de

Pi ne lla s

O ra ng e

Po lk

Be ac h

du va l

Pa sc o

Vo lu si a

Pa lm

self-insured retentions often use this type of predictive analytics as an early warning system to alert them quickly of problem claims and to trigger changes in claims-handling procedures. The risk managers goal is to identify claims characteristics that have a likelihood of resulting in materially higher-thanaverage severity for that type of injury. Early identification of higher-than-average severity claims allows risk managers and claims staff to select the best tactics (fight or settle), involve different experts (lawyers or case managers), and take other proactive steps to handle these claims in the most effective manner. Other factors such as venue of lawsuit, specific attorneys and experts, and the type of procedure performed (e.g., one not meeting best practice protocol) can indicate a greater likelihood of a problem claim and the need for a higher level of claims-handling diligence. Using a predictive model based on the Florida closed claim database, for example, Figure 4 shows substantially higher average claim severity in lawsuits brought in Dade and Orange County Courts than in other areas of the state. This information can help direct closer scrutiny of claims handling based on location. Predictive analytics also has been used to assess the benefits of innovative

claims-resolution techniques such as proactive physician apologies and early offers to settle. Several institutions, including the Lexington Veterans Administration Medical Center, the University of Michigan Health System, and Johns Hopkins Hospital, are using physician apology as a part of a claimshandling strategy. All have had success reducing defense costs and improving patient satisfaction. But would a rigorous assessment of the data support a fundamental change in claims handling? COPIC Insurance Co., the largest medical malpractice carrier in Colorado, has tested the practicality and costeffectiveness of not strongly defending all claims but rather following a philosophy in which: Negligently injured patients are compensated; Legal costs are minimized; Physicians whose efforts were appropriate are defended. COPICs program started out as a pilot that applied only to incidents estimated to have total costs of less than $30,000. Claims administrators had discretion to pay up to $25,000 for patients out-ofpocket expenses (child care, pet or senior relative care, house cleaning, etc.) and an additional $5,000 for their loss of time. Using a decision tree analysis (see

Figure 5) is a good way to evaluate the effectiveness of the COPIC philosophy. The data from the program (available on the COPIC website) were dramatic from the onset and continue to be impressive. During its first five and a quarter years of operation, 2,174 incidents met the COPIC program criteria. Although 52 of the incidents resulted in claims, only two patients have sued. None of the incidents required a trial verdict. Average amounts paid per incident were $5,680, which is dramatically lower than COPICs average claim severity. The COPIC program also appears to be affecting the severity of claims that require traditional claims-handling techniques. Between 2003 and 2005, average severity of closed claims dropped from $88,056 to $77,936 (-11.5 percent).

Applications for Fraud Investigation

A final area of tremendous opportunity in predictive analytics is the identification of potentially fraudulent claims. In some ways, this is simply an extension of predictive analytics developed to improve claims-handling procedures. Early identification of claims with a higher-thanaverage potential for claimant or provider fraud offers the opportunity for early intervention with additional claims-handling approaches and special investigation units.

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Re m ai nd er

FIgURE 5

what is the severity of the claim?

claim < $30,000

claim > $30,000

fatality

early formal Activity*no

early formal Activity*yes

early formal Activity*no

early formal Activity*yes

d&r# Program usedno

d&r# Program usedyes

d&r# Program usedno

d&r# Program usedyes

*Early Formal ActivityFormal Written demand or Attorney Involvement Before First Report #d&R ProgramActive discolsure & Reimbursement Program
Source: Author

Consider, for example, a workers compensation insurance claims model that includes one or more of the characteristics listed below. These characteristics typically would be available two weeks to one month following the first report of a workers compensation claim:

Employee Characteristics
Hired in the past 30 days Currently on probation at work Recently reprimanded Took extensive time off prior to claim Had no health coverage

Claim Characteristics
No witnesses Occurred on Monday or late on Fri-

day, outside normal work hours, or date, time, and place of accident is unknown Reported after several days by worker Occurred immediately prior to strike, layoff, plant closing, job termination, or job completion Seeks benefits in a state other than principal work location

Claimant Behavioral Characteristics

appointment(s), or refuses a diagnostic procedure to confirm an injury Protests a modified or light duty plan for returning to work Seeks a second opinion when released back to work Is difficult or uncooperative during rehabilitation Cannot be reached at home or is frequently reported sleeping and cannot be disturbed. Many of these characteristics are intuitive and have been discussed in claims and risk management literature for some time. The real advantage of adding predictive analytics is quantifying the increased likelihood of fraud, which previously was a qualitative judgment. Decision trees and logistic regression can prove to be tremendous tools in modeling fraud. One frequent challenge is that many of the characteristics useful for fraud models (such as the list above) reside in text fields of claims department databases, not in more easily manipulated data fields. Text-mining techniques are clearly a vital element in predictive analytics.

Cancels or fails to keep

claim-related correspondence

claims grows, companies are discovering its usefulness in workers compensation, medical professional liability insurance, and other commercial casualty insurance coverages. Claims models result in more accurate claims estimates. They also serve as an early warning system in identifying claims with higher likelihood of above average severity and with a higherthan-average potential for fraud. This information can lead to improved processes and reduced costs, both overall and in legal defense. By expanding predictive analytics to claims applications, communication and collaboration between underwriting and claims are enhanced. This, not surprisingly, often improves corporate operations, creating a data-driven culture throughout the company.
r o B er t J . w AL L i n G i i i , a fellow of the Casualty Actuarial Society and a member of the Academy, is a principal and consultant in Pinnacle Actuaries Bloomington, Ill., office. He can be reached at rwalling@pinnacleactuaries.com.
This article is solely the opinion of its author. It does not express the official policy of the American Academy of Actuaries; nor does it necessarily reflect the opinions of the Academys individual officers, members, or staff.

A Data-Driven Culture
As the use of predictive analytics for

Avoids using U.S. mail for

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Booklinks
ed king

REVIEW BY dAN SKWIRE

by David guterson (Knopf, New york, 2011)

SAY THIS FOR dAVId gUTERSON the man knows how to write
an opening paragraph. Consider the start of his new novel, Ed King, a modern retelling of the greek myth of Oedipus:
In 1962, Walter Cousins made the biggest mistake of his life: he slept with the au pair for a month. She was an English exchange student named Diane Burroughs, and he was an actuary at Piersall-Crane. Diane had been in his house for less than a weekmothering his kids, cleaning, making mealswhen he noticed a new word intruding on his assessment of her. Here I am, thought Walter, an actuary, a guy who weighs risk for a living, and now, because Im infatuated with the wrong personbecause Im smitten by an eighteen-year-oldIm using the word fate. Ed King already has gained notoriety in the literary world. One of its more explicit scenes won the coveted Bad Sex Award from the Literary Review (somewhat unfair, perhaps, given that any treatment of the Oedipus story was bound to be cringe-worthy). Im surely not the first to flip through the novel looking for the good parts. But perhaps not everyones idea of good parts consists of the novels many references to the actuarial profession. Growing up in the late 1970s and early 1980s, Ed and Simon show talent and enthusiasm for mathematics and computers, becoming devotees of early Apple computers. Simon begins designing computer games, while Ed has a knack for developing creative algorithms to solve mathematical and programming problems. But Eds precocity extends beyond mathematics and computer logic, as he gains considerable romantic experience at a young age, first with girls in his high school class and ultimately with a series of older women, including one of his high school teachers. Walter, meanwhile, remains married to his wife, Lydia, while raising their two children, Barry and Tina. He continues working at Piersall-Crane, the actuarial firm where he manages loss-reserving projects and ultimately rises to senior vice president of research. All the while, he is blackmailed by the opportunistic Diane, who demands money for child support despite having no contact at all with Ed. Walters relationship with his children, Barry and Tina, has become strained following the revelation of another extramarital affair. Why are you so [expletive] blind? shouts the collegeage Barry after an argument with Walter. Walter storms off, climbs in his car, and soon meets his fate at the hands of . . . well, I wont give it away, but you probably know where this is going. Following Walters death, the novel focuses on the separate adventures of Diane and Ed. Diane scrounges out a living in mostly unsavory ways, while Ed becomes a fabulously wealthy Internet pioneer known as The King of Search. They are destined to meet again, however, and Greek dramas arent known for their happy endings.

Insights on the Profession

One of the pleasures of this novel for those of us in the insurance business is its insightful treatment of the actuarial profession. Rather than treating an actuarial career as an archetype of gray-flannelsuited boredom (a favorite approach of other contemporary authors), Guterson uses it as a deliberate device to illustrate a major theme of the Oedipus storythe blindness of humans with respect to their fates. Some insight into the future can be gained from statistics, of course, as in a Worlds Fair exhibit that Walter admires, in which a series of falling coins inevitably generates a bell-shaped normal curve. That the predictive power of numbers on a large scale could be brought to bear on future eventsfor Walter, that was like an esoteric secret and, as he put it to himself, sort of mystical. But the fate of any individual is ultimately unknowable. Not even an actuary knew what would happenthere were broad trends, of course, which he would express in tables, but individual destinies were always nebulous. Walter may be blind to his fate, but at least he has some awareness of the fact. The same cannot be said for Ed, who ignores warnings from a variety of would-be soothsayerspsychiatrists, tarot readers, and business associatesabout his excessive pride and the troubles that await him. Other details of Walters life, while of less thematic importance to the novel, will strike a familiar note with actuaries,

An Actuary Behaving Badly

Walter Cousins, the actuary of the first paragraph, does indeed have an affair with Diane Burroughs while his wife is being treated for mental illness. The brief relationship results in the birth of a child, Ed, whom Diane abandons and who is adopted and raised by the King family of Seattle. Dan King, the adoptive father, forges a birth certificate for Ed, intending to conceal permanently the fact of his adoption. Shortly thereafter, the Kings have a biological son, Simon.

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as when he unsuccessfully tries to explain his profession to family, friends, and strangers. Or when he finds himself unable to relax at his familys summer house, because he views a day not spent on chores as a day hastening the demise of their investment. Yes, we really do think that way. Actuaries also will enjoy Gutersons success in writing about a number of mathematical concepts beyond simple statistics. These include items ranging from the Monty Hall problem to the Turing Test of artificial intelligence, the latter of which lies behind Eds quest for the perfect search. As in his treatment of actuarial work, Guterson addresses these technical subjects with clarity and insight. The very few scientific or mathematical errors in the book, including confusion between the standard normal distribution and a more general normal curve and an anachronous reference to

the use of a graphing calculator in 1980, are minor enough to pose no particular concern, even for readers with a technical background.

Excessive Cuteness
The only specific flaw of the novel is the relentless and overly cute wordplay masquerading as profound symbolism, most often manifested in the characters names. Ed King is a clear enough synonym for Oedipus Rex, but does every name have to carry deeper meaning? Diane burrows her way into Walters life. An actuary at Piersall-Crane peers into the future and cranes his neck for a better view. Doctors Stern and Fine live up to their monikers, and the psychiatrist Theresa Pierce (in the role of the soothsayer Tiresias) emulates her namesake in refusing to speak with Ed about his future. The reader is welcome to continue the parlor gamea copy of Brewers Dictionary of Phrase and Fable may prove

useful, along with a talent for anagrams. The conceit spreads beyond names, as well. I could feel a vicarious brain freeze, for example, when the lonely and pregnant Diane sat down with a bowl of Rocky Road ice cream to ponder her difficult future. Surely raspberry ripple or chocolate chip would have sufficed. These are minor quibbles, however, and an understandable temptation for a novel with such a clear program. Ed King is enjoyable and thought-provoking reading for any audience, but it is particularly encouraging to find in David Guterson an author who understands the actuarial profession well enough to draw on its lessons and limitations as a means of illustrating the timeless themes in this classic story.
dAn i eL d. s k w i r e is a principal and consulting actuary at Milliman who has written several articles on literary topics for Contingencies and other publications.

DO YOU KNOW
MILLIONS OF AMERICANS?

PROVIDES EDUCATION TO

WHICH ORGANIZATION

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EdWARd SCHER

face-to-face Versus Virtual meetings

ACCORdINg TO THE OCTOBER 2011 EdITION of The Wire from
AirPlus, 59 percent of corporate travel managers report their companys travel budget this year is the same as or greater than pre-recession levels. This despite the fact that respondents to an AirPlus survey in 2009 indicated they were taking several steps to decrease travel as technological advances were making travel alternatives more readily accessible and decreased travel budgets were making them more desirable. In the 2009 survey, 81 percent had increased teleconferencing, 71 percent had implemented web conferencing technology, and 38 percent were using specialized virtual conferencing technology such as telepresence.
Regardless of the reason for choosing travel alternatives, the professionals who responded to the current survey were decidedly ambivalent about the effectiveness of such decisions. A total of 68 percent said remote conferencing is sometimes as effective as meeting in person. Another significant group was even less convinced of the effectiveness of remote conferencing6 percent said it was never as effective as in-person meetings while 15 percent said that was rarely the case. Only 12 percent were firmly in favor, saying remote conferencing was almost always as effective. The current study shows that the concept of virtual meetings has become firmly ingrained in corporate culture. Only 1 percent of those surveyed said that virtual meetings have decreased as in-person meetings and travel increased in the past year. Specifically: 32.4 percent said virtual meetings have increased in the past year, but they have not replaced in-person meetings; 32.4 percent said virtual meetings have increased as a replacement to in-person meetings and travel; 32.9 percent say that the volume has remained steady. While champions of travel alternatives tout the beneficial effects on employee quality of life and corporate social responsibility, these are not the most compelling reasons for most respondents. For the majority of respondents, the most compelling reason

Effectiveness of Remote Conferencing vs. meeting in Person Remote as Effective? Almost always Sometimes Rarely Never % of Respondents 12.0% 68.0% 14.5% 5.8%

Source: The Wire from AirPlus USA, November 2011

Urgency Ranking for Turning to Travel Alternatives (1, Most Urgent; 4, Least Urgent) Reason for Travel Alternative Increased travel costs decreased budgets Employee quality of life Corporate social responsibility
Source: The Wire from AirPlus USA, November 2011

Average Rating 1.59 1.99 2.68 3.40

for travel alternatives is the increased cost of travel, ranked by 63 percent as the most urgent reason for turning to travel alternatives. Smaller budgets was the next most cited urgent reason, with significantly fewer respondents32 percentranking it the most urgent. Despite the lukewarm opinions of travel alternatives, new innovations mean they are likely to continue to be viable for certain kinds of in-person meetingsmost notably internal corporate meetings and those with well-established client relationships. In addition to corporate-owned systems, more wide-scale deployment of technology is increasing the viability of hybrid meetings, those with a mix of inperson and remote attendees. Hotel chains have been installing telepresence rooms at properties around the world and allowing groups to broadcast meetings to remote audiences via the internet. To read the complete study, go to www. airpluscommunity.com/wp-content/ uploads/2011/11/AirPlus_TheWire_ Nov2011-2.pdf.

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S HUTTERST OCK

THE VISION
to see what lies ahead

His ability to see at night gives the lion an advantage. Our ability to see down the road gives our clients the same. Recognizing todays risk is one thing. Planning for tomorrows takes knowledge, foresight, and experience. We use the experience accumulated for over 85 years to help companies manage their risk. Our facultative expertise, mortality analysis, and consultative approach to the reinsurance relationship assure that our clients interests are protected. Both for today and tomorrow.

A Standard and Poors A- A.M. Best www.GeneraliUSALifeRe.com

Uniquely Generali

THE 2011 CRyPTIC PUzzLES

Cryptic Puzzle

TOM TOCE

Large Triangle B contains the 16letter pair. Rather than clue this pair in traditional cryptic fashion, I offer the following message, which you will have to decode. You may think of it as my personal philosophy and/or what has happened to my poor little brain as a result of inventing such a tight interlocking diagram: Creations dullness ruins adolescents and curdles sensation. Also, coarsened insults by nonsecular deists in ardent seclusions outclassed sinner. Moreover, insurances oldest dissonant recluse classed neutrinos as dissonant neutrons! Racinesses untold in driest consensual nonelastic duress. Three medium-large triangles can be found within each large one, with apexes at small triangles 1, 2, and 4. Each medium-large triangle contains nine small ones, each of whose letters can be anagrammed into a nine-letter word. Finally, there are six medium-small triangles made up of four small triangles. The apexes of these six triangles are 1, 2, 4, 5, 7, and 9. A four-letter word can be obtained through anagramming each of these medium-small triangles. There are connections between the faces of the pyramids. Think of the triangles as the outer faces of the pyramid. Adjacent triangles share a letter. Thus, small triangles A1, B1, C1, and D1 will have the same letter. The letter in A4 will be the same as the letter in B2, A9 will be the same as B5, and so on all the way around the pyramid to the pair D16 and A10.

The clues are grouped by large trian1 gle. Placing the letters into the diagram with no guidance would be extremely 3 difficult, so I have thoughtfully provid2 4 ed the starting points for the nine-letter triangles. The four-letter clues are not 6 8 ordered. The masochists among you may 5 9 7 want to try to get the diagram without a guide to the four-letter clues. For 11 13 15 10 12 14 16 the rest of you, the guide is printPYRAMID A ed below. Let me know whether you used the hint, and I will credit you 4-letter clues (in random order) appropriately. Ex-communicants supporting local There are four proper nouns, all fourgovernment issue letter ones. One of them (in Triangle B) Godzilla, for example, losing PR guy refers to a fairly obscure athlete. The to Slate 16-letter words are too long to play in Very small portions in earliest of teleScrabble, but all of them are legitimate vision commercials words. Everything else can be played Michigan and North Dakota care in Scrabble. There is one Yiddish word Elis weaving garlands (mishegaas) in a clue, because I like how One of Jupiters moons starts to it sounds. Look it up. nymphomaniacally spew charged Ignore punctuation, which is departicles signed to confuse. Thanks to Eric Klis and Bob Fink for CluesTriangle B test-solving and editorial suggestions. 16-letter clue See sensual doctrines above
1 4 3 8 2 7 6 5

CluesTriangle A
16-letter clue Renovated mountainside mill having many distinct features 9-letter clues 1. It may be a stretch to use Milo in improvisation 2. A minds not focusing on keys that are four steps up 4. I stalled, I recovered in aerobatic maneuver 9-letter clues 1. Shared the risk for nickels and dimes on the Internetyou Commie 2. Conservative girl I estimated as most elegant 4. Most of Justice OConnor and actress Sharon in sedimentary rock 4-letter clues (in random order): Permits for lengthy excursions to Shenandoah, primarily Former Oakland all-star running

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10

11

PY RA 14 MI DB

12

13

15

16

10

base of the pyramid is irrelevant to this puzzle). Each large triangle comprises 16 small triangles. When completed, each face will anagram into a 16-letter word or, in one case, pair of words. Its possible to make more than one pair.

11

FOUR LARgE TRIANgLES form the faces of a pyramid (the square

DC MI 2 RA 1 Y P
13

14

15

Pyramid scheme

16

10

11

12

PYRAMID D
13 14 15

16

A R E P R O U D Ly S P O N S O R E D B y E R N S T & y O U N g

Says yes to Dons mishegaas

from first to second starts to dive in

4-letter clues (in random order)

Copper Ed told the brass when to See Republican prognosticator

4-letter clues (in random order)

Others relax Retrograde Time issue

British Queen residing in Tuscan

neighborhood Freezes prices after a fashion Assistant maintaining the last shall be first at Russian news agency

come in

Pruned gripping poem with mystical Nights on the overhanging edge of a Without signs of transgressions No musical ability at hand

Democratic office holders making

meaning

CluesTriangle C
16-letter clue State department subordinates to reorganize and see recruiters 9-letter clues 1. Starts up again with constraints around Mussolini 2. Weariness upset dissenter and residents as well 4. People detained by Arkansas remain and look around

loud noises Makes money talking to seabirds Result of crying spree! DUrberville girl in straight sets

roof, listening

CluesTriangle D
16-letter clue Re: Unassertive menquestionable profitability 9-letter clues 1. One poems parallel existences? 2. Worships and strangely never eats 4. Incorrectly puts in: Mies-Stern developed
1

Order for 4 letter triangles (by apex) Triangle A1, 9, 7, 5, 4, 2 Triangle B5, 1, 4, 9, 2, 7 Triangle C1, 4, 2, 7, 5, 9 Triangle D7, 9, 1, 2, 4, 5 Solutions may be emailed to Thomas.Toce@ey.com. In order to make the solver list, your solutions must by received by March 31, 2012.

Previous Issues PuzzleSeeds

Across 1 MANGERAnagram of engram 7 ADJUNCTSADJ (adjective) + UN (one informally) + CTS (Connecticuts) 13 AMUSEA (an) + MUSE (inspiration) 14 PILLORIESPIL(LORI)ES 16 ROBSR (rare) + OBS (obsolete) 17 ENOSAnagram of nose 19 UNCLOGUNC (pops bro) + LOG (account) 20 ARIAA + RIA (little river) 21 AGHASAGHAS(T) (mostly horrified) 22 EASEHomophone of Es (these come with effort) 24 SALEMAnagram of meals 27 BOATEDBOA (long, thin, fluffy scarf) + TED 29 NOSHomophone of knows 30 CLEVERC (about) + LEVER (mechanical device) 33 HEARDDouble definition (John Heard = Home Alone star and on the radio) 34 FATFAT(E) (fortune cut off) 36 AURASAU (Gold) + RAS (sun gods) 38 ROOTDouble definition 41 IRAMr. Gershwin and ARI (Mr. Gold) reversed 42 RIDGYRID(iculous ener)GY 43 UNWISEPun (about the United Nations = UN-wise) 44 ARSONAnagram of sonar 45 GELDFirst letters of Germany, Estonia, Latvia and Djibouti 47 INBOXIN + BOX (case)

M A R S O R A L
34

N B I L E

A S E A

G E S T

E
14 17

R I N O

A L O A

D L
18

J O

U N R I C E
28

10

C
15

11

T S

12

13 16

A M U A

E L

A G E S T
40

S S

19

U N S T
22

O
23

20 24 30

21 27

A R

G H A
31

A
29

25

E M B E T
42 36

26

E A
38

D N O R O D
39

C I

V A N S T

32

U H E R G E A Y
46 37 43

33

L O S O
53

H
41

35

A I

U D
45

R I

B I B

T E

R
44 49

A R E
55

R I

U N W D A
47

N
48

O N
50 56

G T

L I

N
59 64

X A S
65

N U A C E

M E
57

51

P S

N O
58 63

52

54` 60 66 69 71

A L I

T I

O M A N O
67 61

E M N G B O S E
62 68

P R S

E N T O A

K E E

A C I T

A H W A U
70

T Z

N M A R D

T
72

T E R

Q A

A S
73

O N O M R

A R

D H E

48 ONETIMEENO (Roxy Music star) + EMIT (cast) reversed 51 PIANODouble definition of sorts 52 SPAAnagram of asp 54 AUTOMATEPun (Second car = auto mate) 58 GAPESG (1000) + APES (bonobos) 60 LAINAnagram of nail 61 KASBAHK (Potassium) + ASB (asbestos) + AH 64 WANTW (white) + ANT

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Cryptic Puzzle c ont in ue d

66 INMATEIN(TI)MATE (very close and back it out) 68 QUARTZHomophone of quarts (thirty-two ounces) 69 ECONOMIESEvery other letter in ten-crown rooms Im easy 70 ESSOESS + O (so spelled out) 71 NERDNE (New England) RD (road) 72 RETREADAnagram of rerated 73 HEARHomophone of here (now) Down 1 MARASCHINOAnagram of harmonicas 2 AMORAL(Al)AMO RAL(ly) 3 NUBILEHomophone of NEW BILE (virginal irritability) 4 ASEAASIA with E for I 5 GEST(IN)GEST (to eat after two) 6 RINGAnagram of grin 7 ALOHAA + LO (homophone of low from deep) + HA (laugh) 8 JOUSTJ(O)UST (just about love i.e. 0) 9 URNHomophone of earn (net) 10 NICEDouble definition &lit 11 TSOAnagram of sot 12 SAGESTSAGES (Herbs) + T (tenor) 14 PEA-BRAINP (power) + E (excellent) + A BRA (a supporter) + I (one) + N (new) 15 ELANDPun on E-land (cyberworld) 18 SASHASASH (Belt) + A (one) 22 LEANINGLE(ANIN)G 23 SOLOSSO + L (50) + OS (so turned) 25 EVANSTONEVA (Ave = boulevard turned) + N-S (northsouth) + TO + N (Wisconsin ultimately) 26 METROAnagram of Torm 28 DROWNDR (doctor) + OWN (now anagram) 31 BUDGEDouble definition 32 URGE(P)URGE (puke after debut) 34 FRAAnagram of far 35 EARanagram of era 37 SUDANSU(DA)N (day mostly lying in sun) 39 BIBBIB(B) (lettuce chopped) 40 TEASAnagram of sat 46 LIMBOLIM(B)O (fancy car holding Bishop) 49 NUANCENear homophone of GNU ANTS (wildebeest and insects) 50 MAKE MEMEME (element of culture) around AK (Alaska) 51 PETERPE(T)ER (PEER = be just visible) over T (time) 52 SPARSEAnagram of Spears 53 PENTPENTHOUSEHOUSE (not house loses top floor but top floor loses house) 54 LIENHomophone of lean (list) 55 TIMORTIM (Man of Faith = Tim McGraw, Faith Hills husband) + OR (otherwise) 56 MOTORTOM reversed around OR (Oregon) 57 TACITAnagram of tic at 59 AWASHA + WASH (northwestern state) 62 AQUAAA (battery) around QU (question) 63 HUEDHomophone of hewed (cut down) 65 TZARTAR (sailor) holding Z (last letter) 67 ANDAnagram of Dan Seed Answers
BOA(S)TEDAnagram of so a debt MAN(A)GERAnagram of a IRA(N)Anagram of rain

F(E)ATFE (Iron) + AT (with) PE(S)TERAnagram of Streep RING(O)Anagram of gin or and TE(X)ASAnagram of taxes (L)EASEAnagram of easel

Ringo Starr = (Pete) Best replacement

ROB(E)SAnagram of sober

SASHA(Y)SAY around ASH (all

thats left after a fire)

SEED SOURCE OF gREAT ImPORTANCE TO ACTUARIES:

SARBANES OXLEY
Solvers
Dean Apps, Karl Baker, Mike Blakeney, Andrew Buckley, Bob Campbell, Lois Cappellano, Chris Carlson, Todd Dashoff, Mick Diede, Greg Dreher, Deb Edwards, Bryce Fawcett, Bob Fink, Jason Helbraun, Pete Hepokoski, Robert Himmelstein, Bob Hupf, Joe Kilroy, Brian Klimek, Eric Klis, Paul Kolell, James Lamenzo, Louis Lana, Philip Lew, Tim Luker, Bob Maguire, Becky Moody, Jim Muza, David & Corinne Promislow, Francis Regnaucourt, Debbie Rosenberg, Erin and Victor Rutherford, Craig Schmid, Bill Scott, Andrew Shewan, Martin Simmons, Sally Jane Smith, Doug Szper, Dave Wallman, Michael Walsh, Frank Zaret
t o m t o c e is a senior manager for actuarial services with Ernst & Young in New York and is a member of the Jeopardy Hall of Fame.

LEA(R)NINGAnagram of Rangel in

German

Paul sarbanes

(A)LIENAnagram of in ale

(overtime)

michael oxley

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WIKI MEdIA

RO(B)OTROB (take) + OT

Palindromic Puzzle
fishing expedition

CREATEd BY JERRY LEVY; EdITEd BY KATHY FLAxMAN

THE dEFINITIONS BELOW SUggEST THREE-WORd CROSSWORd-STYLE ANSWERS that are palindromes.
For example, the definition biblical man introduces himself suggests the palindrome of Madam Im Adam. The first letter of the third word in each phrase spells out a headline describing a fighters difficulty landing a fish (using the additional word in). Four of the words are proper nouns, and one word is an exclamation.
First letter of third word b a n t a m t r a w l s c a r p v a i n

Definition Rapper addresses fruit vendor The melody of a solo Facetious response to It will not work presently. Ergo, Mexican food for a finicky pet Comparison with irate Scottish philosopher Evil brother is a madman Put a spinning toy in a crock Polish city had windswept weather Exclamation when provoked by a proverb Cry of victory Drive off an outcast Personal emphasis for the final course This crme caramel is awful Season the maps Adopt/deprive Choose the Greek letter Large bird adores bulk
SHU TTERSTOCK / BONOTOM STUdI O

First Word yo air wont so mad Cain pot Warsaw egad now repel desserts drat salt borrow I (I) emu aerate sir dentist

Second Word banana an it cat as a a was an I a I such an or prefer (spy) love pet Im sit

Third Word boy aria now tacos Adam maniac top raw adage won leper stressed custard atlas rob pi (psi) volume area Iris Ned

Deodorize litter box space Irish author Murdoch introduces herself Medical professional to actor Beatty: take a seat

The headline is: Bantam trawls carp (in) vain

Solvers: Dean Apps, Kevin Brimmer, Francis de Regnaucourt, Deb Edwards, Paul Kolell, Tim Luker, Lee Michelson, Jim Muza, David & Corinne Promislow, Alan Putney

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Puzzles

MARK dANBURg-WYLd

national mathematics year

AS YOU MAY KNOW, SRINIVASA RAMANUJAN was a brilliant
mathematician who lived a very brief life. I learned only recently that his birthday (dec. 22) is celebrated in India as National Mathematics day and that India has declared 2012 to be National Mathematics Year.
Im not sure how National Mathematics Day is celebratedit seems like the perfect occasion for a pop quiz, I suppose. And really, shouldnt every day be mathematics daynot just in India but throughout the world? The story that most of you may remember about Ramanujan is that he could find something interesting about any number. Its said that when the English mathematician G. H. Hardy visited Ramanujan in taxi no. 1729 and commented that it was a boring number, Ramanujan corrected him by pointing out that 1,729 is the smallest natural number expressible in two different ways as the sum of two cubes, being both 13 + 123 and 93 + 103. Back in the day, most of us would have memorized the table of cubes through some suitably high number and might have been able to pull out the close connection to 1,728. But you have to admit that Ramanujans comment was impressiveespecially as he was ill at the time. Based upon this story, theres a whole collection of numbers now called taxicab numbers. Inspired by this example, the following puzzle is actually a series of little puzzles. 1. The number 153 is the smallest number equal to the sum of the cubes of its digits: 153 = 13 + 53 + 33 = 1 + 125 + 27. There are three other numbers that are equal to the sum of the cubes of their digits. Find them. Solutions may be emailed to the author at cont.puzzles@gmail. com. In order to make the solver list, your solutions must by received by March 31, 2012. 2. The number 1,634 is the smallest number equal to the sum of the fourth powers of its digits: 1,634 = 14 + 64 + 34 + 44 = 1 + 1,296 + 81 + 256. There are two other numbers with this property. Find them. 3. The number 194,979 is the largest number equal to the sum of the fifth powers of its digits. There are five other numbers with this property. Find them. 4. The number 145 is equal to the sum of the factorials of its digits: 1! + 4! + 5! = 1 + 24 + 120. There is only one other number with this property. Find it. 5. As far as I can tell, theres only one number equal to the sum of the sixth power of its digits, but Ive checked only in the millions. Find it.

srinivasa ramanujan Angelika quickly saved four additional euros and came to her father to claim her prize. Papa, she asked as she pocketed the money, will I get another prize when I save up to the next square? Wolfgang chuckled, No, not at the next squareits too close. Next you must save to a number that is both a square and a triangle! You remember the triangular numbersone, three, six, 10, etc.dont you? If not, I will just tell you that after one, the next triangular number that is also a square number is 36. This took Angelika another few months to achieve. Papa, she asked, Do I need to save enough to reach the next triangle/square number? Wolfgang agreed, with one further stipulation. As you know, Angelika, Onkel Friedrich Gauss proved that every number can be expressed as the sum of at most three triangular numbers. To win your next prize, the amount you save must not only be a square and a triangle but also the sum of two triangles and the sum of three triangles. Seeing her quivering lower lip, he added, Dont despair, Liebchen; 36 is an example of such a number, being 15+21 and also 15+15+6. Theres your puzzle. What are the next

Previous Issues Puzzle

Elementary Economics When Wolfgangs daughter Angelika was born, he wanted her to learn the virtue of thriftiness. This was long ago, of course, when interest rates did not produce negative real returns. (If Angelika were born now, hed want her to learn the virtue of spending it while youve got it.) To help teach Angelika to save, Wolfgang sat her down and gave her five euros. (If you dont like to think about eurosor if there are no longer euros by the time this issue of the magazine goes to press pretend its in dollars. If dollars are gone too, just drop the whole thing.) Now, Angelika, Wolfgang said in the patronizing tone of voice he uses with his children. Here are five euros. As you know, five is a prime number. When you add enough euros of your own to make a square number, I will give you another five euros.

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WI KI MEdIA

Ad Index
five numbers that are all of the following? a. a square b. a triangle c. the sum of two triangles d. the sum of three triangles. Solution 36 1,225 41,616 1,413,721 48,024,900 1,631,432,881 There was a bit of a red herring in that every square number is the sum of two triangles, which you can visualize by cutting the square down the diagonal. Likewise, the restriction that a number must be the sum of three triangular numbers is not functionally a restriction. Thus, the puzzle really just was to find numbers that are both triangular and square. (For an additional comment on the January/February puzzle, see Page 10.) to add your companys name to this list, call mohanna sales representatives at 972-596-8777 or email info@mohanna.com. for links to these advertisers email addresses and websites, visit the contingencies website at contingencies.org/linksto_advert.asp. Actuarial Careers Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 914-285-5100 | actuarialcareers.com Actuarial Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 847-706-3535 | actuarialfoundation.org Actuarial Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C3 913-451-0044 | arcval.com American Academy of Actuaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 49 202-223-8196 | actuary.org Andover Research Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 212-986-8484 | andoverresearch.com Casualty Actuarial Society . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 703-276-3100 | www.casact.org Conference of Consulting Actuaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 847-719-6500 | ccactuaries.org Conning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 888-266-6464 | conning.com DW Simpson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C2 800-837-8338 | dwsimpson.com Ezra Penland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 800-580-3972 | ezrapenland.com generali USA Life Reassurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 877-436-8330 | generaliusalifere.com ggy Axis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 877-ggY-AxIS | ggyaxis.com Insureware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-35 +61 3 9533 6333 | 386-673-1919 | insureware.com milliman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 24-25 206-624-7940 | milliman.com Pauline Reimer/Pryor Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 516-935-0100 | ppryor.com PolySystems Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C4 312-332-5670 | polysystems.com Towers Watson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 15 212-725-7550 | towerswatson.com Valani Consulting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 416-457-8622 | valaniconsulting.com Winklevoss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 203-861-5530 | winklevoss.com/wintech WySTAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 800-505-9076 | wystar.com

Solvers
Steve Altschuld, Kim Balls, Robert Bartholomew, Andy Blough, Bob Byrne, Samantha Casanova, Mike Crooks, Craig DeAlmeida, Andrew Dean, Jeff Dvinoff, Deb Edwards, David Ellsworth, Mark Evans, Megan Farris, Bill Feldman, Mark Fowler, Nick Franceschine, Jerry Francis, Eric Giupponi, Rui Guo, Robert Hall, Jason Helbraun, Ben Kester, Frank Knorr, Eric Kovach, Doug Levy, Tim Luker, Jeanette Manning, Lee Michelson, Geoff Moak, Tyson Mohr, Ryan Morgan, Philip Morse, Paul Navratil, Kyle Nodurft, Don Onnen, Jared Praniewicz, Anthony Rubiano, Frank Santasiero, Edmund Scheuermann, Ernesto Schirmacher, Craig Schmid, Robert Share, John Snyder, Don Sondergeld, Eric Sondergeld, Al Spooner, Ronald Stokes, Michael Vech, Daniel Wade, David Wille, XuFang Zou

MAR | APR.12

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End Paper

BY SAM gUTTERMAN

on regulation
IN ANY ACTIVITY THAT INVOLVES THE PUBLIC INTEREST,
theres a need to protect that interest against unconstrained selfinterest. In many cases this role falls to a government agency, but other means can be just as effective.
Protecting the welfare of affected stakeholders (including the general public) can be problematic and complex. It requires determining what is acceptable behavior and encouraging and, in some cases, enforcing that it be followed by both individuals and corporations. But successfully managing the interests of these stakeholders is the essence of what makes good regulation and good enterprise risk management (ERM). I believe that the most effective form of regulation is constrained selfregulation. Particularly in the case of a business, theres no one in a better position to understand its business model, method of operation, and the products or services sold. Good governance, by considering the interests of those affected and putting customers needs first, is the most effective approach. Still, its useful (and sometimes necessary) to have someone looking over your shoulder to confirm that self-interest doesnt overwhelm good governance. An external regulator may not understand the significance of the particular combination of risks that makes a business unique and only can see expected rather than actual intentions. And externally imposed regulations, if not carefully managed, can lead to inefficiencies, compliance costs that may not add value to stakeholders, and other unintended consequences. While society needs to ensure against abuses, there also must be recognition that the pursuit of self-interest doesnt always lead to abuses. Holes can emerge in official regulatory practicesin some cases faster than politicians, regulators, or standardsetters can respond. Significant effort has been spent in plugging holes, including the consolidation financial reporting information that can facilitate early warningsin some cases quicker than regulators. Information that is useful for regulators is useful for the entitys management and vice versa. One valuable element of Solvency II (the expected new European insurance regulatory scheme) is its use test, which sets criteria for regulators to accept metrics, including internal models, if they are used to manage the entity. Comprehensive riskfocused information, clearly presented, is important to all stakeholders. Even with the best regulatory systems, entity-specific or systemwide crises inevitably will arise. The cause can be wildly gyrating economic or business cycles, inherent flaws in an industry, management incompetence, fraud, or even regulatory risk. We need an early response process, particularly when in the aggregate everything looks rosy (often thats the time to worry and take action). Mitigation techniques are necessary, especially for those who arent responsible. But sound and systematic corporate governance processes that take a risk-focused selfregulatory view can work better than crisis and reactive management. Regulators of all kinds must deal with issues and entities in a risk-focused manner, working in support of multiple stakeholders with competing interests. While there are times when the notion of an all-wise autocrat who dictates all actions on a timely basis sounds attractive, no such person or institution exists. In its absence, the importance of highquality self-governed regulation coupled with a range of external regulators basing their decisions on transparent information may be the best way to protect the public interest.
s Am G u t t er m An , a member of the Academy, is director and consulting actuary with PricewaterhouseCoopers LLP in Chicago.

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IMAg Ez 00 / THE ST OCK IL L USTRATIO N SOU RCE

standards and oversight of banking and financial service groups, but other regulatory mechanisms have been at work. During the European sovereign debt crisis, the fixed-income bond markets and rating agency decisions have in some cases been more responsive to potential financial difficulties than governments. Of course, the market and independent bodies have the advantage of not having to answer to a wide range of political stakeholders. Auditors and professional experts such as actuaries are in a unique position to flag issues and problems before they adversely affect the public interest. What roles do these non-regulator regulators play in upholding the public interest? They provide transparent

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