The insurance regulatory framework is evolving around the world. The National Association of Insur­ance Commissioners’ (NAIC’s) Own Risk Solvency Assessment (ORSA) initiative in the United States appears to be echoing the Solvency II ORSA in Europe; both intending to comply with the Insurance Core Principles of the International Association of Insurance Supervisors (IAIS). The intent of these essays is to generate discussion and debate surrounding the principles and ideas underpinning the ORSA initiative and the risk metrics used for decision making. Different points of view are presented and have been welcome.  Discussion include:

• What questions does a company need to ask under an ORSA?
• Is an economic capital model required to perform an ORSA?
• Who are the stakeholders? Just the shareholders? How about the debt holders?
• Policyholders? Employees? General public?
• What is the ultimate goal of an ORSA? How do you measure success to maximize the benefit of this type of endeavor?
• Should an ORSA focus on governance, validation and documentation?
• What are the respective roles on the company’s Boards of Directors, and senior management?
• How will this initiative impact external stakeholders, rating agencies, regulators, shareholders, customers?

What one can glean from reading these essays may be perhaps that there should not be one way to do an ORSA. What seems to be a common understanding from the essays is that there needs to be:

• An internal risk management process (called either enterprise risk management (ERM) or ORSA) that covers both the observation and assessment of the entire business landscape, from risk identification to risk measurement to risk reporting, and the corresponding actions one can take that influence, prospectively, this landscape, considering risk appetite, busi­ness strategy and capital management.
• Multiple communication outputs, tailored to each audience, to share the risk transparency of the company. The multiplicity of audiences prompts the need for proper framing of the resultant communication consistent with the “eyes” of the beholder. This communication could be called, say, the ORSA report or ORSA template.

It is with great pleasure to congratulate the three articles voted the top three essays in our Call. It carries a cash bonus as well as an invitation to speak at the next ERM symposium in 2013.

1. Understand ORSA Before Implementing It – Anthony Shapella/Owen Stein

2. Effective Resilience and Interdisciplinary Approaches to Risk – Rick Gorvett

3. Focusing on Own Risk of the ORSA Process – Max Rudolph

We hope these essays will provide thought-provoking discussion and commentary in the months and years to come.  We welcome further commentary, editorials and rebuttals on this blog to add to our continuing thought leadership on the topic.  We may include additional notable commentary  on a subsequent edition of the ebook.

Enjoy!

David Schraub, FSA, MAAA, AQ, SOA/CAS/CIA Joint Risk Management Council Member
Robert F Wolf, FCAS, CERA, ASA, MAAA  Staff Partner, SOA/CAS/CIA Joint Risk Management Section Council

In my presidential address at the 2011 Annual Meeting, I asked actuaries to speak out about societal problems that have substantial actuarial components—the funding and potential reform of Social Security, Medicare and Medicaid, healthcare reform, and the underfunding of public pension plans.

The SOA has created PowerPoint presentations on each of these topics targeted to non-actuarial audiences. These presentations are available for you to alter and use as you deem appropriate. You can request these presentations by emailing membercomms@soa.org.

As actuaries, it is important for us to speak out about these issues, whether it’s at a cocktail party, barbeque, family gathering or at work. I encourage you to give presentations to your local community club. Write your congressman. Write letters to the editor of your local newspaper. Tap the power of social media, be it Twitter, Facebook, LinkedIn or YouTube to deliver these messages.

Let’s assure the relevancy of the actuarial profession into the foreseeable future. Let’s commit to do more to contribute to the solutions of society’s problems. Talking about these issues is the first step.

Accountable Care Organizations (ACOs) bring hospitals and physicians together as a risk bearing entity, aligning incentives between parties with different economic interests. This collaboration has not often occurred in the U.S., although success stories exist within specialties in some hospital systems. This alignment becomes the de facto best practice standards of care within the U.S. This new approach requires careful planning and collaboration to ensure it becomes a reality, and more importantly, a success.

The Medicare ACO model represents a dramatic change in Medicare policy and provides an opportunity to transform care delivery and provider alignment. In this model, ACO providers take responsibility for quality and overall care, and Medicare shares the savings from improved policy and the elimination of unnecessary costs. The term used to describe this approach is gainsharing.

What is gainsharing?
Gainsharing refers to provider organizations sharing savings that result from more efficient and effective practice of medicine. There is a presumption that gainsharing will result in a reduction of medical errors and higher overall quality of care. Proponents cite the tremendous regional variation in the amount of care and type of care as a rationale for promoting gainsharing.

There is little in the way of benchmarks and evidence-based research to define the quality of care to start with. Properly constructed, gainsharing arrangements might form the backbone of research for new benchmarks around best practices for cost and quality management. Gainsharing can be a part of a transitional strategy, bringing local systems,  regions, and ultimately the U.S. healthcare system to higher levels of accountability and improved performance.

The interest in gainsharing originally started in the 1990s, with a pull and tug between physicians and hospitals to gain control of the savings being generated by managed care.  While HHS recognized appropriately structured gainsharing arrangements could offer benefits to patients and providers alike, Section 1128A of the Social Security Act clearly prohibited such arrangements. There was a concern that such arrangements might create conflicts of interest that limit the ability of physicians to exercise independent professional judgment in the best interest of their patents.

With the push to align incentives with outcomes, gainsharing arrangements are being revisited as a potential means of bridging the gap between costs and quality of care. In order to effectively implement gainsharing, there must be accountability, quality controls, and safeguards for patients.

Conclusion
ACOs offer the potential for genuine win/win situations for physicians, hospitals, beneficiaries and taxpayers. The private sector is jumping at the opportunity to develop new products, services and contracting arrangements to support the needs for this expanding market. Actuaries are bringing advanced business analytics tools to shed light on the burgeoning healthcare databases in order to assess priorities and measure success. All of which is to say that healthcare delivery is becoming smarter at a rate faster than it ever has before; one can only hope that it becomes fast enough to overtake the weight of medical inflation.

• A recent survey of nearly 1,500 executives globally entitled, “Risk Management in a Time of Uncertainty” showed that while the focus on enterprise risk management has increased, the majority of companies lack a strong “risk-aware culture” and feel they have a long way to go. In addition, when describing their company’s risk cultures, about two-thirds of executives say they’re basic or reactive. The survey was conducted by the Harvard Business Review and published by Zurich Financial Group. (Source: Sustainable Business Forum)
• In a recent interview with Sally Bernstein, a principal with PricewaterhouseCoopers, Eric Krell poses questions regarding the ways in which companies should manage the growing complexities of governance, risk management and compliance programs, resulting from issues such as the financial crisis and regulatory demands, as well as other factors, such as technology and social media. To establish a successful compliance program, Bernstein stresses the critical importance of building a culture of compliance, which should serve as the foundation of the compliance framework. (Source: Business Finance)
• A blog post by ITBusiness Edge addresses Google’s recent announcement of Google Drive, a new cloud-based file storage, management and sharing service, which presents security officers and risk managers with the challenge of managing their staff’s use of the program and the potential threats associated with sharing sensitive corporate information with Google. (Source: IT Business Edge)

The SOA and PolySystems are hosting courses June 6-8 on the latest U.S. reserving principles for traditional life, universal life and deferred annuity products in the Chicago “Loop.” These courses on U.S. reserves have been offered jointly by the SOA and PolySystems since 2002 and feature experienced faculty with a wealth of knowledge.

To provide some perspective, Reserves Courses debuted the same year as “American Idol.”  While you may or may not remember who won “American Idol” that first year, PolySystems and the SOA will give you the tools to retain and apply the concepts discussed at these courses.  Participants receive handouts and spreadsheets prior to the seminars and will have ample opportunity to ask questions related to the reserve calculations, albeit without the fanfare of trick stage lighting, backup singers or Ryan Seacrest.  (FYI—the season one winner was Kelly Clarkson, but admit it, you knew that—didn’t you?)

Reserves courses are designed by PolySystems to give a complete and full understanding of the statutory, GAAP, and tax reserving process and items needed in financial reporting.  The courses are segmented by product type—traditional life, universal life and deferred annuities.  Each course can serve as a comprehensive introduction to reserving principles for the less experienced actuary (Clarkson was a novice, too!).  For those more experienced with current valuation practices, the courses add value as a review of basic concepts; refreshing your knowledge of these basic principles and advanced topics will help when implementing new regulations and approaches.

Did I mention that these one-day courses qualify for continuing professional development (CPD) credit?  Always a good thing! Each course qualifies for a maximum of 8.40 CPD credits.

So if you’re interested in an intro to reserving principles, discovering the latest in valuation techniques or just need to brush up on some skills you haven’t used in a while, please join us in Chicago for the 2012 Reserves Courses. Become a superstar of reserving.

A common misconception is that an actuary is someone who predicts events or eventualities, but the actuary’s role is typically broader:

• Assessing risks and their potential impacts on an organization
• Providing data-driven options for decision-making
• Developing scenarios that balance and illustrate the impact of various risk factors, opportunities and rewards.

Actuaries are expert builders of predictive models that integrate specialized information from various experts – economists, industry analysts, health care experts, etc. – to encompass the multitude of risk factors that can have an impact on the success of your organization, regardless whether it’s a life insurance company, a public pension fund or global manufacturer of aircraft.

Like all good candidates for any job, the prospective actuarial hire will do his or her homework on your organization.  And, given his or her exceptionally strong math, analytic and predictive modeling, he or she will be able to provide an excellent analysis of the quantitative aspects and potential risks associated with your organization.   Yet, how the candidate relates the analysis to the potential contributions he or she can make to your organization’s immediate and longer term challenges (and opportunities) provides strong clues to the value the candidate can bring your business teams.

No doubt you’ll start your search by screening tens, or even hundreds, of resumes looking for a few interview-worthy candidates.  At this stage, the Society of Actuaries can do quite a bit of the work for you by:

• Pointing you to actuarial candidates with the qualifications and experience you’re looking for on the Society of Actuaries’ Employer web link.
• Detailing the key actuarial credentials to look for.   Depending on the candidate’s career stage, these are Associate of Society of Actuaries (ASA), Chartered Enterprise Risk Analyst (CERA) and Fellow of Society of Actuaries (FSA)—for details, visit:  http://www.soa.org/education/exam-req/

During the interview process, how well does the candidate relate his or her experiences and skills to  real-world problems and solutions? In addition to spotting the risks and potential remedies, does the candidate offer insights that balance the risks with potential opportunities?   Insights and clarity in the candidate’s answers often indicate how well he or she understands the core drivers of your organization.  They also give you, as the prospective employer, a sense of the individual’s potential fit within your organization’s culture and needs.

We welcome your thoughts as a prospective employer or a potential candidate on what hiring decision-makers should be looking for when hiring an actuary.

The result?  Like any employer reliant on in-demand talent, actuarial employers need to give thought what makes the job attractive to employees.  Each company is different, so you’ll need to find your own unique formula.  But consider first what actuaries have in common.  Actuaries are:

• Highly intelligent professionals who have spent 4-8 years workingtowards their credentials.  They have exceptional mathematical, analytical, financial and statistical skills that are put to the test on a regular basis in order to keep their valued credentials.
• Integrators, accustomed to working in a collaborative environment and bringing together a broad range of data to build predictive models that speak to companies in a common language that helps them make important business decisions.
• Problem-solvers who take their personal integrity very seriously, viewing it as part of a wider social contract with the public and their profession. (See SOA Code of Conduct.)

Clearly, actuarial professionals need to feel engaged and achieve the satisfaction that comes from a meaningful job.  In a recent McKinsey Quarterly piece, Teresa Amabile and Steven Kramer explore how employers kill that sense of meaning in jobs.  In sending the right signals to employees that lend credibility to the meaning in their jobs, the four most frequent traps management must avoid are:

• Trap 1: Mediocrity signals…Words and actions need to match. Citing two examples, the authors point to the mismatch between rhetoric      espousing innovation and progress, when the signals management was sending      were all about near-term cost cutting and “being ordinary.”
• Trap 2:  Strategic ‘attention deficit disorder’… Focuses on the top managers that start and abandon initiatives so frequently that employees never learn whether initiatives are succeeding, leaving the organization with, at best, a muddy strategic focus, rather than clarity.
• Trap 3:  Corporate keystone cops… “When coordination and support are absent within an organization, people stop believing…  [making]  it extremely difficult to maintain a sense of purpose.”  Without purpose, how can you gauge progress?
• Trap 4:  Misbegotten ‘big hairy audacious goals’ (BHAG)… Despite their value in many organizations, in some companies, “… such  statements are grandiose, containing little relevance or meaning for people…. Result is a meaning vacuum.” Again, leaving employees with neither viable purpose nor sense of progress.

What approaches have you used to keep actuaries engaged in your company?  Or if you’re an actuary, tell us what you wish employers would do to make the job more rewarding.

Usually, this risk relates to the financial impact of a potential future event. Through a deep mathematical analysis, business assessment and understanding of human behavior, actuaries are able to determine how best to value and mitigate potential threats.

Some companies have caught on early, and it has set off a boom in hiring. According to the Bureau of Labor Statistics, the number of job openings for actuaries is expected to grow by 27% [1] through 2020, which is almost double the average national growth rate for other occupations.

Here are three critical roles actuaries are playing to mitigate corporate risk:

• Maintaining financial health during economic downturns: The 2008 global financial crisis was a culmination of many factors and we are still reeling from the resulting recession. With the uncertain commercial environment, actuaries are crucial in determining capital reserve needs when assessing the financial, reputational and operational risks presented by market volatility.
• Understanding ramifications of health care decisions: It is an election year, which means we have already been thrust into multiple health care debates as well as a Supreme Court decision on the constitutionality of the 2010 federal health care reform law. Actuaries are a critical participant in these debates because of the unique skills they bring to the table including understanding affordability and accessibility.
• Anticipating the financial implications of our aging population: According to the U.S. census, the population of people between the ages of 45 and 64 grew from 2000 to 2010 by 31.5%, and currently makes up more than 25% of our total population [2]. Many members of this generation have not effectively planned for retirement, which will impact how companies and individuals manage pension plans, health care options, and retirement savings accounts.

What are the thorniest questions you see executives facing in 2012? Your comments are most welcome.

On April 27, Ford Motor Company announced a voluntary program to provide lump-sum payouts to salaried retirees and former employees in the U.S. in exchange for receiving no further payments from the company’s pension plan in the future. This announcement was framed in the context of a previously announced long-term strategy that Ford is pursuing to de-risk its funded pension plans globally, which includes a shift in asset allocation to 80% fixed income over the next several years (see Ford’s 12/31/2011 year-end filings).  So is this a good risk-management move or not? Maybe – it depends on your stake in Ford and its pension plans.  And if Ford is de-risking, where is the risk going?

Actuarial science is about managing risks. For a retirement plan sponsor, good plan management involves comprehensive risk management. As pension plans have matured, particularly, in manufacturing industries like the auto industry, the size of these plans has become significant relative to other company assets. In the case of Ford, its 2011 year-end financial statement reported global pension assets of $58.6 billion and pension liabilities of $74.0 billion compared with total balance sheet assets of $178.3 billion and a current market cap of about $44 billion. Ford’s pension liabilities exceed their market cap; clearly pensions matter at Ford. Market volatility in pension assets (particularly if highly invested in equities) could have a highly leveraged impact on Ford’s overall financial results.

As an actuary, I applaud Ford’s move to de-risk its pension plans as an example of better corporate risk management. The shift in asset allocation to fixed-income securities (presumably of longer duration) that more closely matches the interest-sensitive-behavior of the pension liabilities makes a lot of sense.  However, even a fully asset-liability matched portfolio does not deal with Ford’s likely concern about the size of pension assets relative to its overall balance sheet.  Thus, Ford has taken the additional step to offer the voluntary program to cash-out retirees and other former employees.  It’s an unusual move, but not necessarily surprising.  It remains to be seen how many of its former employees will take Ford up on this offer and thus how successful it will be, but it certainly makes sense from a balance sheet perspective and shareholders should applaud this move.

However, there is another perspective: that of the participants who must decide whether to take this offer.  Whether this offer is helpful to them is not so clear. One of the positive features of traditional defined benefit plans is their ability to provide lifetime income to plan participants. This protection is extremely valuable – particularly as participants age.

To the extent that participants elect the lump sum, they have effectively given up the security of the lifetime income, unless they turn around and buy an annuity from an insurance company. However, this is not a “cost-free” transaction.  While each situation varies, it is highly unlikely that individuals will be able to take their lump sum from Ford and turn around to buy the equivalent annuity from an insurance company. Ford will be required to calculate the lump sum cash-outs according to fairly conservativeIRS-prescribed rules.  But insurance companies have administrative fees, general conservatism and profit motives built into their calculations that likely make the pricing of an equivalent annuity more than what Ford will pay to the participants in a lump sum.  Plus, insurers often assume any individual interested in purchasing an annuity knows something about their own expected longevity (e.g.great-aunt Mabel lived to be 92) and prices the annuity accordingly (versus better rates generally available in a group-purchasing context).

On the other hand, retirees, who may have watched friends at other automakers or other companies have their benefits cut through bankruptcy may jump at the chance to have the money “in hand” rather than “take their chances.” The Pension Benefit Guaranty Corporation does provide relatively robust guarantees, particularly for those who have been retired for some time, but this information may be hard to ascertain and, even with facts in hand, may not dissuade some retirees.   And finally, the flexibility of a large lump sum – to pay medical bills, help put the grandkids through college, etc. – can be more immediate than the seemingly remote chance of living to be 92 or more.

In reality Ford is transferring risk to plan participants who accept this offer. Ford has every right to manage their costs and balance sheet for the long-term view. But this leads to a number of questions which need to be debated at the policy level:

• What are the implications of transferring risk to individuals who may have less understanding and ability to manage and mitigate that risk – particularly the risk of outliving the assets?
• Does this leave some participants open to bad decisions or unscrupulous advice?
• Does this have implications for society and taxpayers if participants fail to implement strategies to effectively manage the lump sum and need further financial support later in life?

While this may be a good move for some individuals, I can only hope that Ford will provide a comprehensive education campaign so that its retirees and former employees will fully understand the choice. I would point them to publications the SOA has produced for consumers, like our recent Managing Retirement Decisions series including briefs on “Finding Trustworthy Financial Advice for Retirement and Avoiding Pitfalls” and “Designing a Monthly Paycheck for Retirement”.

Ford is taking bold steps to de-risk its pension plans and for that it should be applauded. One can only hope that individuals affected will also be able to make good risk management decisions as they decide whether to accept the offer.

Yes, the times are changing—again and as always—and you don’t need a weatherman to know which way the wind blows.  But if you are a health actuary, don’t miss the 2012 SOA Health Meeting in New Orleans from Wednesday, June 13-15, where many of the 80-plus sessions will consider the manifold ramifications of health reform on our work.

The Health Section has teamed up with its subsections and related sections to bring you outstanding relevance and variety.  Continuing education is a critical part of what makes our profession continually better.  To this end, we have planned a wide range of practical sessions at multiple levels covering the everyday actuarial work of pricing, trending, underwriting, reserving, financial reporting, plan and forecast, risk management, risk adjustment/equalization, predictive modeling, provider reimbursement, alternative delivery systems, product development, etc.  Most of these sessions will consider the downstream implications of health reform.  There will be something for everyone, regardless of your background and professional experience level.

The meeting will also include subject sessions in discrete topics, such as Medicare Advantage, Medicaid, small group, individual coverage, pharmacy, self-funded employee benefit plans, disability, long-term care, group life, reinsurance, regulation, disease management, outcomes assessment, quality measurement, exchanges, accountable care and medical homes, complexity theory, research, public data sources and more. In addition, other sessions and activities have been scheduled on topics ranging from management of people and projects to effective communication and, of course, professionalism.

Join us at the Health Section Hot Breakfast for a presentation by Dale Yamamoto and Ted Prospect on the Health Care Cost Institute (HCCI).  Be sure to attend the opening address by keynote guest speaker and thought leader, Tom Davenport, on business analytics.  Enjoy lunch with guest speaker, Mary Milla,on Wednesday, and Paul Ginsburg on Thursday.  Mary Milla is an executive coach on presentation and communications; Paul Ginsburg is an economist and health policy expert currently serving as president of the Center for Studying Health System Change.  There will be opportunities to meet old friends and make new ones.  And if you wish to join us a day early, you may attend the now famous Medical School for Actuaries.

On behalf of the army of volunteers and others who have worked earnestly to make this meeting a success, we look forward to seeing you in The Big Easy, a city of great historical import, where good food and music also await after each day’s diverse meeting activities are done.  Lagniappe.