?eAchiacial UpdateVOLUME 15 NUMBER 9

In t

2

his issue

from the President

3Tax Reform Spells DiverseChanges

4 1986-1987 Board ofDirectors

5 Committee Roster

5 Retiring Members of theBoard of Directors

6 IASB Quarterly Report

6 Standards Boxscore

8 Capital Views

8Checklist of AcademyStatements-July 1986

EnclosuresIncluded in this month's issue

of The Update are the following :• Government Relations Watch• In Search Of . . .

AMERICAN ACADEMY OF ACTUARIES

Close-Up on Pres Bassett

Newly-elected President Preston C .Bassett retiredfrom Towers, Perrin,Forster & Crosby in 1977 as vice pres-ident and chief actuary. During histwenty years directing the firm's actu-arial practice , his staff grew from lessthan a dozen qualified actuaries to over100. After retiringfrom TPF&C, he wasa consultant to the firm for two years,during which time he became increas-ingly involved In public service. Heserved for two years as consultant tothe president 's Commissionon PensionPolicy, under the Carter Administra-tion.His contributions to the actuarial

profession have included serving aspresident of both the Society of Actu-aries ( 1984-1985) and the Conferenceof Actuaries in Public Practice (197fi-1977) . His publications include threebooks: Financial Aspects of Private Pen-sion Plans , Financial ExecutivesResearch Foundation , co-author :Interpreting Pension Law Develop-ments , New York Law Journal, co-author; and Benefit Accrual Require-

SEPTEMBER 1986

ments. American Law Institute andAmerican BarAssociation . In addition .he has published articles in the majorjournals of the employee benefits field,as well as such publications as Har-vard Business Review a nd The New YorkTimes.Bassett and his wife, Helen, divide

their time between their residences insuburban Philadelphia and Florida .They have two married children, Kath-erine Morris and Preston C . Bassett, Jr.(Chip), and three grandchildren .Update staff put a few questions to

Bassett recently to give readers anopportunity to get better acquaintedwith the Academy's new president .

The Update: Among the many Academyprogram initiatives underway right now,which one rises to the top of the list, inyour judgment, as the single mostimportant issue now before the profes-sion?

Bassett. I believe the most importantissue before the profession right now

(continued on page 3)

2

American Academvof Actuaries

PresidentPreston C. BassettPresident-ElectJohn A. FibigerVice PresidentsEdward H. FriendCommittees on Public Issues-EmployeeBenefitsBurton D. JayCommittees on Accreditation,Qualification and Communication

W. James MacGinnitieCommittees on Public Issues-InsuranceMavis A. WaltersCommittees on Accounting andFinancial ReportingSecretaryRobert H. DobsonTreasurerDaniel J. McCarthyExecutive DirectorStephen G. KellisonExecutive Office1720 1 Street, N .W. 7th FloorWashington, D.C. 20006(202) 223-8196Membership Administration500 Park BoulevardItasca, Illinois 60143(312) 773-4204

ChairpersonCommittee on PublicationsCarl R, OhmanEditorCharles Barry H . WatsonAssociate EditorWarren P. CooperManaging EditorErich ParkerContribuing EditorGeorge SoulesProduction ManagerM. Kathleen Crawford

American Academy of Actuaries1720 1 Street, N .W. 7th FloorWashington, D.C. 20006Statements of fact and opdnion in this publication,including editorials and letters to the editor, are madeon the responsibility of the authors alone and do notnecessarily imply or represent the position of theAmerican Academy of Actuaries , the editors, „r themembers of the Academy,

Plans and ReflectionsThis, my first editorial as president ofthe Academy, seems an appropriate timeto express a few thoughts relative to thecoming year. I'll state for the record thatI have no revolutionary plans . I intendto lead the Academy along the path thathas been so capably laid out before usand to build on what this organizationhas accomplished to date .

Those of you who have, perhaps, fol-lowed my career know that I was at onetime working toward the reorganizationof the actuarial profession . I started overten years ago to try to bring the variousactuarial organizations into more uni-formity, and we did accomplish some ofour goals, such as moving much of theadministration to Chicago. But by andlarge, we met too many obstacles andtoo much resistance, and I do not planto push this during my tenure as Acad-emy president . That does not mean,however, that I have lost my convictionthat consolidation is in the best interestof our profession .

The various issues facing the Acad-emy in the coming year [ classify intothree categories : (1) dormant issues, (2)programs where steady, active progressshould be continued, (3) issues that needto be addressed immediately. My "reor-ganization of the profession" falls Intothe first category. The second categoryincludes the Interim Actuarial Stan-dards Board, valuation actuary, rela-tions with the National Association ofInsurance Commissioners, the Ameri-can Institute of Certified Public Accoun-tants and other organizations, continu-ing education recognition, loss reserveopinions, and public relations (whichIII come back to), among others . Thethird category includes continuing edu-cation requirements for enrolled actu-aries, the impact of the new tax laws onemployee benefits and other areas ofoperation, and any other new legisla-tion that may come up or any action bythe Administration .Apropos of public relations, during

my presidency I'd like to accomplishmuch more in attaining public recog-

The Actuarial Update

nition of our profession . When I startedmy career as an actuary, the public hardlyknew the word . Today we are bettknown, principally due, in my jument, to our activities in the pensiofield . ERISA made us legal, at least itmade enrolled actuaries legal . Mosteveryone is covered by a pension plan,and virtually everyone is covered by SocialSecurity, both of which involve actuar-ies and have given us public recogni-tion. Even though people probably nowhave a better feel for what an actuarydoes, we still have trouble answering thequestion: "What is an actuary?"My response to that question is

another question : "What is a doctor?Or . . . "What is a lawyer?" I can bestdescribe an actuary first by referring toother better known professions. Whatis a doctor? Doctors cure sick people,but they do much more. Medical doctorsmay be surgeons, they may deliverbabies, do research, they may be hos-pital administrators . Doctors protectpeople's health in many ways . What Isa lawyer? Lawyers keep people out oftrouble, but they do much more . Law-yers may be trial lawyers, tax lawyers,corporation lawyers, or politicans . Law-yers protect people's rights in manywaNow, what is an actuary? Actuaries pvide people with financial security. Bu ,again, they do much more. They mayprovide security against loss of incomedue to unemployment, ill health, dis-ability, retirement, death, or loss ofproperty in case of fire or accidents, orthey may do research or be administra-tors. An actuary protects people againstfinancial loss in many ways .

Perhaps this definition will help youanswer this troubling question when itis met in public . Also it provides theperson who asks the question with alittle better understanding of ourprofession . Of course, if you can retainour audience's attention, you can elab-orate. I encourage all of you to talk aboutourprofession at every opportunity, Themore people who understand us, themore they will know to turn to us to helpthem solve their problems .

This reminds me of the story of thetelephone poles . Would you recognizethat the setting up of funds in advanceto replace old telephones as an actuarialproblem? If you were a sole owner oAWhcompany who contracted with a tphone company to maintain their tophone poles far into the future, you couldcertainly use your actuarial skills .

(continued on page 7)

September 1986

Tax Reform Spellsiverse Changes

by Christine E. Nickerson

On August 16, a House-Senate Confer-ence Committee agreed to broad out-lines of the most comprehensive revi-sion ofthe tax structure since 1954. Theagreement, which reconciles the House-and Senate-passed tax reform bills .would set individual tax rates at 15%and 28%, effective about March 15, 1987,while the top corporate rate would be34%, effective July 1, 1987.

The full House and Senate are expectedto approve the conference agreement,which cannot be amended on the floor,in September. President Reagan hasstated that the agreement satisfies hisrequirements for "meaningful taxreform" and has indicated that heintends to sign the bill when it is passedby Congress .The agreement contains a number of

provisions that would affect insurancecompanies and their policyholders . Forlife insurance companies , the special lifesurance company deduction would bepealed. However, life insurance com-

panies would continue to be eligible forthe small company deduction . Lifeinsurance cash value increases andemployee-provided group life insurancewould remain tax sheltered, as undercurrent law.The conference agreement would

eliminate the deduction for all interestpaid by individuals, including policy loaninterest . (There are two exceptions .Generally, interest on first and secondhome mortgages would continue to bedeductible . And, interest paid on a loanused to buy an investment would bedeductible to the extent there is offset-ting investment income.) The agree-ment would also eliminate businessdeductions for interest on large lifeinsurance policy loans.New nondiscrimination rules would

apply to group term life insurance andaccident and health plans . The agree-ment would provide a uniform defini-tion of employer, highly compensatedemployees, excludible employees, andmpensation to be applied for pur-ses of all employee benefit nondiscri-ination requirements (including Sec-

tion 505). All rules could be applied ona line of business or operating unit basis .

In applying the tests to health plans,employees with other health coverage

CLOSE-UP(continuedfrom page 1)

and for some time into the future is thepublic recognition of the role the actu-ary can play in the social and economicaffairs of this nation . Manypeople todayhave a vague understanding of the workof actuaries, but they really don't knowenough about us to know when theyshould call onus for our help and exper-tise. They just don't recognize the actu-arial Implications of many larger, socialissues. The actuarial profession mustget the public, business leaders, politi-cans, other professions to recognize thetalents and skills of the actuary. It's areal public relations challenge .

A nice ancillary benefit, I hope, wouldbe to make the public more comfortableapproaching an actuary. Sometimessomeone will ask "What do you do?"When I reply that I'm an actuary, theykind of hang back as if they were a littleafraid-respectful, but afraid . I wouldprefer a response like, "Gee, that's great .You know I ran into a problem the otherday that you might have some insighton.

The Update: In what areas do you thinkactuaries should become more active,more involved in their profession?

Bassett: We are fortunate that actuarieshave so many opportunities to becomeinvolved in the shaping of their profes-sion-as many opportunities as thereare special Interests . And, I think, inci-dentally, that actuaries, by and large,are to be applauded for their involve-ment (principally as committee volun-teers) in the myriad issues that concernthis profession .

The Update: Do you think that actuar-ies see themselves as a profession, asopposed to a collection of people withthe same skills involved in similar work?

could be disregarded, and family healthcoverage could be tested separately. Inthe case of group term life insurance .the nondiscrimination rules could bebased on the value of the coverage pro-vided expressed as a percentage of eachindividual's compensation (not to exceed$200,000 per individual). In the case ofdiscriminatory plan, generally only thediscriminatory portion of an employee-provided benefit would be taxed if timelyreported .

No changes would be made In the cur-rent-law exclusions for employer-pro-vided health insurance . Self-employed

3

Bassett: Actuaries see themselves asmembers of a professional body, I amsure. Maybe that's somewhat more thecase in the consulting world, whereactuaries are constantly out there sell-ing their professional services, but thatmay be a personal bias as a result of myconsulting background . There is a strongfeeling that we are, indeed, a profession.The advent of ERISA and our continu-ing work with the National Associationof Insurance Commissioners have addeda lot to the general recognition of ourcalling as a profession .

The Update : Do you think it was a severesetback to the profession in the mid-sixties when there was a failed attemptto gain federal certification?Bassett: I wouldn't characterize it as asevere setback, really. I certainly wishwe had the same legal status that Cana-dian or British actuaries have . Theirlaws give them legal status and author-ity. Since we don't have that, we willcontinue to work with what we do have,which is an increasing number of statelaws recognizing actuarial opinions .

The Update: Now to a more personalquestion. What led you as a young manto actuarial science? Was it an extraor-dinary aptitude in mathematics?

Bassett: I went to high school in Port-land, Oregon during the Depression . Idid win our school's math cup mysenioryear for outstanding math graduate, forwhat that's worth, but I'm sure manyactuaries have started out similarly. Myparents told me at graduation that theycouldn't afford to send me away to col-lege, that if I wanted to further my edu-cation I'd have to attend a local schooland live at home . So I applied to a smallschool called Reed College in Portland,Oregon. They accepted me, which turnedout to be very fortunate, for the chair-

(continued on page 71

taxpayers would be allowed to deductup to 25% of their health insurance pre-miums after December 31, 1986, andbefore January 1, 1990 .

Blue Cross and Blue Shield would loseits tax-exempt status and generally wouldbe taxable as stock property and liabilityinsurance companies .

Under the agreement, a property andliability insurance company would berequired to include in income 20% ofits unearned premium reserve balanceat the close of its last taxable year begin-ning prior to January 1, 1987 . This

(continued on page 6)

4

W. James MaoGinnitieVice President

Allan 0 . Affleck

David P. Flynn

American Academy of Actuaries1986-1987

Preston C . BassettPresident

MavisA. WaltersVice President

Robert A. Anker

Harry D . Garber

Board of Directors

John A . FibigerPresident-Elect

Robert H. DobsonSecretary

Linda L . Belt

Thomas M. Malloy Stewart G . Nagler Leroy B. Parks, Jr.

Edward H . FriendVice President

Daniel J. McCarthyTreasurer

Darrel J . Croot

Myles M . Gray

Jay C . Ripps

Burton D. JayVice President

M . Stanley HugheyPast President

Charles E. Farr

Carilon W. Honebein

Richard H . Snader

The Actuarial Update

Bartley L . MunsonPast President

Wayne H . Fisher

Norman S . Lost

Virgil D . Wagner

September 1986

Committee Roster

5

Academy committees and their chairpersons are set forth below. The full composition of these committees will appear in1987 Yearbook .

PRESIDENTIAL COMMITTEES

Nominating CommitteeM. Stanley Hughey

Committee on DisciplineHarry D. GarberCommittee on PlanningW. H . Odell

Standards Organizing CommitteeJohn H . Harding

Admissions CommitteeJames J. MurphyNote : Reports to Secretary

Budget and Finance CommitteeDaniel J. McCarthyNote: Reports to Treasurer

Audit SubcommitteeNorman S. Losk

Task Force on Continuing EducationRecognitionDaphne D . Bartlett

Interim Actuarial StandardsBoardRonald L . Bornhuetter

Casualty Committee of theIASBCharles A. Bryan

Health Committee of theIASBRonald M. Wolf

Life Committee of the IASBWalter N . Miller

Subcommittee onDividends and Other Non-Guaranteed ElementsWilliam T. Tozer

Pension Committee of theIASBThomas D. Levy

Specialty Committee of theIASBJarvis Farley

COMMITTEES ON ACCREDITATION,QUALIFICATION AND

MMUNICATION

mmittee on Guides to ProfessionalConductJack M. Turnquist

Committee on QualificationsWalter S. Rugland

Committee on Liaison with NAICBurton D. Jay

Public Relations CommitteeBruce F. Vane

Committee on PublicationsCarl R. Ohman

COMMITTEES ON ACCOUNTINGAND FINANCIAL REPORTING

Committee on Life InsuranceFinancial ReportingEdward S . Silins

Committee on Property and LiabilityInsurance Financial ReportingStephen P. Lowe

Committee on Pension AccountingHarper L. Garrett, Jr.

Committee on Relations withAccountantsP. Adger Williams

COMMITTEES ON PUBLIC ISSUES-INSURANCE

Committee on HealthE. Paul Barnhart

Committee on Life InsuranceGary E. Dahlman

Committee on Property and LiabilityIssuesAlbert J . Beer

Committee on Risk ClassificationPatricia L . Scahill

Committee on Continuing CareRetirement CommunitiesAlwyn V. Powell

Task Force on Casualty Loss ReserveOpinionsWarren P. Cooper

COMMITTEES ON PUBLIC ISSUES-EMPLOYEE BENEFITS AND SOCIALINSURANCE

Pension CommitteeLarry D. Zimpleman

Committee on Health and WelfarePlansThomas G. NelsonCommittee on Services to EnrolledActuariesPaul L. EngstromCommittee on Social InsuranceKenneth A. Steiner

Retiring Members of theBoard of Directors

A . Norman Crowder, IIIPast President

Harold J . BrownleeVice President

Elsbeth T. Erbe

Carl R . OhmanVice President

Daniel J. Flaherty

Daphne D . Bartlett

Jerome A. Scheibl

James F. A . Biggs

Benjamin R. Whiteley

6

IASB QuarterlyReportThe third-quarter 1986 meeting of theInterim Actuarial Standards Board(IASBI, which was held in Washington,D.C., focused primarily on the activitiesof four of the IASB's operating commit-tees .Every operating committee of the

standards board was represented by itschairperson, with the exception of theSpecialty Committee, which did notreport to the board at this meeting . Sev-eral other non-IASB members attendedthe meeting as observers or to report toboard members on various issues .

Charles A. Bryan, who chairs theCasualty Committee of the IASB, beganthe series of operating committee reportsby presenting some historical back-ground on the work performed on Inter-pretation 8-B, work that began in 1984 .This committee has revised Interpre-

tation 8-B and has asked the IASB torecommend to the Academy Board ofDirectors that the revision be promul-gated as a standard .

Ronald Wolf, chair of the Health Com-mittee of the IASB, described his com-mittee's preparation of initial drafts ofstandards in the areas of health, claimliabilities, health rate filings, and DEFRAhealth and welfare/safe harbor issues .

Thomas D. Levy, who chairs the Pen-sion Committee of the IASB, presentedthe final draft of their proposed stan-dards, "Actuarial Guidelines for Com-pliance with Statement of FinancialAccounting Standards No . 87 ."The IASBagreed that the committee's work wasready for exposure to Academy mem-bers. They set a date of July 1986 fordistribution.

Walter N. Miller, chair of the Life Com-mittee of the IASB, presented a sum-mary of the Recommendations on Non-Guaranteed Elements . A lengthy dis-

The Actuarial Update

cussion ensued regarding the need foradditional disclosure to regulators,which might be appropriately sgested through model interrogatepromulgated by the National Associa-tion of Insurance Commissioners BlanksTask Force. The subcommittee plans tocome to the final 1986 meeting of theIASB for final approval of the standardand further discussion concerningadditional interrogatories .

In addition to reviewing the work ofits operating committees, as present,the IASB is reviewing a proceduresmanual for the operating committees,studying the present standards-writingformats, and discussing the need for amonograph on the common principlesunderlying the various disciplines withinactuarial practice (in essence, an actu-arial primer). These topics are plannedagenda items for the next meeting of thestandards board, which will be held inBoston on October 10-11, 1986. 0

Standards BoxscoreOutstanding Exposure Drafts September 1986

TitleDate

ReleasedCommentDeadline

Number ofResponses Status

1 . Financial Reporting Interpretation 11/84 1/21/85 5 Casualty Committee of the IASB will

.

8-B Adequacy of Reserves for Fireand Casualty Insurance CompanyStatutory Annual Statements

Recommendations Concerning /86 /1/86 1

be submitting proposed final standardfor adoption by the IASB in October.

Subcommittee on Dividends and

.

Non-Guaranteed Elements in LifeInsurance and Annuity Contracts

Actuarial Standards of Practice /86 /1/86 5

Other Non-Guaranteed Elements isevaluating responses to ExposureDraft .

Specialty Committee of the IASBRelating to Continuing CareRetirement Communities

beginning to evaluate responses toExposure Draft.

4. Actuarial Guidelines for Compli- 7/86 9/10/86 10 Comment period still open . Pensionance with Statement of FinancialAccounting Standards No . 87

Committee of the IASB beginning toevaluate responses to Exposure Draft .

TAX REFORM(continued from page 2)

amount would be included in incomeover a six-year period beginning in 1987 .The agreement would reduce the

deductions for loss reserves by 15% oftax-exempt interest income and thedeductible portion of dividends receivedduring the taxable year. Property andliability loss reserves would be dis-counted. The deduction for unpaid losseswould be limited to the increase in the

amount of discontinued unpaid losses,Companies would have to discount lossreserves at 100% of the applicable fed-eral rate .

The protection against loss (PAL)account for mutual property and liabil-ity companies would be repealed .

The agreement would make manychanges to minimum standards forqualified plans including coverage andparticipation requirements, vestingschedules, contribution and benefit

levels , and timing of distributions .These changes are discussed more fullyin September 's Enrolled ActuariesReport. A

The Update welcomes letters from reders. Letters for publication must Endthe writer's name, address, and telepha_number, and should be clearly marked asLetters to the Editor submissions . Lettersmay be edited for style and space require-ments .

September 1986

FROM THE PRESIDENT(continued from page 2)

~ feel that there are many unrecog-~fZed areas where the actuarial talentscan be used . I cannot understand whythere are not more actuaries workingfor the government-at the Office ofManagement and Budget, for example .It seems to me that this is an importantarea where actuarial talent should beused. I truly believe our skills would bemore widely used if others knew whatthese skills are. How can we best informthe public of this? I ask for your sug-gestions. This problem also heads thelist of projects of our . Committee onPlanning and our Public Relations Com-mittee .

In general, I believe that actuaries canprovide a logical approach to financialproblems involving future uncertain-ties. As a case in point, some actuariesare giving advice on investing in com-mon stocks . An immediate problem thatis now recognized as actuarial Is thefinancing of continuing care retirementcommunities. I'm delighted that we arenow active and recognized in thisimportant field .

Fortunately, we enjoy an excellent rep-tion. We have had very few profes-nal problems . All of us recognize the

need to keep this good record . Some ofthe other and better known professionshave not done so well . Thus, there is noembarrassment in speaking about ourprofession with praise .Perhaps we need a slogan : "If you're

going to take on an uncertain futurefinancial obligation, call your friendlyactuary first." A

CLOSE-UP(continued from page 3)

man of their math department was Dr.F. L . Griffin. I suppose if anyone in mylife has functioned as a mentor, it is he .I'm sure many of your readers will rec-ognize the name of Frank Griffin Jr ., hisson and an eminent actuary, who retireda few years ago and was with The WyattCompany for a number of years .

The Update : Now at that point did youknow that actuarial science even existed?

sett: Had no idea . In the course ofsing to Dr. Griffin, one day I said that

as far as I knew about the only thingmathematicians could do is teach . Therewas no computer business then as thereis today. He replied: "Did you ever hear

of an actuary? My son is working atPrudential."

The Update : Now was this conversationborn out of an interest of yours in com-bining business and pure math?

Bassett: Oh no, this conversation wasborn out of my interest in getting a job .It was as simple as that. Remember, thesewere the Depression days . As a matterof fact, it wasn't very long after that whenreading a magazine article about jobsavailable during the Depression that Isaw the word actuary, again. It was listedsecond, right after veterinarian , in a listof ten jobs that seemed to have the mostopenings . That article, coupled with Dr.Griffin's advice, did it . As a freshman, Idecided I wanted to be an actuary. Itlooked like the kind of thing that wouldfit my skills and native abilities, andthat would pay me well .Another interesting aspect of the tim-

ing of all this is that during the Depres-sion, insurance companies didn't fireanybody. They had so many applica-tions for loans that they actually didn'thave to let anybody go. This appealed tome: a sure job. A couple of months beforeI graduated from Reed, Prudential hadhired me .

The Update: And from Prudential youthen went to . . .

Bassett: I was with Prudential until 1950,with a few years out during World WarII for service in the Navy. I attained myFellowship in 1949 and then went toTPF&C .

The Update: What was it that causedyou to venture out into consulting?

Bassett. To be blunt: money and theopportunity to do things more on myown. I had my FSA, so I wasn't too con-cerned about going with a small com-pany after being with a big firm likePrudential . I had learned that with myFSA I could get a job somewhere at mostanytime. So, I didn't have to worry aboutbeing unemployed. I remember one ofthe actuaries at Prudential said to me ."Don't do it ; it's too risky. There is nofuture in the pension field ." So evenactuaries can be wrong once in a while.

The Update : Could you tell us some-thing about your family?

Bassett: My family is probably qu ite typ-ical . Helen and I have a married daugh-ter, Kitty. She and her husband havetwo children, a son and a daughter, bothof whom are in college . Our son, Chip,who is younger than Kitty is married ;

7

and he and his wife have one daughter,three years old .

The Update: Could you single out oneaccomplishment, to date, that has themost significance for you?

Bassett: No, I really can't single out anyone thing . I guess I see mylife as a seriesof accomplishments, some large, somesmall. As I look back, I can say withouthesitation that it's been a joy. I've beenprivileged to have a very successful busi-ness career and a very successful mar-riage. I certainly have not accomplishedeverything that I set out to do in life,but I am happy with what I have beenable to contribute . And, I am especiallypleased with the opportunity to servethe actuarial profession through myAcademy presidency,

The Update : If you have a'life's philos-ophy, would you share it with us?

Bassett : Avoid conflicts . Strive foragreement. That philosophy probablyaccounts for some of my success, and itmay account for some failures, too .Maybe I wasn't aggressive enough, didn'tpush hard enough at times . I would neverhave made a good dictator .

I guess another abiding principle withme is: optimism always .

The Update: If you were speaking to aroom full of young actuaries what advicewould you give them?

Bassett: Continue your education. Ifyou've achieved associateship in theCasualty Actuarial Society (CAS) or theSociety of Actuaries (SOA), obviouslythere's your fellowship to strive for. Ifyou're an enrolled actuary, continue youreducation in the pension and employeebenefit field. There's always continuingeducation in Your specialty and relatedareas. You should never stop learning.You must to enjoy life, too . . . have agood time. That balance is important .

The Update: If you could, simply bywishing it, change something in theactuarial profession, and anything is fairgame in this question, what would thatbe? How would you want this professionof yours to be different?

Bassett: I started on a campaign tenyears ago to unify this profession ; I wastrying to bring all the organizationstogether into one body. I would still liketo see that accomplished . Uniting theAcademy, the CAS, the Conference ofActuaries in Public Practice, the SOA,and even the Canadian Institute of

(continued on overleaf)

8

Capital Viewsby Gary D. Siimms

Tax ReformRegular readers of this column will recallthat last fall, President Reagan unveiledhis proposal for tax reform, which wasbilled as offering "fairness, growth, andsimplicity." The House of Representa-tives examined the proposal, adoptingmost of it in H .R. 3838 last December.After many premature predictions ofdemise , the Senate Finance Committee,under the able leadership of Senator BobPackwood (R-OR), obtained unanimouscommittee approval for a different ver-sion of the bill . which was subsequentlyadopted without major amendment bythe Senate. The 97-3 vote signifiedunusual bipartisan support for a mea-sure as potentially significant as this .At this writing, both houses are expectedto approve a compromise conferencereport .

Despite the hoopla, this latest incan-tation of tax reform has not been sub-jected to the kind of thorough scrutinya major sea change requires . Reasonsfor this omission are several : politicalgamesplaying by the Senate leadership,rules of debate juggling, and perhapsmost significantly, unmitigated reli-ance on economic and financial predic-tions conjured up by the CongressionalBudget Office and the Joint Committeeon Taxation . Politically, the measure hadto achieve tax "neutrality." Neutrality,obviously means different things to theHouse and to the Senate, inasmuch asthe House measured neutrality on a year-by-year basis, while the Senate acceptedfairly wide swings in potential revenuesover a five-year period .

Folks who actually believe budget esti-mates for the next fiscal year are oftenthe butt of joshing and joking on theHill. Witness, for example, the smirksthat accompanied the recent House-passed budget. Does anyone reallybelievethat it satisfies the Gramm-Rudman-Hollings deficit reduction targets? Yet,the stuff scoffed at by those in the bud-get context is taken as Holy Grail in thetax reform context. What this impliesfor those concerned with policy consid-erations is clear and unsettling .For example . Proponents of severe

reductions in Section 415 limits on tax-deductible contributions to qualifiedpension plans rest their case on the factthat major reductions in tax expendi-tures would be accomplished. (In other

words, because the deduction limitswould effectively be reduced from whatthey would otherwise be . less grossdeductions would be made and, hence,revenues to the Treasury would increaseover what they would be under currentlaw.) Yet, the basis upon which theserevenue estimates have been made hasnever been publically explained ordefended . The numbers have been writ-ten large upon the wall, and our electedrepresentatives have chosen to ignorethe voices of many who question thereliability of these estimates .Fbr another example . Proponents of

limitations on 401(k) plan contribu-tions argue that new restrictions willlimit the deductions taken from suchplans. Again, major "tax savings" arepredicted. Have the conjurers of theseestimates taken into account potentialshifts to other forms of tax-favored pen-sion plans? Have they assumed thatmany 401(k) plans will be droppedentirely? We don't know, because thebasis for the estimates has not seen thelight of day.A third example. Proponents of new

limitations on IRA deductions argue thatcurrent law merely provides a tax shelterfor the well-to-do and that net savingsare not increased by IRAs, since peopleonly shift existing savings from one formto another more tax-favored method. Isthis accurate? Upon what evidence issuch a position based? Again, the answeris unclear.Actuaries have long attempted to

explain to their clients and to the gen-eral public that they are not masters ofthe crystal ball, but can only offer a rangeof estimates based upon experience andlogically selected assumptions. There israrely an actuarial claim of what mightbe called accuracy in prognostication.Anyone who reads an actuarial opinionmust acknowledge that actuaries rec-ognize that their estimates are in no wayguarantees of future performance .

Thus, actuaries are in a unique posi-tion to call for clarity and precision inthe numbers thrown about casually inthe political debate . This is particularlytrue when the numbers play a signifi-cant role in the debate .

None of the above necessarily meansthat the revenue estimates or the taxbills, themselves, are flawed . The pro-cess by which the numbers have beencreated may, in fact, be accurate . Wedon't know, and we should know.

The author is the Academy's generalcounsel .

The Actuarial Update

Checklist of AcademyStatements-July 1986Copies are available from the Washilpton office .TO: New Jersey Insurance Department,July 24, 1986. RE: Liability insurance .BACKGROUND: Response to request forinput on the current liability insurance,risis .TO: Senate and House conferees on taxbill, July 25, 1986 . RE: Pension legis-lation. BACKGROUND: Letter on pro-posed penalty for "overstated" liabilitieson pension plans .TO: House Committee on Ways andMeans, July 29, 1986 . RE : Pension leg-islation. BACKGROUND: Congressionaltestimony on underfunded pensionplans. 0

CLOSE-UP(continued_from page 7)Actuaries would be great. I'd like to seeone North American organization .

Of course, one of the big problems isthat people who have attained the sta-tus of FSA feel that if we unified, theirstature would be lowered . They believethat, in effect, we would be bringing intotheir organization people who havegone through the rigors of the exanation process . Thiswas a problem, youwill recall, when the Academy admittedenrolled actuaries . Then, there are thespecialty areas, such as consultants,casualty, or life actuaries, who are afraidthat their individual identities would belost in a larger group . In my view, allthese difficulties could be addressed, butthere are many roadblocks .

The Update: Do you see this problembeing solved in your lifetime?

Bassett: No. There are too many peopleset in their ways . , , too many conflicts .But we are not unique . The legal profes-sion is split into all kinds of splintergroups and so are the CPAs . There aredoctors who don't recognize others whopractice medicine. It's just more dam-aging to us because we are so small rel-ative to those other professions .

The Update: Do you have any conclud-ing thoughts for readers of this inter-view?

Bassett: This profession has a wondful reputation. You say you're an aary, and that commands a lot of respe .even among those whose understand-ing of what you do is imperfect . We mustnot get into trouble . Let's continue to beworthy of that public trust. A