REFERENCES It shall be the responsibility of each candidate to see that the Conference receives letters in support of his application from three qualified actuaries, with a qualified actuary for this purpose being defined as (1) a Fellow or Member of the Conference, (2) a Member of the American Academy of Actuaries, or (3) such other individual as the Membership Committee is willing to accept. At least one of these References should be from someone outside Applicant's firm. Each person acting as a Reference should address a confidential letter to the Board of Directors of the Conference, providing answers to the following questions: 1. How long have you known Applicant? 2. What is extent of your personal knowledge of Applicant? 3. To your knowledge, (a) is Applicant a member of the American Academy of Actuaries, or (b) has he a Master's Degree in Actuarial Science? 4. Are professional ethics of Applicant in keeping with the "Guides to Professional Conduct and Interpretive Opinions" of the Conference? 5. To your knowledge, what actuarial experience and consulting experience has Applicant had? 6. Can you provide for the benefit of the Membership Committee or Board of Directors other information regarding Applicant? 7. Do you recommend Applicant for (a) Fellowship, (b) Membership, or (c) Associateship in the Conference? CONFERENCE OF ACTUARIES IN PUBLIC PRACTICE 10 South LaSalle Street Chicago, Illinois 60603 Mr. DEAN E. SHARP, Assistant Counsel, THE NORTHWESTERN MUTUAL LIFE INSURANCE CO., Senate Antitrust and Monopoly Subcommittee, DEAR DEAN: It was good to visit with you last Wednesday. You asked about a copy of Harold Baird's paper and exhibits used at last summer's Symposium at Madison. Here is the complete 17 page address and xeroxs of the 13 slides illustrating the specific points. Your interest is in slide #1. It is a listing of the twenty-two different comparison methods. This tabulation was the basis of his talk. It was a statement of his views on the subject at the time. My guess is that he has not changed his mind. Congratulations on your choice of professional staff. Sincerely, Enclosures. RALPH N. HARKNESS, CLU, a SLIDE #1 LIFE INSURANCE "PRICE," "COST," AND "VALUE" ILLUSTRATIONS Presentation Before The National Symposium on The Consumer Interest in the Sale May 3-5, 1972 by Harold W. Baird, C.L.U. I am sure that I speak for all of us in expressing appreciation to Mr. Cavanaugh, for his discussion of the Net Cost Method, and to Mr. Houser, for clearing up any questions we might have had about how the Interest Adjusted Cost Method works - or, at least, is intended to work. The current half-hour is labeled in your program as "Other Methods." As William Gould, Actuary, wrote in the National Underwriter of July 19, 1969: "The devising of new indices of net costs has become a flourishing industry, and it is a little difficult to sort them out." Here is a list of twenty, and since this was made up, still another was handed to me, which I have not had time to analyze. With these to "cover" in 30 minutes - that's 90 seconds for each - I'm not going to have time to even read their names. With due consideration for the possiblity that the authors of some of these formulae, including myself, may feel offended at a once-overlightly treatment of a method on which they have spent many hours, I am going to have to group these into several broad classes. - 2 First, however, I think we must ask ourselves: "Exactly what is our objective in behalf of the consumer? Is it that we may be able to tell each buyer, of anything, exactly what his purchase costs, has cost, or may be expected to cost? If it is, as related to life insurance then I suggest we confine our discussion today solely to single premium policies. These are a relatively small segment of the market, but only under the single premium contract can the buyer determine his costs exactly and in the same way he determines the cost of everything else he buys: by what he pays for it. Most of the various cost disclosure methods are applied, however, to annual premium policies. To illustrate how actual costs can vary, under the same type of policy in the same company, let's consider Mr. A and Mr. B, each of whom buys $10,000 of Whole Life at Age 35. Let's assume Mr. A dies in the first year. His widow receives $10,000, plus the first year dividend, for a "cost" of $234.80, or less than 2 cents on the dollar. Is any credit given, in discussing "cost," for the fact that $10,000 was paid in return for this $234.80 cost, representing a return of over 4,200% of premium? Would the "cost" have been any different if Mr. A had paid one year's premium, lapsed the policy, but survived? What would his Then there's Mr. B, who lives to the end of the mortality table. One such policyowner whom I knew personally died a few years ago, at Age 99. He had paid, in net premiums, $902.23 on a $1,000 policy, between Age 35 and 96 when his policy matured for $1,027.70, including the final dividend. "cost" have been on a $10,000 policy? $9,022.30, just exactly what he paid for it. Now, I don't want anyone to try to tell me that I am understating Mr. B's "cost" because, if he had not bought the insurance and instead had put his money in the savings bank, he could have earned interest on it. He did receive the benefit of interest on his money because he was insured for 61 years, and in receiving in cash more than his total premiums. And if you mention "foregone interest," I'm going to ask you what the savings bank would have returned to --or his Now, which of these 20 formulae would tell either Mr. A or Mr. B what the "cost" of their insurance was? The answer is none. Which of these formulae could tell any prospective buyer exactly what his future costs would be? Only one, the last, variously called the Brooklyn Bridge, Potassium Cyanide, or Colt 45 Method. Applied as directed, as soon as possible after the suicide clause has expired and within the grace period, this can tell maximum costs. These will be the sum of two years premiums on whatever plan is desired. However, very few consumers are that much interested in knowing their precise insurance costs. Well, if none of these methods will tell a prospective buyer his exact costs, which will give him guidance on the proper type of policy to buy in any given company? Again, only one. The last. If he knows he is going to apply it after two years, he will doubtless buy the lowest premium term insurance he can find. Otherwise, none will tell the normal buyer the "best" contract, for him, because that depends upon his exact date of death. While this information is readily available, by hindsight, it is very difficult to come by, by foresight. anyone - - If none of these methods can disclose actual insurance costs, to and they cannot and if none of them can give any reliable guidance on the most advantageous policy to buy of those issued by any one company they cannot then what is the objective of a formula? It should be to disclose relative results or relative projections under supposedly comparable contracts of - - and 25-407 74 pt. 2 14 |