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					VOLUME 15, No. 1                                                                                                               JANUARY, 1981

1979 AGENTTERMINATIONTABLES                   IN PRAISEOF COMMUTATION                         PROPOSAL FOR A NEW
        by Joseph R. Brzezinski               FUNCTIONS                                       CONSUMER INDEX
                                                                   Let me be your servant:     by Barnet N. Berin and Lloyd S. Kaye
LIMRA has just conducted an informal          Though I look old, yet I am strong and lusty.
                                                                    As You Like It, II, III
study of agent terminations, collecting                                                       Ed. Note: These are excerpts from a
                                               Ed. Note: In FIASCO, our London sis-           complete article in THE MERCER BUL-
information (for all causes combined)
                                              ter-journal, we read that Mr. Gary Cham-        LETIN, Nov. 1980. You may request
(a) by both contract and calendar years
                                               berlin, an Institute member, had written       the lull text from Mr. Berin at his Year
for full-time career agents hired during
                                               a paper, The Proficient Instrument,            Book address.
the past 15 years, and (b) by calendal
                                               showing "how the Pension Funds actu-
years in attained age groupings for                                                           W e ' r e D o i n q It W r o n q l y
                                               ary can add a new dimension to his
agents hired more than 15 years ago.                                                              We "overmeasure." Changes in the
                                               choice of actuarial bases." Mr. Chamber-
The 74 contributing companies were                                                            Consumer Price Index and other eco-
                                               lin kindly sent us a copy o/ his paper,
sent summary results during 1980.                                                             nomic indicators influence business and
                                               which was/irst presented to the Institute
   Since then, effort has been devoted to     of Actuaries Students' Society on Novem-        investment policies and have a psycho-
smoothing the observed results and cre-        ber 18th, 1980. We undertake no more           logical effect on the marketplace as well
ating agent service tables by contract         than to introduce its theme here, and          as on consumer confidence. These sta-
year. This smoothing was done graphi-          wdl gladly send the text to the first          tistics are converted into equivalent an-
cally. The early termination rates are         reader who expresses enthusiasm/or re-         nual rates of return, assuming 12 suc-
accurately reproduced, but rates for later     viewing it more thoroughly.                    cessive months of the same experience
contract years had to be smoothed more                                                        aud interpretative articles are written.
heavily, primarily to remove apparently          The paper's full title is: THE PRO-          Such commentary leads ¢o news confer-
aberrant heaping of terminations in the       FICIENT INSTRUMENT: A New Ap-                   ences, further interpretation, and the in-
 11th to 14th )'ears attributed to industry   praisal of the Commutation Function in          troduotion of counter statistics indicat-
compensation and management practices.        the Context of Pension Fund Work. The           ing that the unfavorable trend may have
                                              commutation function, says its author,          been reversed. Quietly, months later, the
   Distributions of agents by age at hhe
                                              is part of the actuary's basic equipment,       statistics may be revised to correct an
 were supplemented by the following as-
                                              guiding and assisting him in many of            error (or) an abberr~rfion that, if known
 sumptions:
                                              his calculations. As a whole, these func-       earlier, would have led to different con-
  • 1965-1970 Basic U.ltimate Mortality       tions form a powerful ~lgebraic system           c|usions.
  • 6-month Disability, 1971 Modifica-        for producing approximations to inte-
                                                                                                  (And) we measure the wrong statistics
         tion to 1964 Commissioners           grals. The computer has led many actu-
                                                                                               as a rate of infla~:ion and stubbornly per-
         Disability Table                     aries to disclaim the conunutation func-
                                                                                               sist in doing so. The CPI concept of
   • Various assumptions about agent          tions which have served 6 e m so long
                                                                                               ,tracking a defined list of goods (with
         retirement.                          and so well. But 'both the commutation
                                                                                               housing handled in an unusual fashion)
   Five multiple-decrement service tables,    function and the computer are mathe-
                                                                                               made sense during World War I when
 being called the Brzezinski 1979 Agent       matic,al instruments and can be made to
                                                                                               checkbooks were less prevalent and
 Termination Tables were produced. One        work together well, performing their
                                                                                               credit cards non-existent.
 of these was for agents of multiple-line      separate and complementary functions.
                                                                                               W h a t W e S h o u l d Start D o i n g
 companies, one for combination compa-           The author's way of highlighting the
                                                                                                 To de-emphasize this concentration
 nies, the other three show the expe-          commutation function's continuing use-
                                                                                               on a single month, we should introduce
 rience of companies not in those special      fulness is to focus attention on the "N-
                                                                                               12-mon~ moving averages, (making)
 categories, divided into three perform-       Year Discontinuance Valuation." Says
                                                                                               the latest month's experience a beacon
 ance segments. Each of these segments         he,
                                                                                               only if supported by the trend of several
 reflects the experience of, as closely as           "In such a valuation, by contrast
                                                  to the more usual Aggregate me-              preceding months.
 possible, the same number of entrant
 agents.                                          thod, it is assumed that the fund               Now it is possible, indeed necessary,
                                                  will be voluntarily wound up after           to develop an exact CPI for an individ-
    Information useful to actuaries for
                                                  the passage of the given period of           ual or a group. With a carefully chosen.
 creating their own tables for valuing
             (Continued on page 8)                        (Cor~tinued on page 7)                             (Continued on page 7)
Pace Two                n                         n                   THEACT74RY                                P   \
                                                                                                                                                         Ianuarv.   ,7
                                                                                                                                                                         I.981


                                                                                                                                        LETTERS




        Editor   . . . . . .
        Associate Editon,
                            11
                          . .
                              he

                                  E. J.
                                          /
                                          MOORHEAD
                                  MICEAEL B. xM~G~~~~~~
                                  FREDERIC SELTZER
                                                                 Correspondence should be addressed:
                                                                      The Actuary
                                                                      Bermuda Run, Box 780
                                                                                                                        Case For Taking Futurists
                                                                                                                        Sir :
                                                                                                                        In contrast to our centuries-old profes-
                                                                                                                        sion, futurism as presently practiced has
                                                                                                                        been around for but a quarter-century.
                                                                                                                        Yet its activities and jargon now appear
                                                                                                                                                                 Seriously     -




                                                                      Advance, N.C. ZOO6                                regularly-more          so than even the word
        Competition Editor . .    CHARLES         G. GROESCAELL       Tel:     (919)   998-5335
                                                                                                                        “actuary’‘-in         Sunday newspaper sup-
        Editor Emeritus . . .     ANDREW          C. WEBSTER                                                            plements and popular magazines. And
             Published monthly (except July and August) by the SOCIETY OF ACTUARIES,                                    the U.S. Congress has established a reg-
        208 S. LaSalle St.. Chicago, Illinois, 60604, Robin B. Leckie, President, Kenneth T.
        Clark, Secretay,   Robert J. .Iohwtsen, Treasurer, Robert E. Hanstad, Duector of                                ular forum where its members may hear
        Publications. Non-member subscnptions: students, $4.50; others, $5.50.                                          futurists and discuss with them the need
            The Society is not responsible for statements made or opinions expressed herern.                            for legislation to adjust to or to fore-
        All contributions are subject to editing.                                                                       stall emerging trends.
                                                                                                                            Futurism concerns itself with a whole
                                                                                                                        spectrum of possible (alternative)                 fu-
                                      EDITORIAL                                                                         tures. Its practitioners          ask, and pose
                                                                                                                        answers to, such questions as: What is
                                  SALUTETO BOOK LOVERS                                                                  the future of technology, economics, in-
                                                                                                                        flation,     religion,    civilization,       health,

I N our issue last October we offered to send some mid-19th century volumes of the
    Journal of the Institute of Actuaries tto a responder willing to pay the shipping
cost. These were your Editor’s personal property, and our interest was in finding
                                                                                                                        longevity, even the human race? How
                                                                                                                        will such futures evolve? Which current
                                                                                                                        trends seem to lead in the direction that
a good home for them. We consfess to having feared that nobody would apply.                                             we welcome? Which don’t?
    But there indeed are book Ilovers among our members. From many readers                                                  Futurism wrestles with such questions
w&in and even outside this continent, the requests have rolled in. We now announce                                      in somewhat the same manner as does
&at the winner of the necessary drawing is Samuel Heckler of Don Mills, Ontario,                                        actuarial science - objectively,              dispas-
and we express our sympa&y to all the other applicants.
                                                                                                                        sionately      (usually),    by applying         tech-
       Admittedly we haven’t yet shipped               these books to Mr. Eckler. On the lame excuse                    niques that are familiar to actuaries, and II
,&at the Christmas season is the wrong                  time to send a valuable parcel, we still have                   some that (to our possible detriment)
them, and are browsing through them                     for the last time. Let us start our 1981 edi-
                                                                                                                        aren’t.
torials in light vein by reporting a few                of he pieces that struck our fancy.
                                                                                                                            Much of the futurist’s              perspective
     Who would care ,to know what were the first two questions on the very first                                        would seem not uncomfortable                to most
examination paper for actuarial candidates, on June lOth, 1850? They were these:
                                                                                                                        actuaries. But the futurist may arrive
        1. Show how a decimal        quantity          can be expressed        in the form        of a vulgar           at orderly awareness of this perspective
           fraction.                                                                                                    more quickly than does the typical actu-
        2. Find the fractional   value of the recurring              decimal     .27272727.                             ary. And there are some differences in
                                                                                                                        approach. Futurists look for signs of
       A calculation made in 1682 by one Sir William Petty on the number of the
                                                                                                                        discontinuity       while actuaries prefer a
quick      and the dead at the Resurrection was reported; but this was ‘as a curiosity
 ody,    it being suggested that actuaries might use it “as sauce to a dry discourse.”                                  world of gradualness. Futurists become
 Sir. William’s arithmetic., which took in such elements as ‘the number of “quick” our                                  ‘accustomed to dealing with uncertainty;
 earth can feed, the number who had died up to the time of the calculation      (worked                                 actuaries cling to expected values, and
 out separately for before and since The Flood), and how much room for graves                                           pay little heed to ranges.
 exists in Ireland, caused him ito sum up ,&us: “From all which it is plain how madly                                       Maybe our attitudes and viewpoints
 they were mistaken who did so petulantly vilify what ,the Holy Scriptures have de                                      need to square with those of futurists
 livered.”                                                                                                              as we Gnd ourselves faced with unfore-
       There are some references to statues that forbade life insurance, these mainly                                   seen weaknesses in our traditional              prod-
promulgated       in the 17th century. A French writer of those days said this:                                         ucts, and as pressures from consumerists,
        “Man is beyond price. The life of man is not an object of trade, and it                                         regulators and competitors strain our sys-
        is odious for his death to become matter for mercantile speculation. . . .                                      tems and bring into question the most
        These kinds of wager are of sad augury, and may occasion crimes. Such                                           entrenched practices of our institutions.
        assurances are therefore absolutely void.”                                                                          A few insurance companies have fu-
                                              l    l     l   l   l                                                      turists already. ACLI’s TAP Program,
                                                                                                                        built upon findings of roughly 100 moni-
      On another bookish topic: Several readers have reported being thwarted in
                                                                                                                        tors from the management ranks of our
their efforts to latch onto a copy of Peter G. Moore’s Reason By Numbers, reviewed
in that same October 1980 issue. We believe we have solved this problem-if       you
                                                                                                                        companies, is a futuristic             effort, How /
are one of these you should soon receive your copy. Anybody else interested, please                                     many actuaries keep abreast of that
write to us at our masthead address.                                                                                    Program?
                                                                             E.I.M.                                                  (Continued    on page 4)
January,   1981                                              II’ H       CTUARY


FINANCIAL HAZARDSOF THE CASH                                  AN          OF
                                                    REQUESTING EXPRESSION INTERESTIN FORMING
VALUE LIFE INSURANCEBUSINESS                        A HEALTHINSURANCESECTIONWITHIN THE SOCIETY
Ed. Note: This a a capsule of what may
be called “the Angle/Bladen        theme.”          The twelve undersigned   wish to establish a Health Insurance Section under the
John C. Angle spoke at Hartford in Aprtl            Society’s new arrangement for this form of unit. Any member, whether interested
 1980 (see the Record for that meeting,             in group or individual health insurance, may join To obtain permission to proceed,
pp. 188-193). H is investment colleague,            we must show that there is sufficiently widespread member interest.
Ashby Bladen, addressed our Annual
                                                          We believe that such a Section will be of great benefit to actuaries serving this
Meeting in Montreal last October. Their
                                                    field, as well as to regulators, the industry and the public. The Section’s purpose
observations were about mutual life in-
                                                    would be to enter into and sustain the following activities:
surance in the United States. The speak-
ers’ words are not quoted precisely here,           1. Meetings and Seminars.    Section members would assume responsibility                  for, or
 but we believe the message is faithful to             assist with, planning and conducting sessions on our topics.
the originals.    Our readers’ views are
earnestly solicited.                                2. Education     and Literature.       We would   promote   actuarial   education   and prepare
                                                       literature.
   The ,historically    successful design of
policies with guaranteed cash and loan              3. Research.     We would      define and conduct      actuarial   research.
values implicitly      assumes stability       in
the general price level and in interest             4. Other Activities.  The Section’s broad purpose would be to serve all                 needs of
rates. Can tradi’tional practices and prod-            actuaries in our individual    and group fields, consistent with Society            objectives
ucts be sufficiently modified so we can                and as approved by the Board. We would engage in such additional                     activities
cope with economic instability?             An-        as are agreed will fulfill this purpose, subject to the general rules for            Sections.
swer: Only partially,      not satisfactorily,
and at the cost of exposing ourselves to                  If you have an interest in becoming a member of the Health Insurance Section,
large, ultimately unacceptable, risks.              simply complete the postcard enclosed with this issue of The Actuary and mail it
                                                    ,to the Society Office (DO IT NOW!).      If you have qu&ons,   phone or w&e any
What Is Happening            Around Us
                                                    of the undersigned petitioners. Our addresses and phone numbers are in theYear Book.
    Interest rates have repeatedly soared
far outside the familiar          3% to 65%                Noel J. Abkemeier           Charles Habeck             Charles W. Kraushaar,     Jr.
range, and have precipitated a series of                   E. Paul Barnhart            Ben J. Helphand            Francis T. O’Grady
intensifying   liquidity crises for life com-                                          William L. Hezzelwood      Robert Shapland
                                                           Kiran Desai
panies.
                                                           Alan N. Ferguson            Spencer Koppel             Peter M. Thexton                  0
    After inflation and taxes, companies
are producing substantial real losses for
the savers who own us, and are becom-
ing the most exposed of all financial               the risk of serious economic trouble is            our Commi’ttec on Valuation       and Re-
institutions.                                       rapidly    rising. And at the same time            lated Problems recommended in 1979.
    If government       bailouts   of faltering     state insolvency laws are adding to our                Recognizing the possibility that inter-
private companies, soaring government               risk by subjecting us to liabilities of un-        est rates may again slide into a long-
deficits, and rapid growth of illegal busi-         predictable      size that are beyond our          term decline, steer away from making
nesses, and tax evasions by legitimate              control.                                           long-term reserve interest guarantees of
businesses, all continue, we may end up                                                                $%% or higher.
with hypcrinflation       and the destruction       What We Had Better Do
                                                                                                          Consider introducing,   as stock life
of accumulated wealth, in which case                   We must vociferously    point out the           companies have done, non-guaranteed
 there isn’t much the companies can do              disasters that loom if we don’t have               flexible premiums that would vary in-
that will benefit our customers. But tha,t          financially  responsible elected leaders           versely in some proportion to the return
result is still highly unlikely;       a defla-     determined to end the inflation.                   on long-term government bonds.
tionary crash is far more probable.                    We must understand that we no longer             The Moral Of All This
    The prevailing economic conditions, the         have any reasonable basis for making                    A satisfactory future depends upon re-
 life company tax structure and today’s             any assumptions    whatever  about the              storing stability,     not upon trying       to
 competitive climate are spawning life in-          range within which interest rates will              learn how to cope with instability.
 surance contracts that implicitly     assume       fluctuate.
 that those conditions will continue in-                                                                    Suffering as we are from “institutional
 definitely. By reducing premiums, adopt-             Financing the squeeze by issuing com-             rigidity,”   tinkering with our ailment by
 ing modified reserve systems, introduc-            mercial paper is just about the most                altering only the valuation    interest rate
                                                    dangerous thing a life company can do.              will not enable us to survive in an era
 ing modern mortality tables, raising the
 reserve interest rate, *and lowering our              Have the Society investigate the ex-              of short-term 20% interest rates, 100%
 ratios of surplus to liabilities,     we are       plicite margins needed for the risks we             marginal tax rates, policy loan borrow-
 dangerously reducing our corporate safe-           face, and see &at our provisions       for           ings in excess of cash flow, or an un-
 ty margin. Thus we are becoming pro-               these risks appear in our balance sheets             precedented long-term interest rate.
  gressively less conservative     just when        as designated contingency    reserves, as                                                   E.I.M,.
Page Four                                                       THE       ACTJ+RY                   /-                                January,-   I
                                                                                                                                                      1981


letters                                              Covering     the Canines                               He gave three reasons why it is “to-
          (Continued       from page 2)              Sir:                                                day’s whipping    boy”-incomplete     cov-
                                                     I had a long talk with Daffy, a feline              erage, low loss ratios, scare tactics. In           -
   Can we, today’s actuaries, continuous-                                                                my work I relied on two of these; low
ly renew our vision and attitudes, our               member of my family, about Dog Life
                                                     Insurance     (November   issue).   Daffy           loss ratios are subject to regulatory cor-
knowledge and techniques, to respond                                                                     rection (in theory, at least) under the
effectively to emerging trends and dis-              thought it ridiculous to have monetary
                                                     death benefits for those dependen.t on a            “benefits reasonable in relation to pre-
continuities?    Or are futurists    better                                                              miums” language of most statutes.
equipped to do this? Are they the actu-              dog’s income. Dog’s income? Absurd!
aries of the future?                                 Dogs can’t even provide their own food.                (1) Incomplete Coverage. When ask-
                                                        Daffy, though, looks favorably on cat            ed why I want to ban cancer insurance,
                   A. Anthony Autin, Jr.
                                                     insurance, with a death benefit graded              I find it useful to ask the questioner
               (I      n        l   44
                                                     down with each of a cat’s nine deaths.              why his company doesn’t sell multiple
                                                     But how, she wonders, would the actu-               sclerosis insurance, muscular dystrophy
Acceptances        By The New York Times
                                                     ary construct     appropriate    mortality          insurance etc. This makes my point: can-
Sir:
                                                     tables? And how would the underwriter               cer insurance is a kind of reductio ad
To your hint (September editorial)  that                                                                 absurdum. Most cancer insurance is tied
                                                     determine which lifetime an applicant
Ray M. Peterson’s was not the only let-                                                                  to hospitalization,   and only about one
                                                     cat was experiencing?
ter from a Society member to the Times,                                                                  in fifteen hospital discharges carries a
I respond, “Yes, it isn’t”. That news-                  These theoretical and practical prob-            cancer diagnosis. Mr. Barnhart’s analo-
paper has printed two from me, one on                lems might make the product expensive.              gy to auto insurance covering only red
Social Security, the other “The Actu-                I pointed out to Daffy that many cats
                                                                                                         cars would be sharper if expressed as
arial Implications of the Jumbo Jet.”                 (herself included) cost only about $5.00
                                                                                                         the futility of buying one’s car part-by-
                          Ardian C. Gill             so most people wouldn’t buy insurance.              part from the dealer.
                                                     She left the room muttering about hu-
   Ed. Note: And we saw one recently                 man stupidity      in assigning   financial             (2) Scare Tactics. It is insuficient to
from our own Samuel Tucker.                          values.                                             say that scare tactics are used to sell
                                                                          Charles E. Chittenden          other products. The question is whether
               l       l    *       l
                                                                                                         they appeal unduly to fear of the Big
May His Tribe Increase                                                I    0    *   Q                    C.; indeed, the very description      of the
Sir :                                                Sir:                                                coverage as dread disease insurance sup-
When your October issue arrived, it was                                                                  ports this contention. And a look at the
                                                     The optional feature that provides a sub-
revealed that my copies for June and                                                                     sales literature   is revealing. The ques-          -
                                                     stitute dog as a life insurance benefit
September had failed to reach me. As                                                                     tion of undue appeal to fear is analog-
                                                     has, I believe, exciting possibilities else-
my set of copies of The Actuary is com-                                                                  ous to that of whether insurance pricing
                                                     where. Have any companies yet applied
plete from the first issue (March 1967)                                                                  by class is simply cliscriminating    or un-
                                                     a similar provision     to their surviving-
I would like to receive replacing copies                                                                 fairly discriminatory.
                                                     spouse coverages?
of the missing issues.                                                            Jacob Poleyet              That cancer insurance has shown low
                           John A. Oates                                                                 loss ratios is certainly a reason why it
   Ed. Note: We’d be interested in know-                              I    II   +   .                    has come under fire. Some comments on
ing how many other jaithjul       readers            Sir:                                                this point:
have complete sets.                                  I was born too soon? Years ago I turn-                  (i) Mr. Barnhart argued that prcmi-
                                                     ed down an invitation     to provide actu-          urns may become deficient as loss ratios
                                                     arial services for a proposed Blue Shield-          rise by duration. But isn’t cancer insur-
A Teutonic Mouthful                                  type medical care program for domestic              ance generally     guaranteed     renewable,
                                                     pets, although my competence extends                meaning that premiums can be raised
Sir :
                                                     into the conventional     group insurance           by class? If so, there is a “heads the
If Dr. Eichorn       were alive today, he                                                                company wins, tails the policyholders
                                                     field. But I did suggest that the enter-
might disavow Charles Jacoby’s assump-                                                                   don’t win” quality to this argument.
                                                     prise be named “Dr. Doolittle        Insur-
tion (October issue) that his “second-
                                                     ance.”                                                  (ii) The steep curve of cancer inci-
rate mind of an actuary” comment was
                                                                                 David R. Kass           dence by age suggests need for non-for-
levelled at our professional forebears.
                                                                      *    II   *   *                    feiture values when level premiums are
    Germany is, I believe, the one country                                                               charged.
in the world in which the word actuary
                                                     Con and Pro on Cancer              Insurance            (iii) Use of a realistic interest rate
still retains its original Roman meaning
                                                     Sir :                                                (7%, say) may lower anticipated         loss
of clerk. If memory and spelling-capa-
                                                                                                         ratios figured without      interest by as
city serve me correctly, the German word             As one who was responsible        (in the
                                                                                                         much as ten percentage points.
for one of us is                                     sense of initiating the process) for bans
                                                     on cancer insurance in New Hampshire                    (iv) A major share of the business of
   Lebensversicherungsmatimatekswiss-
                                                     and Massachusetts, I’d like to comment              a leading company in this field is quasi- -
                 enschafftler.
                                                     on Paul Barnhart’s defense of this form             group marketed by employer payroll de-
                                    Ernest R. Vogt   of dread disease coverage (November                 duction techniques. The largest policy-
               l       *    l       l
                                                     issue).                                                        (Continued   on page 5)
             Janliary,     1981                                                             TH             CTUARY


             letters                                                               Chequered       Exam     Career                            SHOULDTAKE A STAND
                                                                                                                                      ACTUARIES
                           (Conhnued             jrom page 4)                      Sir :                                                          by Robert J. Myers
             holder group, according to evidence at                                May I change my entry in the current
                                                                                                                                      Ed. Note: Mr. Myers sent us this artlcle
     0       a MassachuseLts hearing, was employees                                sweepstakes for the actuarial hall of
                                                                                                                                      on November 29th, 1980.
             in their twenties. I estimate the antici-                             fame.
             pated loss ratios for this group at under                                                                                     As explained    in Norman Solomon’s
                                                                                      I hereby withdraw my claim to be the            paper, TSA XV, 167, so-called windfall
             5%, due in large part to very high lapse
                                                                                   only Fellow who has not heretofore sub-            appropriations     are required annually to
             rates.
                                                                                   mitted such a claim. Instead, I claim to           finance dual benefits to which ccl tain
                (v) Mr. Barnhart   can’t be serious                                be the only Fellow who passed Part 4               railroad workers became eligible under
             when he suggests that regulatory bodies                               (or something called Part 4) three times           the Railroad Retirement Act in conse-
             ought to look with favor on 30% to                                    (1938, 1939, 1946), twice “cum laude.”             quence of pre-1975 employment that en-
             40% loss ratios.
                                                                                      For the sake of whatever respect my             titled them to both Railroad Retirement
                                      lames H. Hunt
                                                                                   students in Life Contingencies may have            and Social Security benefits. The I974
4e                                   c       l        0       l
                                                                                   for me, I shall not enter a claim based            Railroad Retirement Act prescribed that
             Srr:                                                                  on the number of times I failed an ex-             these appropriations      be determined by
I’           Three cheers for Mr. Barnhart’s                            plaudits   amination (by whatever number) in that             the Railroad Retirement Board and then
             of Cancer Insurance!                                                  subject.                                           re-valued     at each triennial     actuarial
                                                                                                              Z. 1. Mosesson          valuation     of the Railroad    Retirement
                I suspect that experience will prove                                                                                  Fund.
                                                                                                  * 8 * n
             the premiums, reserves, and loss ratios
                                                                                   Bare Facts                                             The appropriations recommended by
             of many insurers to be seriously under-
                                                                                   Sir:                                               the Board’s Chief Actuary have been as
             stated for at lcast ‘two reasons: (a) fail-
                                                                                                                                      follows:
             ure to recognize increasing cancer inci-                              Perhaps an account in lighter vein of
             dence rates prevalent for several decades,                            events at a couple of employee meetings              Originally   Determined
             and (b) failure to provide for dramatic                               will help to counterbalance   the heavy                    (1974)            $250 million
             cost increases associated with advancing                              discussions of private pension problems              After 13th Valuation
             age.                                                                  and alleged ailments     in your recent                    (1976)             350 million
                 A severely increasing pattern of incur-                           issues.                                              For Fiscal Year 1979 363 million
              red loss ratios is already evident in many                              My partner had the unusual experi-                After 14th Valuation
             companies. Perhaps insurers are placing                               ence of addressing an employee mecting                     (1979)             500 million
     0       great reliance on their contractual right                             about their profit-sharing    plan in which           The first three annual appropriations
             to increase future premiums. Or are pur-                              perhaps three-quarters     of those present        were made in the amount originally       de-
             chasers being given an even better deal                               were nude.                                         termined. But since then the Office of
             than insurers are willing to recognize?                                                                                  Management      and Budget (OMB)        has
                                                                                      This occurred at shift-change time in
                 It is unfortunate that this potentially                           an underground     anthracite  mine. One           stepped in and arbitrarily      reduced the
             valuable product has received such nega-                              shift had surfaced and was ready to en-            revised appropriations       shown above:
             tive publicity. Few A. & H. products re                               ter the showers, while the other shift was         from $350 million      to $250 million;
             quile that so little of the premium dol-                              changing into mining garb. At the close            from $363 million to $313 million;      and
             lar be expended for underwriting         and                          of the customary detailed presentation,            from $500 million to $350 million.
             claims admin&tration.     Economical mar-                             the crowd was asked if there wele any                 This is a serious case of bureaucrats
             keting techniques are also possible and                               questions. There was one: “Can we                  ignoring specific provisions of law, and
             widely utilized. Policy benefits can be                               shower now?”                                       making policy with the tacit consent of,
             readily ascertained and fill a real need.                                                                                or possibly without the knowledge of,
                                                                                      Another memorable case was installing
                    One cannotignore, however, findings                                                                               the Administration     officials to whom
                                                                                    a pension plan for a group of 50 rabbis
             such as those in a recent report by ABT                                                                                  they report.
                                                                                    at an employee meeting held in the
             Associates, Inc. From 45 case histories                               sanctuary of a synagogue. The actuary-                The actuarial profession should take
             they concluded “that cancer insurance                                 employee dialogue       was conducted   in         a strong stand against this by-passing
             will pay at most 29% of the cost of can-                              English, Yiddish and Hebrew with mul-              of actuarial   determinations.  It is just
             cer for the first three years of the dis-                             ,tiple simultaneous translations going on          such actions as this that have caused
             ease,” compared       to 71-92s    coverage                           ,throughout     the room. The Summary              many public employee retirement       sys-
             under    typical    group    comprehensive                            Plan     Description   was subjected    to         tems to become inadequately    funded be-
             plans.                                                                searching analysis by the employees to             cause the advice of the actuary was ig-
1                                                                                  discover hidden meanings, if any.                  nored.
1               If insurers wish to silence their critics
             they will need to broaden coverage sub-                                  I have reason to believe that it
             stantially. Or else-probably     a fruitless                          would be worth your while to solicit
             endeavor--educate     the public to, and                              stories by other pension actuaries inter-           The New York 05ce of The Actuary
             justify, the limited nature of the benefits.                          ested in topping these.                              as a new ‘telephone number. Please
         8
                                                                  Lee A. Zinzow                            Conrad M. Siegel
                                 4       l        l       l
                                                                                   Ed. Note:     Topping    is cordially   invited.
Page Six                  f‘\                                     THE      ACT,+!RY                    n                                  Ianuury,   _   I
                                                                                                                                                             1981


THE PRESIDENTAND PRIVATE                                 (and only those, some would say) who                 These recommendations,   although not
                                                        can “hack it” with the same employer               placing any new restrictions on employ-
PENSION POLICY
                                                        for at least ten years have earned their           ers and empIoyees, would reduce govern-                       ,-,
           by Barbara      J. Eversberg                 pensions by not having exercised their             ment revenues. The incoming President
The first interim report of the President’s             freedom <to:                                       has repeatedly expressed his belief that
 Commission on Pension Policy, released                 l move to a place with a pleasanter                government revenues can be cut back.
 in May 1980, contains several recom-                       climate                                        Even those of us who like these recom-
mendations similar to reforms strongly                                                                     mendations because they might benefit
                                                        . work for a more understanding   boss
 urged upon actuaries three years ago                                                                      us personally have a right to know and
                                                        l be nearer to their parents
  (l&cord, Vol. 3, No. 4, p. 902) by Karen                                                                 a responsibility to find out what price
                                                        l be farther away from their parents               we will pay if they are effected. The
Fcrguson, Director of the Pension Rights
 Center, Washington, D.C.                               l    seek higher compensation or a more            questions we must ask about pension re-
     Similarities     can be seen in views on                   rewarding job experience                   forms are these:
 the issues of (1) Mandatory                Pension         And when persons or families make                  1. What will this “improvement”               cost?
 Coverage, (2) Vesting, and (3) Survi-                  the decision that the breadwinner(s)                2. What else might be had for the same
vor Protection.                                         will change employment, it becomes their                 price?
    One of Ms. Ferguson’s suggestions was               personal responsibility   to weigh person-
for mandatory           employer-sponsored        In-                                                          Even when these questions     are answer-
                                                        al or financial   advantages against the
dividual        Retirement     Accounts;        some                                                       ed, decisions will still be       difficult be-
                                                        loss of non-vested pension benefits.
minimum          amount would be withheld                                                                  cause we may disagree on          which pur-
                                                             (2) Employees who are unmarried,              chases should be made and         whether the
 from an employee’s pay and placed in
                                                        or whose spouses are not dependent,                price is right.                             cl
an IRA. ‘Ihe President’s              Commission
                                                        might prefer some other additional bene-
decided that serious consideration should
                                                         fit rather than increased survivor bene-
be given to establishing a minimum ad-
                                  system, which         fits under their pension plans. Although                         CALLFORPAPERS
vance-funded          pension
                                                        objections to somebody apparently “get-                The 16th Actuarial Research Confer-
might be either a tier of Social Security
                                                        ting something for nothing”       are rare,            ence sponsored by our Committee on
or a universal employee pension system
                                                        undoubtedly     objections would be heard              Research will be held at University of
with a central portability        clearing house.
                                                        if the general public became aware of                  Manitoba,    Winnipeg,     August 27-29,
Ferguson called for at least 5-year vest-
                                                        the costs of some of these proposed pen-                1981. Its main theme will be: “Com-
ing, and the Commission believes that,
                                                        sion reforms and of the ‘alternative uses              puters: The State of the Art and Its
as a general principle, non-vested periods
                                                        to which these monies could be put.                    Implications   for The Actuarial      Pro-
shoud be shortened. Ferguson wanted
vested benefits to be completely non-for-                    (3) To some, the argument that pen-               fcssion.”
feitable when a participant           dies leaving      sions must be mandatory because some                       Emphasis will be on new lines of
a surviving spouse; the Commission rec-                 people cannot or will not otherwise pro-               #thinking and recent developments
ommended that all survivors of employees                vide for their own retirement falls into                (hardware and software) of interest
who die before retirement with a vested                 the same unpalatable     category as pro-               to academics, actuaries in life, casu-
benefit should receive either a survivor                posals for mandatory employer-sponsor-                 alty and consulting fields, computing
benefit under the pension plman or a life               ed safe driving clinics or dental check-               scientists and statisticians. The theme
insurance benefit.                                      ups, or bonuses for employees who stop                 is broad enough to include such topics
    The Commission’s final report is sched-             smoking. Any of these may be labelled                  ‘as numerical analysis and simulation.
uled to ,be released in February 1981. The              “unnecessary interferences with personal                   If you might contribute      a paper,
fate of its recommendations               is mark-      life-styles.”                                           write to the conference coordinator,
edly uncertain since the “President”               in      Other recommendations    in the Com-                 Prof. H. J. Boom, Dept. of Actuarial
the “President’s Commission”             ia not the     mission’s Report, however, appear more                  & Business Mathematics,       University
same as the President who will receive                  in harmony with the oft-cited principles                of Manitoba,    Winnipeg,    Man. R3T
their report. If incoming President Rea-                of individual choice and responsibility.                2N2, Canada. Contributors        will be
gan holds true to his campaign asser-                   These include the recommendation     that:              asked to submit abstracts before July
tions that “the best government               is the        a. Tax treatments of employee and em-               1, 1981.
least government,”         the above-mentioned
                                                                 ployer contributions   to pension
reforms might have rough waves to ride.                          plans, ‘and of earnings thereon
     There are arguments against these re-
forms which segments of the public
                                                                 be the same;                              I                    Deaths                               I
would list under ,headings such as “in-                     b. A tax credit for people with low                 Paul V. Montgomery,  F.S.A. 1913’
dividual       choice,” “individual        responsi-             and moderate incomes, to encour-
                                                                                                                 Edward J. Mullen, A.S.A. 1948
bility, ” “no free lunch,” or “trade-offs.”                      age employee pension contribu-
                                                                 tions and individual   savings for             Elizabeth W. Wilson, A.S.A. 1924
As a sample of such possible counter-
 arguments :                                                     retirement, be considered; and              *Mr. Montgomery was the Society Feln
    (1) Employers enter into deferred com-                  c. Tax treatment of savings earmarked          low of longest service. An appreciatior,
 pensation as a means of retaining work-                          for retirement be the same as that       of his record in our profession will ap-
ers in their employ. Those employees                              of pension contributions.                pear in our next issue.                 q
    January,   1981                                      TH            CTUARY


    Commutation Functions                          med-and      the method of greatest          as indications of expenditures)     could be
               (Confznued   from   page   1)       power and adaptability       may very        extended to a region or the nation.
                                                    well be to combine the subtle dge-          Groups excluded can be assumed to fol-
0      years. . . . By having at his finger
       tips N-year as well as aggregate-
                                                   bra of the commutation
                                                   with the virtuosity
                                                                                  function
                                                                            of calculation
                                                                                                low a similar purchasing       pattern, but
                                                                                                this should be checked periodically.
       type functions, ‘the actuary will add       inherent in the computer. But even
       a further dimension to his possible         in this, one should be ‘aware that              The Point of This Two-Part Plan
       choice of valuation basis. The di-          the algebra must be given first                    In addition to a smoothing          device,
       mension may be thought of as his            place, since it is the instrument of            what is needed is a sampling technique
       ‘horizon’   on those future events                                                         which will result in a vital index of liv-
                                                   control;   while the computer will
       which affect the payment of benefit.        follow in obedience where the alge-            ing costs, rather than a measure of price
       . . . 9,                                                                                   increases. We need to develop an ap-
                                                   bra leads. At all costs, the danger
    The approach itself is described #thus:        is to be avoided whereby the actu-             proach which will reveal, on a 12-month
          “In forwarding    the aim, the pa-       ary may come to depend on a con-               moving average, how people and fami-
       per uses a novel method for the             venient soltware package to such               lies have been spending their money.
       analysis of commutation     functions,      a degree that he effectively hands                 Common sense and personal experi-
       and the construotion    of new ones.        over his conception of and execu-              ence indicate that as prices of certain
       There are several elements to this,         tion of the calculations to a compu-           goods and services rise dramatically,
       for example the use of special ab-          ter programmer        or systems ana-          shifts in expenditures occur almost auto-
       breviated formulae to bring out un-         lyst.” (emphasis added) .                      matically. Less steak, more chicken ; less
      derlying mathematical structure,and          The author develops his ideas through          expensive vacations, etc. The CPI at-
      the introduction    of two new nota-      seven descriptive     chapters and then a        tempts to recognize these shifts by chang-
      mtional forms relating to difference      summing-up.      Even ,a casual reader will,      ing its components. However, Cl’1 mar-
      and ratio. But the most striking fea-     we think, notice that Mr. Chamberlin              ket basket changes occur slowly;            the
      ture is the formal diagrams which         has found personal delight in his vision          current selection of goods and services
      are brought in to show the nature         of what commutation        functions can do        (compiled in 1977 and effective in Janu-
      of the M and R functions,           and   when used imaginatively          to reval the     ary 1978) is based on consumer surveys
      which are of great assistance in the      finer points of pension fund analysis            conducted in 1972-73. Today’s market
      derivation   of many of the N-year        and #to brin.g the actuary closer to being       basket reflects out-of-date buying pat-
      forinulae. Also, there is the step of     monarch of what sheperforms. In answer           terns. The compilation       of the CPI also
      taking normal retirement       benefits                                                    ignores the availability        of discounted
                                                to our question about the applicability
0     as a separaie category, which has         of his approach to pension fund analysis         merch’andise; price data are collected at
      not apparently     been developed in      on #this side of the Atlantic, the author        regular store outlets. What should be
      previous treatments of the subject.       said, “I believe ‘that ‘The Proficient In-       measured are consumers’ real expendi-
      . . .                                     strument’ would be of interest to actu-          tures.
         “These developments in notation        aries in Canada and the United States,               Critics of an approach which moni-
      and exposilion     are intended     in    particularly   in view of the wide variety       tors costs might argue that what is hap-
      large part as a way of loosening          of funding methods which are in use.“0           pening is a reduction         in living stan-
      the hold of the commutation      func-                                                     dards;     a family     that, for example,
      tion theory in its current state. By                                                       changes its eating patterns is not living
                                                Consumer Index                                   as well as previously. The difference fo-
      adopting a new approach, one may                    (Continued   from pnge 1)
      come to see that a great deal more                                                        cuses properly on the problem. By mea-
      is possible with the functions than       national sample, individuals in Lhe study       suring aotual living cost expenditures,
                                                would agree to use &her a check or a             and noting shifts in emphasis attuned to
      may have been supposed. Also, one
      may see that in order to ‘make prog-      oredit card for all purchases in excess         changes in the economy, we get a better
      ress in aotuarial mathematics, it is      of $10. Cancelled checks and credit card         indication of how serious tan issue infla-
      not necessary to discard all that has     slips would furnish verification    of ex-      tion is for any individual        or family.
      gone before, nor indeed desirable.”       penditures which then would be slotted               By approaching      the issue from the
                                                into categories such as food, clothing,         perspective of expenditure          rather than
       The computer’s role in all this is de-   utilities, etc. For either an individual        price, we measure living costs realisti-
    scrimbed thus :                             or a group, ,these monthly ‘totals would        cally. This is particularly     necessary when
          “(The)     computer must be given     produce     an exact consumer       index.      one considers the effect of living cost
       a method by which it is to produce       Month-to-month    ratios would reveal per-      fluctuation on Social Security payments,
       the results. Hence it may come to        centage changes in amount         actually      on collectively    bargained COLA clauses
       be, more frequently than imagined,       spent on basic items and, in aggregate,         and on plan sponsors under pressure to
       that the commutation functions will      changes in monthly living costs. In a           index pensions.
       in a sense reappear within the ma-       stable economy, these ratios would be              This difference in process is vital if
       chine itself as the written program      fairly constant.                                we are to take corrective      action and
       takes effect.                               By utilizing  sampling techniques,     a     avoid conflicts between age and econom-
          “The point is that the mathema-       regular analysis of actual costs (with          ic groups. A retiree index (for example)
      tical series have still to be sum-        cancelled checks and credit card receipts                   (Continued   on page   8)
Pam
  m-
       Eieht
          ”
                          n                     /\                  THE          ACT.FERY   ,                  P                                      lanuarv.   1981


Consumer Index                                           Let’s Get To It
                                                            We have fallen into a habit of mea-                               THIS MONTH’S QUERY FOR
           (Continued     from page 7)
                                                         surement that should ,be discussed, de-                                     ACTUARIES
should reflect an altogether different pat-              bated and corrected. We measure badly
tern of home purchases, transportation                   and yet draw conclusions        from these                       This is the first, in a probably irregu-
costs, tax payments, etc.                                measurements that affect everyone. The                           lar series, of questions that we’ll put
                                                         degree of economic change experienced                            to our readers. All that we seek are
Implications       in Forecasting                        recently, and likely ‘to continue for some                       brief, by no means comprehensive,
    Many     otherwise  thoughtful   studies             time, warrants a new look at how we                              responses. These will be assembled
~outincly project rates of inflation into                measure and how the results are inter-                           into an article, giving credit to those
the future without considering the rami-                 preted and used. The Bureau of Labor                             whose contributions     have been used.
fications. Many governmental       agencies              Statistics should be given the resources
                                                         necessary to develop a new consumer in-                             Query:   The Harvard            Medical
and private institutions projeot inflation
                                                         dex based on what people actually spend                          School Health Letter has come out
rates in excess of 10% for periods of 20
                                                         and not on a “typical”       market basket                       with a piece of advice to its readers
or 30 years or more. But what does this
                                                         of goods and services.                                           entitled, WHO SHOULD             I HAVE
mean? Can our society remain as it is                                                             q                       FOR MY DOCTOR?.              Its test cate-
today if we have double-digit      inflation
                                                                                                                          gories are: Background, Keeping Up,
far into the future? If salaries and ex-
                                                                                                                          Reputation,   Accessibility,       Practice
penses and the price of bread and cloth-                            Council of Professional                               Patterns Relationship      To You, De-
ing move at this rate, what about other                        Associations on Federal Statistics                         meanor - closing with thoughts on
costs? What about the financially       weak
                                                              We alnnouncc with pleasure that our                         parting company from a physician
industries? What about the cost of do-
                                                              own Robert J. Johansen has accepted                         who is judged not to have met mini-
ing business? Whet about lending insti-
                                                              the post of Secretary of the Exccutrve                      mum standards.
tutions? What about the role of govern-
                                                              Committee of COPAFS. The Council
ment? A far better projection technique                                                                                      Please send us, to our masthead ad-
                                                              represents 12 professional       associa-
is to identify a plausible range of possi-                                                                                dress, an idea (or two or three) that
                                                              tions, including the Society of Actu-
bilities, and project not one answer, but                                                                                 you consider suitable for inclusion in
                                                              aries. It was organized to help in-
a range of possible answers. This will,                                                                                   an advisory essay to members of the
                                                              crease the associations’   involvement
of course, require some interpretation                                                                                    public on WHOM SHOULD I HAVE
                                                              and that of their members in federal
but that would be a salutory consequence                                                                                  FOR MY ACTUARY?
                                                              statistical affairs.
of the exercise.

1979 Agent Termination Tables (~onh~ed                    horn page1)
non-vested benefits is available         by writin, u to the author at LJMRA,           Box 208, Hartford,           CT 06141.
      The table herewith summarizes our new tables and compares them with the McConney-Guest Modified, (TASA XLIII, 307))
and Equitable    1949-1960, (TSA XV, 458), tables. Although giving a general picture of the range and patterns of agent termi-
nation experience in the industry today, our values should not be interpreted as “industry averages,” and cannot be applied safely
to any single company without adequate consideration of that company’s own experience.
                                                       ComDarison         of Auent       Termination         Rates
                                                                                                        Brzezmski 1979 Tables
                                                                                 Ord. Cos., not M&.-Line
               Contract        McConney-                                                                                          Multiple      Combination
                 Year          Guest Mod.                                 Best             Middle               vorsr            Line cos.         cos.

                                    -430               .476               .450                  .635            .700                .240             .600
                                    .370               -376               .400                  442             .565                .170             .490
                                    .285               .296               .300                  .315            .385                .105             .360
                                    .225               .237               .210                  .2452           .310                .060             .280
                                    .185               .187               .150                  .190            .250                .040             .225
                   6                .152               .147               .130                  .155               .200             .037             .185
                   7                .130        _      .117               .llO                  .125               .175             .032             .150
                                    .115               .097               .095                  .116               .150             .027             .125
                   ;                .lOO               .088               .087                  .108               .130             .023             .lOO
                  10                .086               .078               .079                  .lOO               .125             .020             .094
                                    .032               .045               .050                  .070               .lOO             .009             .070
                                    .025               .023               .042                  .042               .079             .015             .042
                                    .025”              .Oll”              .045                  .045               .081             .023             .045               --
                                    .037*              .016”              .051                  .051               .110             .032             .051
                                    .085”              .039’              .113                  .113               .313             .092             .113
                                    .183”              .101*              .220                                     .442             .218             .220
                                    * Deaths   only.

				
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