From the Readers
CAS and SOA Boards Discuss RelationshipsFrom the editor:
Following are eleven letters, many of which are closely related or are related to letters that previously appeared in the AR. We start with a series of eight letters regarding CAS/SOA relations.
First is a letter to the SOA Board, from Bob Anker on behalf of the CAS Board, responding to the SOA's reaction to several items that appeared in the May 1997 issue of the AR.
Second is a letter to Bob Anker, from David Holland on behalf of the SOA Board, which Mr. Holland delivered as an invited guest at the September meeting of the CAS Board.
This letter, and the preceding letter, emphasize the desire by both organizations for cooperation rather than for competition.
In the next three letters, W. Paul McCrossan comments on letters from Irene Bass and Charles McClenahan that appeared in the August AR, and then both Ms. Bass and Mr. McClenahan respond.
The sixth and seventh letters are from Charles Gruber and Regina Berens, expressing their views on the CAS/SOA relationship.
The last letter in this series, from Richard Snader, is one that he originally sent to the CAS Board.
The next letter continues the debate between Will Peacock and the NCCI, which started as a letter from Mr. Peacock in the May AR, followed in the August AR by a response from William Hager, CEO of NCCI.
The next letter, from Louis Gariépy, responds to Sri Ramanujam's letter in the August AR regarding the CAS/CIA qualification standards.
Last is a letter from Jim Hall, identifying what he considers to be a serious threat to the existence of the CAS.
The staff of the AR is pleased to be receiving so many letters, and excited by the fact that the AR is being used as a forum to discuss so many vital issues.
Following is a letter that I sent to the SOA Board of Governors on August 12, 1997 on behalf of the CAS Board of Directors.
The May 1997 issue of the Actuarial Review contained three opinion pieces: an editorial titled "How to Catch a Wild Hog" by the Editor-in-Chief of the newsletter and a member of the CAS Board of Directors, C.K. "Stan" Khury; a column titled "Cassandra of the CAS" by a member of the CAS Board of Directors, Sholom Feldblum; and a column titled "From the President" by Robert A. Anker. The CAS Board of Directors has been told that these three pieces have generated a substantial adverse reaction with the SOA leadership.
The CAS Board of Directors wants to reaffirm to all parties that the opinions expressed in these articles do not reflect an official policy of the CAS. Also, although there is a written disclaimer in the Actuarial Review that "The Casualty Actuarial Society is not responsible for statements or opinions expressed in the Actuarial Review" we are aware that some readers have, regrettably, mistakenly assumed that an editorial in an official CAS publication is a reflection of CAS policy.
The CAS Board of Directors also affirms its strategic plan, adopted by the board in September 1996, which (a) characterized the CAS as an independent organization of professionals with a distinct identity, yet (b) recognized that joint activities with the Society of Actuaries will often be beneficial to casualty actuaries, the CAS, and the entire profession. That plan further states "the challenge of the future (in particular, expanding the scope of casualty work) may be 'furthered' by some cooperative endeavors with the SOA."
The CAS Board continues to believe that "...the CAS should become or remain involved in joint activities or co-operative efforts, including exams with other organizations..." so long as the guiding principles set forth in the strategic plan are met. The CAS Board wishes to continue to foster a cooperative relationship between the CAS and the SOA and encourages the CAS leadership to continue to work together for the good of the profession as well as the CAS and the SOA.
For the CAS Board of Directors,
Robert A. Anker, FCAS, MAAA
President, Casualty Actuarial Society
(The following letter was sent to Bob Anker on September 12, 1997.)
Both personally and on behalf of the Board of Governors of the SOA, please accept our sincere thanks for you and Mavis Walters participating in the most recent SOA Board meeting. We are also very appreciative of the memo the CAS Board sent us regarding "Actuarial Review Articles¾ May 1997."
In spite of the best of intentions on the part of all parties, revising the E&E syllabus, the Foundations/AERF and the NAAJ have been contentious issues this year. The unfortunate editorial in the May issue of the Actuarial Review, which was buttressed by four other articles, caused serious concerns about the relationship between our organizations. We are very much encouraged, however, by the CAS Board memo and the broad range of responses in the August issue of Actuarial Review. There are undoubtedly many different opinions held by the individual members of our organizations; we must both be careful not to take such an opinion as official policy or even intention.
Because of recent questions and comments, the SOA Board wants to affirm that it has the utmost respect for the CAS and its members. Further, the SOA Board understands that the CAS is "an independent organization of professionals with a distinct identity" and has no plans to challenge the organizational sovereignty of the CAS. The SOA Board heartily concurs with and has the same sentiments as expressed in the CAS Board state-ment:
"The CAS board wishes to continue to foster a cooperative relationship between the CAS and the SOA and encourages the CAS leadership to continue to work together for the good of the profession as well as the CAS and the SOA."
We hope there will be many opportunities for cooperation between the CAS and the SOA, and that these efforts will further the actuarial profession.
David M. Holland, FSA
President, Society of Actuaries
Readers Argue Issues
In their letters following Stan Khury's editorial on catching wild hogs, Irene Bass referred to the International Forum of Actuarial Associations (IFAA) and its impact on future actuarial education and Charles McClenahan referred to the permanence of the wall between the CAS and SOA. Perhaps, as the founding Chairman of the IFAA, I might make several observations.
Irene stated, "Now, however, it seems that basic education is part of the agenda of the IFAA and, since the U.S. stands alone among nations as having a separate actuarial organization for each basic area, the SOA may be more interested in unification." A commitment to develop a minimum standard of education for all actuaries who qualified in all IFAA member associations after 2005 was deemed so desirable that it was adopted at the founding meeting of the IFAA; it was not an afterthought. The reason for moving in this direction so rapidly is that free trade in professional services is almost a certain result of the next round of negotiations under the General Agreement on Trade and Services (GATS). This means that actuaries in one country are highly likely to be able to practice in another country with minimal (or no) additional country specific qualifications.
But who is an "actuary" and what education does an actuary possess? If the international actuarial profession cannot succeed in establishing inter-nationally agreed educational standards before the GATS is changed, the possibility is open that "actuaries" will be accredited in some jurisdiction with lax (or no real) standards and attempt to achieve international recognition. The founding members of the IFAA recognized from the start that the public interest would best be served by ensuring that those who were recognized as "actuaries" under such a regime should belong to organizations with solid educational credentials.
The use, by Irene, of the phrase "the U.S. stands alone among nations" was very disappointing to me. I had always thought that both the SOA and CAS were international providers of actuarial education and that their non-American members were important to both organizations. Internationally, there is little interest in producing future actuaries with a narrow, limited, professional education. That means that detailed education in all of life contingencies, nonlife contingencies, asset/liability matching techniques and the actuarial thought process itself (which forms the basis of the educational system of the Institute of Actuaries of Australia under the name of "the actuarial control cycle") will increasingly be regarded as prerequisites to be recognized as an "actuary" internationally.
If the CAS wishes to educate its future members in depth but narrowly to serve the immediately foreseeable casualty actuarial needs of the U.S. when the rest of the world's actuarial educational organizations are moving rapidly in the opposite direction, that is its prerogative. But it is not a choice that I would recommend to an actuarial educational organization that wants to be vital by the middle of the next century.
I found it extremely disconcerting to read Charles McClenahan's proud description of the division between the SOA and the CAS not as a "fence" but as a "solid wall which has been erected brick by brick over the past 83 years...held together by the mortar of education, experience, and dedication to casualty actuarial science." Would it be too provocative to note that the Berlin Wall, which lasted two generations, was built by people dedicated to Communism but that it could not stand up either to the new technologies which beamed electronic messages over the wall or to the innovation fostered as new ideas proliferated in the "free world"? Actuaries in the new world of international free trade cannot limit their intellectual base and expect to survive.
W. Paul McCrossan, FSA, FCIA, MAAA
Just as Mr. McCrossan is disappointed by my comments, I am disappointed by his, but I am not surprised by them. He chose not to read my words as they were written, and, in-stead interpreted them to have a nationalistic spin, as he is wont to do. I said that the U.S. stands alone in having separate educational organizations for each basic area; and I continue to say that. I understand fully, being an FCIA myself, that Canada is also served by two separate educational organizations for each basic area; but in addition to these two organizations, the Canadian Institute of Actuaries exerts educational control over its actuaries in a manner that unites the two sides of the profession in a way that the American Academy of Actuaries does not unite the actuaries in the U.S. (Please, let me not get letters now from the Academy. I don't mean to imply the Academy is not doing a fine job-it's doing a different job from the Institute, that's all.)
Mr. McCrossan then suggests, in a left-handed sort of way, that I may be interested in producing future actuaries with narrow and limited professional training, and he suggests, very plainly, that the CAS wishes to educate its members narrowly. Nothing could be further from the truth. On the opposite end of the spectrum, however, I believe there is little value in producing actuaries who have a superficial knowledge of many areas with little depth of understanding. The business world of today and of tomorrow is one that requires specialization-not in its narrow limited sense, but in the sense of focused application with understanding of wide-ranging implications. Mr. McCrossan's suggestion that actuaries can have a detailed understanding of all areas reminds me of the car repair shop in my neighborhood that proudly displays a sign, "We Specialize in All Makes of Autos." I still prefer to take my Volvo to the Volvo dealer.
Irene K. Bass, FCAS, FCIA, MAAA
While I am afraid the fences/walls comparison may be wearing a bit thin on your readers (I know it is on this one!), I would point out to Mr. McCrossan that unlike most walls, the Berlin Wall was designed to keep people in. The Great Wall of China, which has endured a bit more than two generations, was designed to keep invaders out. I will leave it to the readers to decide which is the better analog.
Charles L. McClenahan, FCAS, ASA, MAAA
More Responses to the August Issue
Sitting in a plane on a Newark runway for hours waiting to take off to Chicago allowed me to carefully read all of the letters on CAS independence and CAS/SOA relations in the August AR. It is clear there is much emotion on both sides of the "fence," as Messrs. Khury and Holland put it, or "brick wall," as Mr. McClenahan prefers to interpret it.
Some thoughts from a traveler.
I infer from Mr. Holland's letter that the SOA would like to eventually take the CAS under its wing as a practice area. He claims that the pressure to do so arises from the world outside the U.S. I, for one, have been a CAS member for over 20 years and have not felt any international pressure to become an SOA member.
I do not wish to be under Mr. Holland's or the SOA's wings. I believe the CAS can fly quite well by itself.
The CAS Board of Directors has declared its independence and its desire to conduct joint activities with other actuarial organizations. Perhaps a declaration by the SOA Board that it too agrees with CAS independence and endorses joint activities would put the current controversy to rest.
Growth can be a challenge. The larger the CAS becomes, the more its members may need to create subsets, like the regional actuarial associations, or perhaps groups concentrating on one line of business, like workers compensation, or one area of focus, like regulatory actuaries. Larger size naturally leads to a dilution of interest. It becomes difficult for an association's leadership to pay attention to individual member needs. A CAS/SOA combination would only exacerbate this problem.
Charles Gruber, FCAS, MAAA, FCA
I got a call yesterday from a recruiter with a lovely British accent. Their search firm, in the UK, is beating the bushes looking for actuaries with CAS credentials to relocate to positions in the UK.
This made me realize-again- that our specialization is our strength and the remarks that we're confusing our publics with multiple actuarial organizations is a lot of babble. We need to remember that.
Regina M. Berens, FCAS, MAAA
(Following is a letter that was recently sent to the CAS Board.)
We are at a crossroads not just in our relationship with the SOA but with respect to our future as well. One path, the path we have been on until now, the path charted for us by our forebears, can lead us to continued success and prosperity as a professional organization. The other path potentially can lead us to professional irrelevance and possibly oblivion.
Here is what I believe. I believe in a united (not unified necessarily but united) profession under the umbrella of the American Academy of Actuaries. And, I believe in an independent CAS. These are not mutually exclusive goals. To the contrary, they are mutually supportive goals. I believe the independence of the CAS can best be maintained by supporting the endeavors of the rest of the profession, by having the rest of the profession support the endeavors of the CAS, and by being perceived as a strong, equal partner in endeavors that are common to all actuaries and affect the entire profession.
There are many actuarial endeavors with common elements, but first and foremost among them is the education and examination process. I therefore believe it is essential to jointly test as many common topics as possible. This has not been achieved, and I regard this as a failure more on our part than on the part of the SOA. Consequently, we can depend on the academic community to continue channeling its students to the SOA and away from the CAS just as it has always done in the past. Another opportunity for common endeavor was the NAAJ. The decision to not participate was, I believe, a grave tactical error. I believe it is quite possible that the NAAJ will come to be seen as the voice of the actuarial profession. If so, the CAS will not be heard and our work will remain obscure.
I have been associated with the actuarial profession for well over 30 years. My first boss was Tom Murrin, who was the first CAS member to serve as an Academy president. My second boss was Dick Johe, a CAS president, and Academy vice president and a member of the initial Admissions Committee. Through my early association with these individuals and my direct association with the Academy in several different capacities, I have been able to observe at close hand the changing relationship of the CAS and SOA over the years. In these early days it is safe to say that the attitude of the SOA toward the CAS was dismissive at best. Like most of you, I have been irritated by their denigration of our syllabus and their failure to understand the breadth of the casualty field. But because of the work of leaders like Tom Murrin and Dick Johe and their successors-Dan McNamara, Stan Hughey, Jim MacGinnitie, Mavis Walters, and Dave Hartman to name a few-the attitude of the SOA members we came in contact with at the Academy slowly and inexorably changed to respect and even (perhaps grudgingly given) admiration. And it was not just at the presidential level that this transformation occurred. CAS members showed their mettle and proved their worth on every committee and task force where they participated.
I have followed the events of this past summer with an increasing sense of dismay. It is as if all the slow, hard work of those who preceded us has been blotted out by a dark shadow and the foundation of mutual trust and respect so necessary in professional relationships has been swept away at a single stroke. I refer primarily, of course, to the May issue of the Actuarial Review and its inflammatory lead editorial. The firestorm of protest from all segments of the profession, though startling in its intensity, is in retrospect hardly surprising.
Where can we possibly go from here? Obviously the damage that has been done must somehow be repaired. I have two suggestions. The first is that we throw off the cloak of destructive paranoia that is clouding our thinking. To believe that the SOA is out to get us and to seek refuge in a form of "independence" that isolates us from the rest of the actuarial community is a profound strategic error. The isolation of the CAS and balkanization of the greater actuarial community are not in anyone's best interest.
The second suggestion is that we really communicate with each other. Communication is not dialogue. We have had more than enough dialogue over the years but precious little communication. To communicate effectively each side must make a special effort to understand the needs, ambitions, and apprehensions of the other. This is a prescription for the SOA as well as the CAS.
We need to realize that the SOA is not the enemy. Our common threat is from economists, accountants, financial analysts, and self-important MBAs with spreadsheet programs to calculate average annual compound growth rates and tell them what the internal rate of return is. We need to make common cause against this very real threat. The strength of the profession and the future of the CAS lies in unity, not discord.
Richard H. Snader, FCAS, ASA, MAAA
At Issue with NCCI (Round 3)
Since my last letter to the AR (May '97), the NCCI has informed me that we may license a copy of an individual state rate filing for $600 if I use the filing only for academic and educational purposes, and "not for the specific benefit or on behalf of current and future clients." In contrast, last fall the price of $957,557 was quoted for four rate filings for full use in my business activities. Unfortunately, this reduction in price is meaningless because I undoubtedly will want to use the rate filing to service our clients' actuarial needs. Any price in between would require me to specify my use in advance, i.e., Custom Pricing, but NCCI will not divulge its methodology for non-affiliate pricing. The cost differences between non-affiliate and affiliate pricing is staggering. If all my clients were NCCI affiliates, then I would not have to pay anything for the rate filing. This is economic inequity.
As explained by William Hager of NCCI in his letter to the AR (August, Ô97), NCCI has taken the position that the rate filing is intellectual property that belongs to NCCI and that they can sell at any price they choose. My position is that the rate filings, once they have been filed with the state regulatory agencies, are within the public domain and should be available to anyone for a nominal charge. NCCI is circumventing this availability by persuading insurance departments such as Louisiana and South Carolina to release its rate filings without actuarial backup.
The NCCI copyright claims of the rate filings are spurious and the courts in Florida and Kansas have decided as much. This is because the ratemaking procedures have been developed within the actuarial community over the last forty years and have been published in public journals. Contrary to Mr. Hager's assertions, copyright claims are not based on the amount of investment or effort expended, but require a uniqueness not found elsewhere. Further, since the data in a rate filing is aggregated and not identifiable to any specific company, no competitive advantage or disadvantage is obtained for any company (in contrast to the current rulings concerning zip code data). I believe that public examination of the rate filing is the quid pro quo for the anti-trust exemptions contained in the McCarran-Ferguson Act.
Mr. Hager claims that my firm is a competitor of NCCI, a statement that I fail to understand unless the NCCI is in the actuarial consulting business. If NCCI is acting as an actuarial consultant to individual insurance companies then that is a clear conflict of interest with their role as a ratemaking organization, and insurance regulators should be conscious of that. I have requested NCCI to explain how other consultants and non-affiliate users are getting rate filing data as it is inconceivable to me they would pay approximately $250,000 per rate filing. No response.
NCCI clearly has its own agenda in the current debate, over and above its dubious claims to ownership of the rate filings and other workers compensation insurance data. Because of a gap in sanctioned regulations, NCCI has seized an opportunity to commercialize its service and through exorbitant pricing financially penalize non-affiliate customers for not being a member.
I advocate the licensing of alternative and competitive statistical and ratemaking organizations in each state in which NCCI is a de facto monopoly. The state of Florida recognized the inherent threat to a competitive insurance market and fair pricing from a single loosely regulated statistical/ratemaking organization in workers compensation by recently licensing three statistical agencies.
I will continue to work with the NAIC, state regulators, and insurance organizations to bring about needed regulation of statistical agencies and promote the availability of insurance data to everyone.
William W. Peacock, ACAS, MAAA
U.S. Versus Canada (Round 2)
I am a Fellow of the Casualty Actuarial Society (CAS) and the Canadian Institute of Actuaries (CIA) and I understand the points that Mr. Ramanujam raised in the August 1997 AR, regarding FCAS and FCIA designations. The loopholes he referred to are important and should not be ignored. I disagree though with his preferred alternative as it would create problems similar to those faced by actuaries that have designation in other countries, like England and Australia. It could lead to a complete break between the CAS and the CIA, which would be to the detriment of both in my opinion. It would also be unfortunate for Canadian Actuaries to lose the FCAS designation that is recognized worldwide. Finally, he would have the problem of actuaries from foreign countries who would become CAS Fellows and be allowed to sign financial statements in the U.S. without any relevant U.S. experience.
The CIA has been working very closely with the Office of the Superintendent of Financial Institutions (OSFI) in Canada to set forward requirements for actuaries signing financial statements in Canada. Following this, the CIA has expanded on the Canadian contents of CAS exams and is requiring that in order to be able to sign financial statements in Canada, you need to be an FCIA, which is attained by having the FCAS designation, passing the exams with Canadian contents and having 3 years of related experience in Canada. These requirements are very similar to those of the American Academy of Actuaries (AAA). In fact, the CIA role as a governing body for actuaries in Canada is very similar to that of the AAA, at least in theory.
I would suggest the AAA would have requirements that are similar for its members to those of the CIA. Then, for an actuary to be able to sign financial statements for American companies, they would have to be a member of the AAA. This is similar to what Mr. Ramanujam proposed as his second alternative.
His third alternative is similar to what we had in the past where an FCAS could only do the Canadian section of Part 8 to received their FCIA designation (if they had 3 years of Canadian experience). I think the biggest problem with this alternative is that it is very difficult to create common sections for exams when you are dealing with accounting rules, regulations and laws in different countries. That is why the CAS is proposing to separate part 7 and part 8 into U.S. and Canadian contents.
Finally, I totally agree with his fourth alternative, but I would modify it to make reference to the MAAA designation instead of the FCAS designation. Fellows in either country that have accumulated enough experience in the other country should be allowed to sign financial statements there. This would also open the door for actuaries from foreign countries that are Fellows of their respective societies.
I am willing to discuss the subject further with anyone who would be interested. I am also available to present my views in any CAS forum or committee.
Louis Gariépy, FCAS, FCIA
On Threats to CAS Dear Editor:
While much of the attention of our membership is directed to the contest between the CAS and the SOA, I am much more concerned about a different threat to our continued existence -the suicidal rate war in commercial liability and workers compensation insurance. The current phase of the underwriting cycle features pricing approximately as soft as in the last cycle for commercial liability and extends that level of underpricing to workers compensation as well. The addition of workers compensation to the rate war seems to be linked to the passing of the minimum rate laws in a number of jurisdictions, and this deprives a number of commercial casualty insurers of the opportunity to mitigate commercial liability losses with workers compensation profits. Casualty actuaries who look for employment after the current soft market has motivated numerous commercial casualty insurers to quit the business may use the hindsight method to determine that the biggest culprits in the decline of the CAS were not those pesky SOA guys, but ourselves, for failing to convince operating management that price adequacy, not premium volume, is the prerequisite for profitable underwriting. I accept that the underwriting cycle is the predictable pattern of our business, but CAS members should be able to help their companies minimize the damage caused by the cycle. If this letter stimulates even a fraction of the debate contained in these pages in recent issues on the CAS/SOA tiff, then we may see some progress towards identifying a solution to what I believe is our most serious problem.
Some observers may reason that the excessive level of capital in the insurance industry is both our safety device (allowing the well-capitalized insurers to survive the price war for a longer time than would otherwise be possible) and the reason that the overcapitalized insurers are trying to buy business. If this is true, then a number of well-run smaller, specialty insurers will be "burned" out of their niche markets, by the all-lines, all-states insurers, and the actuaries serving these insurers will be victims just as much as the actuaries who were reorganized out of positions at the recently acquired old-line giants that used to employ so many of our peers.
In quite a few insurers the actuary may already be telling management that prices are inadequate, but the continued underpricing of commercial liability business shows that the actuary has failed to persuade the underwriter to reject underpriced risks.
Given that the authority of the actuary in pricing commercial casualty coverages is shared with the underwriter, and is far less than the authority enjoyed by the pricing actuary in personal lines, it is natural to ask whether the pricing actuary in a commercial liability insurer can reasonably seek help from the reserving actuary to moderate the underpricing of the liability and compensation lines. In particular the reserving actuary may be able to demonstrate the unprofitability of current business as part of expressing an opinion on the current accident year's results.
An excuse offered in a number of companies is that the reserve actuary is often unable to measure current price adequacy in order to update the a priori loss ratios for the Bornhuetter-Ferguson method until it becomes obvious that the expected loss ratios were too low. Rather than accept this excuse, we should at least insist on a "best practice" in which the reserving actuary incorporates the latest price level changes into the estimated a priori ELR's for the most recent years, so that we are at least shortening the time lags between the time when the business is underpriced and the time when the unprofitable results force management to take corrective action. To the extent that "cash flow underwriting" requires both a time lag for generating investment returns, and also a time lag for excessive optimism about underwriting results, whatever we can do to shorten the time lags for reporting reasonably accurate loss estimates may restore a modicum of pricing discipline to our employers and clients.
The SEC (for publicly traded insurers) and the NAIC (for most domestic casualty insurers) together have given the reserving actuary a prominent voice in financial reporting. Only the NAIC requires the actuary's opinion on reserves, but the SEC-mandated loss reserve disclosure exposes the reserve development history for the shareholders to see. If the actuary has the expertise to get the reserves right for the most recent year, and the courage to report the numbers without flinching, the shareholders will learn that their company's management has been giving surplus to the policyholders through the mechanism of underpricing, and the threat of share price declines (or of shareholder revolt) may prompt management to halt the giveaway program. If the actuary fails to get the reserve opinion right, the chances of moderating the underwriting cycle are diminished, and all of us will suffer from the inevitable decline in the number of viable casualty insurers, with the subsequent decline in the prestige of a profession which failed to develop a plan to save our employers and clients.
James A. Hall, III, FCAS, MAAA